-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B5uXpeXC+Wn7Y63TGGkSlrkSDv0TmFDjxL2XA5kcAerdY44uUyahNB7EZ6aConTD aUU078q1tXCZDNkdfMpPVw== 0000916641-96-000248.txt : 19960416 0000916641-96-000248.hdr.sgml : 19960416 ACCESSION NUMBER: 0000916641-96-000248 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960412 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGNET BANKING CORP CENTRAL INDEX KEY: 0000009659 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 546037910 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06505 FILM NUMBER: 96546882 BUSINESS ADDRESS: STREET 1: 7 N EIGHTH ST STREET 2: PO BOX 25970 CITY: RICHMOND STATE: VA ZIP: 23260 BUSINESS PHONE: 8047472000 MAIL ADDRESS: STREET 1: 7 N EIGHTH ST STREET 2: PO BOX 25970 CITY: RICHMOND STATE: VA ZIP: 23260 FORMER COMPANY: FORMER CONFORMED NAME: BANK OF VIRGINIA CO DATE OF NAME CHANGE: 19860717 FORMER COMPANY: FORMER CONFORMED NAME: VIRGINIA COMMONWEALTH BANKSHARES INC DATE OF NAME CHANGE: 19721020 FORMER COMPANY: FORMER CONFORMED NAME: VIRGINIA COMMONWEALTH CORP DATE OF NAME CHANGE: 19701113 10-K 1 SIGNET BANKING CORPORATION 10-K 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, 1995 [ ] 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 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 29, 1996: * Common Stock, $5 Par Value - $1,458,457,780 The number of shares outstanding of each of the registrant's classes of common stock as of February 29, 1996: Common Stock, $5 Par Value - 59,364,665 * 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, 1995 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 May 28, 1996 are incorporated by reference into Part III. PART I ITEM 1. BUSINESS. GENERAL The Registrant is a registered bank holding company, incorporated in Virginia in 1962, and had consolidated assets of $11.0 billion as of December 31, 1995. On the basis of total assets and deposits at December 31, 1995, the Registrant is the second largest banking organization headquartered in Virginia and provided interstate financial services through two principal subsidiaries: Signet Bank (which resulted from the merger of Signet Bank/Virginia and Signet Bank/Maryland in 1995) headquartered in Richmond, Virginia and Signet Bank N.A., headquartered in Washington, D.C. The Company is in the process of merging Signet Bank N. A. into Signet Bank and expects to complete the merger of the two banks during 1996. On November 22, 1994, Signet transferred certain designated assets and liabilities of Signet Bank's credit card division to Capital One Bank, a newly chartered limited purpose credit card bank. Capital One Bank became, in conjunction with the transfer, a wholly-owned subsidiary of Capital One Financial Corporation ("Capital One"), a wholly-owned subsidiary of Signet (the "Separation"). As part of the Separation, Signet Bank retained a small portfolio of in-market credit card loans. At the same time 7,125,000 shares of common stock of Capital One were sold in an initial public offering. Signet distributed all of the remaining Capital One common stock it held to Signet stockholders in a tax-free distribution on February 28, 1995 (the "spin-off"). Related assets of $3.6 billion and equity of $0.4 billion were spun off at that time. The spin-off created two independent financial institutions, each possessing separate long-term business strategies. The Registrant is engaged in general commercial and consumer banking businesses through its principal bank subsidiaries, which are members of the Federal Reserve System. Signet Bank and Signet Bank N.A. provide financial services through banking offices located throughout Virginia, Maryland and Washington, D.C 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, 1995, the Registrant and its subsidiaries employed 3,974 full-time and 1,021 part-time employees. DOMESTIC BANKING OPERATIONS Signet Bank, incorporated under the laws of Virginia, had assets of $10.6 billion at December 31, 1995. Signet Bank N.A., incorporated under the laws of the United States, had assets of $655 million at December 31, 1995. Signet Bank and Signet Bank N.A. provide 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. 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. and Signet Insurance Services, Inc./Maryland, wholly-owned subsidiaries of the Registrant, provide, as agents, 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 originating, 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 a 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. 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. 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, 1995, the Registrant's Tier I and total capital ratios were 9.82 percent and 12.56 percent, 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, 1995 was 6.93 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. Each of the Registrant's subsidiary banks is subject to similar capital requirements adopted by the appropriate federal bank regulator. Following are the capital ratios for the Company's two principal bank subsidiaries at December 31, 1995: Ratio Signet Bank Signet Bank N.A. - ---------------------------------------------------------- Tier I 8.35% 32.80% Total Capital 10.97 34.06 Leverage 5.88 10.90 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. Bank regulators continue to indicate their desire to raise capital requirements applicable to banking organizations beyond current levels. However, management is unable to predict whether and when higher capital requirements would be imposed and, if so, at what levels and on what schedule. For further discussion, refer to the portions of Signet's 1995 Annual Report to Shareholders incorporated by reference herein (Exhibit 13.1). 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. Signet Bank N.A. is subject to regulation, supervision and examination by the Office of the Comptroller of the Currency. Both banking subsidiaries are 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. and Signet Insurance Services, Inc./Maryland are 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 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 and Signet Bank N.A. are 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 and Signet N.A. 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 subsidiaries 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 and the Office of the Comptroller of the Currency have each indicated that banking organizations should generally pay dividends only out of current operating earnings. Under applicable regulatory restrictions, both of the Registrant's banking subsidiaries were able to pay dividends as of January 1, 1995. Under federal law, Signet Bank and Signet Bank N.A. 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 their securities as collateral for loans to any borrower. In addition, federal law requires that certain transactions between Signet Bank, Signet Bank N.A. and their 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 and Signet Bank N.A. are 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. 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. 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 allows the FDIC to recover from a depository institution for any loss or anticipated loss to the FDIC that results from the default of a commonly controlled insured depository institution or from assistance provided to such an institution. Signet Bank and Signet Bank N.A. are commonly controlled by the Registrant, for purposes of this provision. The FDIC's claim for loss reimbursement under the "cross-guaranty" provisions is superior to any claims of shareholders of the liable institution or any claims of affiliates of such institution (other than claims on secured debt that existed as of May 1, 1989). The FDIC's claim is subordinate to the claims of depositors, third party secured creditors, senior and general creditors and holders of subordinated debt other than affiliates. 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 the National Bank Act, if the capital stock of a national bank, such as Signet Bank N.A., is impaired by losses or otherwise, the Office of the Comptroller of the Currency is authorized to require payment of the deficiency by assessment upon the bank's shareholders, prorata, and to the extent necessary, if any such assessment is not paid by any shareholder after three months notice, to sell the stock of such shareholder to make good the deficiency. Under Federal Reserve Board policy, the Registrant is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each of such subsidiaries. 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 banks are 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. As of December 31, 1995, both of the Registrant's banks met the "well capitalized" criteria. 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 will be 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 assertions of the institution's management. Under FDICIA, the appropriate federal banking agencies have issued regulations requiring insured depository institutions to have annual independent audits (which can be performed only by accounting firms which have, among other things, agreed to provide related working papers, policies and procedures to the FDIC, and the appropriate federal and state banking authorities, if so requested). In the case of institutions that are subsidiaries of holding companies, the audit requirement can be met by an audit of the holding company. The accountants must issue reports in compliance with generally accepted accounting principles and FDICIA. The scope of the audit must include a review of whether the financial statements of the institution are presented fairly in accordance with generally accepted accounting principles and whether they comply with such other disclosure requirements as the federal banking agencies may prescribe. Also, the accountants must apply procedures agreed upon by the FDIC to determine objectively if an institution is in compliance with laws and regulations. Institutions are required to provide their accountants copies of reports of condition, examination reports and information concerning any agency enforcement actions. Copies of the accounting firm reports are to be provided to the FDIC and the appropriate primary federal banking agency. 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 requirements the FDIC may establish. Their duties are to include review of the various new 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. Proposed regulations implementing these standards to cover operations and management, asset quality and earnings, and employee compensation are pending adoption. 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 proposal would establish the objectives of proper operations and management, but would leave 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 are to 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 4 cents to 31 cents per $100 of deposits, depending on the institution's capital adequacy and a supervisory judgment of overall risk. As of December 31, 1995, Signet N.A. paid the lowest FDIC insurance premium, 4 cents per $100 of deposits. Signet Bank paid 4 cents per $100 of deposits except for deposits obtained in the acquisition of Pioneer Financial Corporation ("Pioneer"). The premium on these deposits remained 23 cents. The FDIC lowered the 1996 assessment for Signet Bank and Signet N.A. to the minimum semiannual assessment of $1 thousand except for the assessment on deposits acquired from Pioneer, which remained unchanged at 23 cents. 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, eliminate restrictions on interstate banking, expand the powers of banking organizations to enter into new financial service industries and revise the structure of the bank regulatory system. The Registrant cannot determine the ultimate effect that FDICIA and the implementing regulations adopted, or any potential legislation, if enacted, would have upon its financial condition or operations. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information with respect to the Registrant's executive officers:
Names, Positions and Offices With Registrant During Last An Officer of the Five Years Age Registrant Since Robert M. Freeman 54 1978 Chairman and Chief Executive Officer. (Principal Executive Officer) Malcolm S. McDonald 57 1982 President and Chief Operating Officer. David L. Brantley 46 1988 Executive Vice President and Treasurer. Prior to February, 1995, he was Senior Vice President and Treasurer. Robert L. Bryant 45 1990 Senior Executive Vice President. Prior to July, 1994, he was Executive Vice President. Resigned effective March 1, 1996. W.H. Catlett, Jr. 47 1994 Executive Vice President and Controller (Principal Accounting Officer). Prior to August, 1994, he was a Senior Vice President. Philip H. Davidson 51 1977 Executive Vice President. T. Gaylon Layfield, III 44 1988 Senior Executive Vice President. Wallace B. Millner, III 56 1971 Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer). Kenneth H. Trout 47 1990 Senior Executive Vice President. Prior to May, 1991, he was an Executive Vice President. Sara R. Wilson 45 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.
There are no family relationships (as defined in the applicable regulations) among the above listed officers. 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, 1995, and is incorporated herein by reference, as follows:
Page in the Registrant's Annual Report to its shareholders for Guide 3 Disclosure the year ended December 31, 1995 I. Distribution of Assets, Liabilities and Stockholders' Equity, Interest Rates and Interest Differential A. Average Balance Sheet 54 B. Net Interest Earnings Analysis 54 C. Rate/Volume Analysis 52 II. Investment Portfolio A. Book Value of Investment Securities 64 B. Maturities of Investment Securities Not Applicable C. Investment Securities Concentrations Not Applicable III. Loan Portfolio A. Types of Loans 55 B. Maturities and Sensitivities of Loans to Changes in Interest Rates 34 C. Risk Elements 1. Nonaccrual, Past Due and Restructured Loans 36, 37&38 2. Potential Problem Loans 37&38 3. Foreign Outstandings Not Applicable 4. Loan Concentrations 55 D. Other Interest Bearing Assets Not Applicable IV. Summary of Loan Loss Experience A. Analysis of Allowance for Loan Losses 53 B. Allocation of the Allowance for Loan Losses 53 V. Deposits A. Average Balances 54 B. Maturities of Large Denomination Certificates 38 C. Foreign Deposit Liability Disclosure 38 VI. Return on Equity and Assets A. Return on Assets 51 B. Return on Equity 51 C. Dividend Payout Ratio 39 D. Equity to Assets Ratio 51 VII. Short-Term Borrowings 66
ITEM 2. PROPERTIES. The executive offices of the Registrant and Signet Bank are located at 7 N. 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 N.A. were moved in February 1996, from 1130 Connecticut Avenue N.W., Washington, D.C. to their new location at 7799 Leesburg Pike, Falls Church, Virginia. The principal offices of Signet Bank and Signet Bank N.A. are leased. Of the Registrant's 244 domestic branch banking locations, 121 are owned by subsidiaries of the Registrant, of which one is subject to mortgage indebtedness of approximately $9 thousand. The remaining 123 branch banking locations and offices of other subsidiaries are leased for various terms at an aggregate annual rent of approximately $23,456,000. 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. 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, 1995 on page 46 under the heading "Selected Quarterly Financial Information" and on page 71 in Note K, 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, 1995 on pages 39 and 51 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, 1995 on pages 23-55 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, 1995 on pages 56-83 under the heading "Signet Banking Corporation Consolidated Financial Statements" and on page 46 under the heading "Selected Quarterly Financial Information", and is incorporated herein by reference. 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 1996 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 1996 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 1996 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 1996 Proxy Statement on pages 1, 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 1996 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, 1995, are incorporated herein by reference in Item 8: Consolidated Balance Sheet - December 31, 1995 and 1994 Statement of Consolidated Income - Years ended December 31, 1995, 1994 and 1993 Statement of Consolidated Cash Flows - Years ended December 31, 1995, 1994 and 1993 Statement of Changes in Consolidated Stockholders' Equity - Years ended December 31, 1995, 1994 and 1993 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. (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 (Filed herewith). 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, Robert L. Bryant, W.H. Catlett, Jr., Philip H. Davidson, Robert M. Freeman, T. Gaylon Layfield, III, Malcolm S. McDonald, Robert J. Merrick, Wallace B. Millner, III, 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). 11.1 Computation of Earnings Per Share (Filed herewith). 13.1 1995 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 The Registrant filed a Current Report on Form 8-K dated March 19, 1996 reporting that it was the victim of fraudulent commercial loan transactions amounting to approximately $81 million. 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: MARCH 26, 1996 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 26th day of March, 1996.
SIGNATURES TITLE /s/ ROBERT M. FREEMAN Director, Chairman and Chief Executive Robert M. Freeman Officer (Principal Executive Officer) /s/ MALCOLM S. MCDONALD Director, President and Chief Operating Malcolm S. McDonald Officer /s/ WALLACE B. MILLNER, III Senior Executive Vice President and Wallace B. Millner, III Chief Financial Officer (Principal Financial Officer) /s/ W. H. CATLETT, JR. Executive Vice President and Controller W. H. Catlett, Jr. (Principal Accounting Officer) /s/ J. HENRY BUTTA Director J. Henry Butta /s/ NORWOOD H. DAVIS, JR. Director Norwood H. Davis, Jr.
SIGNATURES TITLE /s/ WILLIAM C. DERUSHA Director William C. DeRusha /s/ C. STEPHENSON GILLISPIE, JR. Director C. Stephenson Gillispie, Jr. /s/ BRUCE C. GOTTWALD, 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 EXHIBITS TO SIGNET BANKING CORPORATION ANNUAL REPORT ON FORM 10-K DATED DECEMBER 31, 1995 COMMISSION FILE NO. 1-6505 EXHIBIT INDEX
Page Number or Exhibit Incorporation by Number Description Reference to 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 Page 22 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, Robert L. Bryant, W.H. Catlett, Jr., Philip H. Davidson, Robert M. Freeman, T. Gaylon Layfield, III, Malcolm S. McDonald, Robert J. Merrick, Wallace B. Millner, III, 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 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 11.1 Computation of Earnings per Share Page 30 13.1 1995 Annual Report to Shareholders Page 31 21.1 Subsidiaries of the Registrant Page 95 23.1 Consent of Independent Auditors, Ernst & Young LLP Page 97 27.1 Financial Data Schedule Page 98
EX-3.2 2 EXHIBIT 3.2 Exhibit 3.2 As adopted December 21, 1966 by the Board of Directors and amended and restated by the Board of Directors through December 19, 1995 BYLAWS OF SIGNET BANKING CORPORATION ARTICLE I CORPORATE SEAL The seal of the Corporation shall consist of a circular impression stamped upon paper, with or without a wafer, with the name of the Corporation and the word "Virginia" inscribed along its circumference and the word "seal" inscribed in its center, in the design and form now here impressed upon the margin of this page. It may be affixed and attested by any officer. ARTICLE II STOCK CERTIFICATES Each holder of the shares of stock of the Corporation shall be entitled to a stock certificate evidencing his ownership of the shares of the Corporation. Stock certificates shall be in such form as may be required and approved by the Board of Directors. The signatures of the officers upon any stock certificate may be facsimiles if such certificate is countersigned by a transfer agent designated by the Board of Directors, other than the Corporation itself or an employee of the Corporation, and the signature of the transfer agent may be by facsimile if the certificate is registered by the manual signature of a registrar designated by the Board of Directors other than the Corporation itself or an employee of the Corporation. ARTICLE III MEETINGS OF STOCKHOLDERS Section 1. Place of Meetings. All meetings of the stockholders of the Corporation shall be held in the City of Richmond, Virginia, at the registered office of the Corporation or at such other place within or without the Commonwealth of Virginia as may be fixed in the notice of the meeting or in the waiver thereof. Section 2. Annual Meeting. The annual meeting of the stockholders of the Corporation shall be held on such date and at such place and time as may be fixed by resolution of the Board of Directors. Section 3. Special Meetings. Special meetings of the stockholders may be called by the Chairman of the Board, the President or the Board of Directors. Section 4. Notice of Meetings. Written or printed notice, stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be delivered by the Corporation not less than ten days nor more than sixty days before the date of the meeting, either personally or by mail, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the stockholder at his address as it appears on the stock transfer books of the Corporation. Such further notice shall be given as may be required by law. Only business within the purpose or purposes described in the notice of the meeting delivered by the Corporation may be conducted at a special meeting of stockholders. Any previously scheduled meeting of the stockholders may be postponed, and any special meeting of the stockholders may be cancelled, by resolution of the Board of Directors upon public notice given prior to the time previously scheduled for such meeting of stockholders. Section 5. Quorum and Voting. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at all meetings of the stockholders, annual or special. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, unless the vote of a greater number or voting by class is required by law, and except that in elections of directors those receiving the greatest number of votes shall be deemed elected even though not receiving a majority. Each stockholder shall be entitled to one vote in person or by proxy for each share of stock entitled to vote standing in his name on the books of the Corporation. The vote on all questions shall be taken in such a manner as the Chairman prescribes, provided, however, that all votes taken at any meeting of stockholders shall be by ballot. Section 6. Procedure. Stockholders' meetings shall be presided over by the Chairman of the Board, or, in his absence, the President, or, in his absence, any Vice Chairman of the Board, or, in the absence of all of them, a Chairman to be elected at the meeting. The Secretary of the Corporation or, in his absence, an Assistant Secretary or a secretary elected at the meeting for the purpose, shall act as secretary of each meeting and record the minutes. At each meeting of the stockholders, a committee may be appointed by the Chairman of the meeting, and shall be appointed by the Chairman on the demand of the holders of not less than one-tenth of the stock represented at the meeting and entitled to vote, to determine the number of shares represented at the meeting by stockholders in person or by proxy. Any meeting may be adjourned from day to day, or from time to time, and such adjournment may be directed without a quorum, but no business except adjournment shall be transacted in the absence of a quorum. The Chairman of the meeting or a majority of the shares so represented may adjourn the meeting from time to time, whether or not there is such a quorum. No notice of the time and place of adjourned meetings need be given except as required by law. Section 7. Inspectors of Elections; Opening and Closing the Polls. The Board of Directors by resolution shall appoint one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at the meetings of stockholders and make a written report thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act or is able to act at a meeting of stockholders, the Chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have the duties prescribed by law. The Chairman of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at the meeting. Section 8. Notice of Stockholder Business and Nominations. (A) Annual Meetings. (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Bylaw, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this Bylaw, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the sixtieth day nor earlier than the close of business on the ninetieth day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than thirty days before or more than sixty days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the ninetieth day prior to such annual meeting and not later than the close of business on the later of the sixtieth day prior to such annual meeting or the tenth day following the date on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficiary owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the books of the Corporation, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Bylaw to the contrary, in the event that the number of directors to be elected to the Board of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least seventy days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the tenth day following the date on which such public announcement is first made by the Corporation. (B) Special Meetings. Only business within the purpose or purposes described in the notice of the meeting delivered by the Corporation shall be conducted at a special meeting of stockholders. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Bylaw, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this Bylaw shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not earlier than the close of business on the ninetieth day prior to such special meeting and not later than the close of business on the later of the sixtieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (C) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Bylaw shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Bylaw. Except as otherwise provided by law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Bylaw and, if any proposed nomination or business is not in compliance with this Bylaw, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this Bylaw, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Bylaw, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. ARTICLE IV DIRECTORS AND THEIR MEETINGS Section 1. Number, Election and Qualifying Shares. The general management of the property, business and affairs of the Corporation shall be vested in a Board of Directors which should not exceed twenty members nor be less than ten members, including the Chairman of the Board and President. However, the number of Directors may exceed the desirable size from time to time due to mergers, acquisition or other special circumstances. The Directors shall be elected at the annual meeting of the stockholders or as soon thereafter as practicable, and shall hold office until the next annual meeting of the stockholders and until their successors shall have been elected. Vacancies in the Board of Directors shall be filled as provided by law. Each Director of the Corporation shall be the owner in his own name and have in his possession or control shares of the common stock of the Corporation having an aggregate par value of not less than one thousand dollars ($1,000.00). Such stock must be unpledged and unencumbered at the time such Director becomes a Director and during the whole of his term as such. Section 2. Meetings. Regular meetings of the Board of Directors shall be held on the fourth Tuesday in each month except the month of August or as provided below for the transaction of such business as may properly come before such meeting. The meeting held during the month of the annual meeting of the stockholders shall be held after the stockholders meeting, shall be the annual organizational meeting and shall be held for the purpose of the election of officers and the designation of committees for the ensuing year and for the transaction of such other business as may properly come before the meeting. No notice of the annual organizational meeting of the Board of Directors shall be necessary. Special meetings of the Board of Directors shall be held on call of the Chairman of the Board or the President. Unless waived in the manner prescribed by law, notice of any special meeting of Directors shall be given to each Director at his business or residence in writing by hand delivery, first-class or overnight mail or courier service, telegram or facsimile transmission, or orally by telephone. If mailed by first-class mail, such notice shall be deemed adequately delivered when deposited in the United States mail so addressed, with postage thereon prepaid, at least five days before such meeting. If by telegram, overnight mail or courier service, such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph company or the notice is delivered to the overnight mail or courier service company at least twenty-four hours before such meeting. If by facsimile transmission, such notice shall be deemed adequately delivered when the notice is transmitted at least twelve hours before such meeting. If by telephone or by hand delivery, the notice shall be given at least twelve hours prior to the time set for the meeting. Neither the business to be transacted at nor the purpose of any special meeting need be specified in the notice of the meeting. Meetings of the Board of Directors may be held at any time without notice if all the Directors are present, or if those not present waive notice thereof either before or after the meeting. Meetings of the Board of Directors may be conducted by means of conference telephones or similar communications equipment and a written record shall be made of the action taken at such meetings. Section 3. Quorum. A majority of the Directors shall constitute a quorum at any meeting, regular or special, and a majority of the Directors present at any meeting at which a quorum is present shall be sufficient for the transaction of any and all business for which a different quorum or vote is not otherwise specifically and expressly required by law or these Bylaws. Section 4. Executive Committee. The Board of Directors may, by a resolution adopted by a majority of the whole Board of Directors, designate as an Executive Committee five or more Directors, one of whom shall be the Chairman of the Board, who may be the Chairman of the Executive Committee if so designated by the Board of Directors, and one of whom shall be the President. The Executive Committee, during the interim between meetings of the Board of Directors, shall have, and may exercise all of the authority of the Board of Directors, unless otherwise specifically and expressly prohibited by law. The Executive Committee shall meet at such time and place as established by a resolution of the Executive Committee, and in the alternative, on the call of the Chairman of the Board or the President. In the event that any outside Director designated as a member of the Executive Committee shall be unable to attend a meeting of the Executive Committee, any outside Director not so designated may be requested to attend by the Chairman of the Board or the President as a substitute for the absent member, and, when so in attendance, shall be deemed for all purposes a duly elected member of the Executive Committee. Section 5. Audit Committee. The Audit Committee shall be composed of outside Directors who are independent of the management of the Corporation and are free from any relationship that, in the opinion of the Board of Directors, would interfere with their exercise of independent judgment as an Audit Committee member. The Audit Committee shall include at least two Directors with banking or related financial management expertise and shall not include any large customers of the Corporation. The Audit Committee shall assist the Board of Directors discharge its responsibilities relating to the accounting practices, internal controls and financial reporting of the Corporation. The Audit Committee may serve as the audit committee of each of the Corporation's bank subsidiaries. The Audit Committee shall also perform such other duties as may be specified from time to time by the Board of Directors. The Audit Committee shall meet periodically as deemed necessary or appropriate to carry out its responsibilities and after its meetings shall submit a report of its deliberations and actions to the Board of Directors. Section 6. Organization and Compensation Committee. The Organization and Compensation Committee shall be charged with the review and/or approval of the Corporation's officer title, salary, bonus, incentive and other employee benefit programs for the employees of the Corporation and its subsidiaries. It shall also be charged with at least annually reviewing senior management's plans and recommendations with regard to management succession. Section 7. Finance Committee. The Finance Committee shall be composed of outside Directors and shall be charged with the responsibility of reviewing the financial condition and plans of the Corporation. The Finance Committee shall analyze and make recommendations to the Board of Directors with respect to dividends, investments and financings proposed by management. Section 8. Nominating Governance and Corporate Responsibility Committee. The Nominating, Governance and Corporate Responsibility Committee shall be composed of outside Directors and shall be charged with the responsibility of reviewing and making recommendations with respect to new Directors of the Corporation and its affiliates and the retirement policy of the Board of Directors. In that connection the Committee shall review the qualifications of the current Directors as well as of prospects for continuing or potential membership on the Board of Directors, this review to include business and other relationships, if any, with the Corporation as related to a possible conflict of interest or the appearance thereof. The Committee shall recommend qualifications for and election to the position of Director Emeritus. Section 9. Other Committees. The Board of Directors by resolution adopted by a majority of the Directors present at a meeting at which a quorum is present, may designate other committees to consist of Directors, officers or employees of the Corporation, or others. Such other committees shall have the duties specified in the resolution of appointment. Section 10. Notice of Committee Meetings; Quorum Rules. Notice of meetings of a Committee of the Board of Directors shall be given in the same manner as notices are permitted or required to be given for special meetings of the Board of Directors. A majority of a Committee shall be necessary for a quorum. A Committee shall have authority to elect a secretary (unless otherwise herein provided), and, subject to the first sentence of this Bylaw, to fix its own rules as to notice and procedure. Meetings of a Committee may be conducted by means of conference telephones or similar communications equipment, and a written record shall be made of the action taken at such meetings. Section 11. Chairman Emeritus. The Board of Directors may designate a Chairman Emeritus who may serve as the Chairman of the Executive Committee if so designated. The Chairman Emeritus, if any, shall not be deemed an officer of the Corporation by virtue of such designation or service. ARTICLE V OFFICERS AND THEIR DUTIES Section 1. Officers, Election and Removal. The officers of the Corporation shall be a Chairman of the Board, a President, a Secretary, a Treasurer and such additional officers as the Board of Directors may from time to time prescribe, all of whom shall be elected annually at the annual organizational meeting of the Board of Directors following the annual meeting of the stockholders, to serve until the next such meeting of the Board of Directors and until their successors are elected, unless sooner removed, but may be removed at any time at the pleasure of the Board of Directors, and vacancies may be filled at any meeting of the Board. Any two or more offices may be held by the same person, except the offices of President and Secretary. Section 2. Chairman of the Board. The Chairman of the Board shall have general authority to conduct the business of the Corporation and shall preside at all meetings of the stockholders and the Board of Directors. He may be the Chief Executive Officer of the Corporation if so designated. Also, the Chairman of the Board shall have the authority to appoint officers of the Corporation up to but not including the titles of members of the Management Committee and to delegate that authority up to and including the position of Senior Vice President. Section 3. President. The President shall perform the duties of the Chairman of the Board in the absence or upon the disability of the Chairman of the Board. He may be the Chief Executive Officer or the Chief Operating Officer of the Corporation if so designated. In the absence of the Chairman of the Board, the President shall preside at meetings of the stockholders, the Board of Directors, and the Executive Committee. Also, the President shall have the authority to appoint officers of the Corporation up to but not including the titles of members of the Management Committee and to delegate that authority up to and including the position of Senior Vice President. Section 4. Secretary. The Secretary shall perform the usual duties of the office of Secretary and shall have such special authority as may from time to time be conferred upon him by these Bylaws or the Board of Directors. Section 5. Treasurer. The Treasurer shall perform the usual duties of the office of Treasurer. Section 6. Duties. In addition to the duties herein assigned to certain officers, they and other officers prescribed by the Board of Directors shall perform such duties and have such special authority as may from time to time be conferred upon them by the Board of Directors, the Executive Committee, or officers senior in rank to them. ARTICLE VI VOTING OF STOCK OWNED Unless otherwise provided by a vote of the Board of Directors, the Chairman of the Board, the President, any Vice Chairman of the Board, any Senior Executive Vice President, the Secretary or the Treasurer may appoint attorneys to vote any stock in any other corporation owned by the Corporation or may attend any meeting of the stockholders of such corporation and vote such shares in person. ARTICLE VII Bylaws for the Corporation may be made, altered, amended or repealed by the Board of Directors, but Bylaws made by the Board of Directors may be repealed or changed, and new Bylaws made, by the stockholders. I, Sara Redding Wilson, hereby certify that I am the Corporate Secretary of Signet Banking Corporation (the Corporation), and that the above Bylaws consisting of pages 1 through 8, are the Bylaws of the Corporation and are in effect through December 19, 1995. WITNESS my hand and the seal of the Corporation this 19th day of December, 1995. /s/ SARA REDDING WILSON Corporate Secretary EX-11 3 EXHIBIT 11.1 EXHIBIT 11.1 SIGNET BANKING CORPORATION AND SUBSIDIARIES FORM 10-K COMPUTATION OF EARNINGS PER SHARE (dollars in thousands - except per share)
1995 1994 1993 ----------------------------------------------------- Common and common equivalent: Average shares outstanding 58,843,986 57,355,021 56,291,808 Dilutive stock options - based on the treasury stock method using average market price 953,732 500,034 574,866 ----------------------------------------------------- Shares used 59,797,718 57,855,055 56,866,674 ===================================================== Net income applicable to Common Stock $ 111,080 $ 149,834 $ 174,414 ===================================================== Per share amount $ 1.86 $ 2.59 $ 3.07 ===================================================== Assuming full dilution: Average shares outstanding 58,843,986 57,355,021 56,291,808 Dilutive stock options - based on the treasury stock method using the period end market price, if higher than average market price 982,435 507,906 628,282 ----------------------------------------------------- Shares used 59,826,421 57,862,927 56,920,090 ===================================================== Net income applicable to Common Stock $ 111,080 $ 149,834 $ 174,414 ===================================================== Per share amount $ 1.86 $ 2.59 $ 3.06 =====================================================
The calculations of common and common equivalent earnings per share and fully diluted earnings per share are submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although both calculations are not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because there is dilution of less than 3%. The Registrant has elected to show fully diluted earnings per share in its financial statements. EX-13 4 EXHIBIT 13 Signet Banking Corporation and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--1995 COMPARED TO 1994 INTRODUCTION Signet Banking Corporation ("Signet" or "the Company"), with headquarters in Richmond, Virginia, is a registered multi-bank, multi-state holding company whose stock is listed on the New York Stock Exchange under the symbol SBK. At December 31, 1995, Signet had assets of approximately $11.0 billion and provided interstate financial services through two principal subsidiaries: Signet Bank (which resulted from the merger of Signet Bank/Virginia and Signet Bank/Maryland in 1995) headquartered in Richmond, Virginia and Signet Bank N.A., headquartered in Washington, D.C. The Company is in the process of merging Signet Bank N. A. into Signet Bank and expects to complete the combination of the two banks during 1996. Signet engages in general commercial and consumer banking businesses and provides a full range of financial services to individuals, businesses and organizations through 244 banking offices, 253 automated teller machines 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, specialized services for trust, leasing, asset based lending, cash management, real estate, insurance, consumer financing and trade finance are offered. Signet's primary market area extends from Baltimore to Washington, south to Richmond, and on to Hampton Roads/Tidewater, Virginia. The Company also markets several of its products nationally. On November 22, 1994, Signet transferred certain designated assets and liabilities of Signet Bank's credit card division to Capital One Bank, a newly chartered limited purpose credit card bank. Capital One Bank became, in conjunction with the transfer, a wholly-owned subsidiary of Capital One Financial Corporation ("Capital One"), a wholly-owned subsidiary of Signet (the "Separation"). As part of the Separation, Signet Bank retained a small portfolio of in-market credit card loans. At the same time 7,125,000 shares of common stock of Capital One were sold in an initial public offering. Signet distributed all of the remaining Capital One common stock it held to Signet stockholders in a tax-free distribution on February 28, 1995 (the "spin-off"). Related assets of $3.6 billion and equity of $0.4 billion were spun off at this time. The spin-off enhanced shareholder value by creating two independent financial institutions, each possessing substantial financial and managerial strength and each pursuing separate and attractive long-term business strategies. In 1994, Signet also announced a comprehensive program to improve the performance of its core banking businesses through initiatives to reduce costs and enhance revenues. In connection with the spin-off and the cost reduction measures, Signet recorded special pre-tax charges of $92.2 million for restructuring ($43.2 million) and for terminating certain data processing contracts ($49.0 million). During the third quarter of 1994, the Company acquired Pioneer Financial Corporation ("Pioneer"), the parent company of Pioneer Federal Savings Bank, a $400 million financial institution located in Chester, Virginia. The transaction involved a tax-free exchange of stock and was accounted for as a purchase acquisition. Pioneer's shareholders received .6232 shares of Signet common stock for each Pioneer share held. This resulted in Signet issuing approximately 1.5 million shares of common stock. The transaction had an immaterial dilutive effect on Signet's earnings per share. In 1995, Signet began construction on a new operations center located close to Richmond, Virginia, which will be completed in 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. 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. Also in the fourth quarter of 1995, Signet recognized a $9.6 million gain on securitizing home equity loans. On March 19, 1996, subsequent to the announcement of 1995 earnings, management discovered 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 informed the Company that they believe there will be substantial recoveries of assets related to these transactions. Based on information currently available, 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 is based on the Company's pro rata share of known claims to the total amount currently restrained and held by federal authorities less associated costs. The recovery amount is subject to change, even in the near term, as additional assets are recovered, additional claims are asserted or the market value of the restrained assets fluctuates. Management believes the $35 million charge to
Table 1 SELECTED FINANCIAL DATA (excluding Capital One) - --------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS (dollars in thousands-except per share) Net interest income-taxable equivalent $ 478,670 $ 358,740 $ 353,230 Less: taxable equivalent adjustment 10,603 13,706 15,753 - --------------------------------------------------------------------------------------------------------------------------- Net interest income 468,067 345,034 337,477 Provision for loan losses 34,786 (16,229) 13,256 - --------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 433,281 361,263 324,221 Non-interest operating income 193,780 195,205 193,817 Securities available for sale gains 532 3,413 3,913 Investment securities gains 1,257 46 405 - --------------------------------------------------------------------------------------------------------------------------- Total non-interest income 195,569 198,664 198,135 Non-interest expense (1) 484,520 488,309 444,036 - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 144,330 71,618 78,320 Applicable income taxes (2) 48,769 15,775 14,391 - --------------------------------------------------------------------------------------------------------------------------- Net income $ 95,561 $ 55,843 $ 63,929 - --------------------------------------------------------------------------------------------------------------------------- Per common share: Net income $ 1.60 $ 0.97 $ 1.12 Cash dividends declared 0.79 1.00 0.80 Book value at year-end 14.59 12.69 14.06 Average common shares outstanding 59,826,421 57,862,927 56,920,090 - ---------------------------------------------------------------------------------------------------------------------------- SELECTED AVERAGE BALANCES (dollars in millions) Assets $ 10,607 $ 8,839 $ 9,328 Earning assets 9,447 7,802 8,339 Loans (net of unearned income) 5,765 4,554 4,387 Deposits 7,282 7,436 7,733 Interest bearing liabilities 8,055 6,282 6,973 Common stockholders' equity 808 818 775 Managed consumer loan portfolio 2,532 1,785 1,472 - ---------------------------------------------------------------------------------------------------------------------------- SELECTED YEAR-END BALANCES (dollars in millions) Assets $ 10,978 $ 9,859 $ 9,858 Earning assets 9,443 8,825 8,882 Loans (net of unearned income) 5,416 5,696 4,448 Deposits 7,593 7,343 7,821 Interest bearing liabilities 8,024 7,331 7,376 Common stockholders' equity 864 744 796 Managed consumer loan portfolio 2,807 2,295 1,563 - ---------------------------------------------------------------------------------------------------------------------------- RATIOS Net income to: Average common stockholders' equity (3) 11.83% 6.83% 9.10% Average assets (3) 0.90 0.63 0.69 Efficiency ratio excluding foreclosed property expense (3) 72.02 88.28 78.69 Stockholders' equity to assets at year-end 7.87 7.54 8.07 Loans to deposits (average) 79.17 61.24 56.73 Net loan losses to average loans 0.87 0.55 0.75 Net interest spread (4) 4.44 3.96 3.75 Net yield margin (4) 5.07 4.59 4.24 At year-end: Allowance for loan losses to loans 2.39 2.67 4.27 Allowance for loan losses to non-performing loans 337.05 583.37 256.71 - -----------------------------------------------------------------------------------------------------------------------------
(1) 1993 included a provision of $7.4 million to the reserve for foreclosed properties, which had a December 31, 1993 balance of $5.7 million. 1994 included $43.2 million of restructuring charges. 1995 included the fraud loss of $35.0 million. (2) Income taxes applicable to net securities available for sale gains and investment securities gains were as follows: 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 0.95%, 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. 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 other sources of recovery, but currently is unable to determine the probability or amount of additional recoveries. A detailed discussion of the 1995 operating results and financial condition at December 31, 1995 follows and 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 is provided 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 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 $35.0 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 4% decline from the $523.7 million recorded in 1994. Pro forma taxable equivalent net interest income of $478.7 million was a principal component of earnings and reflected a rise of $119.9 million from the 1994 level. The pro forma net yield margin for 1995 was 5.07%, a 48 basis point increase from the 4.59% for the prior year. This increase in the net yield margin was primarily due to an improvement in the net interest spread. The provision for loan losses of $38.7 million represented a significant rise from the 1994 level of $14.5 million as growth in the consumer loan portfolio warranted this action. Non-interest operating income totaled $277.5 million for 1995, a 51% decline from the $564.6 million for the prior year. 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 was lower in 1995 than in 1994, also due to a decline in credit card servicing and service charge income as the retained credit card portfolio was off-balance sheet for the majority of 1994. 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. Table 1 shows selected financial data for the past three years, primarily on a pro forma basis. INCOME STATEMENT ANALYSIS NET INTEREST INCOME Taxable equivalent net interest income, a primary contributor to earnings, was $503.8 million for 1995, a decline of $19.9 million, or 4%, from the $523.7 million for 1994 as shown in Table 28. 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 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 $9.9 billion for 1995, down 2% from the previous year. On a pro forma basis, average earning assets amounted to $9.4 billion compared with $7.8 billion for 1994, a 21% increase. 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 that may be sold to Capital One, in accordance with previously agreed upon terms of the spin-off, results in a 15% increase in managed earning assets year-over-year. 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. Investment securities rose $62.1 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. See a more detailed discussion of Earning Assets elsewhere in this Report.
Table 2 NET INTEREST INCOME ANALYSIS (excluding Capital One) taxable equivalent basis(1) - ----------------------------------------------------------------------------------------------------------------------------- Year Ended 1995 vs 1994 Year Ended 1994 vs 1993 December 31 Increase Change due to (3) December 31 Increase Change due to (3) (in thousands) 1995 1994 (Decrease) Volume Rates 1993 (Decrease) Volume Rates - ----------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans, including fees(2) $541,780 $373,602 $168,178 $108,650 $ 59,528 $332,854 $ 40,748 $ 13,032 $27,716 Securities available for sale 125,492 72,826 52,666 23,716 28,950 17,007 55,819 56,527 (708) Investment securities 28,669 28,200 469 5,929 (5,460) 126,172 (97,972) (101,511) 3,539 Other earning assets 124,228 88,217 36,011 (1,159) 37,170 83,588 4,629 (11,393) 16,022 - ------------------------------------------------------------------------------------------------------------------------------ Total interest income 820,169 562,845 257,324 130,975 126,349 559,621 3,224 (37,164) 40,388 INTEREST EXPENSE: Interest bearing deposits 216,014 179,311 36,703 (4,439) 41,142 168,197 11,114 (11,771) 22,885 Federal funds and repurchase agreements 105,290 3,213 102,077 101,668 409 3,213 3,213 Other short-term borrowings 3,174 4,896 (1,722) (1,115) (607) 21,513 (16,617) (19,574) 2,957 Long-term borrowings 17,021 16,685 336 (104) 440 16,681 4 (1,977) 1,981 - ----------------------------------------------------------------------------------------------------------------------------- Total interest expense 341,499 204,105 137,394 66,073 71,321 206,391 (2,286) (21,394) 19,108 - ----------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME $478,670 $358,740 $119,930 $ 80,209 $ 39,721 $353,230 $ 5,510 $ (23,153) $28,663 - -----------------------------------------------------------------------------------------------------------------------------
(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 $19,322, $14,019 and $14,655 for 1995, 1994 and 1993, 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. Average interest bearing liabilities rose 28% to $8.1 billion for 1995, on a pro forma basis. Declines in savings certificates, money market savings, large denomination certificates, other short-term borrowings and long-term borrowings were more than offset by growth in savings accounts, money market and interest-checking, and foreign deposit categories and federal funds and repurchase agreements. Included in savings accounts were deposits held on behalf of Capital One. Approximately $500 million of these deposits are expected to transfer to Capital One in the first quarter of 1996. 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 money market and demand products. Pro forma non-interest bearing demand deposits declined less than 1%, on average, during 1995. See a more comprehensive discussion of Funding elsewhere in this Report. The pro forma net interest spread of 4.44% for 1995 rose significantly from the 3.96% reported for the previous year. 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. The pro forma net yield margin rose by 48 basis points in 1995 to 5.07% from 4.59% for 1994. The increase 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. Higher yields and growth in commercial and consumer loans more than offset the rise in funding rates to raise the net yield margin. Signet uses various off-balance sheet interest rate derivatives as an integral part of its asset and liability management and trading activities. For Signet's core business, variable rate assets generally exceed variable rate liabilities. To manage the resulting interest rate risk, Signet enters into derivative transactions. On a consolidated basis, derivative contracts, used for interest rate risk management purposes, (decreased)/increased interest on earning assets by ($14.0) million, $13.4 million and $14.3 million and decreased borrowing costs by $20.3 million, $39.0 million and $82.4 million for 1995, 1994 and 1993, respectively. The overall increase in the net yield margin as a result of these instruments amounted to 5, 52 and 92 basis points for 1995, 1994 and 1993, 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. Table 3 ANALYSIS OF CHANGE IN NET YIELD MARGIN -- 1995 VERSUS 1994 (excluding Capital One) - ------------------------------------------------------------------- Net yield margin for the year ended December 31, 1994 4.59% Higher funding costs (excluding decrease in derivative income) (0.63) Higher average and yield on total on balance sheet consumer loans (excluding decrease in derivative income) 0.61 Decrease in derivative income (0.50) Decline in average/higher yield on Federal funds and resale agreements -- net 0.29 Higher average and yield on securities available for sale (excluding decrease in derivative income) 0.18 Higher average and yield on commercial loans (excluding decrease in derivative income) 0.18 Improved yield and mix on the other earning assets and other factors 0.35 - ------------------------------------------------------------------- Net yield margin for the year ended December 31, 1995 5.07% - ------------------------------------------------------------------- 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 12 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. Credit card loans typically are charged off when they are six months past due and a minimum payment has not been received for 60 days, while other consumer loans are typically charged off when they are six months past due. Credit card and other 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 three-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 $34.8 million for 1995 compared with provision reversals of $16.2 million
Table 4 CHANGES IN ALLOWANCE FOR LOAN LOSSES (excluding Capital One) - ----------------------------------------------------------------------------------------------------------------------------- Year Ended December 31 - ----------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- Balance at beginning of year $152,003 $189,797 $209,543 Provision for loan losses 34,786 (16,229) 13,256 Transfer to loans held for securitization/sale(1) (7,132) Addition arising from acquisition 3,327 Loans charged-off: Consumer(2) 32,386 2,652 1,850 Commercial 5,740 9,827 17,832 Real estate-construction 1,143 9,746 26,890 Real estate-mortgage(3) 18,627 20,360 5,720 - ----------------------------------------------------------------------------------------------------------------------------- Total loans charged-off 57,896 42,585 52,292 Recoveries of loans previously charged-off: Consumer(2) 1,509 1,101 1,338 Commercial 4,570 5,997 13,138 Real estate-construction 1,496 6,037 4,259 Real estate-mortgage(3) 366 4,558 555 - ------------------------------------------------------------------------------------------------------------------------------ Total recoveries 7,941 17,693 19,290 - ------------------------------------------------------------------------------------------------------------------------------ Net loans charged-off 49,955 24,892 33,002 - ------------------------------------------------------------------------------------------------------------------------------ Balance at end of year $129,702 $152,003 $189,797 - ------------------------------------------------------------------------------------------------------------------------------ Net charge-offs to average loans: Consumer 1.39% 0.10% 0.04% Commercial 0.04 0.18 0.22 Real estate 1.95 2.15 2.45 - ------------------------------------------------------------------------------------------------------------------------------ Total 0.87% 0.55% 0.75% - ------------------------------------------------------------------------------------------------------------------------------ Allowance for loans losses to net loans at year-end 2.39% 2.67% 4.27% - ------------------------------------------------------------------------------------------------------------------------------ (1) The amount transferred to loans held for sale related to Capital One assets was $5,272 for 1995. (2) Consumer includes loan-by-check net charge-offs as noted below: Loan-by-check risk tests $ 16,763 $ 8 Other loan-by-check 3,575 222 - ------------------------------------------------------------------------------------------------------------------------------ Total loan-by-check net charge-offs $ 20,338 $ 230 - ------------------------------------------------------------------------------------------------------------------------------ Average loan-by-check: Loan-by-check risk tests $ 211,192 $ 25,795 Other loan-by-check 218,401 33,749 - ------------------------------------------------------------------------------------------------------------------------------ Total loan-by-check $ 429,593 $ 59,544 - ------------------------------------------------------------------------------------------------------------------------------ Net loan losses (annualized) as a percentage of average loan-by-check: Loan-by-check risk tests 7.94% 0.03% Other loan-by-check 1.64 0.66 - ------------------------------------------------------------------------------------------------------------------------------ Total loan-by-check 4.73% 0.39% - ------------------------------------------------------------------------------------------------------------------------------
(3) 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) - -------------------------------------------------------------------------------------------------------------------------------- December 31, 1995 December 31, 1994 December 31, 1993 - -------------------------------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------------------------------- Consumer $ 49,825 31.45% $ 25,577 41.22% $ 3,514 27.59% Commercial 26,367 55.52 34,041 42.74 33,618 51.05 Real estate* 40,123 13.03 60,532 16.04 83,315 21.36 Unallocated 13,387 31,853 69,350 - ------------------------------------------------------------------------------------------------------------------------------- Total $129,702 100.00% $152,003 100.00% $189,797 100.00% - -------------------------------------------------------------------------------------------------------------------------------
* 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. in 1994. The increase resulted primarily from growth and increased losses in the consumer loan portfolio. 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. These sales were part of Signet's strategy to reduce its overall commercial real estate exposure. 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. One large commercial credit, for which there was sufficient allowance, was sold early in 1994 and accounted for approximately $3.3 million of the 1994 commercial loan charge-offs. 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. Information gathered from these risk tests was used to improve the credit quality of loans generated by subsequent solicitations. See footnote 2 to Table 4 for more detailed information on the loan-by-check charge-offs. Management expects the consumer loan charge-off ratio to decline to more moderate levels once the loans from these solicitations have seasoned. 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. The 1995 year-end allowance for loan losses equated to 3.4 times year-end non-performing loans and 2.4 times year-end non-performing assets, down from December 31, 1994 when the pro forma allowance for loan losses amounted to 5.8 times non-performing loans and 3.1 times non-performing assets. The decline in the level of the allowance primarily reflected the higher consumer loan charge-offs and charge-offs taken on real estate related loans, the majority of which resulted from the second quarter 1995 real estate loan sale mentioned previously. 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 normal 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 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. The remaining loan portfolios (unclassified commercial and real estate loans) are attributed 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. Beginning 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 SFAS No. 114, impaired loans are measured and reported based on the present value of expected future 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 the creditor will be unable to collect all amounts due according to the terms of the loan agreement and represent a subset of the classified loans noted above. A valuation allowance is required to the extent that the measure of impaired loans is less than the recorded investment. SFAS No. 114 does not apply to large groups of homogeneous loans such as consumer installment and credit card loans, which are collectively evaluated for impairment. Smaller balance commercial loans are also excluded from the application of SFAS No. 114. 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. SFAS No. 118 allows a creditor to use existing methods for recognizing interest income on impaired loans. Interest receipts on impaired loans are applied in a manner consistent with Signet's policy for non-accrual loans. For the year ended December 31, 1995, no interest income was recorded on loans once placed on non-accrual status. All interest receipts on impaired loans were applied to the principal. NON-INTEREST INCOME (ON A PRO FORMA BASIS) A significant portion of Signet's revenue is derived from non-interest related sources including consumer loan servicing income, service charges, trust and investment management fees 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 three years on a pro forma basis. Non-interest income for 1995 was $195.6 million, down 2% from $198.7 million for 1994 and included $0.5 million ($0.3 million after-tax) and $3.4 million ($2.2 million after-tax), for 1995 and 1994, respectively, of securities available for sale gains. Signet recognized nominal gains on investment securities during 1995 and 1994, as certain securities were called for redemption. Pro forma 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 Separation 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. Service charges on deposit accounts rose $2.1 million, or 3%, over 1994 to $68.2 million. Trust and investment management income, which totaled $23.5 million, was up 21% from last year primarily due to fees for managing the recently acquired Blanchard funds, growth in the number of customers served by Signet and revised trust fee schedules. Consumer loan servicing income and service charge income fell 51% from 1994 primarily related to the fact that prior to the Separation, the entire credit card portfolio retained by Signet was securitized. Signet recognized a $9.6 million gain on the securitization of home equity loans during the fourth quarter of 1995. Mortgage servicing and origination income totaled $22.4 million for 1995 compared with $18.7 million in 1994, an increase of 20%, as a result of the rise in mortgage loan servicing income more than compensating for a decline in the volume of mortgage loans originated. During 1995, residential mortgage production totaled $751 million, which was 13% lower than the 1994 level. However, towards the end of 1995, Signet experienced an increase in volume as mortgage rates declined. The Company's mortgage servicing portfolio grew to $6.6 billion at year-end 1995, up from $4.8 billion at December 31, 1994. Other service charges and fees, which consisted primarily of discount brokerage ($5.1 million), fees related to commercial and standby letters of credit ($3.9 million) and checkbooks ($3.4 million) totaled $15.1 million, level with 1994. Trading profits derived from services performed as a dealer bank for customers and from profits and losses earned on securities trading and arbitrage positions improved to $12.0 million for 1995 compared with trading losses of $268 thousand in 1994. Results from sales of mortgage loans also experienced a turnaround from losses
Table 6 NON-INTEREST INCOME (excluding Capital One) - ------------------------------------------------------------------------------------------------------------------------------- Percent Change Year Ended Increase Year Ended (dollars in thousands) December 31 (Decrease) December 31 - ------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1995/1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- Service charges on deposit accounts $ 68,231 $ 66,141 3% $ 64,471 Trust and investment management income 23,531 19,442 21 17,599 Consumer loan servicing income and service charge income 13,163 26,834 (51) 30,656 Gain on securitization of loans 9,562 N/M Mortgage servicing and origination 22,429 18,661 20 24,210 Other service charges and fees 15,069 14,962 1 16,017 Trading profits (losses) 11,969 (268) N/M (1,396) Gains (losses) on sale of mortgage loans 7,178 (3,276) N/M (3,987) Gain on sale of mortgage servicing 977 6,000 (84) Intercompany reimbursements from Capital One 26,378 N/M 27,524 Other 21,671 20,331 7 18,723 - ------------------------------------------------------------------------------------------------------------------------------ Non-interest operating income 193,780 195,205 (1) 193,817 Securities available for sale gains 532 3,413 (84) 3,913 Investment securities gains 1,257 46 N/M 405 - ------------------------------------------------------------------------------------------------------------------------------ Total non-interest income $195,569 $198,664 (2)% $198,135 - ------------------------------------------------------------------------------------------------------------------------------
of $3.3 million in 1994 to gains of $7.2 million in 1995. The adoption of SFAS No. 122 mentioned earlier and the sale of approximately $179 million adjustable rate mortgage loans in December 1995 were major factors in the improvement. Gains on sales of mortgage servicing rights amounted to $977 thousand in 1995, which was down from $6.0 million in 1994. The remaining portion of non-interest operating income, which included safe deposit box rentals, income from various insurance products, venture capital income and miscellaneous income from other sources, amounted to $21.7 million for 1995, an increase of $1.3 million, or 7%, over the prior year. NON-INTEREST EXPENSE (ON A PRO FORMA BASIS) Pro forma non-interest expense for 1995 totaled $484.5 million, a decline of $3.8 million, or 1%, from 1994. Excluding the 1995 fraud loss and the 1994 restructuring charges, non-interest expenses were up $4.4 million, or just 1%, from the prior year as lower staff expenses were more than offset by higher expenses related to the growth of the consumer loan portfolio. Table 7 details the various categories of non-interest expense for the past three years on a pro forma basis. 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 fraud loss, the restructuring charges, other one-time spin-off related expenses and foreclosed property expense from non-interest expense changes the ratio to 66.88% and 80.30% for the two respective years. On March 19, 1996, subsequent to the announcement of 1995 earnings, management discovered 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 informed the Company that they believe there will be substantial recoveries of assets related to these transactions. Based on information currently available, 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 is based on the Company's pro rata share of known claims to the total amount currently restrained and held by federal authorities less associated costs. The recovery amount is subject to change, even in the near term, as additional assets are recovered, additional claims are asserted or the market value of the restrained assets fluctuates. Management believes 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 other sources of recovery, but currently is unable to determine the probability or amount of additional recoveries. 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
Table 7 NON-INTEREST EXPENSE (excluding Capital One) - -------------------------------------------------------------------------------------------------------------------------------- Percent Change Year Ended Increase Year Ended (dollars in thousands) December 31 (Decrease) December 31 - -------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1995/1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- Salaries $181,030 $186,216 (3)% $173,710 Employee benefits 44,014 50,039 (12) 55,492 - -------------------------------------------------------------------------------------------------------------------------------- Total staff expense 225,044 236,255 (5) 229,202 Occupancy 38,484 41,869 (8) 39,094 Supplies and equipment 36,170 34,045 6 32,587 External data processing services 27,115 27,660 (2) 27,344 Travel and communications 24,544 22,758 8 17,800 Commercial fraud loss 35,000 N/M Restructuring charge 43,212 N/M Professional services 16,176 16,905 (4) 14,096 Public relations, sales and advertising 15,941 13,469 18 14,912 FDIC assessment 8,806 16,754 (47) 18,253 Credit and collection 2,044 2,368 (14) 4,321 Foreclosed property (220) (699) 69 13,575 Other 55,416 33,713 64 32,852 - -------------------------------------------------------------------------------------------------------------------------------- Total non-interest expense $484,520 $488,309 (1)% $444,036 - --------------------------------------------------------------------------------------------------------------------------------
made under the early retirement program and approximately $7.0 for lease termination and other facilities related costs. All cash outflows related to the restructuring charge were funded by cash provided by operations. In addition, $19.5 million was transferred from the restructuring liability to Signet's pension benefit liability and postretirement liability and $0.4 million was reallocated within the restructuring liability from accrued facilities related costs to accrued benefits as a result of a change in the estimated costs. The remaining liability of $7.2 million is primarily comprised of accrued 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. The plan, as it relates to the early retirement and severance programs, was fully implemented by the end of 1995. All other components of the plan should be completed by the end of 1996. Savings of approximately $40 million per year, primarily related to reduced salary and benefits expense, should be realized once the plan is fully implemented. As noted earlier, the decline in staff related costs in 1995 has been more than offset by an increase in expenses associated with expanded marketing and testing initiatives throughout the Company. 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. Travel and communications expense rose $1.8 million, or 8%, year-over-year, primarily due to higher postage and telephone charges related to managing a larger consumer loan portfolio. 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. 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 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 $2.8 billion at December 31, 1995. Occupancy expense decreased $3.4 million, or 8%, from year-to-year, due to the restructuring mentioned earlier. External data processing services totaled $27.1 million, a slight improvement from 1994. Professional services also experienced a moderate decline year-to-year. The $8.0 million, or 47%, 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. The two Signet banks are "well capitalized" under FDIC regulations and, as a result, pay the lowest FDIC insurance premium rate. 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. INCOME TAXES (ON A PRO FORMA BASIS) 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. Note L 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 Pro forma average earning assets totaled $9.4 billion for 1995, (as shown in Table 8--Average Balance Sheet), an increase of 21% from the 1994 level. 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. A more detailed discussion of the various earning asset categories follows. LOANS Pro forma loans (net of unearned income) for 1995, averaged $5.8 billion, an increase of $1.2 billion, or 27%, from the 1994 level. Average balances increased in the consumer, commercial and real estate-residential mortgage loan categories, while the real estate-construction and real estate-commercial mortgage loan average balances declined. 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. 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. The unsecured portion includes mostly student, loan-by-check and credit card loans. Signet reviews each prospective credit in order to determine an adequate level of security or collateral
Table 8 AVERAGE BALANCE SHEET (excluding Capital One) - --------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- Average Income\ Yield\ Average Income\ Yield\ Average Income\ Yield\ (dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Earning assets (tax equivalent basis): (1) Interest bearing deposits with other banks $ 31,649 $ 1,903 6.01% $ 249,866 $ 11,441 4.58% $ 262,910 $ 12,031 4.58% Federal funds and resale agreements 587,333 35,452 6.04 920,591 42,279 4.59 752,510 23,196 3.08 Trading account securities 476,361 30,800 6.47 287,192 21,487 7.48 484,384 31,297 6.46 Loans held for securitization 303,123 32,316 10.66 Loans held for sale 253,758 23,757 9.36 200,712 13,010 6.48 249,797 17,064 6.83 Securities available for sale 1,705,966 125,492 7.36 1,327,896 72,826 5.48 299,023 17,007 5.69 Investment securities-taxable 208,711 15,055 7.21 65,350 4,305 6.59 1,628,855 93,806 5.76 Investment securities-nontaxable 115,221 13,614 11.82 197,231 23,895 12.12 274,967 32,366 11.77 Loans (net of unearned income): (2) Consumer 2,213,646 244,485 11.04 1,497,056 128,570 8.59 1,152,057 87,286 7.58 Commercial 2,633,370 209,765 7.97 2,148,726 165,372 7.70 2,101,423 158,587 7.55 Real estate-construction 224,597 23,263 10.36 249,353 21,007 8.42 448,859 31,590 7.04 Real estate-commercial mortgage 452,392 44,275 9.79 560,542 50,254 8.97 607,573 47,757 7.86 Real estate-residential mortgage 241,038 19,992 8.29 97,855 8,399 8.58 76,962 7,634 9.92 - ----------------------------------------------------------------------------------------------------------------------------------- Total loans 5,765,043 541,780 9.40 4,553,532 373,602 8.20 4,386,874 332,854 7.59 - ----------------------------------------------------------------------------------------------------------------------------------- Total earning assets 9,447,165 $820,169 8.68% 7,802,370 $562,845 7.21% 8,339,320 $559,621 6.71% - ----------------------------------------------------------------------------------------------------------------------------------- Non-rate related assets: Cash and due from banks 522,774 493,490 460,799 Allowance for loan losses (138,655) (175,199) (203,839) Premises and equipment (net) 172,119 189,894 173,730 Other assets 603,964 528,153 558,398 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $10,607,367 $8,838,708 $9,328,408 - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Deposits: Money market and interest checking $ 1,033,501 $ 26,390 2.55% $1,020,838 $ 23,123 2.27% $ 960,342 $ 22,544 2.35% Money market savings 1,361,516 47,696 3.50 1,618,550 44,571 2.75 1,738,336 45,463 2.62 Savings accounts 1,283,696 48,738 3.80 1,019,068 33,461 3.28 772,194 24,079 3.12 Savings certificates 1,852,542 81,345 4.39 1,981,823 66,352 3.35 2,364,320 58,514 2.47 Large denomination certificates 105,390 5,498 5.22 159,027 7,382 4.64 272,693 10,970 4.02 Foreign 106,029 6,347 5.99 86,657 4,422 5.10 200,440 6,627 3.31 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 5,742,674 216,014 3.76 5,885,963 179,311 3.05 6,308,325 168,197 2.67 Federal funds and repurchase agreements 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 6.59 377,457 21,513 5.70 Long-term borrowings 253,319 17,021 6.72 254,917 16,685 6.55 286,809 16,681 5.82 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 8,055,422 341,499 4.24% 6,283,207 204,105 3.25% 6,972,591 206,391 2.96% - ----------------------------------------------------------------------------------------------------------------------------------- Non-interest bearing liabilities: Demand deposits 1,538,928 1,549,629 1,424,260 Other liabilities 205,342 187,995 156,211 Common stockholders' equity 807,675 817,877 775,346 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $10,607,367 $8,838,708 $9,328,408 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income/spread $478,670 4.44% $358,740 3.96% $353,230 3.75% - ------------------------------------------------------------------------------------------------------------------------------------ Interest income to average earning assets 8.68% 7.21% 6.71% Interest expense to average earning assets 3.61 2.62 2.47 - ------------------------------------------------------------------------------------------------------------------------------------ Net yield margin 5.07% 4.59% 4.24% - ------------------------------------------------------------------------------------------------------------------------------------
(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 $19,322, $14,019 and $14,655 for 1995, 1994 and 1993, respectively. Table 9 SUMMARY OF TOTAL LOANS (excluding Capital One) - ------------------------------------------------------------------------------ December 31 - ------------------------------------------------------------------------------ (in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------ Loans: Consumer $1,751,274 $2,384,178 $1,243,080 Commercial 3,090,904 2,472,620 2,299,973 Real estate-construction 236,103 209,183 309,842 Real estate-commercial mortgage 366,698 526,956 581,529 Real estate-residential mortgage 122,584 191,508 71,411 - ------------------------------------------------------------------------------ Total $5,567,563 $5,784,445 $4,505,835 - ------------------------------------------------------------------------------ prior to making the loan. The type of collateral will vary and range from liquid assets to real estate. Consumer loans averaged $2.2 billion for 1995, a 48% increase from 1994, and represented 38% of the total loan portfolio. This category consists of student, home equity, installment, credit card and other consumer loan types. The increase in 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 13 illustrates the effectiveness of Signet's ability to implement growth strategies in the consumer and student loan markets in 1995. 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 46% of the total average loan portfolio, averaged $2.6 billion for 1995, an increase of 23% from last year. Signet's commercial loan portfolio is strongly 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 certain in-house expertise along with projected prospects for profitability. The credit risk associated with middle market and 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 $225 million, a decrease of 10%, or $25 million, from the 1994 average. This category represented less than 4% of the average loan portfolio for 1995. During 1995 and 1994, the Company sold portfolios of real estate related loans totaling $55 million and $102 million, respectively, at a discount for which there was sufficient allowance. The sale of these loans accounted for approximately $13.9 million and $21.0 million of the 1995 and 1994, respectively, net charge-offs. The real estate loan sale impacted the real estate-construction loan ($6 million-1995 and $73 million-1994) and real estate-commercial mortgage loan ($49 million-1995 and $29 million-1994) 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 market 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 8% of the average loan portfolio in 1995. This category averaged $452 million, a 19% decrease from 1994. The portfolio consisted of $254 million of commercial mortgage loans and $198 million of mini-permanent (interim) mortgage loans compared with $276 million and $285 million for the respective loan types in 1994. 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 $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 the result of growth in mortgages originated by Signet and loans acquired in the Pioneer acquisition. This category consisted of conventional home mortgages which experienced a decline in refinancings during 1994. Refinancing activity rose substantially toward the end of 1995 as interest rates fell. 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. 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. The various on-balance sheet loan categories for the past three year-ends are detailed in Table 9. Table 10 shows the maturities of selected loan categories at year-end 1995. 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
Table 10 MATURITIES OF SELECTED LOANS December 31, 1995 - ----------------------------------------------------------------------------------------------------------------------------- Maturing - ----------------------------------------------------------------------------------------------------------------------------- Within After One Year After (in thousands) One Year But Within Five Years Five Years Total - ----------------------------------------------------------------------------------------------------------------------------- Commercial $1,566,075 $1,158,200 $366,629 $3,090,904 Real estate-construction 106,872 121,812 7,419 236,103 Real estate-commercial mortgage 129,673 168,179 68,846 366,698 - ----------------------------------------------------------------------------------------------------------------------------- Total $1,802,620 $1,448,191 $442,894 $3,693,705 - -----------------------------------------------------------------------------------------------------------------------------
For interest sensitivity purposes, $412,207 of the amounts due after one year are fixed rate loans and $1,478,878 are variable rate loans. loan commitments related primarily to commercial loans and excluding credit card loans were approximately $2.7 billion at year-end 1995 down from $2.9 billion at year-end 1994. 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 investment securities is described in Note A to Consolidated Financial Statements. As noted earlier, Signet implemented SFAS No. 115 in 1994. In December, 1995, Signet reclassified the entire investment securities portfolio to the available for sale category. Investment securities for 1995 averaged $324 million, a $61 million increase over the 1994 level. At December 31, 1995, trading account securities consisted of $403 million of government securities, $73 million of asset-backed securities and $3 million of other securities. Trading account securities averaged $476 million in 1995, up 66% from the $287 million level in 1994. 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, 1995, the net unrealized gains, net of tax, related to securities available for sale, totaled $45.2 million primarily from an increase in the value of mortgage-backed securities and U.S. Treasury obligations due to declining interest rates. Pro forma 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. The U.S. Treasury securities portfolio totaled $574 million at year-end 1995, up from $408 million at the end of 1994. 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. Table 11 shows the maturities of the securities available for sale portfolio and the weighted average yields to maturity of such securities. At December 31, 1995, 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
Table 11 SECURITIES AVAILABLE FOR SALE December 31, 1995 - ----------------------------------------------------------------------------------------------------------------------------------- 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 U.S. Government and agency obligations -- Mortgage-backed securities $1,102,553 8.22% $428,265 7.01% $1,530,818 7.88% Other $11,890 5.55% 414,526 6.73 156,859 6.40 583,275 6.61 States and political subdivisions 20,704 10.56 22,839 10.51 6,940 10.45 $ 4,213 10.54% 54,696 10.52 Other 1,019 7.17 69,270 7.06 94,893 6.88 165,182 6.49 - ----------------------------------------------------------------------------------------------------------------------------------- Total $33,613 8.69% $1,609,188 7.82% $592,064 6.89% $99,106 7.04% $2,333,971 7.53% - -----------------------------------------------------------------------------------------------------------------------------------
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. did not have any investments with a single issuer (except for 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 are loans held by Signet on behalf of Capital One under previously agreed upon terms of the spin-off. Pro forma other earning assets averaged $1.2 billion in 1995, down $195 million, or 14%, from $1.4 billion in 1994. These earning assets reflect the normal process of balancing the subsidiary banks' 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. CONSUMER LOAN GROWTH In 1994, Signet expanded its use of information-based strategies to all types of consumer loans, which significantly increased growth in this 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 loan product, "loan-by-check," whereby customers received a direct-mail solicitation and were offered installment loans in the form of a check. To activate the loan, the customer endorsed and deposited the check. Signet is also applying information-based strategies to home equity, student and small business loans. Solicitations in these areas are mostly in the preliminary testing stages. These tests are designed to help Signet develop products that are both appealing to customers and economically feasible for the Company. As a result of these solicitations, loans grew at a strong pace. From December 31, 1994 to December 31, 1995, the student loan portfolio (including $300 million in student loans held for securitization) increased $161 million; the installment loan portfolio
Table 12 IMPACT OF CONSUMER LOAN SECURITIZATIONS (excluding Capital One) - --------------------------------------------------------------------------------- Year Ended December 31 - ----------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------- STATEMENT OF INCOME Net interest income $ 468,067 $ 345,034 $ 337,477 Provision for loan losses 34,786 (16,229) 13,256 Non-interest income 195,569 198,664 198,135 Non-interest expense 484,520 488,309 444,036 - ----------------------------------------------------------------------------------- Income before income taxes $ 144,330 $ 71,618 $ 78,320 - ----------------------------------------------------------------------------------- ADJUSTMENTS FOR SECURITIZATIONS Net interest income $ 31,734 $ 42,722 $ 45,789 Provision for loan losses 11,709 15,106 17,642 Non-interest income (29,587) (27,616) (28,147) Non-interest expense - ------------------------------------------------------------------------------------ Increase (decrease) to income before income taxes $ (9,562) $ 0 $ 0 - ------------------------------------------------------------------------------------ ADJUSTMENTS FOR LOANS THAT MAY BE SOLD TO CAPITAL ONE Net interest income $ (9,559) $ (2,638) $ 0 Provision for loan losses (18,522) (1,043) 0 Non-interest income (8,963) 1,595 0 Non-interest expense - ------------------------------------------------------------------------------------ Increase (decrease) to income before income taxes $ 0 $ 0 $ 0 - ------------------------------------------------------------------------------------ MANAGED STATEMENT OF INCOME (ADJUSTED) Net interest income $ 490,242 $ 385,118 $ 383,266 Provision for loan losses 27,973 (2,166) 30,898 Non-interest income 157,019 172,643 169,988 Non-interest expense 484,520 488,309 444,036 - ------------------------------------------------------------------------------------ Income before income taxes $ 134,768 $ 71,618 $ 78,320 - ------------------------------------------------------------------------------------ As reported (excluding Capital One): Average earning assets $9,447,165 $7,802,370 $ 8,339,320 Return on assets 0.90% 0.63% 0.69% Net yield margin 5.07 4.59 4.24 On a managed basis: Average earning assets $9,338,467 $8,089,158 $ 8,659,320 Return on assets 0.85% 0.61% 0.66% Net yield margin 5.40 4.93 4.61 Yield on managed consumer loan portfolio 10.90% 10.03% 10.15% - ------------------------------------------------------------------------------------
Table 13 MANAGED CONSUMER LOAN PORTFOLIO (excluding Capital One) - ---------------------------------------------------------------------------------------- December 31 - ---------------------------------------------------------------------------------------- (in thousands) 1995 1994 1993 - ---------------------------------------------------------------------------------------- AVERAGE BALANCES: Student loans $ 784,423 $ 649,520 $ 409,371 Installment loans 697,660 268,928 221,699 Home equity loans 411,364 462,315 452,789 Credit card 234,706 30,822 Other loans 85,493 85,471 68,198 - -------------------------------------------------------------------------------------------- Sub-total average consumer loan portfolio 2,213,646 1,497,056 1,152,057 - -------------------------------------------------------------------------------------------- Consumer loans held for sale 124,056 Credit card loans held for securitization 68,465 Home equity loans held for securitization 82,603 Student loans held for securitization 152,055 - -------------------------------------------------------------------------------------------- Total average on-balance sheet portfolio 2,640,825 1,497,056 1,152,057 Securitized consumer loans 301,358 335,007 320,000 Less loans that may be sold to Capital One (410,056) (48,219) - -------------------------------------------------------------------------------------------- Total average managed consumer loan portfolio $2,532,127 $1,783,844 $1,472,057 - -------------------------------------------------------------------------------------------- PERIOD-END BALANCES: Student loans $ 709,583 $ 848,099 $ 526,730 Installment loans 810,999 577,105 225,766 Home equity loans 87,348 511,947 434,101 Credit card 81,532 339,270 Other loans 61,812 107,757 56,483 - -------------------------------------------------------------------------------------------- Sub-total period-end consumer loan portfolio 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 2,381,876 2,384,178 1,243,080 Securitized consumer loans 665,702 428,333 320,000 Less loans that may be sold to Capital One (240,902) (517,295) - -------------------------------------------------------------------------------------------- Total period-end managed consumer loan portfolio $2,806,676 $2,295,216 $1,563,080 - --------------------------------------------------------------------------------------------
(excluding loans that may be sold to Capital One) grew $290 million; and the home equity loan portfolio (including $481 million of securitized loans) was up $56 million. In order to facilitate the growth in the consumer loan portfolio, the Company has securitized portions of the portfolio. 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 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 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 monthly 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), a gain is recorded at the time of sale equal to the present value of the anticipated future net cash flows. Table 12 indicates the impact of securitizations on income, average assets, return on assets and net yield margin for the past three years. The managed consumer loan portfolio is comprised of consumer loans, consumer loans held for sale, consumer loans held for securitization and securitized consumer loans, less loans that may 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 $511 million, or 22%, from December 31, 1994 to December 31, 1995 as indicated in Table 13. RISK ELEMENTS (ON A PRO FORMA BASIS) NON-PERFORMING ASSETS Non-performing assets include non-accrual loans, restructured loans and foreclosed properties. 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
Table 14 NON-PERFORMING ASSETS (excluding Capital One) - ----------------------------------------------------------------------------------------------------------------------------- December 31 ---------------------------------- (dollars in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- Non-accrual loans: Commercial $ 9,033 $10,548 $ 42,303 Consumer 1,572 1,708 2,191 Real estate-construction 2,988 5,490 17,837 Real estate-mortgage * 24,888 7,310 6,523 - ----------------------------------------------------------------------------------------------------------------------------- Total non-accrual loans 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 38,481 26,056 73,933 Foreclosed properties 15,822 22,480 48,295 Less foreclosed property reserve (5,742) - ----------------------------------------------------------------------------------------------------------------------------- Total foreclosed properties 15,822 22,480 42,553 - ----------------------------------------------------------------------------------------------------------------------------- Total non-performing assets $54,303 $48,536 $116,486 - ----------------------------------------------------------------------------------------------------------------------------- Percentage to loans (net of unearned) and foreclosed properties 1.00% 0.85% 2.59% - ----------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses to: Non-performing loans 337.05% 583.37% 256.71% Non-performing assets 238.85 313.18 162.94 - -----------------------------------------------------------------------------------------------------------------------------
* 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. 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. Credit card loans typically are charged off when they are six months past due and a minimum payment has not been received for 60 days, while other consumer loans typically are charged off when the loan is six months past due; therefore, these loans are not usually placed in non-accruing status. 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 physically takes possession of the collateral. Non-performing assets at year-end 1995 totaled $54.3 million, or 1.00% 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. Table 14 provides details on the various components of non-performing assets for the last three year-ends. 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. 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, of the 1995 past due student loans, $30.7 million, or 95%, were indirectly government guaranteed and do not represent material loss exposure to Signet.
Table 15 ACCRUING LOANS PAST DUE 90 DAYS OR MORE (excluding Capital One) - --------------------------------------------------------------------------------------------------------------------------- December 31 - --------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Commercial $ 6,326 $ 5,433 $ 2,641 Consumer: Student loans 32,308 22,654 19,694 Credit card 5,118 3,289 Loan-by-check-risk tests 8,812 Loan-by-check other 2,424 177 Other consumer 2,068 1,192 1,179 - --------------------------------------------------------------------------------------------------------------------------- Total consumer 50,730 27,312 20,873 Mortgage 9,200 5,464 5,989 Construction 115 2,363 11,133 - --------------------------------------------------------------------------------------------------------------------------- Total $66,371 $40,572 $40,636 - ---------------------------------------------------------------------------------------------------------------------------
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 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 $0.9 million, $0.5 million and $2.5 million for 1995, 1994 and 1993, respectively, compared with interest income of $4.1 million, $3.4 million and $7.5 million for the same respective 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 $15.0 million of foreclosed properties in 1995, $34.1 million in 1994 and $61.6 million in 1993 were approximately $0.6 million, $1.1 million and $1.8 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 $7.3 billion for 1995, down 2% from 1994. Core deposits averaged $7.1 billion for 1995, virtually unchanged from 1994. 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 core deposit categories which experienced the greatest decline were money market savings and savings certificates which fell $257 million and $129 million, respectively, from 1994. The increase in savings accounts was due to growth in the Capital One deposits held by Signet under previously agreed upon terms of the spin-off. Approximately $500 million of these deposits will transfer to Capital One in the first quarter of 1996. The competition among financial institutions for these deposits and increased consumer awareness 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 $211 million for 1995, a decline of $34 million, or 14%, 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 1995. Table 16 MATURITIES OF DOMESTIC LARGE DENOMINATION CERTIFICATES ($100,000 OR MORE) December 31, 1995 - ----------------------------------------------------------------- (in thousands) Balance Percent - ----------------------------------------------------------------- 3 months or less $ 78,460 60% Over 3 through 6 months 15,199 12 Over 6 through 12 months 6,202 5 Over 12 months 29,850 23 - ----------------------------------------------------------------- Total $129,711 100% - ----------------------------------------------------------------- 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 generally moderately priced funds and has become 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 $1.9 billion from 1994 to average $2.1 billion in order to fund the growth in loans. See Note G 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 $253 million for 1995, a decline of only $1.6 million from 1994. Note H to Consolidated Financial Statements provides a detailed analysis of long-term borrowings at December 31, 1995 and 1994. 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, 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 $49 million, net unrealized gains on securities available for sale of $67 million and the issuance of common stock through investor, employee stock purchase and stock option plans, 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 (see Note T to the Consolidated Financial Statements). This generally reduced Signet's capital ratios; however, the ratios remained strong and both of Signet's banks are within "well-capitalized" regulatory guidelines (see discussion on Capital Analysis). 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. Signet has no plans at present to sell these securities. 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 principal sources of dividends to be paid to shareholders are dividends and interest from the subsidiary banks. Various state and federal laws and policies limit the ability to pay dividends to shareholders and the ability of Signet's subsidiary banks to pay dividends to the Company. Under applicable regulatory restrictions, each of the Company's banking subsidiaries was able to pay dividends to the Company in 1995. 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 has helped the Company withstand unforeseen adverse developments and take advantage of profitable investment opportunities. Table 17 details certain risk-based and other capital data. 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 Signet's current capital and liquidity positions are strong and its capital position is adequate to support its business areas. 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, 1995, both of Signet's banking subsidiaries met the well-capitalized criteria.
Table 17 RISK-BASED AND OTHER CAPITAL DATA - --------------------------------------------------------------------------------------------------------------------------- December 31 - --------------------------------------------------------------------------------------------------------------------------- 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- (dollars in thousands-except per share) Balance Percent Balance Percent - --------------------------------------------------------------------------------------------------------------------------- Qualifying common stockholders' equity $ 815,342 $1,237,453 Less goodwill and other disallowed intangibles (58,881) (44,581) - --------------------------------------------------------------------------------------------------------------------------- Total Tier I capital 756,461 9.82% 1,192,872 12.58% Qualifying debt 114,534 165,800 Qualifying allowance for loan losses 96,751 119,812 - --------------------------------------------------------------------------------------------------------------------------- Total Tier II capital 211,285 2.74 285,612 3.01 - --------------------------------------------------------------------------------------------------------------------------- Total risked-based capital $ 967,746 12.56 $1,478,484 15.59 - --------------------------------------------------------------------------------------------------------------------------- Total risk-adjusted assets $7,707,111 $9,484,219 - --------------------------------------------------------------------------------------------------------------------------- Leverage ratio 6.93 9.90 - --------------------------------------------------------------------------------------------------------------------------- Tangible Tier I leverage ratio 6.36 9.57 - ---------------------------------------------------------------------------------------------------------------------------
December 31 - --------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Other Ratios: Common equity to assets (excluding Capital One) 7.87% 7.54% 8.07% Internal equity capital generation rate 5.90 8.79 13.21 Common dividend payout ratio 42.55 38.61 26.14 Book value per share $14.59 $18.96 $17.04 - ---------------------------------------------------------------------------------------------------------------------------
Table 18 INTANGIBLE ASSETS (excluding Capital One) - ----------------------------------------------------------- December 31 - ----------------------------------------------------------- (in thousands) 1995 1994 1993 - ----------------------------------------------------------- Goodwill $ 53,125 $37,247 $22,833 Core deposit premiums 12,685 16,019 11,730 Mortgage servicing rights 58,668 29,431 12,847 - ----------------------------------------------------------- Total intangible assets $124,478 $82,697 $47,410 - ----------------------------------------------------------- The amortization of intangibles is expected to be approximately $9,089 annually over the next five years. As detailed in Table 17, the Company's consolidated risk-based capital ratios at December 31, 1995 were 12.56% and 9.82% 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, 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. For informational purposes, Table 18 details the components of Signet's intangible assets for the past three years and the estimated amortization for the next five years. The increase in goodwill during 1995 was due to the acquisition of Sheffield Management Company and Sheffield Investments, Inc. DERIVATIVES 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 existing balance sheet mix. During 1995, the Company's interest rate swaps decreased income on earning assets by $14.0 million and reduced borrowing costs by $20.3 million for a net pre-tax impact of $6.3 million. Of the existing interest rate swaps, the majority will mature by 1998. Interest rate floors, with average strike prices of approximately 5% tied to the three-month LIBOR decreased income on earning assets by $1.9 million in 1995. Interest rate floors were purchased to hedge variable rate assets against decreases in interest rates. Maturity dates on the interest rate floors range from 1997-2003. Interest rate caps, with average strike prices of approximately 7.5% tied to the three-month LIBOR, increased borrowing costs by $0.5 million in 1995. Interest rate caps were purchased to hedge variable rate liabilities against increases in interest rates. All interest rate caps mature by the end of 1996. Futures contracts were purchased to hedge interest rate changes on securities available for sale and savings certificates. During 1995, 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 O and Note U 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 RATE SWAPS - -------------------------------------------------------------- Synthetic Trading/ (notional in millions) Alteration (a) Dealer(b) Total - -------------------------------------------------------------- Balance at December 31, 1993 $2,558 $328 $2,886 Additions (c) 953 30 983 Expirations 187 81 268 - -------------------------------------------------------------- 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 - -------------------------------------------------------------- (a) Impacts interest rate sensitivity. Synthetic alteration is a 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. (c) In 1994, the Company purchased $539 million of interest rate swaps that hedge credit card securitizations. Income from these swaps is recorded in non-interest income. These swaps are not included in this roll forward schedule. 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, the core 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 insulate the Company against the possibility of sudden changes in interest rates. ALCO, in managing interest rate sensitivity, also uses simulations to better measure the impact that market changes and alternative strategies might have on net interest income. Current period maturity, repricing information and Table 20 INTEREST RATE SENSITIVITY December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------------------------- Earning assets: Securities available for sale $ 126 $ 31 $ 10 $ 78 $ 245 $ 72 $ 385 $1,632 Loans 3,265 28 108 337 3,738 311 681 686 Other earnings assets 1,353 40 10 1 1,404 241 48 - --------------------------------------------------------------------------------------------------------------------------------- Total earning assets 4,744 99 128 416 5,387 624 1,114 2,318 Interest bearing liabilities: Deposits: Savings (1) 2,002 2,002 1,632 203 Other time 218 110 122 302 752 358 883 37 Short-term borrowings 1,837 52 9 1,898 6 Long-term borrowings 100 150 250 3 - --------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 4,057 162 231 452 4,902 364 2,515 243 Non-rate related assets and liabilities, net 948 471 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST SENSITIVITY GAP 687 (63) (103) (36) 485 260 (2,349) 1,604 Impact of interest rate swaps, futures, floors and caps (899) (875) (1,100) 400 (2,474) 425 2,034 15 Impact of securitizations and repricing (2) (185) 87 (98) 98 - --------------------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap adjusted for impact of securitization, interest rate swaps, futures, floors and caps (2) (397) (938) (1,203) 451 (2,087) 685 (217) $1,619 - --------------------------------------------------------------------------------------------------------------------------------- Adjusted interest sensitivity gap as a percentage of total assets (3.62)% (8.54)% (10.96)% 4.11% (19.01)% 6.24% (1.98)% 14.75% CUMULATIVE ADJUSTED INTEREST SENSITIVITY GAP $ (397) $(1,335) $(2,538) $(2,087) $(2,087) $(1,402) $(1,619) - --------------------------------------------------------------------------------------------------------------------------------- Adjusted cumulative interest sensitivity gap as a percentage of total assets (3.62)% (12.16)% (23.12)% (19.01)% (19.01)% (12.77)% (14.75)% - ---------------------------------------------------------------------------------------------------------------------------------
(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. 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 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 the latter half of 1995, 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 $485 million at December 31, 1995, 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 $2.1 billion, or 19% of total assets. At December 31, 1995, the notional values of derivative products for the purpose of managing interest rate risk were $2.8 billion of interest rate swaps, $650 million of interest rate floors and $300 million of interest rate caps. LIQUIDITY (ON A PRO FORMA BASIS) 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. Table 21 LIQUIDITY RATIOS (excluding Capital One) - ------------------------------------------------------------- December 31 ---------------------------------- 1995 1994 1993 - ------------------------------------------------------------- Ratio of liquid assets to: Purchased funds 198.0% 194.0% 252.8% Loans 85.4 58.0 94.3 Assets 42.1 33.5 42.6 - ------------------------------------------------------------- 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 1995 maintained the Company's strong liquidity position. Signet's 1995 pro forma average loan balances were entirely funded with core deposits. However, as noted previously, approximately $500 million of core deposits will transfer to Capital One in the first quarter of 1996. 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 does not have any significant long-term debt issues maturing until 1997; however, on February 1, 1994, Signet called for redemption at par the remaining $11.9 million of 7 3/4% Senior Debentures due in 1997. For 1995, cash and cash equivalents declined $961 million primarily due to a sharp decline in interest bearing deposits with other banks and federal funds sold and securities purchased under resale agreements. Cash used by operations was $70 million for this time period resulting mainly from purchases and originations exceeding proceeds from sales of loans held for sale and purchases exceeding proceeds from sales of trading account securities. Cash used by investing activities amounted to $2.3 billion principally due to purchases of securities available for sale and an increase in loans. Cash provided by financing activities amounted to $1.4 billion due primarily to financing Capital One prior to the spin-off. 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, 1995 was $58.0 million. The Company does not expect any losses from counterparties failing to meet their obligations. Also, at December 31, 1995, the Company had unrealized losses on derivative transactions totaling $21.8 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. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was issued in March 1995. The statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Signet will adopt the statement beginning January 1, 1996. The effect of adopting SFAS No. 121 is not expected to have a material impact on the financial statements of the Company. Signet Banking Corporation and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--1994 COMPARED TO 1993 On February 28, 1995, Signet completed the spin-off of substantially all of its credit card business. For a more detailed discussion of this transaction, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations -- 1995 Compared To 1994. 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. INCOME STATEMENT ANALYSIS Signet reported consolidated net income of $149.8 million, or $2.59 per share, for 1994 compared with $174.4 million, or $3.06 per share, in 1993. The 1994 net income reflected 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 consolidation of facilities. On a pro forma basis, net income was $55.8 million in 1994, a decrease of $8.1 million, or 12.6%, from $63.9 million in 1993. The 1994 pro forma net income reflected special pre-tax charges of $43.2 million for restructuring. On a pro forma basis and excluding special one-time charges, 1994 net income amounted to $83.9 million resulting in an ROA of 0.95% and an ROE of 10.26%. These ratios compared favorably with the 0.69% ROA and 9.10% ROE achieved in 1993, on a pro forma basis. Taxable equivalent net interest income of $523.7 million was a principal component of earnings and reflected a decline of $21.4 million, or 3.9%, from the 1993 level. The net yield margin for 1994 was 5.16%, a one basis point decline from the prior year. This decrease in the net yield margin was primarily due to higher funding costs associated with interim funding for Capital One. On a pro forma basis, taxable equivalent net interest income increased slightly to $345.0 million. The pro forma net yield margin increased 35 basis points to 4.59% from 4.24% in the previous year. On a pro forma basis, the net interest spread was 3.96%, a 6% increase from the 1993 level of 3.75%. The overall yield on earning assets was 7.21%, up 50 basis points from 1993, while the increase in rates paid for interest bearing liabilities amounted to 3.25%, up 29 basis points from the previous year. Pro forma non-interest operating income totaled $195.2 million for 1994, relatively level with the prior year. Most of the change from the previous year resulted from increases in service charges on deposit accounts ($1.7 million) and trust income ($1.8 million) that were offset by a decline in credit card servicing and service charge income ($3.8 million). Pro forma non-interest expense totaled $488.3 million for 1994, an increase of $44.3 million, or 10%. The increase from the previous year is due to the restructuring charge of $43.2 million which included costs related to an early retirement plan, employee severance and consolidation of facilities. Staff expense (salaries and employee benefits), the largest component of non-interest expense, totaled $236.3 million, a $7.1 million, or 3%, increase over 1993. Salaries rose $12.5 million or 7% year-over-year and benefits expense for 1994 decreased $5.5 million, or 10%, because the $6 million cost of implementing SFAS No. 112, "Employers' Accounting for Postemployment Benefits," was recorded in 1993. Travel and communications expense rose $5.0 million, or 28%, year-over-year, primarily due to higher postage and telephone charges related to managing a larger consumer loan portfolio. The $14.3 million decline in foreclosed property expense was primarily due to the elimination in 1994 of provisions recorded to maintain the reserve for foreclosed properties and lower costs to maintain and operate these properties. During 1993, foreclosed property reserve provisions of $7.4 million were recorded. The reserve was eliminated at year-end 1994 as management deemed foreclosed property to be fairly valued on the balance sheet. The deposit insurance assessment from the FDIC totaled $16.8 million, a $1.5 million decline from 1993. Signet's pro forma efficiency ratio (the ratio of non-interest expense to taxable equivalent operating income) was 88.2% for 1994, compared with 81.2% for 1993. Excluding the restructuring charges and foreclosed property expense from non-interest expense lowered the ratio to 80.3% and 78.7% for the same respective years. With the anticipated Capital One spin-off, Signet began a major refocus on its core banking businesses. 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. In conjunction with the plan, Signet recorded a restructuring charge of $43.2 million ($28.1 million after-tax, or $0.48 per share). Included in the charge was 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 obligations 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, 1994, Signet had reduced the restructuring liability by approximately $2.4 million for severance and early retirement benefits and approximately $5.9 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 13% during the year ended December 31, 1994. The provision for loan losses of $14.5 million represented a significant decrease from the 1993 level of $47.3 million as credit quality continued to improve. On a pro forma basis, Signet had net provision reversals of $16.2 million in 1994 due to improved credit quality in the commercial portfolio and improved confidence in the real estate portfolio from successful completion of the Accelerated Real Estate Assets Reduction Program compared with provision expense of $13.3 million in 1993. Net charge-offs decreased 25% to $24.9 million for 1994, compared with $33.0 million for the prior year. Decreases were noted in all loan categories except real estate-mortgage. Of the $30.1 million in real estate charge-offs, approximately $21 million were the result of the sale of $102 million of real estate related loans in the third quarter of 1994. Commercial loan net charge-offs experienced an improvement when comparing 1994 with 1993 due to improved credit quality. Consumer net charge-offs increased to $1.6 million from $0.5 in 1993 partially the result of charge-offs on the loan-by-check product. The allowance for loan losses on a pro forma basis at December 31, 1994 was $152.0 million, or 2.67% of year-end loans, compared with the 1993 year-end allowance of $189.8 million, or 4.27% of loans. Pro forma income tax expense for 1994 was $15.8 million as compared with $14.4 million for 1993. This represented an effective tax rate of 22.0% for 1994 and 18.4% for 1993. An increase in the federal tax rate from 34% to 35% in 1993 had minimal impact on the income tax expense. Adoption of SFAS No. 109, "Accounting for Income Taxes" in 1993 did not have a material impact on the Company's financial position or results of operations. BALANCE SHEET REVIEW Pro forma average earning assets totaled $7.8 billion for 1994, down $537 million from 1993. The portfolios experiencing the largest declines were investment securities ($1.6 billion) and trading account securities ($203 million), while the securities available for sale and the loan portfolios increased by $1.0 billion and $167 million, respectively. Loans (net of unearned income) for 1994, averaged $4.6 billion, a 4% increase from the 1993 level. Pro forma consumer loans averaged $1.5 billion for 1994, a 30% increase from 1993, and represented 33% of the total loan portfolio. The increase in pro forma consumer loans was concentrated in student loans and loans generated by implementing Signet's information-based strategy. Real estate-construction loans totaled $249 million, a decrease of 44%, or $200 million, from the 1993 average. During 1994, the Company sold a $102 million portfolio of real estate related loans at a discount for which there was sufficient allowance. The real estate loan sale impacted the real estate-construction ($73 million) and real estate-commercial mortgage loan ($29 million) categories. At December 31, 1994, trading account securities consisted of $212 million of government securities, $139 million of asset-backed securities and $2 million of other securities. Trading account securities averaged $287 million in 1994, down 41% from the $484 million level in 1993. Securities available for sale for 1994 averaged $1.3 billion, an increase of $1.0 billion over the 1993 level, when SFAS No. 115 was adopted. At December 31, 1994, the securities available for sale portfolio (excluding securities having no maturity) had a remaining average maturity of less than four years and unrealized gains of $1.6 million and unrealized losses of $39.2 million. Signet's investment securities portfolio totaled $399 million at December 31, 1994. Investment securities for 1994 averaged $264 million, a decrease of $1.6 billion over the 1993 level, as approximately $1.5 billion were reclassified from investment securities to securities available for sale when SFAS No. 115 was adopted. At year-end 1994, the investment securities portfolio had a remaining average maturity of less than four years and unrealized gains of $5.9 million and unrealized losses of $5.0 million. Investment securities portfolio yields increased to 10.71% from the 1993 level of 6.63% as the majority of securities reclassified to available for sale were lower yielding securities. RISK ELEMENTS Non-performing assets at year-end 1994 totaled $48.5 million. This compared favorably with $116.5 million (net of the $5.7 million foreclosed property reserve) at the end of 1993. Non-performing real estate assets declined $34.1 million, or 48%, including a $20.1 million drop in foreclosed properties (net of reserves). One large commercial credit ($24.7 million) was placed on non-accrual status at the end of 1993. In early 1994, the Company sold this loan, for which there was sufficient allowance. Signet sold $27.5 million of foreclosed properties during 1994. Signet provided financing on only $388 thousand of the foreclosed properties sold in 1994. The reserve for foreclosed properties was eliminated at December 31, 1994, since management deemed foreclosed properties to be fairly valued on the balance sheet. Pro forma accruing loans past due 90 days or more as to principal or interest payments totaled $40.6 million at the end of 1994 and 1993. Of the 1994 past due student loans, $20.3 million, or 90%, were indirectly government guaranteed and do not represent material loss exposure to Signet. At year-end 1994, management was monitoring $43.2 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. By the end of 1993, Signet had successfully completed its Accelerated Real Estate Asset Reduction Program. As a result of the success, Signet terminated the Program effective January 1, 1994, and all remaining assets were assigned to work-out units. FUNDING AND CAPITAL Pro forma average deposits totaled $7.4 billion for 1994, a 4% decrease from 1993. Short-term borrowings declined $235 million, or 62%, from 1993 to average $142 million. Long-term borrowings averaged $255 million for 1994, a decline of 11%, or $32 million, from 1993. This decline resulted primarily from regularly scheduled amortization of principal and on February 1, 1994, Signet called for redemption at par the remaining $11.9 million of 7 3/4% Senior Debentures due in 1997. During the third quarter of 1994, Signet completed the acquisition of Pioneer, a $400 million financial institution located in Chester, Virginia. The transaction was structured as a tax-free exchange of stock and was accounted for as a purchase. Pioneer's shareholders received .6232 shares of Signet common stock for each Pioneer share held. This resulted in Signet issuing approximately 1.5 million shares of common stock. The transaction had little dilutive effect on Signet's earnings per share. Effective January 1, 1994, Signet adopted 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, 1994, the net unrealized losses, net of tax, related to securities available for sale, totaled $21.8 million primarily from a reduction in the value of mortgage backed securities and U.S. Treasury obligations. The risk-based capital ratios for the Company at December 31, 1994 were 15.59% and 12.58% for Total Capital and Tier I Capital, respectively. The leverage ratio at December 31, 1994 was 9.90%. Signet Banking Corporation and Subsidiaries 1995 FOURTH QUARTER ANALYSIS Tables 22 through 25, on the following pages, contain selected quarterly financial data for the years ended December 31, 1995 and 1994. In addition to the discussion of consolidated information, pro forma data is provided for the same periods where it was meaningful to discuss the Company's results excluding Capital One. Consolidated and pro forma results are the same for the second, third and fourth quarters of 1995. Consolidated net income for the fourth quarter of 1995 was $9.0 million, or $.15 per share, and included the $35.0 million fraud loss, as noted previously, and a $9.6 million gain related to the securitization of $481 million of equity line loans. This compared with $42.9 million, or $.73 per share, for the fourth quarter of 1994 which included special pre-tax charges of $9.6 million related to restructuring. The fourth quarter 1995 results represent a 49% decrease in net income from the 1994 fourth quarter net income of $17.6 million, or $.31 per share, on a pro forma basis. The fourth quarter 1995 ROA of 0.33% and ROE of 4.18% were down from the fourth quarter 1994 ROA of 0.74% and ROE of 8.61% on a pro forma basis. The equity-to-asset ratio was 7.90% as of December 31, 1995, up from 7.54% at the end of 1994, on a pro forma basis. Total revenues (net interest income and non-interest income) for the quarter were $183.7 million, up 12% from the previous quarter. On a pro forma basis, total revenues were up 34% from the 1994 fourth quarter. Signet's net interest margin was 4.78%, a slight increase from the 4.73% margin on a pro forma basis in the fourth quarter of 1994, but down from the third quarter 1995 net interest margin of 4.96%. Approximately half of the decline in the net interest margin from the third quarter resulted from securitizing consumer loans. Taxable equivalent net interest income declined $14.2 million, or 11%, from the fourth quarter of 1994. On a pro forma basis, net interest income was up $18.4 million, or 19%. Interest income on consumer loans and loans held for securitization increased $20.0 million, or 43%, as a result of a $535 million, or 28%, increase in outstandings and higher yields on the portfolio. Taxable equivalent commercial loan income increased $13.9 million, or 32%, compared with the fourth quarter of 1994 due to a $668 million, or 30%, increase in average commercial loans outstanding. The increase in interest income was partially offset by a $26.5 million increase in interest expense resulting from $1.5 billion in additional interest bearing liabilities required to fund the loan growth. A 58 basis point increase in the rate paid on interest bearing liabilities also contributed to the increase in interest expense. Non-interest income increased $26.4 million, or 63%, from $41.7 million in the fourth quarter of 1994, on a pro forma basis. Trust and investment management income increased $2.0 million, or 39%, as a result of the increase in mutual fund assets under management due to the July acquisition of the assets of Sheffield Management Company and Sheffield Investments, Inc., managers and distributors of the Blanchard family of funds. Mortgage servicing and origination income increased $2.5 million, or 59%, related to an increase in the volume of loans processed due to lower interest rates along with an increase in the mortgage loans serviced by Signet. Trading profits were $4.0 million compared to $106 thousand in the fourth quarter of 1994. 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). Nominal investment securities gains resulted from securities being called for redemption. On a pro forma basis, non-interest expense increased over the fourth quarter of 1994 due to the fraud loss. Categories experiencing increases included salaries and employee benefits of $3.9 million, or 7%, travel and communications of $1.3 million, or 21%, and a decrease in income related to foreclosed properties of $1.6 million that is recorded net of foreclosed property expense. The FDIC assessment fell $3.5 million from the same quarter in 1994 reflecting the decline in rates charged by the FDIC effective June 1, 1995. A restructuring charge of $9.6 million related to the writedown of bank-owned properties and lease termination costs due to the abandonment of facilities was recorded in the fourth quarter of 1994. The efficiency ratio of 63%, excluding the fraud loss, improved 3 points from the 1995 third quarter and 14 points from the 1994 fourth quarter, excluding restructuring charges, primarily as a result of re-engineering programs initiated in the second half of 1994. Growth in installment and student loans fueled a 5% increase in the managed consumer loan portfolio, which was up $142 million from the previous quarter. The Company securitized $481 million of home equity loans and sold $179 million of adjustable rate residential mortgages. Signet continued to de-emphasize commercial real estate lending and reduced that portfolio 6% to $603 million at year-end from $643 million on September 30, 1995. Non-performing assets at December 31, 1995, totaled $54.3 million, or 1.00% of loans and foreclosed properties. Net charge-offs for the quarter were $15.6 million, or 1.12%, of average loans. The Company provided $18.6 million for the allowance for loan losses in the fourth quarter which was significantly higher than previous quarters due to higher loss estimates on the loan-by-check risk tests. At December 31, 1995, the loan loss allowance of $129.7 million equaled 238.85% of non-performing assets and 2.39% of loans outstanding. Table 22 SELECTED QUARTERLY FINANCIAL INFORMATION (dollars in thousands -- except per share) Signet Banking Corporation ("Signet") completed the spin-off of its subsidiary, Capital One Financial Corporation ("Capital One") on February 28, 1995. Due to the significance of the spin-off, certain pro forma financial information is provided below to illustrate Signet's financial results and other data assuming the spin-off occurred prior to the periods presented.
- --------------------------------------------------------------------------------------------------------------------------- 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED EARNINGS Interest income $ 206,989 $ 206,743 $ 202,735 $ 249,532 $ 222,931 $ 198,222 $ 196,225 $ 189,635 Interest expense 91,394 89,799 85,289 106,283 94,768 68,500 71,315 62,419 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income 115,595 116,944 117,446 143,249 128,163 129,722 124,910 127,216 Provision for loan losses 18,604 8,681 4,250 7,180 3,000 3,000 2,999 5,499 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 96,991 108,263 113,196 136,069 125,163 126,722 121,911 121,717 Non-interest operating income (1) 67,666 46,363 42,692 120,758 148,166 151,658 136,157 128,643 Securities gains (losses) 454 731 247 357 267 162 3,310 (280) Non-interest expense (2) 152,191 109,507 111,444 190,926 210,875 276,814 186,625 172,109 - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes (benefit) 12,920 45,850 44,691 66,258 62,721 1,728 74,753 77,971 Applicable income taxes (benefit) 3,894 15,707 15,005 24,033 19,847 (1,734) 24,368 24,858 - ------------------------------------------------------------------------------------------------------------------------------ Net income 9,026 30,143 29,686 42,225 42,874 3,462 50,385 53,113 Net income excluding the fraud loss and restructuring/ termination charges (2) 31,776 30,143 29,686 42,225 49,110 57,164 50,385 53,113 PER COMMON SHARE Net income $ 0.15 $ 0.50 $ 0.50 $ 0.71 $ 0.73 $ 0.05 $ 0.88 $ 0.93 Net income excluding the fraud loss and restructuring/termination charges (2) 0.53 0.50 0.50 0.71 0.84 0.98 0.88 0.93 - ------------------------------------------------------------------------------------------------------------------------------ PRO FORMA (excluding Capital One) EARNINGS Net interest income (taxable equivalent) $ 117,443 $ 119,482 $ 120,401 $ 121,344 $ 99,009 $ 92,621 $ 79,600 $ 87,510 Net interest income 115,595 116,944 117,446 118,082 95,561 89,166 76,231 84,076 Net income 9,026 30,143 29,686 26,706 17,621 4,456 15,784 17,982 Net income excluding the fraud loss and restructuring charges (3) 31,776 30,143 29,686 26,706 23,857 26,308 15,784 17,982 PER COMMON SHARE Net income $ 0.15 $ 0.50 $ 0.50 $ 0.45 $ 0.31 $ 0.07 $ 0.28 $ 0.31 Net income excluding the fraud loss and restructuring charges (3) 0.53 0.50 0.50 0.45 0.42 0.45 0.28 0.31 Book value 14.59 14.27 13.90 13.15 12.69 14.41 14.31 14.47 AT PERIOD-END Earning assets $9,443,028 $9,911,356 $9,514,318 $9,337,761 $8,824,793 $7,774,290 $7,461,630 $7,645,907 Loans (net of unearned income) 5,416,028 5,509,437 5,684,427 5,647,599 5,695,722 4,720,418 4,379,022 4,325,734 Core deposits 7,413,414 7,173,040 7,106,437 7,113,166 7,164,587 7,239,642 7,083,856 7,321,176 Number of common stockholders 15,166 15,134 15,259 15,374 15,503 15,462 14,716 14,756 Full-time employees 3,974 3,900 3,743 3,759 3,723 4,154 4,462 4,402 Part-time employees 1,021 1,049 1,133 1,029 987 967 1,218 1,103 RATIOS Return on average assets 0.33% 1.11% 1.14% 1.06% 0.74% 0.21% 0.74% 0.82% Return on average common stockholders' equity 4.18 14.51 15.00 14.34 8.61 2.13 7.87 8.85 Efficiency ratio (4) 63.47 65.99 68.67 69.95 77.46 75.89 87.04 81.55 Net interest spread 4.16 4.32 4.50 4.83 4.07 4.26 3.60 3.93 Net yield margin 4.78 4.96 5.14 5.42 4.73 4.90 4.24 4.50 Total stockholders' equity to assets 7.87 7.59 7.70 7.36 7.54 9.58 9.60 9.43 AVERAGE SHARES OUTSTANDING (in thousands) 60,230 60,146 59,669 59,142 58,927 57,898 57,358 57,247 CREDIT QUALITY DATA Non-performing assets $ 54,303 $ 51,504 $ 57,447 $ 41,597 $ 48,536 $ 65,857 $ 77,655 $ 88,370 Accruing loans past due 90 days or more 66,371 66,232 54,538 42,919 40,572 45,080 39,835 38,380 Net charge-offs (5) 15,622 12,965 18,593 2,775 1,707 21,570 1,262 353 Allowance for loan losses to: Non-performing loans 337.05% 339.92% 297.24% 574.88% 583.37% 410.51% 452.45% 389.42% Non-performing assets 238.85 251.77 237.60 364.76 313.18 238.16 232.11 211.57 Net loans 2.39 2.35 2.40 2.69 2.67 3.32 4.12 4.32 Non-performing assets to loans and foreclosed properties 1.00 0.93 1.01 0.74 0.85 1.39 1.76 2.02 Net loan losses to average loans 1.12 0.89 1.27 0.19 0.14 1.92 0.12 0.03 - ------------------------------------------------------------------------------------------------------------------------------
(1) The third quarter of 1994 included a $6.0 million gain on sale of mortgage servicing rights. The fourth quarter of 1995 included a $9.6 million gain on securitization of loans. (2) The third quarter of 1994 included a $49.0 million contract termination fee and $33.6 million of restructuring charges. The fourth quarter of 1994 included $9.6 million of restructuring charges. First, second, third and fourth quarters of 1994 included credit card solicitation expenses of $21.4 million, $24.2 million, $24.2 million and $31.1 million, respectively. 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 third and fourth quarters of 1994 included $33.6 million and $9.6 million of restructuring charges, respectively. The fourth quarter of 1995 included the $35.0 million fraud loss. (4) The efficiency ratio has been adjusted to exclude the fraud loss, restructuring charges, foreclosed property expense and one-time spin-off expenses. (5) The second quarter of 1995 and the third quarter of 1994 included approximately $13.9 million and $20.6 million, respectively, of charge-offs related to the sale of approximately $55.0 million and $101.5 million, respectively, 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, 1995 and 1994. 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. Table 23 QUARTER-END BALANCE SHEET TREND (excluding Capital One)
- ------------------------------------------------------------------------------------------------------------------------------ (in thousands) 12/31/95 9/30/95 6/30/95 3/31/95 12/31/94 9/30/94 6/30/94 3/31/94 - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 599,113 $ 498,193 $ 529,205 $ 541,946 $ 437,867 $ 451,079 $ 537,330 $ 501,678 Interest bearing deposits with other banks 3,129 1,712 14,610 33,523 342,795 239,274 227,198 217,430 Federal funds sold and resale agreements 460,217 425,305 638,641 772,865 835,821 1,090,348 1,078,429 728,735 Trading account securities 478,723 464,950 439,737 490,266 353,040 279,245 258,547 262,944 Loans held for securitization 389,700 750,000 450,300 150,000 Loans held for sale 361,260 267,535 259,372 159,224 69,506 128,613 145,299 241,312 Securities available for sale 2,333,971 2,195,180 1,651,554 1,692,387 1,142,626 1,113,371 1,152,477 1,637,359 Investment securities 297,237 375,677 391,897 385,283 203,021 220,658 232,393 Loans: Consumer 1,751,274 1,776,434 2,116,882 2,229,957 2,384,178 1,618,995 1,377,554 1,286,806 Commercial 3,090,904 2,982,401 2,820,339 2,577,674 2,472,620 2,282,334 2,173,695 2,163,035 Real estate-construction 236,103 237,271 227,531 211,097 209,183 218,500 244,354 278,554 Real estate mortgage- commercial 366,698 406,102 433,701 505,717 526,956 532,391 566,211 578,906 Real estate mortgage- residential 122,584 248,145 224,433 225,477 191,508 133,084 73,815 71,927 - ------------------------------------------------------------------------------------------------------------------------------ Gross loans 5,567,563 5,650,353 5,822,886 5,749,922 5,784,445 4,785,304 4,435,629 4,379,228 Less: Unearned income (151,535) (140,916) (138,459) (102,323) (88,723) (64,886) (56,607) (53,494) Allowance for loan losses (129,702) (129,672) (136,497) (151,729) (152,003) (156,843) (180,248) (186,961) - ------------------------------------------------------------------------------------------------------------------------------ Net loans 5,286,326 5,379,765 5,547,930 5,495,870 5,543,719 4,563,575 4,198,774 4,138,773 Premises and equipment (net) 192,431 180,549 166,731 160,672 159,031 202,714 202,697 196,036 Interest receivable 104,437 98,000 90,190 75,082 83,942 70,484 65,990 82,602 Other assets 768,558 534,689 458,370 513,994 505,053 457,403 389,500 469,901 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $10,977,865 $11,093,115 $10,622,317 $10,477,726 $9,858,683 $8,799,127 $8,476,899 $8,709,163 - ------------------------------------------------------------------------------------------------------------------------------ LIABILITIES Non-interest bearing deposits $ 1,726,378 $ 1,603,922 $ 1,647,309 $ 1,533,797 $1,537,702 $1,592,825 $1,543,001 $1,631,185 Interest bearing deposits: Money market and interest checking 1,102,140 1,064,412 1,038,959 1,023,532 1,050,176 1,011,484 996,276 1,032,734 Money market savings 1,338,985 1,337,665 1,319,829 1,382,105 1,453,629 1,500,611 1,620,924 1,686,754 Savings accounts 1,395,514 1,338,824 1,291,289 1,224,393 1,170,990 1,095,370 1,000,049 951,792 Savings certificates 1,850,397 1,828,217 1,809,051 1,949,339 1,952,090 2,039,352 1,923,606 2,018,711 Large denomination certificates 129,711 99,890 99,020 100,987 168,853 216,428 201,739 138,304 Foreign 49,846 80,318 96,084 183,337 9,225 85,242 - ------------------------------------------------------------------------------------------------------------------------------ Total interest bearing deposits 5,866,593 5,749,326 5,654,232 5,863,693 5,804,963 5,948,487 5,742,594 5,828,295 - ------------------------------------------------------------------------------------------------------------------------------ Total deposits 7,592,971 7,353,248 7,301,541 7,397,490 7,342,665 7,541,312 7,285,595 7,459,480 Securities sold under repurchase agreements 1,124,105 1,153,479 1,229,433 1,202,629 875,458 Federal funds purchased 780,193 1,285,918 816,946 521,295 195,005 Other short-term borrowings 105,408 201,619 Long-term borrowings 253,033 253,129 253,222 253,550 253,641 253,729 253,818 254,124 Interest payable 19,460 23,455 18,030 26,047 21,814 28,036 24,874 35,490 Other liabilities 344,154 181,514 185,140 199,831 224,659 133,159 99,023 139,208 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 10,113,916 10,250,743 9,804,312 9,706,250 9,114,861 7,956,236 7,663,310 7,888,302 STOCKHOLDERS' EQUITY Common stock 296,044 295,244 294,175 293,298 293,184 292,389 284,333 283,594 Capital surplus 200,093 197,911 195,899 193,986 198,869 195,704 141,446 137,942 Retained earnings 367,812 349,217 327,931 284,192 251,769 354,798 387,810 399,325 - ------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 863,949 842,372 818,005 771,476 743,822 842,891 813,589 820,861 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $10,977,865 $11,093,115 $10,622,317 $10,477,726 $9,858,683 $8,799,127 $8,476,899 $8,709,163 - ------------------------------------------------------------------------------------------------------------------------------
Table 24 QUARTERLY AVERAGE BALANCE SHEET TREND (excluding Capital One)
- ------------------------------------------------------------------------------------------------------------------------------ Three Months Ended - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) 12/31/95 9/30/95 6/30/95 3/31/95 12/31/94 9/30/94 6/30/94 3/31/94 - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Earning assets Interest bearing deposits with other banks $ 7,077 $ 8,136 $ 22,799 $ 89,749 $ 247,233 $ 243,888 $ 247,936 $ 260,623 Federal funds sold and resale agreements 538,752 469,512 532,922 812,447 1,230,529 1,003,048 856,757 607,287 Trading account securities 469,665 464,254 553,080 418,011 309,084 257,789 272,872 286,083 Loans held for securitization 623,801 425,543 153,300 1,667 Loans held for sale 369,802 312,734 234,107 94,718 110,040 127,541 212,379 356,399 Securities available for sale 1,932,161 1,712,148 1,679,836 1,494,844 1,037,842 1,157,308 1,351,368 1,775,042 Investment securities-taxable 154,857 230,852 235,514 214,027 191,270 20,984 20,942 26,886 Investment securities- nontaxable 50,812 106,860 146,867 157,609 177,261 187,469 205,078 219,689 Loans (net of unearned income): Consumer 1,824,487 2,182,724 2,349,345 2,505,854 1,913,217 1,464,321 1,335,810 1,268,147 Commercial 2,863,087 2,747,241 2,553,554 2,362,850 2,194,675 2,149,870 2,108,076 2,141,690 Real estate-construction 242,094 230,364 217,685 207,805 212,661 229,590 262,844 293,423 Real estate mortgage- commercial 387,273 423,622 480,112 520,340 524,541 564,423 573,203 580,572 Real estate mortgage- residential 281,250 241,066 236,107 204,888 154,567 89,412 74,312 72,317 - ------------------------------------------------------------------------------------------------------------------------------ Total loans 5,598,191 5,825,017 5,836,803 5,801,737 4,999,661 4,497,616 4,354,245 4,356,149 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets 9,745,118 9,555,056 9,395,228 9,084,809 8,302,920 7,495,643 7,521,577 7,888,158 Non-rate related assets: Cash and due from banks 543,776 533,901 509,633 503,217 485,718 500,352 499,276 488,570 Allowance for loan losses (125,658) (133,144) (144,407) (151,757) (156,150) (170,879) (185,330) (188,844) Premises and equipment (net) 188,689 174,691 164,536 160,217 184,648 186,738 200,858 187,395 Other assets 630,085 625,258 561,476 598,458 587,877 502,227 483,960 538,285 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $10,982,010 $10,755,762 $10,486,466 $10,194,944 $9,405,013 $8,514,081 $8,520,341 $8,913,564 - ------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Deposits: Money market and interest checking $ 1,050,321 $ 1,037,342 $ 1,031,701 $ 1,014,201 $1,027,081 $1,012,616 $1,022,071 $1,021,613 Money market savings 1,356,002 1,341,762 1,346,920 1,402,102 1,489,537 1,618,108 1,669,819 1,699,044 Savings accounts 1,372,400 1,315,832 1,255,593 1,188,584 1,138,532 1,042,726 981,676 910,572 Savings certificates 1,800,643 1,791,296 1,876,689 1,943,788 1,981,963 1,937,671 1,972,308 2,036,432 Large denomination certificates 104,933 100,367 92,660 123,864 126,316 100,199 83,526 328,939 Foreign 77,306 116,204 146,829 83,737 263,810 81,771 - ------------------------------------------------------------------------------------------------------------------------------ Total interest bearing deposits 5,761,605 5,702,803 5,750,392 5,756,276 6,027,239 5,711,320 5,729,400 6,078,371 Federal funds and repurchase agreements 2,338,713 2,201,617 1,950,959 1,512,558 269,945 Other short-term borrowings 30,098 195,275 294,721 Long-term borrowings 253,085 253,174 253,427 253,596 253,685 253,773 254,007 258,266 - ------------------------------------------------------------------------------------------------------------------------------ Total interest bearing liabilities 8,353,403 8,157,594 7,984,876 7,717,705 6,845,590 5,965,093 5,983,407 6,336,637 Non-interest bearing liabilities: Demand deposits 1,584,375 1,557,185 1,497,770 1,515,423 1,536,099 1,543,375 1,563,117 1,556,213 Other liabilities 188,036 216,792 210,092 206,520 211,256 174,840 169,646 196,223 Common stockholders' equity 856,196 824,191 793,728 755,296 812,068 830,773 804,171 824,491 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $10,982,010 $10,755,762 $10,486,466 $10,194,944 $9,405,013 $8,514,081 $8,520,341 $8,913,564 - ------------------------------------------------------------------------------------------------------------------------------
Table 25 QUARTERLY INCOME TREND (excluding Capital One)
- ------------------------------------------------------------------------------------------------------------------------------ Three Months Ended - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) 12/31/95 9/30/95 6/30/95 3/31/95 12/31/94 9/30/94 6/30/94 3/31/94 - ------------------------------------------------------------------------------------------------------------------------------ Interest income: Loans, including fees: Consumer $ 52,026 $ 60,296 $ 62,068 $ 70,095 $ 46,254 $ 34,054 $ 24,909 $ 23,353 Commercial 56,128 53,703 50,358 46,365 42,337 40,539 39,664 40,655 Real estate-construction 6,402 6,080 5,628 5,152 5,203 5,298 5,241 5,235 Real estate-commercial mortgage 8,856 9,358 11,276 12,131 12,651 12,707 11,754 10,408 Real estate-residential mortgage 5,628 5,011 5,074 4,279 3,152 1,917 1,514 1,816 - ------------------------------------------------------------------------------------------------------------------------------ Total loans, including fees 129,040 134,448 134,404 138,022 109,597 94,515 83,082 81,467 Interest bearing deposits with other banks 102 127 358 1,316 3,067 2,851 2,952 2,571 Federal funds sold and resale agreements 8,025 7,166 8,232 12,029 17,053 11,602 8,674 4,950 Trading account securities 7,736 7,410 8,936 6,718 6,038 5,062 4,747 5,640 Loans held for securitization 14,262 11,561 6,420 73 Loans held for sale 8,635 7,785 5,858 1,479 1,864 2,270 3,115 5,761 Securities available for sale 35,442 31,963 31,342 26,512 15,928 15,949 16,343 23,893 Investment securities-taxable 2,797 4,190 4,257 3,811 3,302 311 307 385 Investment securities-nontaxable 950 2,093 2,928 3,139 3,560 3,756 4,131 4,396 - ------------------------------------------------------------------------------------------------------------------------------ Total interest income 206,989 206,743 202,735 193,099 160,409 136,316 123,351 129,063 Interest expense: Money market and interest checking 6,516 6,794 6,939 6,141 6,124 5,842 5,605 5,552 Money market savings 12,161 11,873 11,704 11,958 10,954 10,918 11,381 11,318 Savings accounts 13,426 12,785 11,800 10,727 10,106 8,656 7,751 6,948 Savings certificates 21,381 22,070 20,747 17,147 19,514 16,468 17,320 13,050 Large denomination certificates 1,451 1,332 1,186 1,529 2,143 1,135 880 3,224 Foreign 1,138 1,721 2,235 1,253 3,393 1,029 - ------------------------------------------------------------------------------------------------------------------------------ Total interest on deposits 56,073 56,575 54,611 48,755 52,234 43,019 42,937 41,121 Securities sold under repurchase agreements 16,343 14,689 13,880 11,732 Federal funds purchased 14,874 14,211 12,266 7,295 3,213 Other short-term borrowings 413 2,761 4,896 Long-term borrowings 4,104 4,324 4,119 4,474 4,505 4,131 4,183 3,866 - ------------------------------------------------------------------------------------------------------------------------------ Total interest expense 91,394 89,799 85,289 75,017 64,848 47,150 47,120 44,987 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income 115,595 116,944 117,446 118,082 95,561 89,166 76,231 84,076 Provision for loan losses 18,604 8,681 4,250 3,251 (3,133) (5,162) (5,451) (2,483) - ------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 96,991 108,263 113,196 114,831 98,694 94,328 81,682 86,559 Non-interest income: Service charges on deposit accounts 16,816 17,732 17,212 16,471 16,104 16,234 18,106 15,697 Trust and investment management income 6,997 6,430 5,212 4,892 5,025 4,747 4,869 4,801 Consumer loan servicing and service charge income 6,468 2,511 1,633 2,551 6,832 7,379 6,062 6,561 Gain on securitization of loans 9,562 Other 27,823 19,690 18,635 13,145 13,509 26,670 22,041 20,568 - ------------------------------------------------------------------------------------------------------------------------------ Non-interest operating income 67,666 46,363 42,692 37,059 41,470 55,030 51,078 47,627 Securities available for sale gains 20 166 244 102 220 140 3,265 (212) Investment securities gains 434 565 3 255 47 22 45 (68) - ------------------------------------------------------------------------------------------------------------------------------ Total non-interest income 68,120 47,094 42,939 37,416 41,737 55,192 54,388 47,347 Non-interest expense: Salaries 48,932 45,792 43,668 42,638 43,962 48,078 48,123 46,053 Employee benefits 7,723 10,517 12,076 13,698 8,770 12,360 14,189 14,720 Occupancy 9,572 9,635 9,434 9,843 10,668 11,248 9,965 9,988 Supplies and equipment 9,513 9,384 8,715 8,558 9,108 8,019 8,518 8,400 External data processing services 7,289 6,868 6,748 6,210 7,024 8,236 6,503 5,897 Travel and communications 7,208 6,138 5,604 5,594 5,952 5,638 5,458 5,710 Commercial fraud loss 35,000 Restructuring charges 9,593 33,619 Foreclosed property-net (301) 64 (556) 572 (1,888) 595 810 (216) Other 27,255 21,109 25,755 24,265 24,325 18,470 20,984 19,430 - ------------------------------------------------------------------------------------------------------------------------------ Total non-interest expense 152,191 109,507 111,444 111,378 117,514 146,263 114,550 109,982 - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes (benefit) 12,920 45,850 44,691 40,869 22,917 3,257 21,520 23,924 Applicable income taxes (benefit) 3,894 15,707 15,005 14,163 5,296 (1,199) 5,736 5,942 - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 9,026 $ 30,143 $ 29,686 $ 26,706 $ 17,621 $ 4,456 $ 15,784 $ 17,982 - ------------------------------------------------------------------------------------------------------------------------------
Table 26 STATEMENT OF CONSOLIDATED INCOME (excluding Capital One)
- ----------------------------------------------------------------------------------------------- Year Ended December 31 - ----------------------------------------------------------------------------------------------- (in thousands) (unaudited) 1995 1994 1993 - ----------------------------------------------------------------------------------------------- Interest income: Loans, including fees: Consumer $244,485 $128,570 $ 87,286 Commercial 206,554 163,195 157,157 Real estate-construction 23,262 20,977 31,570 Real estate-commercial mortgage 41,621 47,520 44,830 Real estate-residential mortgage 19,992 8,399 7,634 - ----------------------------------------------------------------------------------------------- Total loans, including fees 535,914 368,661 328,477 Interest bearing deposits with other banks 1,903 11,441 12,031 Federal funds sold and resale agreements 35,452 42,279 23,196 Trading account securities 30,800 21,487 31,297 Loans held for securitization 32,316 Loans held for sale 23,757 13,010 16,875 Securities available for sale 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 809,566 549,139 543,868 Interest expense: Money market and interest checking 26,390 23,123 22,544 Money market savings 47,696 44,571 45,463 Savings accounts 48,738 33,461 24,079 Savings certificates 81,345 66,352 58,514 Large denomination certificates 5,498 7,382 10,970 Foreign 6,347 4,422 6,627 - ----------------------------------------------------------------------------------------------- Total interest on deposits 216,014 179,311 168,197 Securities sold under repurchase agreements 56,644 Federal funds purchased 48,646 3,213 Other short-term borrowings 3,174 4,896 21,513 Long-term borrowings 17,021 16,685 16,681 - ----------------------------------------------------------------------------------------------- Total interest expense 341,499 204,105 206,391 - ----------------------------------------------------------------------------------------------- Net interest income 468,067 345,034 337,477 Provision for loan losses 34,786 (16,229) 13,256 - ----------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 433,281 361,263 324,221 Non-interest income: Service charges on deposit accounts 68,231 66,141 64,471 Trust and investment management income 23,531 19,442 17,599 Consumer loan servicing and service charge income 13,163 26,834 30,656 Gain on securitization of loans 9,562 Other 79,293 82,788 81,091 - ----------------------------------------------------------------------------------------------- Non-interest operating income 193,780 195,205 193,817 Securities available for sale gains 532 3,413 3,913 Investment securities gains 1,257 46 405 - ----------------------------------------------------------------------------------------------- Total non-interest income 195,569 198,664 198,135 Non-interest expense: Salaries 181,030 186,216 173,710 Employee benefits 44,014 50,039 55,492 Occupancy 38,484 41,869 39,094 Supplies and equipment 36,170 34,045 32,587 External data processing services 27,115 27,660 27,344 Travel and communications 24,544 22,758 17,800 Commercial fraud loss 35,000 Restructuring charges 43,212 Other 98,163 82,510 98,009 - ----------------------------------------------------------------------------------------------- Total non-interest expense 484,520 488,309 444,036 - ----------------------------------------------------------------------------------------------- Income before income taxes 144,330 71,618 78,320 Applicable income taxes 48,769 15,775 14,391 - ----------------------------------------------------------------------------------------------- Net income $ 95,561 $ 55,843 $ 63,929 - -----------------------------------------------------------------------------------------------
Table 27 SELECTED FINANCIAL DATA (1)
- --------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 - ---------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS (dollars in thousands-except per share) Net interest income-taxable equivalent $ 503,837 $ 523,717 $ 545,093 $ 454,912 $ 420,026 $ 469,807 Less: taxable equivalent adjustment 10,603 13,706 15,753 19,302 22,056 25,879 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income 493,234 510,011 529,340 435,610 397,970 443,928 Provision for loan losses (2) 38,715 14,498 47,286 67,794 287,484 182,724 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 454,519 495,513 482,054 367,816 110,486 261,204 Non-interest operating income (3) 277,479 564,624 361,118 280,988 248,537 188,571 Securities available for sale gains 532 3,413 3,913 10,504 94,666 Investment securities gains (losses) 1,257 46 405 (17,951) (1,445) 12,971 - ---------------------------------------------------------------------------------------------------------------------------- Total non-interest income 279,268 568,083 365,436 273,541 341,758 201,542 Non-interest expense (4) 564,068 846,423 598,316 499,239 508,925 414,535 - ---------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) 169,719 217,173 249,174 142,118 (56,681) 48,211 Applicable income taxes (benefit) (5) 58,639 67,339 74,760 32,918 (30,934) 6,833 - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 111,080 $ 149,834 $ 174,414 $ 109,200 $ (25,747) $ 41,378 - ---------------------------------------------------------------------------------------------------------------------------- Per common share: Net income (loss) $ 1.86 $ 2.59 $ 3.06 $ 1.96 $ (0.48) $ 0.78 Cash dividends declared (6) 0.79 1.00 0.80 0.45 0.30 0.78 Book value at year-end 14.59 18.96 17.04 14.77 13.17 13.83 Average common shares outstanding 59,826,421 57,862,927 56,920,090 55,727,358 53,994,340 53,026,764 - ---------------------------------------------------------------------------------------------------------------------------- SELECTED AVERAGE BALANCES (dollars in millions) Assets $ 11,134 $ 11,469 $ 11,617 $ 11,168 $ 11,534 $ 12,349 Earning assets 9,919 10,152 10,553 10,181 10,538 11,374 Loans (net of unearned income) 6,120 6,408 6,206 5,618 6,071 7,218 Deposits 7,367 7,747 7,733 7,886 8,362 7,900 Long-term borrowings 233 255 287 298 318 353 Interest bearing liabilities 8,501 8,606 9,121 9,000 9,506 10,291 Common stockholders' equity 868 1,046 889 768 750 755 - ---------------------------------------------------------------------------------------------------------------------------- SELECTED YEAR-END BALANCES (dollars in millions) Assets $ 10,978 $ 12,931 $ 11,849 $ 12,093 $ 11,239 $ 11,405 Earning assets 9,443 11,479 10,745 11,010 9,443 10,291 Loans (net of unearned income) 5,416 7,924 6,310 5,809 5,884 6,445 Deposits 7,593 7,822 7,821 7,823 8,481 8,344 Long-term borrowings 253 254 266 298 299 350 Interest bearing liabilities 8,024 9,846 9,167 9,684 9,031 9,272 Common stockholders' equity 864 1,111 965 827 712 736 - ---------------------------------------------------------------------------------------------------------------------------- OPERATING RATIOS Net income to: Average common stockholders' equity 12.79% 14.33% 19.62% 14.22% N/M 5.48% Average assets 1.00 1.31 1.50 0.98 N/M 0.34 Stockholders' equity to assets (average) 7.80 9.12 7.65 6.88 6.50% 6.11 Loans to deposits (average) 83.07 82.72 80.26 71.24 72.60 91.36 Net loan losses to average loans 0.87 0.71 0.91 2.34 2.03 1.51 Net interest spread (7) 4.45 4.63 4.76 4.05 3.40 3.41 Net yield margin (7) 5.08 5.16 5.17 4.47 3.98 4.13 At year-end: Allowance for loan losses to loans 2.39 2.78 4.01 4.57 5.60 2.54 Allowance for loan losses to non-performing loans 337.05 846.32 342.63 228.25 156.84 117.15 - ----------------------------------------------------------------------------------------------------------------------------
(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; 1991--$53.5 million; and 1990--$52.1 million. (2) 1991 included a special provision of $146.6 million to accelerate the reduction of real estate assets. (3) 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, 1991, and 1990 included $29.1 million, $100.9 million, $55.8 million, $23.1 million, $14.6 million and $21.4 million, respectively, of 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: 1995--$0.7 million; 1994--$1.2 million; 1993--$1.5 million; 1992--($2.5) million; 1991--$32.9 million; and 1990--$4.6 million. Additionally, 1992 included $6.3 million of recaptured alternative minimum tax and 1990 included $6.3 million of 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. Table 28 NET INTEREST INCOME ANALYSIS taxable equivalent basis (1)
- ---------------------------------------------------------------------------------------------------------------------------------- 1995 vs 1994 1994 vs 1993 Year Ended ---------------------------- Year Ended --------------------------- December 31 Increase Change due to (3) December 31 Increase Change due to (3) (in thousands) 1995 1994 (Decrease) Volume Rates 1993 (Decrease) Volume Rates - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans, including fees: (2) Consumer $292,024 $342,670 $(50,646) $(86,336) $35,690 $310,880 $ 31,790 $ 33,160 $ (1,370) Commercial 209,765 165,372 44,393 38,501 5,892 158,587 6,785 3,570 3,215 Real estate-construction 23,263 21,007 2,256 (2,252) 4,508 31,590 (10,583) (14,041) 3,458 Real estate-commercial mortgage 44,275 50,254 (5,979) (10,281) 4,302 47,757 2,497 (3,697) 6,194 Real estate-residential mortgage 19,992 8,399 11,593 11,882 (289) 7,634 765 2,072 (1,307) - ---------------------------------------------------------------------------------------------------------------------------------- Total loans 589,319 587,702 1,617 (27,043) 28,660 556,448 31,254 18,041 13,213 Interest bearing deposits with other banks 2,025 11,512 (9,487) (12,269) 2,782 12,031 (519) (533) 14 Federal funds and resale agreements 38,732 44,294 (5,562) (17,472) 11,910 23,196 21,098 6,713 14,385 Trading account securities 30,800 21,487 9,313 12,555 (3,242) 31,297 (9,810) (12,741) 2,931 Credit card loans held for securitization 36,448 41,015 (4,567) (9,625) 5,058 36,263 4,752 3,568 1,184 Loans held for sale 23,757 13,010 10,747 3,972 6,775 17,007 (3,997) (3,342) (655) Securities available for sale 126,717 73,409 53,308 24,415 28,893 17,064 56,345 59,316 (2,971) Investment securities-taxable 15,190 4,395 10,795 10,341 454 93,806 (89,411) (89,957) 546 Investment securities-nontaxable 13,614 23,895 (10,281) (9,695) (586) 32,366 (8,471) (9,150) 679 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest income 876,602 820,719 55,883 (19,254) 75,137 819,478 1,241 (31,101) 32,342 INTEREST EXPENSE: Money market and interest checking 26,390 23,123 3,267 295 2,972 22,544 579 1,420 (841) Money market savings 47,696 44,571 3,125 (7,808) 10,933 45,463 (892) (3,133) 2,241 Savings accounts 48,738 33,461 15,277 9,513 5,764 24,079 9,382 7,698 1,684 Savings certificates 81,345 61,377 19,968 (4,169) 24,137 58,514 2,863 (9,466) 12,329 Large denomination certificates 11,669 14,527 (2,858) (6,516) 3,658 10,970 3,557 1,849 1,708 Foreign 6,347 10,071 (3,724) (6,893) 3,169 6,627 3,444 1,201 2,243 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest on deposits 222,185 187,130 35,055 (11,395) 46,450 168,197 18,933 (3,003) 21,936 Federal funds and repurchase agreements 109,961 65,894 44,067 17,530 26,537 63,986 1,908 (11,441) 13,349 Other short-term borrowings 15,302 27,293 (11,991) (16,091) 4,100 25,521 1,772 (264) 2,036 Long-term borrowings 25,317 16,685 8,632 7,566 1,066 16,681 4 (1,855) 1,859 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest expense 372,765 297,002 75,763 (3,673) 79,436 274,385 22,617 (15,488) 38,105 - ---------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME $503,837 $523,717 $(19,880) $(11,861) $(8,019) $545,093 $(21,376) $ 43,516 $(64,892) - ----------------------------------------------------------------------------------------------------------------------------------
(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 $25,938, $30,497, and $24,440 for 1995, 1994, and 1993, 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. Table 29 CHANGES IN ALLOWANCE FOR LOAN LOSSES
- ----------------------------------------------------------------------------------------------------------------------------- Year Ended December 31 - ----------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------------------------------------------------------- Balance at beginning of year $220,519 $253,313 $265,536 $329,371 $163,669 Provision for loan losses (1) 38,715 14,498 47,286 67,794 287,484 Transfer (to) from loans held for securitization/sale (7,871) (4,869) (2,902) 1,503 Addition arising from acquisition 3,327 Transfer to Capital One Financial Corporation (68,516) Loans charged-off: Consumer 37,483 34,600 41,475 48,185 49,264 Commercial 5,740 9,827 17,832 33,238 55,312 Real estate-construction 1,143 9,746 26,890 58,406 32,514 Real estate-mortgage (2) 18,627 20,360 5,720 15,140 2,990 - ----------------------------------------------------------------------------------------------------------------------------- Total loans charged-off 62,993 74,533 91,917 154,969 140,080 Recoveries of loans previously charged-off: Consumer 3,416 12,191 17,358 15,488 12,053 Commercial 4,570 5,997 13,138 6,992 3,263 Real estate-construction 1,496 6,037 4,259 523 1,479 Real estate-mortgage (2) 366 4,558 555 337 - ----------------------------------------------------------------------------------------------------------------------------- Total recoveries 9,848 28,783 35,310 23,340 16,795 - ----------------------------------------------------------------------------------------------------------------------------- Net loans charged-off 53,145 45,750 56,607 131,629 123,285 - ----------------------------------------------------------------------------------------------------------------------------- Balance at end of year $129,702 $220,519 $253,313 $265,536 $329,371 - ----------------------------------------------------------------------------------------------------------------------------- Net charge-offs to average loans: Consumer 1.33% 0.67% 0.81% 1.71% 1.94% Commercial 0.04 0.18 0.22 1.17 2.22 Real estate 1.95 2.15 2.45 4.93 1.88 - ----------------------------------------------------------------------------------------------------------------------------- Total 0.87% 0.71% 0.91% 2.34% 2.03% - ----------------------------------------------------------------------------------------------------------------------------- Allowance for loans losses to net loans at year-end 2.39% 2.78% 4.01% 4.57% 5.60% - -----------------------------------------------------------------------------------------------------------------------------
(1) Included $146,600 special provision to accelerate the reduction of real estate loans in 1991. (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 30 ALLOWANCE FOR LOAN LOSSES ALLOCATION
- ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 December 31, 1994 December 31, 1993 December 31, 1992 December 31, 1991 - ---------------------------------------------------------------------------------------------------------------------------------- PERCENTAGE Percentage Percentage Percentage Percentage OF LOANS of Loans of Loans of Loans of Loans IN EACH in Each in Each in Each in Each CATEGORY Category Category Category Category ALLOWANCE TO TOTAL Allowance to Total Allowance to Total Allowance to Total Allowance to Total (dollars in thousands) AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans - ---------------------------------------------------------------------------------------------------------------------------------- Consumer (1) $ 49,825 31.45% $ 94,093 57.56% $ 67,030 48.77% $ 59,501 41.32% $ 36,367 32.56% Commercial 26,367 55.52 34,041 30.86 33,618 35.87 33,930 36.87 50,795 39.08 Commercial- special (2) 0.24 1,064 0.34 6,376 0.52 Real estate (3) 40,123 13.03 60,532 11.58 25,684 11.31 19,056 14.30 20,466 16.40 Real estate- special (2) 57,631 3.81 98,924 7.17 173,162 11.44 Unallocated 13,387 31,853 69,350 53,061 42,205 - ---------------------------------------------------------------------------------------------------------------------------------- Total $129,702 100.00% $220,519 100.00% $253,313 100.00% $265,536 100.00% $329,371 100.00% - ----------------------------------------------------------------------------------------------------------------------------------
(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. Table 31 AVERAGE BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- AVERAGE INCOME\ YIELD\ Average Income\ Yield\ Average Income\ Yield\ (dollars in thousands) BALANCE EXPENSE RATE Balance Expense Rate Balance Expense Rate - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Earning assets (tax equivalent basis): (1) Interest bearing deposits with other banks $ 33,750 $ 2,025 6.00% $ 251,266 $ 11,512 4.58% $ 262,910 $ 12,031 4.58% Federal funds and resale agreements 643,386 38,732 6.02 970,300 44,294 4.56 752,510 23,196 3.08 Trading account securities 476,361 30,800 6.47 287,192 21,487 7.48 484,384 31,297 6.46 Loans held for securitization 338,877 36,448 10.76 432,581 41,015 9.48 393,835 36,263 9.21 Loans held for sale 253,758 23,757 9.36 200,712 13,010 6.48 249,797 17,007 6.81 Securities available for sale 1,726,886 126,717 7.34 1,338,449 73,409 5.48 299,023 17,064 5.71 Investment securities-taxable 210,893 15,190 7.20 66,829 4,395 6.58 1,628,855 93,806 5.76 Investment securities-nontaxable 115,221 13,614 11.82 197,231 23,895 12.12 274,967 32,366 11.77 Loans (net of unearned income): (2) Consumer 2,568,796 292,024 11.37 3,351,159 342,670 10.23 2,971,600 310,880 10.46 Commercial 2,633,370 209,765 7.97 2,148,726 165,372 7.70 2,101,423 158,587 7.55 Real estate-construction 224,597 23,263 10.36 249,353 21,007 8.42 448,859 31,590 7.04 Real estate-commercial mortgage 452,392 44,275 9.79 560,542 50,254 8.97 607,573 47,757 7.86 Real estate-residential mortgage 241,038 19,992 8.29 97,855 8,399 8.58 76,962 7,634 9.92 - ---------------------------------------------------------------------------------------------------------------------------------- Total loans 6,120,193 589,319 9.63 6,407,635 587,702 9.17 6,206,417 556,448 8.97 - ---------------------------------------------------------------------------------------------------------------------------------- Total earning assets 9,919,325 $876,602 8.84 10,152,195 $820,719 8.08 10,552,698 819,478 7.77 - ---------------------------------------------------------------------------------------------------------------------------------- Non-rate related assets: Cash and due from banks 523,224 501,821 461,249 Allowance for loan losses (149,681) (241,633) (263,593) Premises and equipment (net) 188,974 242,933 201,792 Other assets 652,515 813,312 665,305 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $11,134,357 $11,468,628 $11,617,451 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Deposits: Money market and interest checking $ 1,033,501 $ 26,390 2.55% $ 1,020,838 $ 23,123 2.27% $ 960,342 $ 22,544 2.35% Money market savings 1,361,516 47,696 3.50 1,618,550 44,571 2.75 1,738,336 45,463 2.62 Savings accounts 1,283,695 48,738 3.80 1,019,068 33,461 3.28 772,194 24,079 3.12 Savings certificates 1,854,091 81,345 4.39 1,981,823 61,377 3.10 2,364,320 58,514 2.47 Large denomination certificates 196,798 11,669 5.93 318,659 14,527 4.56 272,693 10,970 4.02 Foreign 106,029 6,347 5.99 236,765 10,071 4.25 200,440 6,627 3.31 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 5,835,630 222,185 3.81 6,195,703 187,130 3.02 6,308,325 168,197 2.67 Federal funds and repurchase agreements 2,071,944 109,961 5.31 1,677,884 65,894 3.93 2,043,207 63,986 3.13 Other short-term borrowings 228,572 15,302 6.69 477,424 27,293 5.72 482,405 25,521 5.29 Long-term borrowings 364,713 25,317 6.94 254,917 16,685 6.55 286,809 16,681 5.82 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 8,500,859 372,765 4.39 8,605,928 297,002 3.45 9,120,746 274,385 3.01 - ---------------------------------------------------------------------------------------------------------------------------------- Non-interest bearing liabilities: Demand deposits 1,531,553 1,550,902 1,424,260 Other liabilities 233,495 265,899 183,284 Common stockholders' equity 868,450 1,045,899 889,161 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $11,134,357 $11,468,628 $11,617,451 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income/spread $503,837 4.45% $523,717 4.63% $545,093 4.76% - ---------------------------------------------------------------------------------------------------------------------------------- Interest income to average earning assets 8.84% 8.08% 7.77% Interest expense to average earning assets 3.76 2.92 2.60 - ---------------------------------------------------------------------------------------------------------------------------------- Net yield margin 5.08% 5.16% 5.17% - ----------------------------------------------------------------------------------------------------------------------------------
(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 $25,938, $30,497 and $24,440 for the years 1995, 1994 and 1993, respectively. Table 32 NON-PERFORMING ASSETS AND PAST DUE LOANS
- ----------------------------------------------------------------------------------------------------------------------------- December 31 - -------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------------- Non-accrual loans: Commercial $ 9,033 $10,548 $ 42,303 $ 25,470 $ 57,824 Consumer 1,572 1,708 2,191 808 989 Real estate-construction 2,988 5,490 17,837 52,051 107,778 Real estate-mortgage * 24,888 7,310 6,523 7,341 40,494 - -------------------------------------------------------------------------------------------------------------------------- Total non-accrual loans 38,481 25,056 68,854 85,670 207,085 Restructured loans: Commercial 1,609 8,099 2,923 Real estate-construction 1,000 3,470 22,568 - -------------------------------------------------------------------------------------------------------------------------- Total restructured loans 1,000 5,079 30,667 2,923 - -------------------------------------------------------------------------------------------------------------------------- Total non-performing loans 38,481 26,056 73,933 116,337 210,008 Foreclosed properties 15,822 22,480 48,295 75,403 164,014 Less foreclosed property reserve (5,742) (10,625) (41,632) - -------------------------------------------------------------------------------------------------------------------------- Total foreclosed properties 15,822 22,480 42,553 64,778 122,382 - -------------------------------------------------------------------------------------------------------------------------- Total non-performing assets $54,303 $48,536 $116,486 $181,115 $332,390 - -------------------------------------------------------------------------------------------------------------------------- Percentage to loans (net of unearned) and foreclosed properties 1.00% 0.61% 1.83% 3.08% 5.53% - -------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses to: Non-performing loans 337.05% 846.32% 342.63% 228.25% 156.84% Non-performing assets 238.85 454.34 217.46 146.61 99.09 - -------------------------------------------------------------------------------------------------------------------------- Accruing loans past due 90 days or more $66,371 $65,333 $ 58,891 $ 64,835 $ 91,971 - --------------------------------------------------------------------------------------------------------------------------
* 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
- --------------------------------------------------------------------------------------------------------- December 31 - --------------------------------------------------------------------------------------------------------- (in thousands) 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------- Loans: Consumer $1,751,274 $4,612,633 $3,105,824 $2,423,176 $1,933,798 Commercial 3,090,904 2,472,620 2,299,973 2,181,218 2,351,990 Real estate-construction 236,103 209,183 309,842 549,001 952,687 Real estate-commercial mortgage 366,698 526,956 581,529 632,072 587,644 Real estate-residential mortgage 122,584 191,508 71,411 77,844 113,466 - --------------------------------------------------------------------------------------------------------- Total $5,567,563 $8,012,900 $6,368,579 $5,863,311 $5,939,585 - ---------------------------------------------------------------------------------------------------------
Signet Banking Corporation and Subsidiaries consolidated balance sheet
- ---------------------------------------------------------------------------------------------------- December 31 - ---------------------------------------------------------------------------------------------------- (dollars in thousands-- except per share) 1995 1994 - ---------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks 599,113 $ 531,747 Interest bearing deposits with other banks 3,129 355,795 Federal funds sold and securities purchased under resale agreements 460,217 1,135,821 Trading account securities 478,723 353,040 Loans held for securitization 389,700 Loans held for sale 361,260 69,506 Securities available for sale 2,333,971 1,241,696 Investment securities (market value: 1994 - $399,666) 398,783 Loans: Consumer 1,751,274 4,612,633 Commercial 3,090,904 2,472,620 Real estate-construction 236,103 209,183 Real estate-commercial mortgage 366,698 526,956 Real estate-residential mortgage 122,584 191,508 - ---------------------------------------------------------------------------------------------------- Gross loans 5,567,563 8,012,900 Less: Unearned income (151,535) (88,723) Allowance for loan losses (129,702) (220,519) - ---------------------------------------------------------------------------------------------------- Net loans 5,286,326 7,703,658 - ---------------------------------------------------------------------------------------------------- Premises and equipment (net) 192,431 258,715 Interest receivable 104,437 98,557 Other assets 768,558 783,911 - ---------------------------------------------------------------------------------------------------- Total assets (Capital One Financial Corporation amounted to $0, and $3,072,546, respectively) $10,977,865 $12,931,229 - ---------------------------------------------------------------------------------------------------- LIABILITIES Non-interest bearing deposits $ 1,726,378 $ 1,542,349 Interest bearing deposits: Money market and interest checking 1,102,140 1,050,176 Money market savings 1,338,985 1,453,629 Savings accounts 1,395,514 1,170,990 Savings certificates 1,850,397 1,952,090 Large denomination certificates 129,711 643,054 Foreign 49,846 9,225 - ---------------------------------------------------------------------------------------------------- Total interest bearing deposits 5,866,593 6,279,164 - ---------------------------------------------------------------------------------------------------- Total deposits 7,592,971 7,821,513 Securities sold under repurchase agreements 1,124,105 875,458 Federal funds purchased 780,193 881,693 Commercial paper 108,664 Bridge financing facility 1,300,000 Other short-term borrowings 146,955 Long-term borrowings 253,033 253,641 Interest payable 19,460 31,078 Minority interest in Capital One Financial Corporation 106,900 Other liabilities 344,154 293,848 - ---------------------------------------------------------------------------------------------------- Total liabilities 10,113,916 11,819,750 - ---------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common Stock, par value $5 per share; Authorized 100,000,000 shares, issued and outstanding 59,208,745 (1995), and 58,636,759 (1994) 296,044 293,184 Capital surplus 200,093 198,869 Retained earnings 367,812 619,426 - ---------------------------------------------------------------------------------------------------- Total stockholders' equity 863,949 1,111,479 - ---------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $10,977,865 $12,931,229 - ----------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. Signet Banking Corporation and Subsidiaries statement of consolidated income
- ------------------------------------------------------------------------------------------------------- Year Ended December 31 - ------------------------------------------------------------------------------------------------------- (in thousands-- except per share) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- Interest income: Loans, including fees: Consumer $292,024 $342,670 $310,880 Commercial 206,554 163,195 157,157 Real estate-construction 23,262 20,977 31,570 Real estate-commercial mortgage 41,621 47,520 44,830 Real estate-residential mortgage 19,992 8,399 7,634 - ------------------------------------------------------------------------------------------------------- Total loans, including fees 583,453 582,761 552,071 Interest bearing deposits with other banks 2,025 11,512 12,031 Federal funds sold and resale agreements 38,732 44,294 23,196 Trading account securities 30,800 21,487 31,297 Loans held for securitization 36,448 41,015 36,263 Loans held for sale 23,757 13,010 16,875 Securities available for sale 126,484 72,696 17,064 Investment securities-taxable 15,190 4,395 93,538 Investment securities-nontaxable 9,110 15,843 21,390 - ------------------------------------------------------------------------------------------------------- Total interest income 865,999 807,013 803,725 Interest expense: Money market and interest checking 26,390 23,123 22,544 Money market savings 47,696 44,571 45,463 Savings accounts 48,738 33,461 24,079 Savings certificates 81,345 61,377 58,514 Large denomination certificates 11,669 14,527 10,970 Foreign 6,347 10,071 6,627 - ------------------------------------------------------------------------------------------------------- Total interest on deposits 222,185 187,130 168,197 Securities sold under repurchase agreements 56,739 37,712 42,193 Federal funds purchased 53,222 28,182 21,793 Other short-term borrowings 15,302 27,293 25,521 Long-term borrowings 25,317 16,685 16,681 - ------------------------------------------------------------------------------------------------------- Total interest expense 372,765 297,002 274,385 - ------------------------------------------------------------------------------------------------------- Net interest income 493,234 510,011 529,340 Provision for loan losses 38,715 14,498 47,286 - ------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 454,519 495,513 482,054 Non-interest income: Consumer loan servicing and service charge income 94,389 410,605 216,240 Service charges on deposit accounts 68,231 66,141 64,471 Trust and investment management income 23,531 19,442 17,599 Gain on securitization of loans 9,562 Other 81,766 68,436 62,808 - ------------------------------------------------------------------------------------------------------- Non-interest operating income 277,479 564,624 361,118 Securities available for sale gains 532 3,413 3,913 Investment securities gains 1,257 46 405 - ------------------------------------------------------------------------------------------------------- Total non-interest income 279,268 568,083 365,436 Non-interest expense: Salaries 196,093 257,297 212,665 Employee benefits 48,657 66,188 65,249 Supplies and equipment 42,138 54,862 40,550 Occupancy 40,595 47,059 40,192 Travel and communications 32,103 57,543 35,416 External data processing services 29,951 50,026 36,578 Credit card solicitation 29,050 100,886 55,815 Commercial fraud loss 35,000 Contract termination 49,000 Restructuring charges 43,212 Other 110,481 120,350 111,851 - ------------------------------------------------------------------------------------------------------- Total non-interest expense 564,068 846,423 598,316 - ------------------------------------------------------------------------------------------------------- Income before income taxes (Capital One Financial Corporation amounted to $27,407, $146,827 and $170,854, respectively) 169,719 217,173 249,174 Applicable income taxes 58,639 67,339 74,760 - ------------------------------------------------------------------------------------------------------- Net income $111,080 $149,834 $174,414 - ------------------------------------------------------------------------------------------------------- Earnings per common share $ 1.86 $ 2.59 $ 3.06 Cash dividends declared per share 0.79 1.00 0.80 Average common shares outstanding 59,826 57,863 56,920 - -------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. Signet Banking Corporation and Subsidiaries statement of consolidated cash flows
- ------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31 - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 111,080 $ 149,834 $ 174,414 Adjustments to reconcile net income to net cash (used) provided by operating activities: Provision for loan losses 38,715 14,498 47,286 Provision and writedowns on foreclosed property 1,924 1,536 7,852 Depreciation and amortization 35,366 44,055 37,073 Investment securities gains (1,257) (46) (405) Securities available for sale gains (532) (3,413) (3,913) Increase (decrease) in interest receivable (5,880) (14,439) 16,734 Increase in other assets (570,773) (180,121) (52,749) Increase in interest payable 9,799 2,873 595 Increase in other liabilities 64,851 268,010 23,075 Proceeds from securitization of consumer loans 663,694 2,393,936 2,283,329 Proceeds from sales of loans held for sale 36,734,493 24,555,822 11,518,162 Purchases and originations of loans held for sale (37,026,247) (26,597,903) (14,007,768) Proceeds from sales of trading account securities 16,340,675 15,691,014 13,184,093 Purchases of trading account securities (16,466,358) (15,654,476) (12,895,420) - ------------------------------------------------------------------------------------------------------------------------------ Net cash (used) provided by operating activities (70,450) 671,180 332,358 INVESTING ACTIVITIES Proceeds from maturities of investment securities 180,725 64,542 519,509 Purchases of investment securities (25,510) (213,057) (218,197) Proceeds from sales of securities available for sale 1,033,081 1,380,809 62,354 Proceeds from maturities of securities available for sale 621,509 2,289,363 46,239 Purchases of securities available for sale (2,760,830) (3,188,560) (6,000) Net increase in loans (1,223,179) (1,689,940) (596,509) Recoveries of loans previously charged-off 9,848 28,783 35,310 Purchases of premises and equipment (70,639) (75,210) (44,526) Purchases of mortgage servicing rights (31,590) (18,784) (10,914) Acquisition of Sheffield Management Company and Sheffield Investments, Inc. (20,996) - ------------------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (2,287,581) (1,422,054) (212,734) FINANCING ACTIVITIES Net increase (decrease) in deposits 394,356 900 (2,701) Net increase (decrease) in short-term borrowings (342,369) 687,644 (370,714) Increase in Capital One Financial Corporation long-term debt prior to spin-off 1,388,153 Net decrease in other long-term debt (608) (12,511) (31,810) Net issuance of common stock 4,084 75,972 9,203 Payment of cash dividends (46,489) (57,192) (45,058) - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities 1,397,127 694,813 (441,080) - ------------------------------------------------------------------------------------------------------------------------------ Decrease in cash and cash equivalents (960,904) (56,061) (321,456) Cash and cash equivalents at beginning of period 2,023,363 2,079,424 2,400,880 - ------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 1,062,459 $ 2,023,363 $ 2,079,424 - ------------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURES Interest paid $ 384,383 $ 294,130 $ 273,790 Income taxes paid 21,455 47,091 48,520 Transfer of loans to foreclosed property 5,790 10,112 26,238 Transfer of loans to loans held for securitization 989,700 2,000,000 1,750,000 - ------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements Signet Banking Corporation and Subsidiaries statement of changes in consolidated stockholders' equity
- ----------------------------------------------------------------------------------------------------------------------------- Common Stock Capital Retained (dollars in thousands -- except per share) Shares Amount Surplus Earnings - ----------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1992 27,980,824 $139,904 $126,282 $ 560,446 Net income 174,414 Issuance of Common Stock 489,283 2,447 6,756 Cash dividends -- Common Stock -- $.80 a share (45,058) Change in valuation allowance -- marketable equity securities (529) Two-for-one common stock split 28,138,471 140,692 (140,692) - ----------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1993 56,608,578 283,043 133,038 548,581 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 Net income 149,834 Issuance of Common Stock Related to acquisition 1,514,286 7,571 51,708 Other 513,895 2,570 14,123 Cash dividends -- Common Stock -- $1.00 a share (57,192) Change in net unrealized losses on securities available for sale, net of tax benefit of $27,880 (51,784) - ----------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1994 58,636,759 293,184 198,869 619,426 NET INCOME 111,080 ISSUANCE OF COMMON STOCK 830,463 4,152 8,431 PURCHASE OF COMMON STOCK (258,477) (1,292) (7,207) CASH DIVIDENDS-- COMMON STOCK-- $.79 A SHARE (46,489) SPIN-OFF OF CAPITAL ONE FINANCIAL CORPORATION (383,200) CHANGE IN NET UNREALIZED GAINS ON SECURITIES AVAILABLE FOR SALE, NET OF TAX OF $36,074 66,995 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1995 59,208,745 $296,044 $200,093 $ 367,812 - -----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 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, specialized services for trust, leasing, asset-based lending, cash management, real estate, insurance, consumer financing and an international operation concentrating on trade finance are offered. Signet's primary market area extends from Baltimore to Washington, south to Richmond, and on to Hampton Roads/Tidewater, Virginia. The Company markets several of its products nationally. 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. CONSOLIDATION AND RECLASSIFICATIONS: The consolidated financial statements include the accounts of Signet, including Signet Bank (formerly Signet Bank/Virginia and Signet Bank/Maryland) and Signet Bank N.A., its principal banking subsidiaries. Capital One Financial Corporation is included in the financial statements through February 28, 1995, at which time the spin-off to shareholders was completed. All significant intercompany balances and transactions have been eliminated. Certain prior years' amounts have been reclassified to conform to the 1995 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 (trading profits (losses)) 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. In 1995, the net gain on all trading activities recorded in trading profits was $11,969; in 1994, the net loss was $268. The increase (decrease) in net unrealized income on all trading activities during 1995 and 1994 was $1,875 and ($4,998), respectively. 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. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in 1994. At adoption, securities totaling $1,509,328 were reclassified from investment securities to securities available for sale. An after-tax gain of $29,987 was carried as a component of retained earnings, representing the unrealized gain in securities available for sale at adoption. During 1994, the fair value of these securities declined, resulting in an after-tax unrealized loss of $51,784. 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 SFAS No. 115 implementation guidance. The reclassification resulted in an unrealized gain of $6,054 which was recorded in equity, net of tax. During 1995, the fair value of securities available for sale increased by $66,995, net of tax. The net after-tax unrealized gain recorded as a component of retained earnings since the adoption of SFAS No. 115 is $45,198. LOANS HELD FOR SALE AND SECURITIZATION: Loans held for sale and securitization are carried at the lower of aggregate cost or market value. NOTE A-SIGNIFICANT ACCOUNTING POLICIES CONTINUED INVESTMENT SECURITIES: When securities are purchased and at each balance sheet date, they are classified as investment securities if it is management's positive intent and ability to hold them until maturity. These securities are carried at cost and adjusted for amortization of premiums and accretion of discounts, both computed using the effective yield method. During December, 1995, the Company reclassified all of its investment securities to securities available for sale, as discussed in the above Securities Available for Sale section. 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. 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, while other consumer loans typically are charged off when the loan is six months past due. Credit card and other 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 $1,194 and $33,690 at December 31, 1995 and 1994, 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 SFAS No. 114, impaired loans 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 the creditor 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. SFAS No. 114 does not apply to large groups of homogeneous loans such as consumer installment and bank card loans, which are collectively evaluated for impairment. Smaller balance commercial loans are also excluded from the application of the statement. 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, 1995. SFAS No. 118 allows a creditor to use existing methods for recognizing interest income on impaired loans. Interest receipts on impaired loans are applied in a manner consistent with Signet's policy for non-accrual loans. For the year ended December 31, 1995, no interest income was recorded on loans once placed on non-accrual status. 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 $173,336 and $208,476 at December 31, 1995 and 1994, respectively. Depreciation and amortization expense are generally computed using the straight-line method. Interest costs relating to the construction of major operating facilities are capitalized using a weighted average 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands -- except per share) NOTE A-SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 also uses 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, and residential mortgage loans. Signet's consumer loans are recorded as sales in accordance with SFAS No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse." Gains on the 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 securitizations, which have a substantially longer average life, a gain or loss is recorded at the 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. 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 SFAS No. 122, 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. The estimated fair value of mortgage servicing rights is determined based upon quoted market prices for similar assets, if available, or the results of valuation techniques such as the present value of future cash flows using an appropriate discount rate. 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. Once capitalized, 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, SFAS No. 122 requires that such rights be stratified based on one or more of the predominant risk characteristics of the underlying loans. For Signet, these characteristics include 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. Subsequent to the initial measurement of impairment, the valuation allowance should be adjusted to reflect changes in the measurement of impairment. Fair value in excess of the amount capitalized net of amortization is, however, not recognized. The adoption of these impairment provisions did not require Signet to record a valuation allowance at December 31, 1995 for any of its capitalized mortgage servicing rights, including servicing rights that had been purchased prior to the adoption of the statement. 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) with a corresponding increase in mortgage servicing rights. The additional income resulted from a lower adjusted cost basis of originated mortgage loans sold with servicing retained. In addition to the servicing rights capitalized on originated mortgage servicing rights, Signet capitalized $31.6 million of purchased mortgage servicing rights in 1995. Amortization expense related to mortgage servicing rights was $5.6, $2.2 and $1.5 million for 1995, 1994 and 1993, respectively. At December 31, 1995, Signet's portfolio of capitalized mortgage servicing rights totaled $58.7 million and had a market value of $66.0 million. NOTE A-SIGNIFICANT ACCOUNTING POLICIES CONTINUED 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. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was issued in March, 1995. The statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Signet will adopt the statement beginning January 1, 1996. The effect of adopting SFAS No. 121 is not expected to have a material impact on the financial statements of the Company. 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 amounts of those reserve balances were approximately $87,477 and $103,141 for the years ended December 31, 1995 and 1994, respectively. NOTE C-SECURITIES AVAILABLE FOR SALE Securities available for sale are summarized as follows:
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------- December 31, 1993 U.S. Government and agency obligations-- Mortgage-backed securities $ 47,672 $ 3,123 $ 50,795 Other 199,641 1,484 201,125 Other 850 850 - ----------------------------------------------------------------------------------------------------------------------- $ 248,163 $ 4,607 $ 252,770 - -----------------------------------------------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands -- except per share) NOTE C-SECURITIES AVAILABLE FOR SALE CONTINUED The cost and fair values of securities available for sale by contractual maturity, except mortgage-backed securities for which an average life is used, at December 31, 1995 are shown below: Fair Cost Value - --------------------------------------------------------------------------- Due in one year or less $ 33,315 $ 33,613 Due after one year through five years 1,546,203 1,609,188 Due after five years through ten years 579,409 592,064 Due after ten years 108,573 99,106 - --------------------------------------------------------------------------- $2,267,500 $2,333,971 - --------------------------------------------------------------------------- Securities available for sale with aggregate book values of approximately $1,476,767, $623,743, and $198,619 at December 31, 1995, 1994 and 1993, respectively, were pledged to secure public deposits, repurchase agreements and other banking transactions. Proceeds from sales of securities available for sale during 1995, 1994 and 1993 were $1,033,081, $1,380,809, and $62,354, respectively. Gross gains of $2,610, $6,152 and $3,913, and gross losses of $2,078, $2,739 and $-0- were realized on those sales for 1995, 1994 and 1993, respectively. NOTE D-INVESTMENT SECURITIES The Company reclassified all of its 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". Investment securities for December 31, 1994 and 1993 are summarized as follows:
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------- December 31, 1994 U.S. Government and agency obligations-- Mortgage-backed securities $ 75,174 $(1,867) $ 73,307 Other 74,550 (1,894) 72,656 Obligations of states and political subdivisions 173,571 $ 5,920 (24) 179,467 Other 75,488 (1,252) 74,236 - --------------------------------------------------------------------------------------------------------------------- $ 398,783 $ 5,920 $(5,037) $ 399,666 December 31, 1993 U.S. Government and agency obligations-- Mortgage-backed securities $ 461,345 $ 4,843 $ (37) $ 466,151 Other 925,225 39,263 (6) 964,482 Obligations of states and political subdivisions 258,815 18,690 (49) 277,456 Other 124,230 1,797 (4,885) 121,142 - --------------------------------------------------------------------------------------------------------------------- $1,769,615 $ 64,593 $(4,977) $ 1,829,231 - -----------------------------------------------------------------------------------------------------------------------
Investment securities with aggregate book values of approximately $-0-, $264,775 and $1,460,790 at December 31, 1995, 1994 and 1993, respectively, were pledged to secure public deposits, repurchase agreements and other banking transactions. There were no proceeds from sales of investment securities during 1995, 1994 and 1993. Gross gains of $1,257, $113 and $534 and gross losses of $-0-, $67 and $129 were realized on called securities for 1995, 1994 and 1993, respectively. NOTE E-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 1995 1994 1993 - ------------------------------------------------------------------------------- Balance at beginning of year $220,519 $253,313 $265,536 Provision for loan losses 38,715 14,498 47,286 Net deduction arising in purchase/ sale transactions (7,871) (1,542) (2,902) Transfer to Capital One Financial Corporation (68,516) Losses 62,993 74,533 91,917 Recoveries 9,848 28,783 35,310 - ------------------------------------------------------------------------------- Net loan losses 53,145 45,750 56,607 - ------------------------------------------------------------------------------- Balance at end of year $129,702 $220,519 $253,313 - ------------------------------------------------------------------------------- Following is a summary of changes in the reserve for foreclosed property: Year Ended December 31 1994 1993 - --------------------------------------------------------------------------- Balance at beginning of year $5,742 $ 10,625 Additions (reductions) to reserve charged (credited) to expense (1,764) 7,405 Writedowns of foreclosed property (3,978) (12,288) - --------------------------------------------------------------------------- Balance at end of year $ 0 $ 5,742 - --------------------------------------------------------------------------- NOTE F-NON-PERFORMING ASSETS Following is a summary of non-performing assets at December 31, 1995 and 1994 along with the interest recorded as income in 1995 and 1994 on the year-end non-accrual and restructured loans, as well as the interest income for the same respective periods which would have been recorded had the loans performed in accordance with their original terms: Non-Accrual Restructured Foreclosed Loans Loans Properties Total - ------------------------------------------------------------------------------- 1995 Aggregate recorded investment $38,481 $15,822 $54,303 Interest at contracted rates 4,092 4,092 Interest recorded as income 920 920 - ------------------------------------------------------------------------------- 1994 Aggregate recorded investment $25,056 $1,000 $22,480 $48,536 Interest at contracted rates 3,301 82 3,383 Interest recorded as income 424 82 506 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands -- except per share) NOTE G-SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM BORROWINGS Following is a summary of short-term borrowings for the years ended December 31, 1995, 1994, and 1993:
Maximum Average Outstanding Weighted Interest at Any Outstanding Average Average Rate at Month End at Year End Outstanding Interest Rate Year End - -------------------------------------------------------------------------------------------------------------------- 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% - -------------------------------------------------------------------------------------------------------------------- 1993 Repurchase agreements $1,674,044 $1,281,645 $1,337,553 3.2% 2.5% Federal funds 1,043,546 942,969 705,654 3.1 3.1 Commercial paper 174,552 168,488 144,129 2.5 3.0 Other short-term borrowings 459,346 232,024 338,276 6.5 6.2 - -------------------------------------------------------------------------------------------------------------------- Total $2,625,126 $2,525,612 3.5% 3.2% - --------------------------------------------------------------------------------------------------------------------
The weighted average interest rate is calculated by dividing annual interest expense by the daily average outstanding principal balance. 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. NOTE H-LONG-TERM BORROWINGS Long-term borrowings consisted of the following: December 31 1995 1994 - --------------------------------------------------------------------- Notes and mortgages (5-11 3/5%) $ 3,033 $ 3,641 Subordinated notes: 9 5/8% due 1999 100,000 100,000 Floating Rate due 1998 100,000 100,000 Floating Rate due 1997 50,000 50,000 - --------------------------------------------------------------------- 250,000 250,000 - --------------------------------------------------------------------- $253,033 $253,641 - --------------------------------------------------------------------- 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 on June 1, 1999. 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. Premises stated at approximately $4,463 at December 31, 1995 are subject to liens relating to notes and mortgages. Maturities of long-term borrowings in the aggregate for the next five years are as follows: 1996 $ 281 1998 $100,297 2000 $322 1997 50,290 1999 100,313 NOTE I-COMMON STOCK At December 31, 1995, the Company had reserved 5,456,045 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 1995 1994 1993 - -------------------------------------------------------------------------------- Investor stock purchase plan 327,539 263,180 166,224 Employee stock purchase plan 143,821 114,057 76,344 Stock option plan 359,103 136,658 246,715 Acquisition of Pioneer Financial Corporation 1,514,286 Two-for-one stock split 28,138,471 - -------------------------------------------------------------------------------- Total 830,463 2,028,181 28,627,754 - -------------------------------------------------------------------------------- Under the Investor Stock Purchase Plan, 608,384 shares of Common Stock were reserved at December 31, 1995. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands -- except per share) NOTE I-COMMON STOCK CONTINUED 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. On December 19, 1995, the Company's Board of Directors approved the 1996 Non-Employee Director Stock Option Plan under which up to 300,000 shares of the Company's Common Stock will be reserved. Under the plan, each eligible director will receive an option to purchase 1,000 shares of the Company's Common Stock each year. The options will become exercisable on the six-month anniversary of the date of grant. No option will be exercisable until the plan is approved by the shareholders of the Company and the requirements of all federal and state securities laws have been met. NOTE J-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 98% of the plan assets at December 31, 1995 were invested in listed stocks and bonds. Another 1% is invested in a money market fund sponsored by Signet Trust Company (a subsidiary of the Parent Company). Net periodic pension cost included the following components: 1995 1994 1993 - ------------------------------------------------------------------------------- Service cost-benefits earned during the period $ 4,870 $ 7,379 $ 6,505 Interest cost on projected benefit obligation 7,912 6,737 6,482 Actual return on plan assets (18,683) 5,548 (3,532) Net amortization and deferral 8,047 (14,256) (5,435) - ------------------------------------------------------------------------------- Net periodic pension cost $ 2,146 $ 5,408 $ 4,020 - ------------------------------------------------------------------------------- The following sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheet: December 31 1995 1994 - ----------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $(88,366) $ (95,548) - ----------------------------------------------------------------------------- Accumulated benefit obligation $(96,228) $(103,370) - ----------------------------------------------------------------------------- Projected benefit obligation $(96,228) $(103,370) Plan assets, at fair value 98,352 104,707 - ----------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 2,124 1,337 Unrecognized net asset (4,731) (5,966) Unrecognized prior service cost 2,092 2,293 Unrecognized net loss 21,502 25,406 - ----------------------------------------------------------------------------- Net pension asset $ 20,987 $ 23,070 - ----------------------------------------------------------------------------- NOTE J-EMPLOYEE BENEFIT PLANS CONTINUED Assumptions used were as follows: 1995 1994 1993 - ------------------------------------------------------------------------------- Discount rates 7.00% 8.50% 7.25% Rates of increase in compensation levels of employees 5.00 5.00 5.00 Expected long-term rate of return on plan assets 9.50 8.75 8.75 - ------------------------------------------------------------------------------- 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 the same periods 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 income of the Company. The Company's expense was $15,908, $23,729, and $22,235 in 1995, 1994 and 1993 under these plans, respectively. At December 31, 1995, employees of the Company held options to purchase 2,387,643 common shares at an average option price of $13.84 per share. These options expire on various dates beginning February 25, 1996 and ending March 1, 2005. At the time options are exercised, proceeds from the shares issued are credited to capital and no charges or credits to income are made with respect to any of the options. As of the date of the Capital One spin-off, on February 28, 1995, the number of options outstanding and the related price per share were adjusted, so that the value of options would not change. No compensation expense was reflected in the income statement as a result of this transaction. Under the 1992 Stock Option Plan, options for the purchase of up to 4,000,000 shares of Common Stock may be granted to key personnel at prices not less than the market price per share on the date of grant, and are exercisable not more than ten years from the date of grant. At December 31, 1995 and 1994, options to purchase 2,576,873 and 1,179,371 shares, respectively, of Common Stock were available for future grants. Under the 1992 Stock Option Plan, a feature was established by the Company, whereby an employee is automatically granted a reload option when shares of Common Stock owned by the employee are delivered for cancellation to the Company in order to exercise options. The option price of the reload options is the fair market value of common stock on the date that the employee delivers shares to the Company. The reload options are not exercisable within the first six months after grant unless the employee dies or becomes disabled during the six month period. On February 22, 1994, the Company adopted the 1994 Stock Incentive Plan. Under the plan, employees holding management positions with the Company can be awarded Restricted Stock or Incentive Stock at the discretion of a committee of three Directors of the Company when performance goals are achieved. The 1994 Plan authorizes the reservation of 300,000 shares of Common Stock, however, no stock had been reserved or issued at December 31, 1995. A summary of changes, under several plans, in shares of Common Stock under option for the years 1995, 1994 and 1993 is as follows: Option Price Shares Per Share - ----------------------------------------------------------------------------- Outstanding December 31, 1992 1,215,368 $ 3.72-22.84 Granted 306,666 23.72-31.25 Exercised (446,032) 3.72-23.72 Cancelled (42,494) 12.72-23.72 - ----------------------------------------------------------------------------- Outstanding December 31, 1993 1,033,508 3.72-31.25 Granted 219,027 33.75 -42.50 Exercised (191,304) 3.72-36.56 Cancelled (900) 36.56 - ----------------------------------------------------------------------------- Outstanding December 31, 1994 1,060,331 3.72-42.50 Granted 740,290 15.74-26.06 Exercised (456,368) 1.90-27.75 Adjustment for Capital One spin-off 1,075,669 1.90-20.91 Cancelled (32,279) 15.74-37.06 - ----------------------------------------------------------------------------- Outstanding December 31, 1995 2,387,643 $ 1.90-26.06 - ----------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands -- except per share) NOTE J-EMPLOYEE BENEFIT PLANS CONTINUED The Company has an employee stock purchase plan whereby employees of the Company and its subsidiaries are eligible to participate through monthly salary deduction of a maximum of 15% and a minimum of 2% of monthly base pay. The amounts deducted are applied to the purchase of unissued Common Stock of the Company at 85% of the current market price. No charges or credits to income are made with respect to this plan. 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. The following table sets forth the plans' combined funded status reconciled with the amount shown in the Company's consolidated balance sheet: December 31 1995 1994 - ----------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $(35,326) $(33,918) Fully eligible active plan participants (869) (2,146) Other active plan participants (2,807) (11,016) - ----------------------------------------------------------------------------- (39,002) (47,080) Plan assets at fair value, primarily listed stocks and bonds 5,767 4,957 - ----------------------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets (33,235) (42,123) Unrecognized transition obligation 24,162 32,390 Unrecognized net loss (13,492) (10,644) - ----------------------------------------------------------------------------- Accrued postretirement benefit cost $(22,565) $(20,377) - ----------------------------------------------------------------------------- Net periodic postretirement benefit cost includes the following components: Year Ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------- Service cost $ 807 $1,457 $1,230 Interest cost 3,470 3,758 3,800 Actual return on plan assets (960) (74) (133) Amortization of transition obligation over 20 years 1,652 2,010 2,080 Net amortization and deferral (8) (385) (366) - ------------------------------------------------------------------------------- Net periodic postretirement benefit cost $4,961 $6,766 $6,611 - ------------------------------------------------------------------------------- For measurement purposes, a 9.50% and 7.60% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1995 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. For 1993, a 13% and 10% 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 5.25% in 2007 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, 1995 and 1994 by $4.3 million and $6.9 million, respectively, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1995 by $0.5 million and 1994 and 1993 by $0.6 million. NOTE J-EMPLOYEE BENEFIT PLANS CONTINUED The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.00%, 8.50% and 7.25% for 1995, 1994 and 1993, respectively. The expected long-term rate of return on plan assets, after estimated income taxes, was 9.50% for 1995 and 8.75% for 1994 and 1993. The Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits" in 1993. In 1995, a $2.4 million reduction in 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 1994. The related expense reflected on the 1993 income statement was approximately $6.0 million. In 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" was issued establishing financial accounting and reporting standards for stock-based employee compensation plans which becomes effective in 1996. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. SFAS No. 123 defines a fair value based method of accounting for compensation cost of equity instruments and encourages all entities to adopt that method of accounting. However, it also allows an entity to continue to measure compensation cost for equity instruments using the method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25") with pro forma disclosures. These pro forma disclosures reflect the difference between compensation cost, if any, included in net income in accordance with APB No. 25 and the related cost measured by the fair value based method, as well as additional tax effects, if any, that would have been recognized in the income statement if the fair value based method had been used. Signet has elected to continue to account for compensation cost under the method of accounting prescribed by APB No. 25, and will include the required pro forma disclosures in the 1996 financial statements. 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 manage its rising health care costs, as well as provide employees more choice in the selection of their benefits package. As described in Note M, in 1994 Signet announced plans to implement 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 K-DIVIDENDS AND OTHER RESTRICTIONS 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, 1995, approximately $137,229, $16,025 and $4,381 of the retained earnings of Signet Bank, Signet Bank N.A. and Signet Trust Company, respectively, and approximately $8,665 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 $625,768 at December 31, 1995. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINED) (dollars in thousands -- except per share) NOTE L-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 1995 1994 - ---------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $ 46,646 $ 79,788 Foreclosed property 4,305 6,224 Unrealized losses on securities 11,733 Commercial fraud loss 12,250 Other 32,779 38,593 - ---------------------------------------------------------------- Total deferred tax assets 95,980 136,338 Deferred tax liabilities: Leasing 94,995 81,838 Unrealized gains on securities 24,341 Other 28,646 33,761 - ---------------------------------------------------------------- Total deferred tax liabilities 147,982 115,599 - ---------------------------------------------------------------- Net deferred tax assets (liabilities) $(52,002) $ 20,739 - ---------------------------------------------------------------- Differences between applicable income taxes (benefit) and the amount computed by applying statutory income tax rates are summarized as follows: Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- Amounts at statutory rates $59,402 $76,011 $87,211 Effect of: Tax exempt income (6,774) (8,582) (9,913) State taxes net of federal benefit 5,246 2,248 2,066 Other 765 (2,338) (4,604) - -------------------------------------------------------------------------------- Applicable income taxes $58,639 $67,339 $74,760 - -------------------------------------------------------------------------------- Taxes currently payable $35,180 $33,156 $58,201 Deferred income taxes 23,459 34,183 16,559 - -------------------------------------------------------------------------------- Applicable income taxes $58,639 $67,339 $74,760 - -------------------------------------------------------------------------------- Applicable income taxes include $677 in 1995, $1,243 in 1994 and $1,513 in 1993 relating to securities available for sale gains and investment securities gains. The components of income tax expense are as follows: Year Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- CURRENT DEFERRED Current Deferred Current Deferred - -------------------------------------------------------------------------------- Federal $32,468 $18,101 $34,396 $29,484 $57,960 $13,621 State 2,712 5,358 (1,240) 4,699 241 2,938 - -------------------------------------------------------------------------------- $35,180 $23,459 $33,156 $34,183 $58,201 $16,559 - -------------------------------------------------------------------------------- NOTE M-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 pre-tax 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, 1995, 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 $7.0 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 Note J) and $.4 million was reallocated within the restructuring liability from accrued facilities related costs to accrued severance benefits as a result of a change in estimated costs. The remaining liability of $7.2 million is primarily comprised of accrued facilities related costs. The restructuring plan as it relates to severance, the early retirement program and lease terminations was fully implemented as of December 31, 1995. The remainder of the plan, which relates to the disposition of bank-owned properties is expected to be implemented by the end of 1996. Also, in conjunction with the anticipated Capital One spin-off, Signet recorded a special pre-tax 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. NOTE N-OTHER NON-INTEREST INCOME AND EXPENSE The following schedule represents the items comprising other non-interest income and expense: Year Ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------- Other non-interest income: Mortgage servicing and origination $ 22,429 $ 18,661 $ 24,210 Other service charges and fees 15,069 15,112 16,260 Trading profits (losses) 11,969 (268) (1,396) Gains (losses) on sales of mortgage loans 7,178 (3,276) (3,987) Gain on sale of mortgage servicing 977 6,000 Other 24,144 32,207 27,721 - ------------------------------------------------------------------------------- Total $ 81,766 $ 68,436 $ 62,808 - ------------------------------------------------------------------------------- Other non-interest expense: Professional services $ 19,920 $ 26,108 $ 16,159 Public relations, sales and advertising 18,054 16,662 17,213 FDIC assessment 8,981 16,754 18,253 Taxes and licenses other than payroll and income 3,896 3,448 2,962 Credit and collection 3,790 11,646 10,619 Insurance 1,614 1,783 2,030 Other 54,226 43,949 44,615 - ------------------------------------------------------------------------------- Total $110,481 $120,350 $111,851 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in thousands -- except per share) Note O - 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 losses from counterparties failing to meet their obligations. The market risk of derivative financial derivatives arises from the potential for changes in value due to fluctuations in interest and foreign exchange rates.
December 31 - --------------------------------------------------------------------------------------------------------------------------------- 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Average Average (in millions) Carrying Fair Fair (in millions) Carrying Fair Fair Notional(a) Value(b) Value(c) Value Notional(a) Value(b) Value(c) Value - --------------------------------------------------------------------------------------------------------------------------------- Derivative Financial Instruments: Held for trading: Forward and futures contracts $1,300 $ (7) $ (7) 944 $2,806 $ 576 $ 576 $(1,603) Interest rate swap agreements 270 803 803 698 277 (1,468) (1,468) (836) Interest rate caps and floors and options(d) 478 (50) (50) 4,064 969 3,077 3,077 7,367 Held for purposes other than trading: Forward and futures contracts 111 (1,476) (1,476) 330 153 Interest rate swap agreements 2,824 33,549 3,863 (133,575) Interest rate caps and floors(e) 950 10,179 14,680 750 10,554 2,194
(a) The contract or notional amounts of the financial derivative instruments shown in the table 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, 1995 and 1994, 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 floors and purchased options which have no credit risk of $213 and $925 at December 31, 1995 and 1994, respectively. (e) Includes (notional) purchased interest rate caps and floors which have no credit risk of $950 and $750 at December 31, 1995 and 1994, 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. NOTE O-DERIVATIVE FINANCIAL INSTRUMENTS CONTINUED 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. 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 losses in earnings on derivative financial instruments totaled $32,590, $22,168 and $1,000 in the years ended December 31, 1995, 1994 and 1993, respectively. See Note A 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. During 1995, the Company had no terminations. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands -- except per share) NOTE P-SECURITIZATIONS The Company securitized $185,000 of credit card receivables in 1995, $2,398,801 in 1994 and $2,289,656 in 1993. These transactions were recorded as sales in accordance with SFAS No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse." Proceeds from the sales in 1995 and 1994 totaled $184,900 and $2,393,936, respectively. Receivables outstanding under credit card securitizations were $185,000 and $5,116,791 at December 31, 1995 and 1994, respectively. Recourse obligations related to these transactions are not material. Excess servicing fees related to the credit card securitizations are recorded over the life of each sale transaction. The excess servicing fee is based upon the difference between finance charges received from the cardholders less the yield paid to investors, credit losses, and a normal servicing fee, which is also retained by the Company. In accordance with the sale agreements, a fixed amount of excess servicing fees is set aside to absorb credit losses. The amount available to absorb credit losses is included in other assets and was zero at December 31, 1995 and $146,910 at December 31, 1994. 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 prior to February 28, 1995, as well as any related assets and liabilities were transferred to Capital One Bank. Receivables outstanding under Signet's remaining securitizations totaled $185,000 at December 31, 1995. In 1995, the Company also securitized $480,702 of home equity lines of credit. This transaction was also recorded as a sale in accordance with SFAS No. 77. Proceeds from the sale totaled $478,794. Receivables outstanding under this securitization were $480,702 at December 31, 1995. Recourse obligations related to this transaction are not material. A gain, equal to the present value of anticipated future net cash flows, net of transaction expenses and any unamortized deferred loan origination costs, of $9,562 was recorded as a result of the sale. In accordance with the sale agreement, a fixed amount of excess servicing fees will be set aside to absorb credit losses. The amount available to absorb credit losses at December 31, 1995 was zero. NOTE Q-CONCENTRATIONS OF RISK During 1995 and 1994, the Company maintained a concentration of business activities with customers located within Virginia, Maryland, California and the District of Columbia. As of December 31, 1995 and 1994, the Company held approximately $2.4 billion and $1.3 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, 1995, the Company had $1.2 billion and $1.4 billion, respectively, of credit exposure in the manufacturing and servicing industries. 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. 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 O - Derivative Financial Instruments for fair value information on Signet's derivatives.
December 31 - --------------------------------------------------------------------------------------------------------------------------- 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - --------------------------------------------------------------------------------------------------------------------------- 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) $ 599,113 $ 599,113 $ 531,747 $ 531,747 Interest bearing deposits with other banks(a)(e) 3,129 3,129 355,503 355,503 Federal funds sold and securities purchased under resale agreements(a) 460,217 460,217 1,135,821 1,135,821 Trading account securities(b)(e) 478,705 478,705 352,719 352,719 Loans held for securitization(a) 389,700 389,700 Loans held for sale(a)(b)(e) 362,736 362,736 69,585 69,585 Securities available for sale(b) 2,333,971 2,333,971 1,241,696 1,241,696 Investment securities(b) 398,783 399,666 Loans(c)(f) 4,920,793 4,960,403 7,440,679 7,588,917 Interest receivable(a)(e) 104,259 104,259 98,557 98,557 Other assets(a)(e)(g) 126,894 126,894 319,866 319,866 Liabilities: Non-interest bearing deposits(a) 1,726,378 1,726,378 1,542,349 1,542,349 Interest bearing deposits(d) 5,866,593 5,865,813 6,279,164 6,192,484 Securities sold under repurchase agreements(a) 1,124,105 1,124,105 875,458 875,458 Federal funds purchased(a) 780,193 780,193 881,693 881,693 Commercial paper(a) 108,664 108,664 Bridge financing facility(a) 1,300,000 1,300,000 Other short-term borrowings(a) 146,955 146,955 Long-term borrowings(b)(d) 253,033 262,920 253,641 257,325 Interest payable(a) 19,460 19,460 31,078 31,078 Other liabilities(a)(e)(g) 127,149 127,149 114,801 114,801 - ---------------------------------------------------------------------------------------------------------------------------
(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 O). (f) As required by SFAS No. 107, lease receivables (net of unearned income) with a carrying value totaling $365,533 and $262,979 at December 31, 1995 and 1994, 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands -- except per share) NOTE S-SIGNET BANKING CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL INFORMATION December 31 BALANCE SHEET 1995 1994 - ------------------------------------------------------------------------------- Assets Interest bearing deposits with other banks $ 110,000 Securities available for sale $ 10,646 17,795 Commercial loans 777 4,131 Advances to bank subsidiaries 215,929 204,878 Investments in: Bank subsidiaries 812,110 692,516 Non-bank subsidiaries 39,026 382,864 Other assets 39,503 65,582 - ------------------------------------------------------------------------------- $1,117,991 $1,477,766 - ------------------------------------------------------------------------------- Liabilities Commercial paper $ 108,664 Long-term borrowings - subordinated notes $ 250,000 250,000 Other liabilities 4,042 7,623 - ------------------------------------------------------------------------------- Total liabilities 254,042 366,287 Common Stockholders' Equity 863,949 1,111,479 - ------------------------------------------------------------------------------- $1,117,991 $1,477,766 - ------------------------------------------------------------------------------- Year Ended December 31 STATEMENT OF INCOME 1995 1994 1993 - ------------------------------------------------------------------------------- Income: Dividends from bank subsidiaries $ 57,651 $ 75,531 $ 50,328 Interest from: Bank subsidiaries 14,240 10,545 8,716 Non-bank subsidiaries 50 286 127 Others 414 4,528 2,674 Other income-- net 2,538 5,562 2,738 - ------------------------------------------------------------------------------- 74,893 96,452 64,583 Expense: Interest 17,486 20,983 18,002 Non-interest 2,594 4,489 3,795 - ------------------------------------------------------------------------------- 20,080 25,472 21,797 - ------------------------------------------------------------------------------- Income before income taxes benefit and equity in undistributed net income of subsidiaries 54,813 70,980 42,786 Applicable income taxes benefit (806) (1,204) (2,122) - ------------------------------------------------------------------------------- 55,619 72,184 44,908 Equity in undistributed net income: Bank subsidiaries 39,380 66,101 129,455 Non-bank subsidiaries 16,081 11,549 51 - ------------------------------------------------------------------------------- Net income $111,080 $149,834 $174,414 - ------------------------------------------------------------------------------- NOTE S-SIGNET BANKING CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL INFORMATION CONTINUED
Year Ended December 31 STATEMENT OF CASH FLOWS 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income $ 111,080 $149,834 $ 174,414 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (55,461) (77,650) (129,506) Realized securities available for sale losses (gains) 418 (459) 12 Realized investment security gains (107) Proceeds from sales of trading account securities 10,000 Decrease (increase) in other assets 26,389 (8,160) (12,472) (Decrease) increase in other liabilities (4,239) 454 769 - ---------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 78,187 64,019 43,110 INVESTING ACTIVITIES Decrease (increase) in interest bearing deposits with other banks 110,000 (55,000) Proceeds from sales of securities available for sale 47,552 3,662 Purchases of securities available for sale (39,469) (107) Proceeds from sales of investment securities 9,000 Purchases of investment securities (9,659) (Increase) decrease in advances to subsidiaries (11,052) 100,683 (47,121) Increase in investment in subsidiaries (37,721) (56,535) (1,413) Net decrease (increase) in loans 3,354 (4,131) - ---------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities 72,664 (11,321) (49,300) FINANCING ACTIVITIES (Decrease) increase in commercial paper (108,664) (59,824) 43,362 Decrease in long-term borrowings (11,943) (848) Proceeds from issuance of common stock 4,084 75,972 9,203 Payment of cash dividends (46,489) (57,192) (45,058) - ---------------------------------------------------------------------------------------------------------------- Net cash (used) provided by financing activities (151,069) (52,987) 6,659 - ---------------------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (218) (289) 469 Cash and cash equivalents at beginning of year 219 508 39 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 1 $ 219 $ 508 - ---------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES Interest paid $ 18,327 $ 20,692 $ 18,029 Income taxes (received) paid (27,453) 5,288 9,238 Distribution of common stock of Capital One Financial Corporation 383,200
Maturities of long-term borrowings for the next five years are as follows: 1996--$0, 1997--$50,000, 1998--$100,000, 1999--$100,000, 2000--$0. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands -- except per share) NOTE T-SPIN-OFF OF CAPITAL ONE FINANCIAL CORPORATION ("CAPITAL ONE") On July 27, 1994, Signet announced plans to spin-off substantially all of its credit card business. Under such plans, designated assets and liabilities of Signet Bank's credit card division were transferred to Capital One Bank, a newly chartered limited purpose credit card bank. Capital One Bank became, in conjunction with the transfer, a wholly-owned subsidiary of Capital One, a wholly-owned subsidiary of Signet (the "Separation"). Accounts representing approximately $335 million, or 5%, of the managed credit card portfolio were retained by Signet. The Separation occurred November 22, 1994, at which time 7,125,000 shares of common stock of Capital One were sold in an initial public offering. On February 28, 1995, Signet distributed all of the common stock it held in Capital One to Signet stockholders in a tax free distribution. Included in Signet's 1995 and 1994 non-interest expense is $2,018 and $1,272, respectively, of minority interest in Capital One's earnings. 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. Prior to November 22, 1994, the date of the Separation, Capital One operated as a division of Signet Bank, a wholly-owned subsidiary of Signet. Subsequent to the Separation, Capital One operated as an independently funded and stand-alone company. The accompanying financial summary data covers the time periods prior and subsequent to the Separation. The basis of preparation of the accompanying financial summary data for the periods prior to the Separation is as follows: (1) The data includes interest expense paid on borrowings from Signet Bank. For purposes of constructing the accompanying financial summary data, three funding pools (short-term, medium-term and long-term pools) were assumed, each with costs based on the average relevant historical rates paid by Signet. (2) The accompanying financial summary data also includes an allocation of expenses for data processing, accounting, audit, human resources, corporate secretary, treasury, legal and other administrative support provided by Signet. Such expenses were allocated based on actual usage or using other allocation methods which, in the opinion of management, approximate actual usage. Management believes the allocation methods were reasonable. Certain services currently provided by affiliates are expected to continue on a transitional basis. (3) Additionally, Signet Bank retained a credit card portfolio of approximately $335 million for all periods presented that is associated with its deposit customer base. The financial summary data assumes Capital One assessed Signet Bank a normal servicing fee for servicing this retained portfolio for all periods presented. Included in Capital One's 1994 non-interest expense is a special pre-tax charge of $49.0 million for terminating data processing contracts related to the credit card business. Various agreements continue to exist between Signet and Capital One. These include basic servicing agreements, an agreement to hold deposits on behalf of Capital One, $500,000 of which will transfer to Capital One in the first quarter of 1996, and an agreement to hold non-card consumer loans, which management anticipates will eventually be sold to Capital One. The net amount Signet paid to Capital One related to these agreements since the spin-off was $18,487. Capital One summary financial data follows: February 28 December 31 1995 1994 - ----------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------- NOTE T-SPIN-OFF OF CAPITAL ONE FINANCIAL CORPORATION ("CAPITAL ONE") CONTINUED
Year Ended Two Months Ended December 31 February 28, 1995 1994 1993 - --------------------------------------------------------------------------------------------- Net interest income $25,167 $164,977 $191,863 Provision for loan losses 3,929 30,727 34,030 - --------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 21,238 134,250 157,833 Non-interest income 87,679 396,902 194,825 Non-interest expense (1994 includes a $49,000 contract termination fee) 81,510 384,325 181,804 - --------------------------------------------------------------------------------------------- Income before income taxes 27,407 146,827 170,854 Applicable income taxes 9,870 51,564 60,369 - --------------------------------------------------------------------------------------------- Net income $17,537 $ 95,263 $110,485 - ---------------------------------------------------------------------------------------------
NOTE U-COMMITMENTS AND CONTINGENT LIABILITIES 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) 1995 1994 - ---------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit (unused) - net $3,505 $11,723 Standby and commercial letters of credit 318 289 Mortgage loans sold with recourse 15 19 - ---------------------------------------------------------------------------- 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 $10,209 and $8,994 at December 31, 1995 and 1994, 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands -- except per share) NOTE U-COMMITMENTS AND CONTINGENT LIABILITIES CONTINUED 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). Certain premises and equipment 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 $22,827 in 1995, $21,947 in 1994 and $18,541 in 1993. Future minimum rental commitments as of December 31, 1995 for all non-cancelable operating leases with initial or remaining terms of one year or more amounted to $121,640 and rental commitments for the next five years are as follows: 1996 $22,066 1998 $17,258 2000 $9,846 1997 19,439 1999 12,944 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 six years. NOTE V-COMMERCIAL FRAUD LOSS On March 19, 1996, subsequent to the announcement of 1995 earnings, management discovered 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 informed the Company that they believe there will be substantial recoveries of assets related to these transactions. Based on information currently available, 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 is based on the Company's pro rata share of known claims to the total amount currently restrained and held by federal authorities less associated costs. The recovery amount is subject to change, even in the near term, as additional assets are recovered, additional claims are asserted or the market value of the restrained assets fluctuates. Management believes 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 other sources of recovery, but currently is unable to determine the probability or amount of additional recoveries. REPORT OF ERNST & YOUNG LLP, INDEPENDENT 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Richmond, Virginia April 8, 1996 Signet Banking Corporation and Subsidiaries CONSOLIDATING BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------------------------------- December 31, 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Capital One Signet Banking Signet Financial Signet Banking Corporation Bank Signet Bank Corporation Other Corporation (in thousands) (unaudited) (Parent Company) Consolidated N.A. Consolidated(a) Subsidiaries Eliminations Consolidated - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 1 $ 579,070 $ 35,904 $ 7,903 $ (23,765) $ 599,113 Interest bearing deposits with other banks 1,800 1,329 3,129 Fed funds sold and resale agreements 460,217 460,217 Trading account securities 478,723 478,723 Loans held for securitization 389,700 389,700 Loans held for sale 360,831 429 361,260 Securities available for sale 10,646 2,173,605 492,792 4,983 (348,055) 2,333,971 Loans 808 5,470,442 103,213 (6,900) 5,567,563 Less: Unearned Income (31) (151,504) (151,535) Allowance for loan losses (125,371) (4,331) (129,702) - ---------------------------------------------------------------------------------------------------------------------------------- Net loans 777 5,193,567 98,882 (6,900) 5,286,326 Premises and equipment 184,425 3,889 4,117 192,431 Other assets 1,106,567 790,252 23,039 36,224 (1,083,087) 872,995 - ---------------------------------------------------------------------------------------------------------------------------------- $1,117,991 $10,612,190 $654,506 $54,985 $(1,461,807) $10,977,865 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest bearing deposits $ 1,607,615 $142,528 $ (23,765) $ 1,726,378 Interest bearing deposits 5,584,057 282,536 5,866,593 - ---------------------------------------------------------------------------------------------------------------------------------- Total deposits 7,191,672 425,064 (23,765) 7,592,971 Other short-term borrowings 2,355,289 118,173 (569,164) 1,904,298 Long-term borrowings $ 250,000 3,033 253,033 Other liabilities 4,042 350,695 21,387 $ 5,232 (17,742) 363,614 Stockholders' equity 863,949 711,501 89,882 49,753 (851,136) 863,949 - ---------------------------------------------------------------------------------------------------------------------------------- $1,117,991 $10,612,190 $654,506 $54,985 $(1,461,807) $10,977,865 - ----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CONSOLIDATING INCOME
- --------------------------------------------------------------------------------------------------------------------------------- (in thousands) (unaudited) Year Ended December 31, 1995 - --------------------------------------------------------------------------------------------------------------------------------- Interest income $ 14,704 $ 804,937 $ 40,501 $ 57,682 $ 546 $ (52,371) $ 865,999 Interest expense 17,486 359,195 15,322 32,515 515 (52,268) 372,765 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income (expense) (2,782) 445,742 25,179 25,167 31 (103) 493,234 Provision for loan losses 35,786 (1,000) 3,929 38,715 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income (expense) after provision for loan losses (2,782) 409,956 26,179 21,238 31 (103) 454,519 Non-interest operating income 2,956 148,675 7,442 87,679 35,296 (4,569) 277,479 Securities gains (losses) (418) 2,088 23 96 1,789 Non-interest expense 2,594 432,256 18,786 81,510 31,534 (2,612) 564,068 - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) (2,838) 128,463 14,858 27,407 3,889 (2,060) 169,719 Applicable income taxes (benefit) (806) 41,153 6,950 9,870 1,514 (42) 58,639 - --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (2,032) $ 87,310 $ 7,908 $ 17,537 $ 2,375 $ (2,018)(b)$ 111,080 - ---------------------------------------------------------------------------------------------------------------------------------
(a) The Capital One Financial Corporation balance sheet is not included in the Signet Banking Corporation Consolidated balance sheet as of December 31, 1995 due to the spin-off that was effective February 28, 1995. The income statement for Capital One Financial Corporation reflects the activity for 1995 until the spin-off. (b) The $2,018 represents the minority interest in Capital One Financial Corporation's net income which is recorded in other non-interest expense in the eliminations column. Signet Bank CONSOLIDATING BALANCE SHEET
- ------------------------------------------------------------------------------------------------------ December 31, 1995 - ------------------------------------------------------------------------------------------------------ Signet Bank Excluding Signet Signet Mortgage Mortgage Signet Bank (in thousands) (unaudited) Corporation Corporation Eliminations Consolidated - ------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 579,070 $ 2,484 $ (2,484) $ 579,070 Interest bearing deposits with other banks 1,800 1,800 Fed funds sold and resale agreements 460,217 460,217 Trading account securities 478,723 478,723 Loans held for securitization 389,700 389,700 Loans held for sale 264,902 95,929 360,831 Securities available for sale 2,173,319 286 2,173,605 Loans 5,469,597 845 5,470,442 Less: Unearned Income (151,504) (151,504) Allowance for loan losses (125,371) (125,371) - ------------------------------------------------------------------------------------------------------ Net loans 5,192,722 845 5,193,567 Investment in subsidiary 16,645 (16,645) Premises and equipment 180,076 4,349 184,425 Interest receivable 97,115 509 97,624 Other assets 761,477 59,012 (127,861) 692,628 - ------------------------------------------------------------------------------------------------------ $10,595,766 $163,414 $(146,990) $10,612,190 - ------------------------------------------------------------------------------------------------------ LIABILITIES Non-interest bearing deposits $ 1,610,039 $ 60 $ (2,484) $ 1,607,615 Interest bearing deposits 5,584,057 5,584,057 - ------------------------------------------------------------------------------------------------------ Total deposits 7,194,096 60 (2,484) 7,191,672 Advances (to) from affiliates-net (7,129) 134,990 (127,861) Other short-term borrowings 2,355,289 2,355,289 Long-term borrowings 3,033 3,033 Other liabilities 338,976 11,719 350,695 - ------------------------------------------------------------------------------------------------------ Total liabilities 9,884,265 146,769 (130,345) 9,900,689 STOCKHOLDERS' EQUITY Common stock 68,242 750 (750) 68,242 Capital surplus 330,895 500 (500) 330,895 Retained earnings 312,364 15,395 (15,395) 312,364 - ------------------------------------------------------------------------------------------------------ Total stockholders' equity 711,501 16,645 (16,645) 711,501 - ------------------------------------------------------------------------------------------------------ $10,595,766 $163,414 $(146,990) $10,612,190 - ------------------------------------------------------------------------------------------------------
STATEMENT OF CONSOLIDATING INCOME
- -------------------------------------------------------------------------------------------------- (in thousands) (unaudited) Year Ended December 31, 1995 - -------------------------------------------------------------------------------------------------- Interest income $800,277 $ 4,660 $804,937 Interest expense 354,428 4,767 359,195 - -------------------------------------------------------------------------------------------------- Net interest income (expense) 445,849 (107) 445,742 Provision for loan losses 35,786 35,786 - -------------------------------------------------------------------------------------------------- Net interest income (expense) after provision for loan losses 410,063 (107) 409,956 Non-interest operating income 121,457 27,218 148,675 Securities gains 2,088 2,088 Non-interest expense 402,200 30,056 432,256 - -------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) 131,408 (2,945) 128,463 Applicable income taxes (benefit) 42,184 (1,031) 41,153 - -------------------------------------------------------------------------------------------------- Net income (loss) $ 89,224 $(1,914) $ 87,310 - --------------------------------------------------------------------------------------------------
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 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. Signet shareholders of record on February 10 received the Capital One distribution. The cost basis of their investment was adjusted so that 50.69% was attributed to Signet shares and 49.31% was attributed to the Capital One shares. March 1, 1995 Signet share price adjusted to reflect the spin-off of Capital One.
QUARTERLY PER SHARE INFORMATION Data through February 28, 1995 include Signet's ownership of Capital One Financial Corporation
1994 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER Price Range 34 1/2-40 3/8 38-43 7/8 34 1/8-41 27 1/4-35 1/2 Book Value $17.95 $18.23 $18.52 $18.96 E.P.S. .93 .88 .05 .73 Dividends Declared .25 .25 .25 .25 Average Common Shares and Equivalents (000s) 57,247 57,358 57,898 58,927
1995 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER Price Range 17 5/8-36 5/8 20 1/8-23 1/4 21 1/2-28 22-27 1/2 Book Value $13.15 $13.90 $14.27 $14.59 E.P.S. .71 .50 .50 .15 Dividends Declared .25 .17 .17 .20 Average Common Shares and Equivalents (000s) 59,142 59,669 60,146 60,230
TOTAL RETURN TO SHAREHOLDERS IN 1995 Value of 1 Signet share on December 31, 1994 $28.63 - -------------------------------------------------------------------------------- Cash dividends paid by Signet in 1995 .79 Cash dividends paid by Capital One in 1995 .24 Value of 1 Capital One share on December 31, 1995 23.75 Value of 1 Signet share on December 31, 1995 23.88 - -------------------------------------------------------------------------------- $48.66 Total Return to Shareholders in 1995 70.0% Annual Return of S&P 500 in 1995 34.1% Total Return of Keefe, Bruyette & Woods 50 Bank Index in 1995 60.2% [recycled logo] The contents of this Annual Report are printed on recycled paper. EX-21 5 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF SIGNET BANKING CORPORATION December 31, 1995 Subsidiary Place of Incorporation Signet Bank Virginia 800 Building Corporation Virginia Signet Mortgage Corporation Virginia Signet Second Mortgage Corporation Virginia Signet Bank (Bahamas), Ltd. Bahamas Second Eleutheran Investment Co., Ltd. Bahamas Signet Trust Company Virginia Signet Insurance Services, Inc. Virginia Signet Financial Services, Inc. Virginia Signet Commercial Credit Corporation Virginia Signet Strategic Capital Corporation Virginia General Finance Service Corporation Pennsylvania Elgin Corporation Virginia Signet Investment Banking Company Virginia St. Paul Realty, Inc. Maryland Signet Equipment Company Maryland Wharton & Bennett, Inc. Maryland 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 Landexco, Inc. Maryland Signet Leasing and Financial Corporation Maryland Signet Insurance Services Inc./Maryland Maryland Signet Realty, Inc. Maryland Signet Bank N.A. Washington, D.C. Signet Municipal LeaseCorp., Inc. Virginia The Budget Plan Company of Virginia Virginia Signet Lending Services, Inc. Tennessee DOPWO, Inc. Virginia NP Corporation 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 VMD Servicing Corporation Maryland MWG VII, Inc. Maryland Signet Residential Finance Corporation Virginia FH Crossings, Ltd. Virginia FH Properties, No. 4, Inc. Virginia FH Properties, No. 6, Inc. Virginia FH Properties, No. 7, Inc. Virginia FH Properties, No. 9, Inc. Virginia FH Properties, No. 10, Inc. Virginia FH Properties, No. 13, Inc. Virginia Signet Business Leasing Corporation Virginia Signet Loan Company Pennsylvania EXHIBIT 21.1 SUBSIDIARIES OF SIGNET BANKING CORPORATION December 31, 1995 Subsidiary Place of Incorporation RE IV, Inc. Maryland RE VIII, Inc. Maryland RE IX, Inc. Maryland EEI Holding's Corporation, 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 Signet Asset Management, Inc./Delaware Delaware Signet Banking Corporation/Delaware Delaware Signet Commercial Credit Corporation/Delaware Delaware Signet Credit Corporation/Delaware Delaware Signet Equipment Company/Delaware Delaware Signet Financial Corporation/Delaware Delaware Signet Insurance Services, Inc./Delaware Delaware Signet Investment Banking Corporation/Delaware Delaware Signet Investment Corporation/Delaware Delaware Signet Leasing & Financial Corporation/Delaware Delaware Signet Properties Company/Delaware Delaware Signet Services Corporation/Delaware Delaware Signet Venture Capital Corporation/Delaware Delaware Virtus Capital Management, Inc. Maryland Pioneer Properties, Inc. Virginia Pioneer Asset Management Virginia Pioneer Mortgage Corporation Virginia Pioneer Development Corporation Virginia PFR Corporation Virginia Pioneer Properties I, Inc. Virginia Pioneer Properties II, Inc. Virginia Pioneer Properties III, Inc. Virginia Pioneer Capital I, Inc. Virginia EX-23 6 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Signet Banking Corporation of our report dated April 8, 1996, included in the 1995 Annual Report to Shareholders of Signet Banking Corporation. We also consent to the incorporation by reference in the following Registration Statements, or most recent post-effective amendments thereto, filed prior to April 10, 1996 of our report dated April 8, 1996, with respect to the consolidated financial statements incorporated herein by reference: - 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 April 10, 1996 EX-27 7 ARTICLE 9 FDS FOR 10-K
9 1,000 YEAR DEC-31-1995 DEC-31-1995 599,113 3,129 460,217 478,723 361,260 0 0 5,567,563 129,702 10,977,865 7,592,971 1,904,298 363,614 253,033 296,044 0 0 567,905 10,977,865 583,453 24,300 258,246 865,999 222,185 372,765 493,234 38,715 1,789 564,068 169,719 169,719 0 0 111,080 1.86 1.86 5.08 38,481 66,371 0 0 220,519 62,993 9,848 129,702 116,315 0 13,387
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