-----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, Gh7bY3x2K5AVn+FETA7MnbIQWAaei0eU5cwKsU1tnNmzSe7/Dl3Dj92GOARkJCYW gkwPXwXPkpMK1CIgNbPFvA== 0000916641-96-000970.txt : 19961115 0000916641-96-000970.hdr.sgml : 19961115 ACCESSION NUMBER: 0000916641-96-000970 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGNET BANKING CORP CENTRAL INDEX KEY: 0000009659 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 546037910 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06505 FILM NUMBER: 96661838 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-Q 1 SIGNET 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1996 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______ to _______. Commission file number 1-6505 SIGNET BANKING CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-6037910 (State or other jurisdiction (I.R.S. Employer Identification No.) incorporation or organization) 7 North Eighth Street, Richmond, Virginia 23219 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 804 747-2000 Not Applicable Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Common Shares outstanding as of October 31, 1996 - 59,832,150 1 Index SIGNET BANKING CORPORATION AND SUBSIDIARIES September 30, 1996 Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheet 3 Statement of Consolidated Income 4 Statement of Consolidated Cash Flows 5 Statement of Changes in Consolidated Stockholders' Equity 6 Supplemental Notes to Quarterly Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings 24 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 24 2 PART 1. FINANCIAL INFORMATION Signet Banking Corporation and Subsidiaries Item 1. Financial Statements Consolidated Balance Sheet (in thousands--except per share) (unaudited)
- ----------------------------------------------------------------------------------------------------------------------------- September 30 December 31 1996 1995 1995 - ----------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 592,307 $ 498,193 $ 599,113 Interest bearing deposits with other banks 2,211 1,712 3,129 Federal funds sold and securities purchased under resale agreements 589,590 425,305 460,217 Trading account securities 478,631 464,950 478,723 Loans held for securitization 300,000 750,000 389,700 Loans held for sale 110,005 267,535 361,260 Securities available for sale 2,520,136 2,195,180 2,333,971 Investment securities 297,237 Loans: Consumer 2,221,244 1,776,434 1,751,274 Commercial 3,325,278 2,982,401 3,090,904 Real estate-construction 250,140 237,271 236,103 Real estate-commercial mortgage 275,995 406,102 366,698 Real estate-residential mortgage 311,169 248,145 122,584 - ----------------------------------------------------------------------------------------------------------------------------- Gross loans 6,383,826 5,650,353 5,567,563 Less: Unearned income (211,759) (140,916) (151,535) Allowance for loan losses (128,459) (129,672) (129,702) - ----------------------------------------------------------------------------------------------------------------------------- Net loans 6,043,608 5,379,765 5,286,326 Premises and equipment (net) 191,402 180,549 192,431 Interest receivable 101,958 98,000 104,437 Other assets 562,711 534,689 768,558 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $11,492,559 $11,093,115 $10,977,865 - ----------------------------------------------------------------------------------------------------------------------------- Liabilities Non-interest bearing deposits $ 1,774,901 $ 1,603,922 $ 1,726,378 Interest bearing deposits: Interest bearing demand 2,739,923 2,402,077 2,441,125 Savings accounts 669,062 1,338,824 1,395,514 Savings certificates 2,285,807 1,828,217 1,850,397 Large denomination certificates 204,940 99,890 129,711 Foreign 159,446 80,318 49,846 - ----------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 6,059,178 5,749,326 5,866,593 - ----------------------------------------------------------------------------------------------------------------------------- Total deposits 7,834,079 7,353,248 7,592,971 Securities sold under repurchase agreements 1,356,190 1,153,479 1,124,105 Federal funds purchased 799,376 1,285,918 780,193 Long-term borrowings 400,018 253,129 253,033 Interest payable 31,134 23,455 19,460 Other liabilities 182,288 181,514 344,154 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities 10,603,085 10,250,743 10,113,916 Stockholders' Equity Common stock, $5 par value; authorized 100,000,000 shares, issued and outstanding 59,724,436, 59,048,852 and 59,208,745 shares, respectively 298,622 295,244 296,044 Capital surplus 207,180 197,911 200,093 Retained earnings 383,672 349,217 367,812 - ----------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 889,474 842,372 863,949 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $11,492,559 $11,093,115 $10,977,865 - -----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 3 Signet Banking Corporation and Subsidiaries Statement of Consolidated Income (in thousands--except per share) (unaudited)
- ----------------------------------------------------------------------------------------------------------------------- Three Months Nine Months Ended September 30 Ended September 30 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Interest income: Loans, including fees: Consumer $ 55,516 $ 60,296 $163,303 $239,998 Commercial 59,691 53,703 171,611 150,426 Real estate-construction 6,085 6,080 18,211 16,860 Real estate-commercial mortgage 6,036 9,358 21,896 32,765 Real estate-residential mortgage 5,701 5,011 13,081 14,364 - ----------------------------------------------------------------------------------------------------------------------- Total loans, including fees 133,029 134,448 388,102 454,413 Interest bearing deposits with other banks 106 127 303 1,923 Federal funds sold and resale agreements 8,793 7,166 26,524 30,707 Trading account securities 8,383 7,410 24,370 23,064 Loans held for securitization 6,005 11,561 19,416 22,186 Loans held for sale 8,441 7,785 28,106 15,122 Securities available for sale 46,286 31,963 132,030 91,042 Investment securities-taxable 4,190 12,393 Investment securities-nontaxable 2,093 8,160 - ----------------------------------------------------------------------------------------------------------------------- Total interest income 211,043 206,743 618,851 659,010 Interest expense: Interest bearing demand 21,230 18,667 57,519 55,409 Savings accounts 4,607 12,785 23,632 35,312 Savings certificates 27,227 22,070 75,157 59,964 Large denomination certificates 2,566 1,332 5,822 10,218 Foreign 2,583 1,721 6,277 5,209 - ----------------------------------------------------------------------------------------------------------------------- Total interest on deposits 58,213 56,575 168,407 166,112 Securities sold under repurchase agreements 19,329 14,689 50,924 40,396 Federal funds purchased 10,939 14,211 35,441 38,348 Other short-term borrowings 15,302 Long-term borrowings 4,128 4,324 12,038 21,213 - ----------------------------------------------------------------------------------------------------------------------- Total interest expense 92,609 89,799 266,810 281,371 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 118,434 116,944 352,041 377,639 Provision for loan losses 19,000 8,681 44,051 20,111 - ----------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 99,434 108,263 307,990 357,528 Non-interest income: Service charges on deposit accounts 17,180 17,732 50,511 51,415 Consumer loan servicing and service charge income 11,439 2,511 38,871 87,921 Trust and other financial services income 10,308 8,680 30,021 23,125 Other 29,831 17,440 70,486 47,352 - ----------------------------------------------------------------------------------------------------------------------- Non-interest operating income 68,758 46,363 189,889 209,813 Securities available for sale gains (losses) (629) 166 127 512 Investment securities gains 565 823 - ----------------------------------------------------------------------------------------------------------------------- Total non-interest income 68,129 47,094 190,016 211,148 Non-interest expense: Salaries 54,605 45,792 155,607 147,161 Employee benefits 8,811 10,517 31,678 40,934 Supplies and equipment 10,036 9,384 29,626 32,625 Occupancy 9,045 9,635 28,759 31,023 External data processing services 7,992 6,868 23,471 22,662 Travel and communications 6,231 6,138 18,857 24,895 Capital One credit card solicitation 29,050 Other 26,135 21,173 71,983 83,527 - ----------------------------------------------------------------------------------------------------------------------- Total non-interest expense 122,855 109,507 359,981 411,877 - ----------------------------------------------------------------------------------------------------------------------- Income before income taxes (Capital One Financial Corporation amounted to $0, $0, $0 and $27,407, respectively) 44,708 45,850 138,025 156,799 Applicable income taxes 15,102 15,707 46,743 54,745 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 29,606 $ 30,143 $ 91,282 $102,054 Earnings per common share $ 0.49 $ 0.50 $ 1.51 $ 1.71 Cash dividends declared per share 0.20 0.17 0.60 0.59 Average common shares outstanding 60,738 60,146 60,533 59,691 - -----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 4 Signet Banking Corporation and Subsidiaries Statement of Consolidated Cash Flows (in thousands)(unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------ Nine Months Ended September 30 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Activities Net income $ 91,282 $ 102,054 Adjustments to reconcile net income to net cash (used) provided by operating activities: Provision for loan losses 44,051 20,111 Provision and writedowns on foreclosed property 128 2,040 Depreciation and amortization 30,630 23,251 Investment securities gains (823) Securities available for sale gains (127) (512) Decrease in interest receivable 2,479 557 Decrease (increase) in other assets 195,683 (381,345) Increase in interest payable 11,674 13,794 Decrease in other liabilities (166,110) (16,119) Proceeds from securitization of credit card loans 90,000 184,900 Proceeds from sales of loans held for sale 24,812,124 29,325,216 Purchases and originations of loans held for sale (24,560,869) (29,708,145) Proceeds from sales of trading account securities 13,116,785 12,082,168 Purchases of trading account securities (13,116,693) (12,194,078) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by operating activities 551,037 (546,931) Investing Activities Proceeds from maturities of investment securities 115,279 Purchases of investment securities (25,510) Proceeds from sales of securities available for sale 1,275,292 494,445 Proceeds from maturities of securities available for sale 284,411 626,389 Purchases of securities available for sale (1,781,933) (2,425,232) Net increase in loans (805,172) (993,038) Recoveries of loans previously charged-off 3,539 8,266 Purchases of premises and equipment (18,859) (53,266) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (1,042,722) (2,252,667) Financing Activities Net increase in deposits 241,108 154,633 Net increase in short-term borrowings 251,268 192,730 Increase in Capital One Financial Corporation long-term debt prior to spin-off 1,388,153 Proceeds from issuance of long-term debt 150,000 Payments on long-term debt (3,015) (512) Net issuance of common stock 9,665 1,102 Payment of cash dividends (35,692) (34,661) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 613,334 1,701,445 - ------------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents 121,649 (1,098,153) Cash and cash equivalents at beginning of period 1,062,459 2,023,363 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 1,184,108 $ 925,210 - ------------------------------------------------------------------------------------------------------------------------------------ Supplemental disclosures Interest paid $ 255,137 $ 288,993 Income taxes paid 16,327 21,436 Transfer of loans to foreclosed property 6,276 2,446 Transfer of loans to loans held for securitization 900,000 - ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 5 Signet Banking Corporation and Subsidiaries Statement of Changes in Consolidated Stockholders' Equity (in thousands) (unaudited)
- -------------------------------------------------------------------------------------------------------- Common Capital Retained Stock Surplus Earnings - -------------------------------------------------------------------------------------------------------- Nine Months Ended September 30, 1996 Balance at beginning of period $296,044 $200,093 $367,812 Net income 91,282 Issuance of Common Stock 2,578 7,087 Cash dividends (35,692) Net unrealized losses on securities available for sale, net of tax benefit of $21,393 (39,730) - -------------------------------------------------------------------------------------------------------- Balance at end of period $298,622 $207,180 $383,672 - -------------------------------------------------------------------------------------------------------- Nine Months Ended September 30, 1995 Balance at beginning of period $293,184 $198,869 $619,426 Net income 102,054 Issuance of Common Stock 3,352 6,249 Purchase of Common Stock (1,292) (7,207) Cash dividends (34,661) Spin-off of Capital One Financial Corporation (383,200) Net unrealized gains on securities available for sale, net of tax of $24,553 45,598 - -------------------------------------------------------------------------------------------------------- Balance at end of period $295,244 $197,911 $349,217 - --------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements Supplemental Notes to Quarterly Financial Statements (dollars in thousands) (unaudited) - -------------------------------------------------------------------------------- General The accompanying financial statements (unaudited) reflect all adjustments which are, in the opinion of management, necessary for a fair presentation. All such adjustments are of a normal recurring nature. The financial statements have been prepared based on the accounting policies as described in the 1995 annual report and as noted below, except certain amounts which have been reclassified for prior periods to conform to the 1996 presentation format. Statement of Consolidated Cash Flows Cash and cash equivalents, as presented in this statement, includes cash and due from banks, interest bearing deposits with other banks and federal funds sold and securities purchased under resale agreements. A significant noncash transaction in the first nine months of 1995 included a transfer of $3,639,288 of assets (primarily $2,538,554 of loans), $3,256,088 of liabilities (primarily $1,388,153 related to long-term borrowings) and a decrease in retained earnings of $383,200 related to the spin-off of Capital One. Securities Available for Sale Securities available for sale are summarized as follows:
September 30, 1996 September 30, 1995 December 31, 1995 Fair Fair Fair Cost Value Cost Value Cost Value - ---------------------------------------------------------------------------------------------------------------------------------- U.S. Government and agency obligations - Mortgage-backed securities $2,022,469 $2,024,226 $1,135,678 $1,173,564 $1,478,517 $1,530,818 Other 298,058 301,875 912,132 920,609 562,815 583,275 States and political subdivisions 26,169 26,853 111 119 53,031 54,696 Other 170,289 167,182 112,885 100,888 173,137 165,182 - ---------------------------------------------------------------------------------------------------------------------------------- Total $2,516,985 $2,520,136 $2,160,806 $2,195,180 $2,267,500 $2,333,971 - ----------------------------------------------------------------------------------------------------------------------------------
6 Supplemental Notes to Quarterly Financial Statements (continued) (dollars in thousands) (unaudited) - -------------------------------------------------------------------------------- Investment Securities The Company reclassified all of its investment securities to available for sale in December 1995 as allowed by implementation guidance for Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Income Taxes Differences between the effective rate of income taxes and the statutory rate arise principally from non-taxable interest on investments and loans. Net Unrealized Gains (Losses) on Securities Available-for-Sale, Net of Tax - --------------------------------------------------------------------------- Nine Months Ended September 30 1996 1995 - --------------------------------------------------------------------------- Balance at beginning of period $ 45,202 $(21,790) First Quarter (31,940) 20,386 Second Quarter (14,021) 24,046 Third Quarter 6,231 1,166 - --------------------------------------------------------------------------- Total change (39,730) 45,598 Balance at end of period $ 5,472 $ 23,808 - --------------------------------------------------------------------------- Securitizations The Company securitized $90,000 of credit card receivables in February, 1996 and $185,000 in September, 1995. These transactions were recorded as sales in accordance with SFAS No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse." Proceeds from these sales in 1996 and 1995 totaled $90,000 and $184,900, respectively. Receivables outstanding under credit card securitizations were $275,000 at September 30, 1996. 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 may be set aside to absorb credit losses. None was required at September 30, 1996. In December, 1995, the Company 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 $420,446 at September 30, 1996. 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. Gains resulting from ongoing sales of receivables are recorded over the life of the transaction. In accordance with the sale agreement, a fixed amount of excess servicing fees is set aside to absorb credit losses. The amount available to absorb credit losses at September 30, 1996 was $5,288. Recent Accounting Statements The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," on January 1, 1996. The Statement requires that long-lived assets and certain identifiable intangibles to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In determining the recoverability of an asset, the enterprise should estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted cash flows is less than the carrying amount of the asset, an impairment loss would be recognized. The Statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less selling costs. Adoption of the Statement did not have a material impact on the Company's financial position or results of operations. In June 1996, the Financial Accounting Standards Board issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The statement deals with accounting for transfers and servicing of financial assets and extinguishment of liabilities. In accordance with the statement, an entity recognizes the financial assets it controls and the 7 Supplemental Notes to Quarterly Financial Statements (continued) (dollars in thousands) (unaudited) - -------------------------------------------------------------------------------- liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The statement also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of transfer. Servicing assets and liabilities would subsequently be measured by (a) amortization in proportion to and over the period of estimated net servicing income or loss and (b) assessment for asset impairment or increased obligation based on their fair values. The statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. The Company is currently in the process of assessing the impact of SFAS 125. Commercial Fraud Loss On March 19, 1996, subsequent to the announcement of 1995 earnings, Signet's management discovered that the Company was one of several major financial institutions that were victims of fraudulent commercial loan transactions which occurred prior to 1996. After taking into account sales of interests in and repayments of such loans, 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. 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 that management believes is likely to be recovered based on current facts and circumstances. The amount of the recovery was based on the Company's pro-rata share of known claims to the total amount restrained by federal authorities, less associated costs, and turned over to a trustee. 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 continues to believe the $35 million charge to 1995 earnings is adequate to cover estimated losses related to these fraudulent transactions based on currently available information, but is unable to predict the timing of the recovery. The Company will vigorously pursue all other sources of recovery, but currently is unable to determine the probability or amount of additional recoveries. Capital One Financial Corporation ("Capital One") On February 28, 1995, Signet distributed to Signet stockholders in a tax free distribution all of the common stock it held in Capital One. Included in Signet's nine months ended September 30, 1995 non-interest expense is $2,018 of minority interest in Capital One's earnings. Capital One's results of operations and financial position are excluded from those of the Company for periods subsequent to February 28,1995. Capital One summary financial data follows: Two Months Ended February 28, 1995 - --------------------------------------------------------------------------- Net interest income $25,167 Provision for loan losses 3,929 - --------------------------------------------------------------------------- Net interest income after provision for loan losses 21,238 Non-interest income 87,679 Non-interest expense 81,510 - --------------------------------------------------------------------------- Income before income taxes 27,407 Applicable income taxes 9,870 - --------------------------------------------------------------------------- Net income $17,537 - --------------------------------------------------------------------------- 8 Signet Banking Corporation and Subsidiaries Financial Highlights (dollars in thousands--except per share) - -------------------------------------------------------------------------------- Signet Banking Corporation (Signet) completed the spin-off of its subsidiary, Capital One Financial Corporation on February 28, 1995. Due to the significance of the spin-off, pro forma financial information for the first nine months of 1995 is provided below to illustrate Signet's financial results and other data assuming the spin-off had occurred prior to January 1, 1995.
- ------------------------------------------------------------------------------------------------------------------------------------ Consolidated Consolidated Pro Forma Consolidated Three Months Ended Nine Months Ended Nine Months Ended September 30 Percent September 30 Percent September 30 1996 1995 Change 1996 1995 Change 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings Net interest income (taxable equivalent) $ 120,492 $ 119,482 0.8 % $ 357,992 $ 361,227 (0.9)% $ 386,394 Net interest income 118,434 116,944 1.3 352,041 352,472 (0.1) 377,639 Net income 29,606 30,143 (1.8) 91,282 86,535 5.5 102,054 - ----------------------------------------------------------------------------------------------------------------------------------- Per Common Share Net income $ 0.49 $ 0.50 (2.0) $ 1.51 $ 1.45 4.1 $ 1.71 Cash dividends declared 0.20 0.17 17.6 0.60 -- -- 0.59 Book value 14.89 14.27 4.3 Period-end price 26.75 26.38 1.4 - ----------------------------------------------------------------------------------------------------------------------------------- Average Daily Balance Assets $11,429,415 $10,755,762 6.3 $11,281,783 $10,481,112 7.6 $11,185,698 Earning assets 10,203,525 9,555,056 6.8 9,995,768 9,346,754 6.9 9,978,031 Loans (net of unearned income) 5,928,045 5,825,017 1.8 5,770,232 5,821,271 (0.9) 6,296,105 Managed loan portfolio 6,932,773 6,234,072 11.2 6,795,270 5,949,099 14.2 7,659,533 Deposits 7,568,833 7,259,988 4.3 7,548,594 7,259,906 4.0 7,374,330 Core deposits 7,200,579 7,043,417 2.2 7,255,271 7,038,653 3.1 7,030,864 Common stockholders' equity 863,801 824,191 4.8 856,758 791,324 8.3 872,580 Common shares outstanding 60,738,071 60,145,919 1.0 60,532,872 59,690,734 1.4 59,690,734 - ----------------------------------------------------------------------------------------------------------------------------------- Ratios Return on average assets 1.03% 1.11% (7.2) 1.08% 1.10% (1.8) 1.22% Return on average common stockholders' equity 13.63 14.51 (6.1) 14.23 14.62 (2.7) 15.64 Net yield margin 4.70 4.96 (5.2) 4.78 5.17 (7.5) 5.18 Allowance for loan losses to: Non-performing loans 441.17 339.92 29.8 Non-performing assets 292.95 251.77 16.4 Net loans 2.08 2.35 (11.5) Non-performing assets to loans and foreclosed properties 0.71 0.93 (23.7) Stockholders' equity to assets 7.74 7.59 2.0 - ----------------------------------------------------------------------------------------------------------------------------------- At Period-end Assets $11,492,559 $11,093,115 3.6 Earning assets 10,172,640 9,911,356 2.6 Loans (net of unearned income) 6,172,067 5,509,437 12.0 Managed loan portfolio 7,167,513 6,397,315 12.0 Deposits 7,834,079 7,353,248 6.5 Core deposits 7,469,693 7,173,040 4.1 Common stockholders' equity 889,474 842,372 5.6 Non-performing assets 43,851 51,504 (14.9) Number of common stockholders 15,164 15,134 0.2 Full-time employees 4,201 3,900 7.7 Part-time employees 955 1,049 (9.0) - -----------------------------------------------------------------------------------------------------------------------------------
Note: The common stock of Signet Banking Corporation is traded on the New York Stock Exchange under the symbol "SBK." 9 Table 1 Signet Banking Corporation Selected Quarterly Financial Information
- ----------------------------------------------------------------------------------------------------------------------- 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 1996 1996 1996 1995 1995 - ------------------------------------------------------------------------------------------------------------------------ Summary of Operations (dollars in thousands--except per share) Net interest income (taxable equivalent) $120,492 $119,122 $118,378 $117,443 $119,482 Less: taxable equivalent adjustment 2,058 1,749 2,144 1,848 2,538 - ------------------------------------------------------------------------------------------------------------------------ Net interest income 118,434 117,373 116,234 115,595 116,944 Provision for loan losses 19,000 13,794 11,257 18,604 8,681 - ------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 99,434 103,579 104,977 96,991 108,263 Non-interest income 68,129 63,871 58,016 68,120 47,094 Non-interest expense (1) 122,855 121,511 115,615 152,191 109,507 - ------------------------------------------------------------------------------------------------------------------------ Income before income taxes 44,708 45,939 47,378 12,920 45,850 - ------------------------------------------------------------------------------------------------------------------------ Applicable income taxes 15,102 15,458 16,183 3,894 15,707 - ------------------------------------------------------------------------------------------------------------------------ Net income $ 29,606 $ 30,481 $ 31,195 $ 9,026 $ 30,143 - ------------------------------------------------------------------------------------------------------------------------ Net income excluding commercial fraud loss $ 29,606 $ 30,481 $ 31,195 $ 31,776 $ 30,143 - ------------------------------------------------------------------------------------------------------------------------ Per common share: Net income (1) $ 0.49 $ 0.50 $ 0.52 $ 0.15 $ 0.50 Net income excluding commercial fraud loss 0.49 0.50 0.52 0.53 0.50 Cash dividends declared 0.20 0.20 0.20 0.20 0.17 Book value 14.89 14.48 14.39 14.59 14.27 Average common shares outstanding 60,738,071 60,502,076 60,356,655 60,230,489 60,145,919 Selected Average Balances (dollars in millions) Assets $ 11,429 $ 11,347 $ 11,068 $ 10,982 $ 10,756 Earning assets 10,204 10,075 9,706 9,745 9,555 Loans (net of unearned income) 5,928 5,814 5,566 5,598 5,825 Managed loan portfolio 6,933 6,841 6,611 6,482 6,234 Deposits 7,569 7,525 7,551 7,346 7,260 Core deposits 7,201 7,219 7,347 7,164 7,043 Interest bearing liabilities 8,781 8,694 8,336 8,353 8,158 Stockholders' equity 864 847 859 856 824 Ratios Return on average assets (2) 1.03% 1.08% 1.13% 0.33% 1.11% Return on average common stockholders' equity (2) 13.63 14.47 14.60 4.18 14.51 Efficiency ratio (excluding foreclosed prop. exp.) (3) 64.92 66.16 66.23 63.47 65.99 Net interest spread 4.11 4.19 4.32 4.16 4.32 Net yield margin 4.70 4.75 4.91 4.78 4.96 Stockholders' equity to assets 7.74 7.48 7.19 7.87 7.59 Credit Quality Data Non-performing assets $ 43,851 $ 54,864 $ 47,203 $ 54,303 $ 51,504 Net charge-offs 16,983 13,785 14,526 15,622 12,965 Allowance for loan losses to: Non-performing loans 441.17% 371.73% 395.64% 337.05% 339.92% Non-performing assets 292.95 230.46 267.85 238.85 251.77 Net loans 2.08 2.14 2.18 2.39 2.35 Non-performing assets to loans and foreclosed properties 0.71 0.92 0.81 1.00 0.93 Net loan losses to average loans 1.15 0.95 1.04 1.12 0.89 - ------------------------------------------------------------------------------------------------------------------------
(1) The fourth quarter of 1995 included a $35.0 million commercial fraud loss. (2) The fourth quarter 1995 return on average assets and return on average stockholders equity excluding the $35.0 million commercial fraud loss were 1.15% and 14.72%, respectively. (3) The fourth quarter 1995 efficiency ratio excludes the $35.0 million commercial fraud loss. 10 Table 2 Signet Banking Corporation Net Interest Income Analysis Taxable Equivalent Basis (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------- Third Quarter 1996 Compared Third Quarter 1996 Compared YTD September 30, 1996 Compared with Third Quarter 1995 with Second Quarter 1996 with YTD September 30, 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Increase Change due to * Increase Change due to * Increase Change due to * (Decrease) Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume - ------------------------------------------------------------------------------------------------------------------------------------ Interest income: Loans, including fees $(1,124) $ (4,703) $ 3,579 $4,194 $ 191 $4,003 $(65,928) $(13,871) $(52,057) Securities available for sale 14,595 874 13,721 2,226 376 1,850 41,888 751 41,137 Investment securities (7,330) (7,330) (24,640) (24,640) Other earning assets (2,321) (2,892) 571 (1,294) 201 (1,495) 5,717 (4,037) 9,754 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 3,820 (16,148) 19,968 5,126 387 4,739 (42,963) (41,992) (971) Interest expense: Interest bearing deposits 1,638 (2,258) 3,896 2,933 2,356 577 2,295 (64) 2,359 Fed funds and repurchase agreements 1,368 (4,231) 5,599 491 20 471 7,621 (3,457) 11,078 Other short-term borrowings (15,302) (15,302) Long-term borrowings (196) (745) 549 332 (60) 392 (9,175) (947) (8,228) - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 2,810 (6,620) 9,430 3,756 2,540 1,216 (14,561) (13,687) (874) - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $1,010 $(10,579) $11,589 $1,370 $ (751) $2,121 $(28,402) $(27,848) $ (554) - ------------------------------------------------------------------------------------------------------------------------------------
* The change in interest due to both volume and rates has been allocated in proportion to the relationship of the absolute dollar amountof the changes in each. The changes in income and expense are calculated independently for each line in the schedule. The totals for the volume and rate columns are the sum of the individual lines. Signet Banking Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Introduction Signet Banking Corporation ("Signet" or "the Company"), with headquarters in Richmond, Virginia, is a registered multi-state bank holding company whose stock is listed on the New York Stock Exchange under the symbol SBK. At September 30, 1996, Signet had assets of approximately $11.5 billion and provided interstate financial services through its principal subsidiary, Signet Bank, a Virginia banking corporation headquartered in Richmond, Virginia. Signet Bank has banking offices in Virginia, Maryland and Washington, DC. Signet Bank was formed by the merger of Signet Bank/Virginia and Signet Bank/Maryland in 1995. In 1996, Signet Bank N.A. also merged into Signet Bank. Signet engages in general commercial and consumer banking businesses and provides a full range of financial services to individuals, businesses and organizations through 240 banking offices, 252 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, it provides specialized services for trust, leasing, asset based lending, cash management, real estate and insurance. Signet's primary market area for its traditional banking business extends from Baltimore to Washington, south to Richmond, and on to Hampton Roads/Tidewater, Virginia. The Company markets several of its products nationally and is exploring the national marketing of certain other products. On October 17, 1996, Signet announced that it was initiating a wide-ranging business redesign project to accelerate the Company's transformation from a traditional regional bank to a national, information-based, financial services company. The project will begin with a comprehensive seven-month review followed by a twelve-to-eighteen month implementation period. The principal goals of the project are to align the processes and procedures more closely with strategies and to enhance revenue by shifting focus from products to customers. Signet expects improved profitability as a result of this project. The Company has engaged Aston Associates, a financial services consulting firm specializing in process redesign, to assist Signet employees in the effort. Aston has recently completed highly successful redesign engagements for two other large banking organizations. On March 19, 1996, subsequent to the announcement of 1995 earnings, Signet's management discovered that the Company was one of several major financial institutions that were victims of fraudulent commercial loan transactions which occurred prior to 1996. The Company had loan outstandings related to these transactions of approximately $81 million. Federal authorities have informed the Company that they believe there will be substantial recoveries of assets related to these transactions. Management recorded a $35 million 11 commercial fraud loss in non-interest expense at December 31, 1995 ("the fraud loss") and recorded the estimated probable recovery amount of $46 million in other assets as a receivable. The receivable represents an amount management believes is likely to be recovered based on current facts and circumstances. The amount of the recovery was based on the Company's pro-rata share of known claims to the total amount restrained by federal authorities, less associated costs, and now turned over to a trustee. 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 continues to believe the $35 million charge to 1995 earnings is adequate to cover estimated losses related to these fraudulent transactions based on currently available information, but is unable to predict the timing of the recovery. The Company will vigorously pursue all other sources of recovery, but currently is unable to determine the probability or amount of additional recoveries. On February 28, 1995, Signet distributed all of the remaining Capital One Financial Corporation ("Capital One") common stock it held to Signet stockholders in a tax-free distribution (the "spin-off"). Related assets of $3.6 billion and equity of $0.4 billion were included in the spin-off at that time. The spin-off created two independent financial institutions, each possessing substantial financial and managerial strength and each pursuing separate long-term business strategies. In 1995, Signet began construction on a new operations center located close to Richmond, Virginia, which was completed and fully occupied in the third quarter of 1996 at a total cost of approximately $55 million. The following discussion should be read in conjunction with the accompanying financial statements, notes and other supplemental information contained in this document. Results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of results to be attained for any other period. In addition to the discussion of consolidated information, Signet Banking Corporation excluding Capital One ("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 time periods subsequent to February 28, 1995, the date of the spin-off. Earnings Analysis Signet reported consolidated net income for the 1996 third quarter of $29.6 million, or $.49 per share, compared with $30.1 million, or $.50 per share, for the third quarter of 1995. Net income for the first nine months of 1996 was $91.3 million, or $1.51 per share, compared with $102.1 million, or $1.71 per share, for the same period last year. Consolidated earnings for the first nine months of 1995 included the results of Capital One for the two months prior to the spin-off on February 28, 1995. Net income for the first nine months of 1996 increased 5% from $86.5 million, or $1.45 per share, in the first nine months of 1995, on a pro forma basis. The 1996 performance reflected a 13% increase in total revenues (net interest income and non-interest income) for the first nine months of 1996 compared with pro forma results for the same period in 1995. The return on assets ("ROA") for the quarter and nine months ended September 30, 1996 was 1.03% and 1.08%, respectively. This compares with 1.11% and 1.22% for the comparable periods last year. The ROA for the first nine months of 1996 was down slightly from the 1.10% reported for the first nine months of 1995, on a pro forma basis. The return on equity ("ROE") for the quarter and nine months ended September 30, 1996 was 13.63% and 14.23%, respectively. This compares with 14.51% and 15.64% for the comparable periods last year. The ROE for the first nine months of 1996 was also down from 14.62% for the first nine months of 1995, on a pro forma basis. Net Interest Income Taxable equivalent net interest income, a primary contributor to earnings, totaled $120.5 million for the 1996 third quarter and $358.0 million for the nine months ended September 30, 1996. The net interest income in the third quarter of 1996 was relatively flat compared with the $119.5 million reported in the third quarter of 1995. On a pro forma basis, taxable equivalent net interest income amounted to $361.2 million for the first nine months of 1995. The net yield margin for the third quarter of 1996 was 4.70%, a 5 basis point decline from the second quarter of 1996, primarily the result of higher funding costs. The net interest spread of 4.11% for the third quarter of 1996 declined 8 basis points from the second quarter of 1996. Table 3 analyzes the change in the net yield margin from the second to the third quarter of 1996. The third quarter 1996 net yield margin decreased 26 basis points from 4.96% in the third quarter of 1995. The decline in the net yield margin was principally the result of a drop in the net interest spread from 4.32% to 4.11%, as the yield on earning assets fell more than funding rates. The lower yield on earning assets from the same quarter last year was partly due to the securitization of higher yielding home equity line and credit card loans. Table 3 Signet Banking Corporation Analysis of Change in Net Yield Margin Second Quarter 1996 Versus Third Quarter 1996 - ------------------------------------------------------------------------------- Net Yield Margin for Second Quarter 1996 4.75% Higher funding costs (excluding decrease in derivative income) (0.06) Decrease in derivative income (0.03) Lower average Federal funds and resale agreements 0.03 Other (net) -- Primarily change in mix and yield on remaining earning assets 0.01 - ------------------------------------------------------------------------------- Net Yield Margin for Third Quarter 1996 4.70% - ------------------------------------------------------------------------------- 12 Table 4 Signet Banking Corporation Statement of Changes in Allowances for Loan Losses (dollars in thousands) - --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended Consolidated Pro Forma September 30 June 30 September 30 - ------------------------------------------------------------------------------------------------------------------------ 1996 1995 1996 1996 1995 1995 - ------------------------------------------------------------------------------------------------------------------------ Balance at beginning of period $126,442 $136,497 $126,433 $129,702 $220,519 $152,003 Additions to allowance charged to expense 19,000 8,681 13,794 44,051 20,111 16,182 Transfer to loans held for securitization/sale (2,542) (4,920) (4,181) Transfer to Capital One Financial Corporation (68,516) Loans charged off: Consumer (1) 14,069 9,354 12,656 38,006 24,218 19,120 Commercial 478 77 55 3,414 1,918 1,918 Real estate-construction 3,654 683 4,493 1,080 1,080 Real estate-mortgage (2) 131 4,325 2,186 2,920 18,572 18,572 - ------------------------------------------------------------------------------------------------------------------------ Total loans charged off 18,332 14,439 14,897 48,833 45,788 40,690 Recoveries of loans previously charged off: Consumer (1) 454 402 440 1,248 2,963 1,055 Commercial 725 758 440 1,556 3,800 3,800 Real estate-construction 99 131 132 279 1,201 1,201 Real estate-mortgage (2) 71 184 100 456 302 302 - ------------------------------------------------------------------------------------------------------------------------ Total recoveries 1,349 1,475 1,112 3,539 8,266 6,358 - ------------------------------------------------------------------------------------------------------------------------ Net loans charged off 16,983 12,964 13,785 45,294 37,522 34,332 - ------------------------------------------------------------------------------------------------------------------------ Balance at end of period $128,459 $129,672 $126,442 $128,459 $129,672 $129,672 - ------------------------------------------------------------------------------------------------------------------------ Net loan losses (annualized) as a percentage of average loans: Consumer 2.64% 1.64% 2.38% 2.44% 1.01% 1.03% Commercial (0.03) (0.10) (0.05) 0.08 (0.10) (0.10) Real estate 1.73 2.10 0.94 1.10 2.63 2.63 - ------------------------------------------------------------------------------------------------------------------------ Total 1.15% 0.89% 0.95% 1.05% 0.79% 0.79% - ------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses to net loans at end of period 2.14% 2.08% 2.35% 2.35% (1) Consumer includes loan-by-check net charge-offs as noted below: Loan-by-check risk tests $ 5,546 $ 5,754 $ 6,504 $ 19,283 $ 7,928 $ 7,928 Other loan-by-check 7,191 876 4,626 14,489 1,869 1,869 - ------------------------------------------------------------------------------------------------------------------------ Total loan-by-check net charge-offs $ 12,737 $ 6,630 $ 11,130 $ 33,772 $ 9,797 $ 9,797 - ------------------------------------------------------------------------------------------------------------------------ Average loan-by-check: Loan-by-check risk tests $115,877 $205,356 $136,598 $136,922 $221,138 $221,138 Other loan-by-check 670,594 276,320 676,586 621,156 179,306 179,306 - ------------------------------------------------------------------------------------------------------------------------ Total loan-by-check $786,471 $481,676 $813,184 $758,078 $400,444 $400,444 - ------------------------------------------------------------------------------------------------------------------------ Net loan losses (annualized) as a percentage of average loan-by-check: Loan-by-check risk tests 19.14% 11.21% 19.05% 18.78% 4.78% 4.78% Other loan-by-check 4.29 1.27 2.73 3.11 1.39 1.39 Total loan-by-check 6.48% 5.51% 5.47% 5.94% 3.26% 3.26% - ------------------------------------------------------------------------------------------------------------------------
(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. 13 Signet uses various off-balance sheet interest rate derivatives as an integral part of its asset and liability management and trading activities. For Signet, variable rate assets generally exceed variable rate liabilities. To manage the resulting interest rate risk, Signet enters into derivative transactions. Derivative contracts, used for interest rate risk management purposes, reduced interest on earning assets by $1.8 million, $1.4 million and $3.4 million, and decreased borrowing costs by $3.7 million, $3.9 million and $2.8 million for the third quarter of 1996, second quarter of 1996 and third quarter of 1995, respectively. The overall increase in the net yield margin as a result of these instruments amounted to 7 and 10 basis points for the third and second quarters of 1996, respectively. Interest rate derivative products reduced the third quarter 1995 net yield margin by 3 basis points. Provision and Allowance for Loan Losses The $19.0 million provision for loan losses in the third quarter of 1996 exceeded net charge-offs by $2.0 million for the same period and represented a $10.3 million increase from the 1995 third quarter level of $8.7 million. The increase in the provision was tied to the growth in consumer loans, primarily the loan-by-check portfolio. The Company provided $13.8 million for the allowance for loan losses in the 1996 second quarter. (See the following paragraph and the Consumer Loan Growth section for further discussion concerning the loan-by-check product.) Net charge-offs amounted to $17.0 million in the third quarter of 1996, a $3.2 million rise from the second quarter 1996 level of $13.8 million and up $4.0 million from $13.0 million in the third quarter of 1995. The increase in net charge-offs from the second quarter of 1996 was primarily caused by a $3.7 million charge-off on a real estate-construction loan for which sufficient specific allowance had already been provided and a $1.6 million increase in loan-by-check charge-offs. The increase in net charge-offs from the prior year's third quarter was primarily caused by a $6.1 million rise in loan-by-check charge-offs along with a $3.0 million increase in real estate-construction loan charge-offs partially offset by a $4.2 million drop in real estate-mortgage loan charge-offs. The loan-by-check risk test charge-offs noted in Table 4 were related to 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. (See footnote 2 in Table 4 for more detailed information on the loan-by-check charge-offs.) The allowance for loan losses at September 30, 1996 was $128.5 million, or 2.08% of period-end loans, compared with $129.7 million, or 2.35% of loans at September 30, 1995 and the June 30, 1996 allowance of $126.4 million, or 2.14% of loans. The September 30, 1996 allowance for loan losses equaled 4.4 times non-performing loans and 2.9 times non-performing assets, compared with September 30, 1995 when the allowance for loan losses amounted to 3.4 times non-performing loans and 2.5 times non-performing assets. The decline in the level of the allowance from September 30, 1995 resulted primarily from charge-offs on commercial and real estate loans for which sufficient specific allowance had already been provided. At September 30, 1996, Signet's loans that were considered to be impaired under Statement of Financial Accounting Standards ("SFAS") No. 114 were comprised of $23.0 million of non-accrual loans for which the related allowance was $5.1 million. The average recorded investment in impaired loans during the nine months ended September 30, 1996 was approximately $25.3 million. Collateral dependent loans, which were measured at the fair value of the loan's collateral, made up the majority of impaired loans at September 30, 1996. Non-Interest Income A significant portion of Signet's revenue is derived from non-interest sources such as deposit account service charges, consumer loan servicing and service charge income and trust and other financial services income. Signet's business strategies continue to emphasize non-interest operating income sources. Table 5 details the various components of non-interest income for the third quarter and first nine months of 1996 compared with the third quarter and first nine months of 1995, excluding Capital One, as well as the second quarter of 1996. Non-interest income for the third quarter of 1996 totaled $68.1 million, a $21.0 million, or 45%, increase over the third quarter of 1995 and a $4.3 million, or 7%, increase over the second quarter of 1996. Several factors contributed to the increase in non-interest income in the third quarter of 1996 compared to the same quarter of 1995. Consumer loan servicing and service charge income, which includes ongoing gains and servicing income on securitized assets, increased $8.9 million primarily due to an approximately $400 million increase in securitized consumer loans since the end of the third quarter of 1995. Non-interest income for the third quarter of 1996 benefited from strong trading profits, which were up $6.1 million from the same period last year, and $6.8 million of revenues earned by Signet's specialty commercial groups. Trust and other financial services income increased $1.6 million, or 19%, primarily from a rise in annuity product commissions and mutual fund investment management fees. The $4.3 million rise in non-interest income from the second to the third quarter of 1996 resulted mainly from a $4.9 million rise in trading profits as well as $6.8 million of revenues earned by Signet's specialty commercial groups. These positive factors were partially offset by a $3.8 million drop in consumer loan servicing and service charge income as present value gains on the securitized home equity loans fell and charge-offs on the securitized credit card portfolio rose thereby reducing servicing income. Signet recorded $3.1 million of gains from the sale of mortgage servicing rights in the second quarter of 1996. 14 Table 5 Signet Banking Corporation Non-Interest Income and Expense (in thousands) - --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended September 30 June 30 September 30 1996 1995 1996 1996 1995* - ----------------------------------------------------------------------------------------------------------------------------- Non-interest income: Service charges on deposit accounts $ 17,180 $ 17,732 $ 17,100 $ 50,511 $ 51,415 Consumer loan servicing and service charge income 11,439 2,511 15,276 38,871 6,695 Trust and other financial services income 10,308 8,680 10,108 30,021 22,880 Mortgage servicing and origination 8,336 5,985 8,797 24,801 15,592 Other service charges and fees 3,874 2,880 3,916 11,672 9,429 Trading profits 7,877 1,806 3,000 11,644 8,015 Gain on sale of mortgage servicing 3,073 6,499 977 Gains on sale of mortgage loans 1,644 2,422 2,606 5,826 1,877 Other 8,100 4,347 (169) 10,044 9,234 - ----------------------------------------------------------------------------------------------------------------------------- Non-interest operating income 68,758 46,363 63,707 189,889 126,114 Securities available for sale gains (losses) (629) 166 164 127 512 Investment securities gains 565 823 - ----------------------------------------------------------------------------------------------------------------------------- Total non-interest income $ 68,129 $ 47,094 $ 63,871 $190,016 $127,449 - ----------------------------------------------------------------------------------------------------------------------------- Non-interest expense: Salaries $ 54,605 $ 45,792 $ 52,302 $155,607 $132,098 Employee benefits 8,811 10,517 10,466 31,678 36,291 - ----------------------------------------------------------------------------------------------------------------------------- Total staff expense 63,416 56,309 62,768 187,285 168,389 Supplies and equipment 10,036 9,384 9,985 29,626 26,657 Occupancy 9,045 9,635 9,520 28,759 28,912 External data processing services 7,992 6,868 8,333 23,471 19,826 Travel and communications 6,231 6,138 6,706 18,857 17,336 Public relations, sales and advertising 6,304 3,360 4,559 15,752 10,887 Professional services 2,954 3,783 3,797 10,064 11,238 Credit and collection 1,475 760 1,307 4,129 1,097 FDIC assessment 1,725 (312) 180 2,075 7,965 Foreclosed property - net 64 552 (268) 80 Other 13,677 13,518 13,804 40,231 39,942 - ----------------------------------------------------------------------------------------------------------------------------- Total non-interest expense $122,855 $109,507 $121,511 $359,981 $332,329 - -----------------------------------------------------------------------------------------------------------------------------
* Nine months ended September 30, 1995 excludes Capital One Financial Corporation Non-Interest Expense Non-interest expense for the third quarter of 1996 totaled $122.9 million, an increase of $13.3 million, or 12%, from the third quarter of 1995 reflecting continued investment in people and systems to build the infrastructure for information based businesses. The largest increase was $7.1 million in staff expense resulting primarily from an 8% increase in the number of full-time employees. Public relations, sales and advertising rose $2.9 million as Signet resumed its consumer loan direct mail solicitations. The $1.1 million rise in external data processing services, the $0.7 million increase in supplies and equipment expense as well as a $0.7 million jump in credit and collection expenses were attributable to servicing the expanded consumer loan base. The FDIC assessment rose significantly due to a one-time $1.6 million charge for the Savings Association Insurance Fund recapitalization. Non-interest expense rose a modest $1.3 million, or 1%, from the second to the third quarter of 1996 largely as a result of the one-time $1.6 million charge for the Savings Association Insurance Fund recapitalization mentioned previously. A $2.3 million increase in salaries, mainly from higher incentives due to strong trading profits, was substantially offset by a $1.7 million drop in benefits expense as health care claims were more favorable than originally projected. Public relations, sales and advertising expense rose $1.7 million due to the resumption of direct mail solicitations mentioned earlier. Signet's efficiency ratio (the ratio of non-interest expense, excluding foreclosed property expense, to taxable equivalent operating income) of 64.92% for the third quarter of 1996 improved from the 65.99% reported for the third quarter of 1995. In addition, this ratio was down slightly from 66.16% for the second quarter of 1996. 15 Table 6 Signet Banking Corporation Average Balance Sheet (dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------- Three Months Ended September 30 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate - ----------------------------------------------------------------------------------------------------------------------------- Assets Earning assets (tax equivalent basis):* Interest bearing deposits with other banks $ 8,322 $ 106 4.98% $ 8,136 $ 127 6.11% Federal funds and resale agreements 632,373 8,793 5.44 469,512 7,166 5.97 Trading account securities 534,483 8,383 6.24 464,254 7,410 6.33 Loans held for securitization 300,000 6,005 7.96 425,543 11,561 10.87 Loans held for sale 322,318 8,441 10.25 312,734 7,785 9.74 Securities available for sale 2,477,984 46,541 7.51 1,712,148 31,946 7.30 Investment securities-taxable 230,852 4,190 7.26 Investment securities-nontaxable 106,860 3,140 11.75 Loans (net of unearned income): Consumer 2,061,732 55,516 10.71 2,182,724 60,296 10.98 Commercial 3,031,863 61,080 8.01 2,747,241 54,598 7.88 Real estate-construction 250,921 6,085 9.49 230,364 6,080 10.33 Real estate-commercial mortgage 291,124 6,450 8.81 423,622 9,971 9.34 Real estate-residential mortgage 292,405 5,701 7.80 241,066 5,011 8.31 - ----------------------------------------------------------------------------------------------------------------------------- Total loans 5,928,045 134,832 9.05 5,825,017 135,956 9.26 - ----------------------------------------------------------------------------------------------------------------------------- Total earning assets 10,203,525 $213,101 8.31% 9,555,056 $209,281 8.69% - ----------------------------------------------------------------------------------------------------------------------------- Non-rate related assets: Cash and due from banks 473,638 533,901 Allowance for loan losses (126,539) (133,144) Premises and equipment (net) 194,211 174,691 Other assets 684,580 625,258 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $11,429,415 $10,755,762 - ----------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Interest bearing liabilities: Deposits: Interest bearing demand $ 2,654,412 $ 21,230 3.18% $ 2,379,104 $ 18,667 3.11% Savings accounts 687,441 4,607 2.67 1,315,832 12,785 3.85 Savings certificates 2,288,185 27,227 4.73 1,791,296 22,070 4.89 Large denomination certificates 180,640 2,566 5.56 100,367 1,332 5.19 Foreign 187,614 2,583 5.39 116,204 1,721 5.80 - ----------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 5,998,292 58,213 3.86 5,702,803 56,575 3.94 Federal funds and repurchase agreements 2,507,844 30,268 4.72 2,201,617 28,900 5.14 Other short-term borrowings Long-term borrowings 274,419 4,128 5.89 253,174 4,324 6.68 - ----------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 8,780,555 $ 92,609 4.20% 8,157,594 $ 89,799 4.37% - ----------------------------------------------------------------------------------------------------------------------------- Non-interest bearing liabilities: Demand deposits 1,570,541 1,557,185 Other liabilities 214,518 216,792 Common stockholders' equity 863,801 824,191 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $11,429,415 $10,755,762 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income / spread $120,492 4.11% $119,482 4.32% - ----------------------------------------------------------------------------------------------------------------------------- Interest income to average earning assets 8.31% 8.69% Interest expense to average earning assets 3.61 3.73 - ----------------------------------------------------------------------------------------------------------------------------- Net yield margin 4.70% 4.96% - -----------------------------------------------------------------------------------------------------------------------------
16 Table 6 Signet Banking Corporation Average Balance Sheet (continued) (dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------ Nine Months Ended June 30 September 30 1996 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate - ------------------------------------------------------------------------------------------------------------------------------------ Assets Earning assets (tax equivalent basis):* Interest bearing deposits with other banks $ 2,862 $ 43 5.94% $ 7,940 $ 303 5.01% $ 42,739 $ 1,923 5.93% Federal funds and resale agreements 703,429 9,543 5.37 642,363 26,524 5.43 678,648 30,707 5.97 Trading account securities 493,912 7,865 6.40 511,562 24,370 6.36 478,617 23,064 6.44 Loans held for securitization 300,000 5,992 8.03 310,149 19,416 8.36 242,858 22,186 12.18 Loans held for sale 381,530 9,579 9.93 364,319 28,106 10.14 214,652 15,122 9.29 Securities available for sale 2,379,317 44,315 7.45 2,389,203 133,089 7.43 1,657,709 91,201 7.25 Investment securities-taxable 229,777 12,393 7.19 Investment securities-nontaxable 136,926 12,247 11.93 Loans (net of unearned income): Consumer 2,055,518 54,725 10.71 2,008,202 163,303 10.86 2,819,625 239,998 11.37 Commercial 2,923,535 57,485 7.91 2,949,564 175,071 7.93 2,555,956 152,790 7.99 Real estate-construction 252,540 6,064 9.50 249,571 18,211 9.59 218,701 16,862 10.17 Real estate-commercial mortgage 348,219 8,188 9.46 332,293 23,328 9.38 474,337 34,908 9.84 Real estate-residential mortgage 234,634 4,176 7.12 230,602 13,081 7.56 227,486 14,364 8.42 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans 5,814,446 130,638 9.04 5,770,232 392,994 9.10 6,296,105 458,922 9.75 - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets 10,075,496 $207,975 8.30% 9,995,768 $624,802 8.35% 9,978,031 $667,765 8.95% - ------------------------------------------------------------------------------------------------------------------------------------ Non-rate related assets: Cash and due from banks 514,523 505,617 516,299 Allowance for loan losses (126,569) (127,201) (157,777) Premises and equipment (net) 197,471 195,992 189,071 Other assets 685,761 711,607 660,074 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $11,346,682 $11,281,783 $11,185,698 - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities and Stockholders' Equity Interest bearing liabilities: Deposits: Interest bearing demand $ 2,537,684 $ 18,209 2.89% $ 2,555,917 $ 57,519 3.01% $2,391,207 $ 55,409 3.10% Savings accounts 949,193 7,530 3.19 960,679 23,632 3.29 1,253,802 35,312 3.77 Savings certificates 2,158,040 25,395 4.73 2,132,445 75,157 4.71 1,872,103 59,964 4.28 Large denomination certificates 126,537 1,731 5.41 139,607 5,822 5.48 227,757 10,218 5.92 Foreign 179,726 2,415 5.32 153,716 6,277 5.37 115,709 5,209 5.94 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest bearing deposits 5,951,180 55,280 3.74 5,942,364 168,407 3.79 5,860,578 166,112 3.79 Federal funds and repurchase agreements 2,491,809 29,777 4.73 2,402,182 86,365 4.72 1,982,044 78,744 5.24 Other short-term borrowings 305,599 15,302 6.60 Long-term borrowings 250,606 3,796 5.99 259,394 12,038 6.10 402,331 21,213 6.95 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest bearing liabilities 8,693,595 $ 88,853 4.11% 8,603,940 $266,810 4.14% 8,550,552 $281,371 4.40% - ------------------------------------------------------------------------------------------------------------------------------------ Non-interest bearing liabilities: Demand deposits 1,574,282 1,606,230 1,513,752 Other liabilities 231,798 214,855 248,814 Common stockholders' equity 847,007 856,758 872,580 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $11,346,682 $11,281,783 $11,185,698 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income / spread $119,122 4.19% $357,992 4.21% $386,394 4.55% - ------------------------------------------------------------------------------------------------------------------------------------ Interest income to average earning assets 8.30% 8.35% 8.95% Interest expense to average earning assets 3.55 3.57 3.77 - ------------------------------------------------------------------------------------------------------------------------------------ Net yield margin 4.75% 4.78% 5.18% - ------------------------------------------------------------------------------------------------------------------------------------
* Includes the effects of taxable equivalent adjustments using a tax rate of 35%. 17 Income Taxes Income tax expense for the third quarter of 1996 was $15.1 million, compared with the third quarter 1995 expense of $15.7 million and second quarter 1996 expense of $15.5 million. The Company's effective tax rate was approximately 34% for all three quarters. Financial Condition Average earning assets totaled $10.2 billion for the third quarter of 1996, up $648 million, or 7%, from the third quarter 1995 and up a modest $128 million from the $10.1 billion reported for the second quarter of 1996. Loan securitizations reduced consumer loans by transferring assets off the balance sheet. Adding average securitized loans to both years' quarterly 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, resulted in a 12% increase in managed earning assets from the third quarter of 1995 compared with the third quarter of 1996. Loans (net of unearned income) for the third quarter of 1996 averaged $5.9 billion, up slightly from the third quarter of 1995 and the second quarter of 1996. Including securitized assets and loans held for securitization, managed loans grew $242 million during the quarter and totaled approximately $7.2 billion at September 30, 1996. In keeping with Signet's de-emphasis of commercial real estate lending, the Company sold $43 million of performing loans in July, 1996. The average amount of commercial loans increased $285 million when comparing the third quarter of 1996 to the same period in 1995, as Signet successfully grew its leasing portfolio and targeted certain specialized industries. Healthy residential mortgage loan origination activity caused the real estate-residential mortgage average outstandings to rise $51 million from the third quarter of 1995 even though Signet sold approximately $179 million of adjustable rate mortgages in December, 1995. Investment securities declined from a $338 million average in the third quarter of 1995 to zero in the third quarter of 1996, reflecting the reclassification of all of the Company's investment securities to securities available for sale in December, 1995, as allowed by implementation guidance for SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Average securities available for sale increased $766 million, or 44%, in the third quarter of 1996 compared with the average for the same quarter of 1995. A portion of this increase resulted from the reclassification of investment securities to securities available for sale in December, 1995, as noted above. Interest bearing liabilities averaged $8.8 billion in the third quarter of 1996, up $623 million, or 8%, from the third quarter of 1995. The increase came from a $306 million increase in average federal funds and repurchase agreements and a $295 million rise in average deposits. Average non-interest bearing demand deposits remained relatively level at $1.6 billion when comparing the third quarter of 1996 to the same quarter of 1995. The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," on January 1, 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 121 also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of the carrying amount or the fair value less selling costs. Adoption of SFAS No. 121 did not have a material impact on the Company's financial position or results of operations. Consumer Loan Growth In 1994, Signet expanded its use of information-based strategies, formerly used in connection with its credit card business, 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 direct-mail solicitations and were offered installment loans in the form of a check which were activated by the customer's endorsement and deposit of the check. Signet is also beginning to apply information-based strategies to home equity, student and small business loans. Solicitations in these areas are mostly in the early 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, from September 30, 1995, to September 30, 1996, the installment loan portfolio (primarily loan-by-check) grew $375 million; the student loan portfolio (including $300 million in student loans held for securitization) increased $145 million; and the home equity loan portfolio (including $420 million of securitized loans) was up $45 million. In total, the managed consumer loan portfolio increased $552 million, or 21%. The portfolio rose $187 million from the end of the second quarter. During the second quarter, Signet elected to delay some of its national marketing programs while re-examining market conditions and further calibrating the models used for targeting customers. Signet focused its efforts on improving product design and delivery, and on developing new customer management techniques to improve account profitability. The Company resumed more active direct mail solicitations during the third quarter of 1996. The managed consumer loan portfolio is composed of consumer loans, consumer loans held for sale and consumer loans held for securitization. Securitized consumer loans are not assets of the Company and, therefore, are not shown on the balance sheet. 18 Table 7 Signet Banking Corporation Managed Consumer Loan Portfolio (in thousands)
- -------------------------------------------------------------------------------------------------------------------------------- Three Months Ended - -------------------------------------------------------------------------------------------------------------------------------- September 30 June 30 March 31 December 31 September 30 1996 1996 1996 1995 1995 - -------------------------------------------------------------------------------------------------------------------------------- Average balances: Student loans $ 788,904 $ 776,326 $ 746,038 $ 683,704 $ 645,145 Installment loans 1,015,639 1,035,592 921,869 773,134 730,186 Home equity loans 147,376 122,649 101,404 87,915 525,232 Credit card 48,845 60,792 73,166 218,933 195,115 Other loans 60,968 60,159 64,291 60,801 87,046 - -------------------------------------------------------------------------------------------------------------------------------- Sub-total average consumer loan portfolio 2,061,732 2,055,518 1,906,768 1,824,487 2,182,724 - -------------------------------------------------------------------------------------------------------------------------------- Consumer loans held for sale 161,860 202,029 231,968 196,296 163,082 Credit card loans held for securitization 30,557 975 120,652 Home equity loans held for securitization 322,826 4,891 Student loans held for securitization 300,000 300,000 300,000 300,000 300,000 - -------------------------------------------------------------------------------------------------------------------------------- Total average on-balance sheet portfolio 2,523,592 2,557,547 2,469,293 2,644,584 2,771,349 Securitized home equity loans 429,728 451,118 469,593 135,850 Securitized credit card loans 275,000 275,000 244,341 234,330 195,390 - -------------------------------------------------------------------------------------------------------------------------------- Total securitized consumer loans 704,728 726,118 713,934 370,180 195,390 Less loans that may be sold to Capital One (161,860) (202,029) (231,968) (306,054) (374,960) - -------------------------------------------------------------------------------------------------------------------------------- Total average managed consumer loan portfolio $3,066,460 $3,081,636 $2,951,259 $2,708,710 $2,591,779 - -------------------------------------------------------------------------------------------------------------------------------- Period-end balances: Student loans $ 820,319 $ 773,196 $ 776,663 $ 709,583 $ 675,348 Installment loans 1,128,607 994,243 1,072,831 810,999 753,631 Home equity loans 164,805 135,064 111,579 87,348 89,843 Credit card 47,524 49,630 64,261 81,532 197,419 Other loans 59,989 64,230 61,185 61,812 60,193 - -------------------------------------------------------------------------------------------------------------------------------- Sub-total period-end consumer loan portfolio 2,221,244 2,016,363 2,086,519 1,751,274 1,776,434 - -------------------------------------------------------------------------------------------------------------------------------- Consumer loans held for sale 194,097 215,961 240,902 165,205 Credit card loans held for securitization 89,700 Home equity loans held for securitization 450,000 Student loans held for securitization 300,000 300,000 300,000 300,000 300,000 - -------------------------------------------------------------------------------------------------------------------------------- Total period-end on-balance sheet portfolio 2,521,244 2,510,460 2,602,480 2,381,876 2,691,639 Securitized home equity loans 420,446 438,368 459,949 480,702 Securitized credit card loans 275,000 275,000 275,000 185,000 290,833 - -------------------------------------------------------------------------------------------------------------------------------- Total securitized consumer loans 695,446 713,368 734,949 665,702 290,833 Less loans that may be sold to Capital One (194,097) (215,961) (240,902) (318,160) - -------------------------------------------------------------------------------------------------------------------------------- Total period-end managed consumer loan portfolio $3,216,690 $3,029,731 $3,121,468 $2,806,676 $2,664,312 - --------------------------------------------------------------------------------------------------------------------------------
19 Table 8 Signet Banking Corporation Impact of Consumer Loan Securitizations (dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------- 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 1996 1996 1996 1995 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Statement of Income Net interest income $ 118,434 $ 117,373 $ 116,234 $ 115,595 $ 116,944 Provision for loan losses 19,000 13,794 11,257 18,604 8,681 Non-interest income 68,129 63,871 58,016 68,120 47,094 Non-interest expense 122,855 121,511 115,615 152,191 109,507 - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 44,708 $ 45,939 $ 47,378 $ 12,920 $ 45,850 - ---------------------------------------------------------------------------------------------------------------------------------- Adjustments for Securitizations Net interest income $ 12,206 $ 12,484 $ 11,849 $ 7,071 $ 5,889 Provision for loan losses 3,276 2,322 2,011 1,876 2,314 Non-interest income (7,575) (11,750) (9,061) (14,757) (3,575) Non-interest expense - ---------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) to income before income taxes $ 1,355 $ (1,588) $ 777 $ (9,562) $ 0 - ---------------------------------------------------------------------------------------------------------------------------------- Adjustments for Loans That May Be Sold to Capital One Net interest income $ (2,333) $ (3,322) $ (2,724) $ (2,951) $ (2,632) Provision for loan losses 0 0 0 (3,957) (4,352) Non-interest income 2,333 3,322 2,724 (1,006) (1,720) Non-interest expense - ---------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) to income before income taxes $ 0 $ 0 $ 0 $ 0 $ 0 - ---------------------------------------------------------------------------------------------------------------------------------- Managed Statement of Income (adjusted) Net interest income $ 128,307 $ 126,535 $ 125,359 $ 119,715 $ 120,201 Provision for loan losses 22,276 16,116 13,268 16,523 6,643 Non-interest income 62,887 55,443 51,679 52,357 41,799 Non-interest expense 122,855 121,511 115,615 152,191 109,507 - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 46,063 $ 44,351 $ 48,155 $ 3,358 $ 45,850 - ---------------------------------------------------------------------------------------------------------------------------------- As reported: Average earning assets $ 10,203,525 $10,075,496 $ 9,705,995 $9,745,118 $9,555,056 Return on assets 1.03% 1.08% 1.13% 0.33% 1.11% Net yield margin 4.70% 4.75% 4.91% 4.78% 4.96% On a managed basis: Average earning assets $ 10,746,393 $10,599,585 $10,187,961 $9,809,244 $9,375,586 Return on assets 1.01% 1.00% 1.10% 0.10% 1.13% Net yield margin 4.83% 4.87% 5.03% 4.92% 5.19% Yield on managed consumer loan portfolio 10.86% 10.89% 11.21% 10.85% 10.86% - ----------------------------------------------------------------------------------------------------------------------------------
20 Table 9 Signet Banking Corporation Non-Performing Assets (dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------------- September 30 June 30 December 31 1996 1995 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Non-accrual loans: Commercial $10,672 $ 8,595 $ 7,552 $ 9,033 Consumer 2,374 1,039 1,694 1,572 Real estate - construction 1,206 3,471 9,596 2,988 Real estate - mortgage * 14,866 25,043 15,172 24,888 - -------------------------------------------------------------------------------------------------------------------------------- Total non-accrual loans 29,118 38,148 34,014 38,481 Foreclosed properties 14,733 13,356 20,850 15,822 - -------------------------------------------------------------------------------------------------------------------------------- Total non-performing assets $43,851 $51,504 $54,864 $54,303 - -------------------------------------------------------------------------------------------------------------------------------- Percentage to loans (net of unearned) and foreclosed properties 0.71% 0.93% 0.92% 1.00% Allowance for loan losses to: Non-performing loans 441.17 339.92 371.73 337.05 Non-performing assets 292.95 251.77 230.46 238.85 - --------------------------------------------------------------------------------------------------------------------------------
* Real estate-mortgage includes real estate-commercial mortgage and real estate-residential mortgage. Real estate-residential mortgage non-accrual loans were not significant for the periods presented. Risk Elements Non-performing assets at September 30, 1996 totaled $43.9 million, or 0.71% of loans and foreclosed properties, down from $51.5 million, or 0.93%, at September 30, 1995 and $54.9 million, or 0.92%, at June 30, 1996. Overall, non-performing commercial loans rose $2.1 million from September 30, 1995 to September 30, 1996. Over the same period, consumer loans rose a modest $1.3 million, real estate-construction loans fell $2.3 million and real estate-mortgage loans declined $10.2 million. Foreclosed properties rose to $14.7 million and were equal to 34% of total non-performing assets and 48% of non-performing real estate assets as of September 30, 1996. In accordance with SFAS No. 114, a loan is classified as foreclosed property where possession has been taken of the collateral, regardless of whether formal foreclosure proceedings have taken place. Table 9 provides details on the various components of non-performing assets at the dates indicated. Accruing loans contractually past due 90 days or more as to principal or interest payments totaled $78.0 million, $66.2 million and $70.8 million as of September 30, 1996, September 30, 1995 and June 30, 1996, respectively. The details of these past due loans are displayed in Table 10. The past due commercial and real estate loans were in the process of collection and were adequately collateralized. The increase in past due student loans from June 30, 1996 was attributable to seasonal factors. Students graduating in December have a six month grace period in which they do not have to make any payments. Therefore, September is the first month in which they may become 90 days past due. Past due student loans accounted for $45.2 million, or 58%, of all past due loans. Of the past due student loan balances, $43.7 million, or 97%, were indirectly government guaranteed and do not represent material loss exposure to Signet. Table 10 Signet Banking Corporation Accruing Loans Past Due 90 Days or More (dollars in thousands)
- ----------------------------------------------------------------------------------------------------------- September 30 June 30 December 31 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------------- Commercial $ 6,969 $ 3,947 $ 5,308 $ 6,326 Consumer: Student loans 45,159 29,863 37,374 32,308 Credit card 1,950 5,147 3,396 5,118 Loan-by-check-risk tests 6,865 9,263 7,530 8,812 Loan-by-check-other 8,321 1,403 5,666 2,424 Other consumer 2,320 1,604 2,286 2,068 - ----------------------------------------------------------------------------------------------------------- Total consumer 64,615 47,280 56,252 50,730 Mortgage 6,083 14,563 6,197 9,200 Construction 366 442 3,005 115 - ----------------------------------------------------------------------------------------------------------- Total $78,033 $66,232 $70,762 $66,371 - -----------------------------------------------------------------------------------------------------------
21 Table 11 Signet Banking Corporation Selected Capital Data (dollars in thousands)
- --------------------------------------------------------------------------------------------------------------- September 30 December 31 1996 1995 1995 - ---------------------------------------------------------------------------------------------------------------- Qualifying common stockholders' equity $ 882,040 $ 815,149 $ 815,342 Less goodwill and other disallowed intangibles (53,844) (60,553) (58,881) - ---------------------------------------------------------------------------------------------------------------- Total Tier I capital 828,196 754,596 756,461 Qualifying debt 212,667 115,334 114,534 Qualifying allowance for loan losses 97,208 95,587 96,751 - ---------------------------------------------------------------------------------------------------------------- Total Tier II capital 309,875 210,921 211,285 - ---------------------------------------------------------------------------------------------------------------- Total risked-based capital $1,138,071 $ 965,517 $ 967,746 - ---------------------------------------------------------------------------------------------------------------- Total risk-adjusted assets $7,745,427 $7,612,866 $7,707,111 - ---------------------------------------------------------------------------------------------------------------- Ratios: Tier I capital 10.69% 9.91% 9.82% Total risk-based capital 14.69 12.68 12.56 Tier I leverage 7.33 7.06 6.93 Tangible Tier I leverage 6.68 6.64 6.36 Common equity to assets 7.74 7.59 7.87 Common dividend payout ratio (year-to-date) 39.74 34.50 42.47 Book value per share $14.89 $14.27 $14.59
Stockholders' Equity Stockholders' equity provides a source of permanent funding, allows for future growth and assists the Company in withstanding unforeseen adverse developments. At September 30, 1996, stockholders' equity totaled $889 million, an increase of $47 million, or 6%, from the September 30, 1995 level of $842 million. Since June 30, 1996, stockholders' equity rose $27 million as net income, the issuance of common stock and net unrealized gains on securities available for sale exceeded dividends declared. Unrealized gains and losses, net of tax, on securities available for sale increased equity by $6 million in the third quarter of 1996. At September 30, 1996, the net unrealized gains, net of tax, related to securities available for sale, totaled $5.5 million. The dividends declared during the third quarter of 1996 were $11.9 million or $0.20 per common share. On October 25, 1996, Signet's Board of Directors increased the quarterly dividend 5 percent to $0.21 per share. The dividend will be payable November 20, 1996 to shareholders of record on November 5, 1996. At September 30, 1996, Signet's banking subsidiary, Signet Bank, met the criteria established by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") for "well capitalized" institutions. The Company's risk-based capital ratios at September 30, 1996 were 14.69% and 10.69% for Total Capital and Tier I Capital, respectively. The improvement in the Total Capital ratio from June 30, 1996 reflected the impact of issuing $150 million of subordinated bank notes. Signet's leverage ratio at September 30, 1996 was 7.33% which also improved from the end of the second quarter. Interest Rate Sensitivity Signet's interest rate sensitivity position is managed by the Asset and Liability Committee ("ALCO") and monitored through the use of simulations on rate sensitive pre-tax income. Interest rate sensitivity is the relationship between changes in market interest rates and changes in rate sensitive income due to the repricing characteristics of assets and liabilities. For example, in periods of rising rates, banking businesses will experience wider spreads as consumer deposit costs lag increases in market interest rates. Improved spreads due to the lag in pricing on consumer deposits will be partially offset to the extent that the funding cost on the investment portfolio increases. ALCO routinely uses derivatives such as interest rate swaps to manage the Company's interest rate risk. ALCO, in managing interest rate sensitivity, also uses simulations to measure the impact that market changes and alternative strategies might have on net interest income and other income exposed to changing rates. Current period maturity, repricing information and projected balance sheet strategies are used to simulate rate sensitivity. The lag effect of consumer deposit rates, 22 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 3% 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 first nine months of 1996, Signet's balance sheet was in a moderately liability sensitive position. The Company has taken steps to limit its exposure to rising interest rates through the use of derivative products. At September 30, 1996, the notional values of the Company's derivative products for the purpose of managing interest rate risk were $2.6 billion of interest rate swaps, $650 million of interest rate floors and $300 million of interest rate caps. 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 the first nine months of 1996 maintained the Company's strong liquidity position. Signet is using its direct mail expertise to grow core deposits. At September 30, 1996, a total of approximately $427 million of interest bearing demand deposits had been obtained in that manner. During the first nine months of 1996, Signet's loan to deposit ratio based on average balances was 80%. During the second quarter, Signet Bank established a $2.5 billion Senior and Subordinated Bank Note facility, due from 30 days to 30 years from date of issue. A total of $150 million of subordinated bank notes had been issued under the facility at September 30, 1996. Signet's equity base, as noted earlier, also provides a stable source of funding. The parent company has not recently relied directly on the capital markets for funding. For the first nine months of 1996, cash and cash equivalents increased $122 million. Cash provided by operating activities amounted to $551 million resulting mainly from net proceeds from sales of loans held for sale. Cash used by investing activities amounted to $1.0 billion principally due to net purchases of securities available for sale and an increase in loans. Cash provided by financing activities amounted to $613 million due to an increase in deposits, short-term borrowings and issuing the subordinated bank notes. 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings (Incorporated by reference to Part II, Item 1 of the Form 10-Q for the quarter ended June 30, 1996.) Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 11 - Computation of Earnings Per Share (b) Reports on Form 8-K: none SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SIGNET BANKING CORPORATION -------------------------- (Registrant) Date: November 8, 1996 /s/ Wallace B. Millner III ---------------- -------------------------- Wallace B. Millner III Vice Chairman and Chief Financial Officer (Principal Financial Officer) Date: November 8, 1996 /s/ W. H. Catlett, Jr. ---------------- ---------------------- W. H. Catlett, Jr. Executive Vice President and Controller (Principal Accounting Officer) 24 EX-11 2 EXHIBIT 11 SIGNET BANKING CORPORATION AND SUBSIDIARIES FORM 10-Q EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE (dollars in thousands--except per share)
Three Months Nine Months Ended September 30 Ended September 30 - ---------------------------------------------------------------------------------------------------------------------------- 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- Common and common equivalent: Average shares outstanding 59,631,865 58,923,625 59,466,680 58,752,290 Dilutive stock options--based on the treasury stock method using average market price 924,506 1,171,588 1,002,308 900,173 - ---------------------------------------------------------------------------------------------------------------------------- Shares used 60,556,371 60,095,213 60,468,988 59,652,463 - ---------------------------------------------------------------------------------------------------------------------------- Net income applicable to Common Stock $ 29,606 $ 30,143 $ 91,282 $ 102,054 - ---------------------------------------------------------------------------------------------------------------------------- Per share amount $ 0.49 $ 0.50 $ 1.51 $ 1.71 - ---------------------------------------------------------------------------------------------------------------------------- Assuming full dilution: Average shares outstanding 59,631,865 58,923,625 59,466,680 58,752,290 Dilutive stock options--based on the treasury stock method using the period end market price, if higher than the average market price 1,106,206 1,222,294 1,066,192 938,444 - ---------------------------------------------------------------------------------------------------------------------------- Shares used 60,738,071 60,145,919 60,532,872 59,690,734 - ---------------------------------------------------------------------------------------------------------------------------- Net income applicable to Common Stock $ 29,606 $ 30,143 $ 91,282 $ 102,054 - ---------------------------------------------------------------------------------------------------------------------------- Per share amount $ 0.49 $ 0.50 $ 1.51 $ 1.71 - ----------------------------------------------------------------------------------------------------------------------------
The calculations of common and common equivalent earnings per share and fully diluted earnings per share are submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although both are not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because there is dilution of less than 3%. The Registrant has elected to show fully diluted earnings per share in its financial statements. 25 EX-27 3 EXHIBIT 27
9 1,000 3-MOS DEC-31-1996 SEP-30-1996 592,307 2,211 589,590 478,631 110,005 0 0 6,383,827 (128,459) 11,492,559 7,834,080 2,155,566 213,423 400,018 0 0 298,622 590,852 11,492,559 388,102 (1) 230,750 618,851 168,408 266,811 352,041 44,051 127 359,981 138,025 138,025 0 0 91,282 1.51 1.51 4.78 43,851 78,033 0 0 129,702 48,833 3,539 128,459 128,459 0 2,299
-----END PRIVACY-ENHANCED MESSAGE-----