-----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, LAnrFRzyFyQMXn7VgRqyOVDVy0jz7OiQUaWjRs77mC9iCeq2cgBFGlmd6DyrBCD1 XhXgl8BjyjVlZm8A7TaPMw== 0000916641-97-000212.txt : 19970320 0000916641-97-000212.hdr.sgml : 19970320 ACCESSION NUMBER: 0000916641-97-000212 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970319 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06505 FILM NUMBER: 97559464 BUSINESS ADDRESS: STREET 1: 7 N EIGHTH ST STREET 2: PO BOX 25970 CITY: RICHMOND STATE: VA ZIP: 23260 BUSINESS PHONE: 8047472000 MAIL ADDRESS: STREET 1: 7 N EIGHTH ST STREET 2: PO BOX 25970 CITY: RICHMOND STATE: VA ZIP: 23260 FORMER COMPANY: FORMER CONFORMED NAME: BANK OF VIRGINIA CO DATE OF NAME CHANGE: 19860717 FORMER COMPANY: FORMER CONFORMED NAME: VIRGINIA COMMONWEALTH BANKSHARES INC DATE OF NAME CHANGE: 19721020 FORMER COMPANY: FORMER CONFORMED NAME: VIRGINIA COMMONWEALTH CORP DATE OF NAME CHANGE: 19701113 10-K 1 SIGNET BANKING CORPORATION SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required). For the fiscal year ended December 31, 1996 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required). For the transition period from ____________ to ____________. Commission File No. 1-6505 SIGNET BANKING CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-6037910 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 7 North Eighth Street 23219 Richmond, Virginia (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (804) 747-2000 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $5 Par Value New York Stock Exchange Rights to Purchase Series A Junior Participating Preferred Stock, $20 par value New York Stock Exchange (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 28, 1997: * Common Stock, $5 Par Value - $1,825,200,384 The number of shares outstanding of each of the registrant's classes of common stock as of February 28, 1997: Common Stock, $5 Par Value - 60,202,621 - -------- * In determining this figure, the Registrant has assumed that the executive officers of the Registrant, the Registrant's directors, and persons known to the Registrant to be the beneficial owners of more than five percent of the Registrant's Common Stock, that directly or indirectly control the Registrant, are affiliates. Such assumption shall not be deemed to be conclusive for any other purpose. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the annual report to shareholders for the year ended December 31, 1996 are incorporated by reference into Parts I, II and IV. 2. Portions of the proxy statement for the annual shareholders' meeting to be held on April 29, 1997 are incorporated by reference into Part III. 2 PART I ITEM 1. BUSINESS. General The Registrant is a registered bank holding company, incorporated in Virginia in 1962, and had consolidated assets of $11.7 billion as of December 31, 1996. On the basis of total assets and deposits at December 31, 1996, the Registrant is the second largest banking organization headquartered in Virginia and provided interstate financial services through Signet Bank (which resulted from the mergers of Signet Bank/Virginia and Signet Bank/Maryland in 1995 and Signet Bank N.A. in June 1996) headquartered in Richmond, Virginia. On February 28, 1995, Signet distributed all of the remaining Capital One Financial Corporation common stock it held to Signet stockholders in a tax-free distribution (the "spin-off"). Related assets of $3.6 billion and equity of $0.4 billion were included in the spin-off at that time. The spin-off created two independent financial institutions, each pursuing separate long-term business strategies. The Registrant is engaged in general commercial and consumer banking businesses through its principal bank subsidiary, Signet Bank, which is a member of the Federal Reserve System. Signet Bank provides financial services through banking offices located throughout Virginia, Maryland and Washington, D.C., on-line INTERNET access and a 24-hour full-service Telephone Banking Center. Signet Bank owns a commercial bank operating in the Bahamas. International banking operations are conducted through a foreign branch of Signet Bank. Service subsidiaries are engaged in writing insurance in connection with the lending activities of the banks and bank-related subsidiaries and owning real estate for banking premises. Other subsidiaries are engaged in trust operations, various kinds of lending and leasing activities, insurance agency activities, mortgage lending and broker and dealer activities relating to certain phases of the domestic securities business. As of December 31, 1996, the Registrant and its subsidiaries employed 3,862 full-time and 941 part-time employees. Domestic Banking Operations Signet Bank, incorporated under the laws of Virginia, had assets of $11.7 billion at December 31, 1996. Signet Bank provides all customary banking services to businesses and individuals. Domestic Trust Operations Trust operations are administered by Signet Trust Company, a subsidiary of the Registrant which presently operates four offices in Virginia, one office in Maryland and one office in Washington, D.C. International Banking Operations International banking operations are conducted through Signet Bank's international division and through Signet Bank (Bahamas), Ltd., a subsidiary of Signet Bank. Signet Bank also conducts international banking operations through a foreign branch located in the Bahamas. International banking is subject to special risks such as exchange controls and other regulatory or political policies of governments, both foreign and domestic. Currency devaluation is an additional risk of international banking; however, substantially all of the Registrant's international assets are repayable in U.S. dollars. 3 Domestic Bank-Related Activities Signet Commercial Credit Corporation, a wholly-owned subsidiary of the Registrant, is engaged in bank-related activities in the United States. It makes loans that are often secured by inventory, accounts receivable or like security and are generally structured on a revolving basis. Signet Insurance Services, Inc., a wholly-owned subsidiary of the Registrant, provides, as an agent, a full line of life and property/casualty insurance coverage for both individuals and business enterprises. Signet Mortgage Corporation, a wholly-owned subsidiary of Signet Bank, engages in the business of servicing and selling mortgage loans. Signet Leasing and Financial Corporation, a wholly-owned subsidiary of Signet Bank, engages in diversified equipment lease financing activities (excluding passenger automobiles) for commercial customers on a national basis. Signet Business Leasing Corporation, a wholly-owned subsidiary of Signet Bank, engages in small ticket lease financing, primarily targeting small businesses on a national basis. Signet Financial Services, Inc., a wholly-owned subsidiary of the Registrant, acts as an introducing broker and dealer in certain phases of the domestic securities business. Virtus Capital Management, Inc. a wholly-owned subsidiary of the Registrant, acts as investment manager of various registered open-end management investment companies, mutual funds, etc. and as a sponsor of mutual funds. Competition The Registrant is subject to substantial competition in all phases of its business. Its banks compete not only with other commercial banks but with other financial institutions, including brokerage firms, credit card banks, savings and loan associations and savings banks, credit unions, consumer loan companies, finance companies, insurance companies and certain governmental agencies, many of which are substantially larger than the Registrant. The Registrant's non-banking subsidiaries also operate in highly competitive fields and compete with organizations substantially larger than themselves. See "Regulation" below for a discussion of legislation which has increased competition in the markets served by the Registrant. Government Policy The earnings of the Registrant are affected not only by general economic conditions but also by the policies of various governmental regulatory authorities. In particular, the Federal Reserve System regulates money and credit conditions in order to influence general economic conditions, primarily through open market transactions in U.S. Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against member bank deposits. These policies have a significant influence on overall growth and distribution of bank loans, investments and deposits, and affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The Registrant cannot accurately predict the effect such policies may have in the future on its business and earnings. 4 Capital Guidelines The Board of Governors of the Federal Reserve System (the "Federal Reserve Board") has adopted risk-based capital guidelines for bank holding companies. The minimum guidelines for the ratio of capital to risk-weighted assets (including certain off-balance-sheet activities, such as standby letters of credit) is 8 percent. At least half of the total capital must be composed of common equity, retained earnings and qualifying perpetual preferred stock less disallowed intangibles, including goodwill ("Tier I capital"). The remainder may consist of qualifying subordinated debt, other preferred stock and a limited amount of the loan loss allowance. At December 31, 1996, the Registrant's Tier I and total capital ratios were 10.78% and 14.70%, respectively. In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of Tier I capital to adjusted average quarterly assets equal to 3 percent for bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating. All other bank holding companies are generally required to maintain a leverage ratio of 3 percent plus an additional cushion of at least 100 to 200 basis points. The Registrant's leverage ratio at December 31, 1996 was 7.43 percent. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve Board has indicated that it will continue to consider a "tangible Tier I leverage ratio" (deducting all intangibles) in evaluating proposals for expansion or new activities. Signet Bank, the Registrant's subsidiary bank, is subject to similar capital requirements adopted by its appropriate federal bank regulator. As of December 31, 1996, Signet Bank met the "well capitalized" criteria, as the Tier I, total capital and leverage ratios for Signet Bank were 10.17%, 13.33% and 6.93%, respectively. For further discussion about capital matters, refer to the portions of Signet's 1996 Annual Report to Shareholders incorporated by reference herein (Exhibit 13.1). Failure to meet capital guidelines could subject a national or state member bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC and a prohibition on the taking of brokered deposits. Supervision Signet Bank is regularly examined by the Federal Reserve Board and by the Bureau of Financial Institutions of the Virginia State Corporation Commission and the Maryland Bank Commissioner and is also subject to regulation and examination by the Federal Deposit Insurance Corporation. The Registrant is also subject to examination by the Federal Reserve Board. The Registrant's non-banking subsidiaries are supervised by the Federal Reserve Board. In addition, Signet Insurance Services, Inc. is subject to insurance laws and regulations of Virginia and Maryland, respectively, and the activities of Signet Financial Services, Inc. and Virtus Capital Management, Inc. are regulated by the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and state securities laws. Regulation The Registrant is registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The BHC Act restricts the activities of the Registrant and requires prior approval of the Federal Reserve Board of any acquisition by the Registrant of more than 5% of the voting shares of any bank or bank holding company, any acquisition of all or substantially all of the assets of a bank and any merger or consolidation with another bank holding company. Under the BHC Act, as amended by the Riegle-Neal Interstate Banking and Branching Efficiency Act, the Registrant may acquire other banks located outside of Virginia and may merge subsidiary banks with out of state banks where such mergers are specifically authorized by statute in the state where the bank is located. (See the discussion of interstate banking legislation below.) The BHC Act also prohibits the Registrant from engaging in any business in the United States other than that of managing or controlling banks or businesses closely related to banking, or of furnishing services to or performing services for subsidiaries and, with certain 5 limited exceptions, from acquiring more than 5% of the voting shares of any company. The Federal Reserve Board generally follows a restrictive policy in permitting the entry of bank holding companies and other bank affiliates into domestic and foreign bank-related activities. Further, under Section 106 of the 1970 Amendments to the BHC Act and the Federal Reserve Board's regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of any property or service. Federal law imposes limitations on the ability of the Registrant and its subsidiaries to engage in certain phases of the domestic securities business. The Registrant is a bank holding company and is a legal entity separate and distinct from its banking and other subsidiaries. The principal sources of the Registrant's revenues are interest income derived from loans to and deposits in subsidiaries and dividends the Registrant receives from its subsidiaries. The right of the Registrant to participate as a shareholder in any distribution of assets of any subsidiary upon its liquidation or reorganization or otherwise is subject to the prior claims of creditors of any such subsidiary. Signet Bank is subject to claims by creditors for long-term and short-term debt obligations, including substantial obligations for federal funds purchased and securities sold under repurchase agreements, as well as deposit liabilities. There is also a number of federal and state legal limitations to the extent to which Signet Bank may pay dividends or otherwise supply funds to the Registrant or its affiliates. The prior approval of the appropriate federal bank regulator is required if the total of all dividends declared by a national bank or state member bank in any calendar year will exceed the sum of such bank's net profits, as defined by the regulators, for the year plus the preceding two calendar years. In addition, a dividend may not be paid in excess of a bank's undivided profits then on hand, after deducting losses and bad debts in excess of the allowance for loan and lease losses. The payment of dividends by the Registrant and its banking subsidiary may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory minimums. In addition, the appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a national bank, a state member bank or a bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The payment of dividends that deplete a bank's capital base could be deemed to constitute such an unsafe or unsound practice. The Federal Reserve Board has indicated that banking organizations should generally pay dividends only out of current operating earnings. Under applicable regulatory restrictions, the Registrant's banking subsidiary, Signet Bank, was able to pay dividends as of January 1, 1997. Under federal law, Signet Bank may not, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, the Registrant or any non-bank subsidiary, or take its securities as collateral for loans to any borrower. In addition, federal law requires that certain transactions between Signet Bank and its affiliates, including sales of assets and furnishing of services, must be on terms that are at least as favorable to the banks as those prevailing in transactions with independent third parties. Signet Bank is subject to various statutes and regulations relating to required reserves, investments, loans, acquisitions of fixed assets, interest rates payable on deposits, requirements for meeting community credit needs, transactions among affiliates and the Registrant, mergers and consolidations, and other aspects of their operations. On July 1, 1994, legislation became effective which permits out-of-state bank holding companies that do not already have a Virginia bank subsidiary to acquire Virginia banking institutions if the laws of the out-of-state bank holding company's home state permit acquisitions of banking institutions in that state by Virginia bank holding companies under the same conditions. On September 29, 1994, the federal Riegle-Neal Interstate Banking and Branching Efficiency Act (the "Riegle Act") became law. Under the Riegle Act, effective September 30, 1995, the Federal Reserve may approve bank holding company acquisition of banks in other states, subject to certain aging and deposit concentration limits. Commencing June 1, 1997 (or earlier if a particular state chooses), banks in one state may merge with banks in another state, unless the other state has chosen not to implement this section of the Riegle Act. These mergers are also subject to similar aging and deposit concentration limits. On February 23, 1995, the Virginia General Assembly passed legislation, effective July 1, 1995, which permits Virginia banks to merge with out-of-state banks, and out-of-state banks resulting from such an interstate merger transaction to maintain and operate branches in Virginia of a merged Virginia bank, if the laws of the home state of such out-of-state bank permit interstate merger transactions. In addition, effective July 1, 1995, Virginia banks are permitted to establish de novo branches in other states, and out-of-state banks are permitted to establish de novo branches in Virginia, if the laws of the home state of such out-of-state bank permit Virginia banks to establish de novo branches in that state. 6 Effective September 29, 1995, out-of-state banks may enter Maryland by acquiring single branches or other parts of Maryland banks, by de novo branching and through mergers with or acquisitions of other banks. An out-of-state bank may not acquire an existing branch before June 1, 1997, unless the laws of that bank's home state would permit a Maryland bank to establish a branch in that state under similar conditions. In July 1996, the Council of the District of Columbia passed similar legislation with respect to the entry of out-of-state banks into the District of Columbia through acquisition of branches, de novo branches and through mergers with or acquisitions of other banks. Maryland law allows statewide branching, subject to regulatory approval. Virginia law provides that a bank may establish new branches, subject to regulatory approval, anywhere in the state and, effective July 1, 1995, in other states with branching reciprocity. District of Columbia law allows branching by District of Columbia banks within the District, subject to regulatory approval. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), contains a number of provisions which directly or indirectly affect the activities of federally insured national and state-chartered commercial banks. FIRREA made a number of important changes in the deposit insurance system. FIRREA established separate insurance funds for banks (the Bank Insurance Fund ("BIF")) and savings associations (the Savings Association Insurance Fund) to be managed by the Federal Deposit Insurance Corporation (the "FDIC"). All national and state-chartered commercial banks that were insured by the FDIC at the time of the enactment of FIRREA were automatically insured by BIF. FIRREA gives the Federal Reserve Board specific authority to permit the acquisition of healthy, as well as failing, savings associations by a bank holding company under the BHC Act. FIRREA enhances the enforcement powers of the federal banking regulators, increases the penalties for violations of law and substantially revises and codifies the powers of receivers and conservators of depository institutions. The receivership and conservatorship provisions of FIRREA include a statutory claims procedure and provisions which confirm the powers of the FDIC to obtain a stay of pending litigation and to repudiate certain contracts or leases. The Crime Control Act of 1990, also contains a number of provisions which enhance the enforcement powers of the federal banking regulators and increase the penalties for violations of law. Under Federal Reserve Board policy, the Registrant is expected to act as a source of financial strength to its subsidiary bank and to commit resources to support such a subsidiary. This support may be required at times when, absent such Federal Reserve Board policy, the Registrant may not find itself able to provide it. The Registrant's subsidiary bank is subject to FDIC deposit insurance assessments. FIRREA requires that the FDIC reach an insurance fund reserve for the BIF of $1.25 for every $100 of insured deposits. If the reserve ratio of the BIF is less than the designated reserve ratio, the FDIC is required to set assessment rates sufficient to increase the ratio to the required ratio, and is authorized to impose special additional assessments. A significant increase in the assessment could have an adverse impact on the Registrant's results of operations. See discussion below under Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), for further information on the risk-based insurance assessment system adopted by the FDIC. In December 1991, FDICIA was enacted. FDICIA substantially revises the bank regulatory and funding provisions of the Federal Deposit Insurance Act and makes revisions to several other federal banking statutes. FDICIA requires the federal banking agencies to take "prompt corrective action" with depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized". A depository institution's capital tier depends upon where its capital levels are in relation to various relevant capital measures, which include a risk-based capital measure and a leverage ratio capital measure, and certain other factors. 7 A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets each such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is significantly below any such measure and critically undercapitalized if it fails to meet any critical capital level set forth in the regulations. The critical capital level must be a level of tangible equity equal to not less than two percent of total assets and not more than 65 percent of the minimum leverage ratio to be prescribed by regulation (except to the extent that two percent would be higher than such 65 percent level). An institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. For a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5 percent of the depository institution's total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator. Under FDICIA, an institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. In addition, "pass through" insurance coverage may not be available for certain employee benefit accounts. FDICIA restated Section 22(h) of the Federal Reserve Act, a statutory provision which, among other things, restricts the amounts and terms of extensions of credit which may be made by a bank to its executive officers, directors, principal shareholders (collectively, "insiders"), and to their related interests. In addition to limitations previously in place, FDICIA requires a bank, when lending to insiders, to follow credit underwriting procedures that are not less stringent than those applicable to comparable transactions by the bank with persons outside the bank. Directors and their related interests are now subject to the same aggregate lending limits previously applicable to executive officers and their principal shareholders and their related interests; further, the amount a bank can lend in the aggregate to insiders, and to their related interests, is limited to an amount equal to the bank's unimpaired capital and surplus. Insiders are also prohibited from knowingly receiving, or knowingly permitting their related interests to receive, any extension of credit not authorized by Section 22(h) of the Federal Reserve Act. Under FDICIA, each insured depository institution is required to submit annual financial statements to the FDIC, its primary federal regulatory, and any appropriate state banking supervisor and a report signed by the chief executive officer and chief accounting or financial officer which contains (i) a statement of management's responsibilities for preparing financial reports, establishing and maintaining an adequate internal control structure, and complying with laws and regulations relating to safety and soundness and (ii) an assessment of the effectiveness of such structures and compliance effort. The institution's independent public accountant will then be required to attest to and report separately on the assertion of the institution's management on internal control over financial reporting. Each insured depository institution will be required to have an independent audit committee made up entirely of outside directors who are independent of management of the institution and who satisfy any specific 8 requirements the FDIC may establish. Their duties are to include review of the various reports required under FDICIA. In the case of any insured depository institution which the FDIC determines to be a "large institution", the audit committee must include members with banking or related financial expertise. Also, in the case of such large institutions, the committee must have access to its own outside counsel, and may not include any large customers of the institution. There are certain exemptions for institutions that are part of a holding company structure, but the institution must have total assets of less than $9 billion, and an examination rating of 1 or 2. FDICIA amended the Federal Deposit Insurance Act by inserting a new provision concerning accounting objectives, standards and requirements. Among other matters, the federal banking agencies are required to: (i) review the accounting principles used by depository institutions in preparing financial reports required to be filed with a federal banking agency and related matters with respect to such reports; (ii) modify or eliminate any accounting principles or reporting requirements which are inconsistent with FDICIA's objectives of effective supervision, prompt corrective action, and increased accuracy of financial statements; (iii) prescribe regulations which require that all assets and liabilities, including contingent assets and liabilities, of insured depository institutions be reported in, or otherwise taken into account of, in the preparation of any balance sheet, financial statement, report of condition, or other report required to be filed with the federal banking agency; and (iv) develop jointly with the other appropriate federal banking agencies, a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practical, in any such reports. All financial reports and statements are to be prepared in accordance with generally accepted accounting principles, except that each federal banking agency has the power to implement more stringent procedures in certain instances. FDICIA also imposes certain operational and managerial standards on financial institutions relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. FDICIA also imposes new restrictions on activities and investments of insured state banks, and prescribes limitations on risks posed by exposure of insured banks to other depository institutions, including adoption of policies to limit overnight credit exposures to correspondent banks. FDICIA requires the federal banking regulators to adopt rules prescribing certain safety and soundness standards for insured depository institutions and their holding companies. The Uniform Financial Institutions Rating System ("UFIRS") is an internal rating system used by the federal and state regulators for assessing the soundness of financial institutions on a uniform basis and for identifying those institutions requiring special supervisory attention. On December 20, 1996, the FDIC Board of Directors adopted the Federal Financial Institutions Examination Council's ("FFIEC") updated UFIRS, which replaces the 1979 statement of policy and is effective January 1, 1997. The updated rating system now will be referred to as the "CAMELS" rating system, as each financial institution is assigned a rating based on an evaluation of five essential components of an institution's financial condition and operations, including Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity. The standards are intended to enable the regulatory agencies to address problems at depository institutions and holding companies before the problems cause significant deterioration in the financial condition of the institution. The CAMELS rating system establishes the objectives of proper operations and management, but leaves specific methods for achieving those objectives to each institution. FDICIA sets forth a new Truth in Savings Act. The Federal Reserve Board has adopted regulations implementing the Truth in Savings Act. A variety of significant new disclosure requirements are imposed concerning interest rates and terms of deposit accounts. A requirement is also imposed that interest paid on interest-bearing accounts must be calculated on the full amount of principal, as opposed to on only non-reservable balances. Under FDICIA, the federal banking agencies adopted regulations providing standards for extensions of credit that are secured by liens on interests in real estate or made for the purpose of financing the construction of buildings or other improvements of real estate. In prescribing standards, the agencies must consider the risk posed to the deposit insurance fund, the need for safe and sound operation of depository institutions, and the availability of credit. Under FDICIA, the FDIC adopted a risk-based insurance assessment system for implementation January 1, 1994 that evaluates an institution's potential for causing a loss to the insurance fund and to base deposit insurance premiums upon individual bank profiles. Under the risk-based assessment system, each institution pays FDIC insurance premiums within a range from 0 cents to 31 cents per $100 of deposits, depending on the institution's 9 capital adequacy and a supervisory judgment of overall risk. As of December 31, 1996, Signet Bank paid no deposit insurance premium except for those deposits obtained in the acquisition of Pioneer Financial Corporation ("Pioneer"), a savings and loan holding company. The premium on these deposits remained at 23 cents per $100 of deposits. The FDIC lowered the 1996 assessment for Signet Bank to the minimum semiannual assessment of $1,000 except for the assessment on deposits acquired from Pioneer, which remained unchanged at 23 cents per $100 of deposits. In 1997, the annual rate paid on deposits acquired from Pioneer will be reduced from 23 cents to 6 cents per $100 of deposits. As a result of The Deposit Insurance Funds Act of 1996 (the "Funds Act), the FDIC Board of Directors approved the imposition of a special assessment rate of 65.7 cents per $100 of Savings Association Insurance Fund ("SAIF") assessable deposits on October 8, 1996. The Funds Act also authorizes the Financing Corporation ("FICO") to impose periodic assessments on depository institutions that are members of the BIF in order to spread the cost of interest payments on the outstanding FICO bonds over a larger number of institutions. Thrift deposits will be assessed 6 cents per $100 annually, and bank deposits will be assessed 13 cents. These payments will start January 1, 1997 and run through 2000. From time to time, various legislative proposals are submitted to and considered by Congress concerning the banking industry. Recent legislative initiatives have included, among other things, proposals to reform deposit insurance, limit the investments that a depository institution may make with insured funds, expand the powers of banking organizations to enter into new financial service industries and revise the structure of the bank regulatory system. 10 Executive Officers of the Registrant The following table sets forth information with respect to the Registrant's executive officers:
Names, Positions and Offices With Registrant During Last An Officer of the Five Years Age Registrant Since - ------------------------------ --- ----------------- Malcolm S. McDonald 58 1982 Chairman and Chief Executive Officer (Principal Executive Officer). Prior to December, 1996, he was President and Chief Operating Officer. T. Gaylon Layfield, III 45 1988 President and Chief Operating Officer. Prior to December, 1996, he was Senior Executive Vice President. Wallace B. Millner, III 57 1971 Vice Chairman and Chief Financial Officer (Principal Financial Officer). Prior to May, 1996, he was Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer). David L. Brantley 47 1988 Executive Vice President and Treasurer. Prior to February, 1995, he was Senior Vice President and Treasurer. W.H. Catlett, Jr. 48 1994 Executive Vice President and Controller (Principal Accounting Officer). Prior to August, 1994, he was a Senior Vice President. Philip H. Davidson 52 1977 Executive Vice President. Robert J. Merrick 51 1996 Executive Vice President and Chief Credit Officer. Kenneth H. Trout 48 1990 Senior Executive Vice President. Prior to May, 1991, he was an Executive Vice President. Sara R. Wilson 46 1980 Executive Vice President, General Counsel and Corporate Secretary. Prior to January, 1995, she was Executive Vice President and General Counsel. Prior to January, 1994, she was Senior Vice President and Senior Corporate Counsel.
There are no family relationships (as defined in the applicable regulations) among the above listed officers. 11 The executive officers of the Registrant are elected to serve until the next organizational meeting of the board of directors of the Registrant following the next annual meeting of the stockholders of the Registrant and until their successors are elected. Statistical Information The statistical information required by Item 1 is in the Registrant's Annual Report to its shareholders for the year ended December 31, 1996, and is incorporated herein by reference, as follows:
Page in the Registrant's Annual Report to its shareholders for Guide 3 Disclosure the year ended December 31, 1996 ------------------ -------------------------------- I. Distribution of Assets, Liabilities and Stockholders' Equity, Interest Rates and Interest Differential A. Average Balance Sheet 52 B. Net Interest Earnings Analysis 52 C. Rate/Volume Analysis 50 II. Investment Portfolio A. Book Value of Investment Securities 62 B. Maturities of Investment Securities 30 C. Investment Securities Concentrations 30&31 III. Loan Portfolio A. Types of Loans 53 B. Maturities and Sensitivities of Loans to Changes in Interest Rates 27 C. Risk Elements 1. Nonaccrual, Past Due and Restructured Loans 31&32 2. Potential Problem Loans 32 3. Foreign Outstandings Not Applicable 4. Loan Concentrations 53 D. Other Interest Bearing Assets Not Applicable IV. Summary of Loan Loss Experience A. Analysis of Allowance for Loan Losses 51 B. Allocation of the Allowance for Loan Losses 51 V. Deposits A. Average Balances 52 B. Maturities of Large Denomination Certificates 33 C. Foreign Deposit Liability Disclosure 33 VI. Return on Equity and Assets A. Return on Assets 49 B. Return on Equity 49 C. Dividend Payout Ratio 34 D. Equity to Assets Ratio 49 VII. Short-Term Borrowings 64
12 ITEM 2. PROPERTIES. The executive offices of the Registrant and Signet Bank are located at 7 North Eighth Street, Richmond, Virginia, in a building owned by a subsidiary of the Registrant. The Registrant's main operations center is located in Henrico County, Virginia, in a newly constructed building completed in the first quarter of 1996. The principal offices of Signet Bank are leased. Of the Registrant's 239 domestic branch banking locations, 119 are owned by subsidiaries of the Registrant. The remaining 120 branch banking locations and offices of other subsidiaries are leased for various terms at an aggregate annual rent of approximately $21,685,000. ITEM 3. LEGAL PROCEEDINGS. The Registrant and its subsidiaries are parties plaintiff or defendant in suits arising out of the collection of loans and the enforcement or defense of the priority of its security interests. Management believes that the pending actions against the Registrant or its subsidiaries, both individually and in the aggregate, will not have a material adverse effect on the financial condition or future operations of the Registrant. For further discussion of legal proceedings, refer to the Registrant's 1996 Annual Report to Shareholders on page 17 under the heading "Introduction" and on page 78 in Note O, incorporated be reference herein. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The information required by Item 5 is included in the Registrant's Annual Report to its shareholders for the year ended December 31, 1996 on page 44 under the heading "Selected Quarterly Financial Information", page 71 in Note J, and page 90 under the heading "Quarterly Per Share Information", and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. The information required by Item 6 is included in the Registrant's Annual Report to its shareholders for the year ended December 31, 1996 on pages 34 and 49 under the headings "Risk-Based and Other Capital Data" and "Selected Financial Data", respectively, and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by Item 7 is included in the Registrant's Annual Report to its shareholders for the year ended December 31, 1996 on pages 17-53 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations", and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by Item 8 is included in the Registrant's Annual Report to its shareholders for the year ended December 31, 1996 on pages 54-84 under the heading "Signet Banking Corporation Consolidated Financial Statements" and on page 44 under the heading "Selected Quarterly Financial Information", and is incorporated herein by reference. 13 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by Item 10 as to the directors of the Registrant is included in the Registrant's 1997 Proxy Statement on pages 2-5 under the headings "Election of Directors" and "Other Directorships", and is incorporated herein by reference. The information required by Item 10 as to the executive officers of the Registrant is included in Item 1 under the heading "Executive Officers of the Registrant". ITEM 11. EXECUTIVE COMPENSATION. The information required by Item 11 is included in the Registrant's 1997 Proxy Statement on pages 8-13 under the headings "Compensation of the Board" and "Executive Compensation", and is incorporated herein by reference. Information under the headings "Organization and Compensation Committee Report on Executive Compensation" and "Performance Graph" in the Registrant's 1997 Proxy Statement is not incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by Item 12 is included in the Registrant's 1997 Proxy Statement on pages 1, 5, 6 and 7 under the headings "Proxy Statement" and "Stock Ownership", and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by Item 13 is included in the Registrant's 1997 Proxy Statement on page 7 under the heading "Transactions", and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) The following consolidated financial statements of Signet Banking Corporation and Subsidiaries, included in the Registrant's Annual Report to its shareholders for the year ended December 31, 1996, are incorporated herein by reference in Item 8: Consolidated Balance Sheet - December 31, 1996 and 1995 Statement of Consolidated Income - Years ended December 31, 1996, 1995 and 1994 Statement of Consolidated Cash Flows - Years ended December 31, 1996, 1995 and 1994 Statement of Changes in Consolidated Stockholders' Equity - Years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors (2) All schedules are omitted since the required information is either not applicable, not deemed material, or is shown in the respective financial statements or in notes thereto. 14 (3) Exhibits: 2.1 Separation, Distribution and Indemnity Agreement dated as of February 22, 1994 among the Registrant, Signet Bank and Capital One Financial Corporation (Incorporated by reference to Exhibit 2.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 2.2 Retained Portfolio, Origination, Servicing and Management Agreement dated as of February 22, 1994 between Signet Bank and Capital One Financial Corporation (Incorporated by reference to Exhibit 2.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 3.1 Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 1992). 3.2 Bylaws (Incorporated by reference to Exhibit 3.2 to Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 4.1 Indenture dated as of May 1, 1972 Providing for Issuance of Unlimited Senior Debt Securities (Incorporated by reference to Exhibit 4-3 to Registration Statement No. 2-43731). 4.2 Indenture dated as of September 1, 1970 Providing for Issuance of Unlimited Capital Notes (Incorporated by reference to Exhibit 4-2 to Registration Statement No. 2-37919). 4.3 Indenture dated as of May 1, 1985 relating to $50,000,000 Floating Rate Subordinated Notes due 1997 (Incorporated by reference to Exhibit 4(a) to Registration Statement No. 2-97720). 4.4 Indenture dated as of April 1, 1986 Providing for Issuance of Unlimited Subordinated Debt Securities (Incorporated by reference to Exhibit 4(a) to Registration Statement No. 33-4491). 4.5 Officer's Certificate dated as of April 4, 1986 setting forth the form and terms of $100,000,000 of unsecured floating rate Subordinated Notes due in 1998 (Incorporated by reference to Exhibit 4.11 to Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 4.6 Officers' Certificate dated as of May 23, 1989 setting forth the form and terms of $100,000,000 of unsecured 9 5/8% Subordinated Notes due in 1999 (Incorporated by reference to Exhibit 4.12 to Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 4.7 Articles of Amendment, Rights Agreement, Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 1 to Current Report on Form 8-K dated May 23, 1989). 10.1 Executive Employee Supplemental Retirement Plan (Incorporated by reference to Exhibit 10.4 to Annual Report on Form 10-K for the fiscal year ended December 31, 1988). 10.2 Form of Executive Employment Agreement between the Registrant and David L. Brantley, W.H. Catlett, Jr., Philip H. Davidson, Gordon Z. Holt, T. Gaylon Layfield, III, Malcolm S. McDonald, John McKenney III, Robert J. Merrick, 15 Wallace B. Millner, III, Christopher Oddleifson, Keith A. Reynolds, H. Nathaniel Taylor, Kenneth H. Trout, Sara R. Wilson and Randolph W. Wyckoff (Incorporated by reference to Exhibit 10.8 on Form 10-K for the fiscal year ended December 31, 1989). 10.3 1983 Stock Option Plan (Incorporated by reference to Exhibit A to Proxy Statement for 1983 Annual Meeting of Shareholders). 10.4 1985 Union Trust Bancorp Key Employee Stock Option Plan (Incorporated by reference to Exhibit 10.13 to Annual Report on Form 10-K for the fiscal year ended December 31, 1985). 10.5 1992 Stock Option Plan (as amended and restated January 24, 1995) (Incorporated by reference to Exhibit I to Proxy Statement for 1995 Annual Meeting of Shareholders). 10.6 Executive Employee Excess Savings Plan (Incorporated by reference to Exhibit 10.14 to Annual Report on Form 10-K for the fiscal year ended December 31, 1987). 10.7 Split Dollar Life Insurance Plan and Agreement (Incorporated by reference to Exhibit 10.13 to Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 10.8 Executive Employee Deferred Compensation Plan (Incorporated by reference to Exhibit 10.15 to Annual Report on Form 10-K for the fiscal year ended December 31, 1988). 10.9 1988 Deferred Compensation Plan (Incorporated by reference to Exhibit 10.16 to Annual Report on Form 10-K for the fiscal year ended December 31, 1988). 10.10 Excess Benefit Retirement Plan (Incorporated by reference to Exhibit 10.17 to Annual Report on Form 10-K for the fiscal year ended December 31, 1988). 10.11 Annual Executive Incentive Compensation Plan (Incorporated by reference to Exhibit I to Proxy Statement for 1994 Annual Meeting of Shareholders). 10.12 Executive Long-Term Incentive Plan (Incorporated by reference to Exhibit II to Proxy Statement for 1994 Annual Meeting of Shareholders). 10.13 1994 Stock Incentive Plan (Incorporated by reference to Exhibit III to Proxy Statement for 1994 Annual Meeting of Shareholders). 10.14 1996 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit I to Proxy Statement for 1996 Annual Meeting of Shareholders). 11.1 Computation of Earnings Per Share (Filed herewith). 13.1 1996 Annual Report to Shareholders (Filed herewith). 21.1 Subsidiaries of the Registrant (Filed herewith). 23.1 Consent of Ernst & Young LLP (Filed herewith). 27.1 Financial Data Schedule (Filed herewith). (b) Reports on Form 8-K none 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNET BANKING CORPORATION Date: February 25, 1997 By /S/ W. H. Catlett, Jr. ------------------------ W. H. Catlett, Jr. Executive Vice President and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 25th day of February, 1997.
SIGNATURES TITLE ---------- ----- /S/ Malcolm S. McDonald Director, Chairman and Chief Executive --------------------------- Officer (Principal Executive Officer) Malcolm S. McDonald /S/ T. Gaylon Layfield, III Director, President and Chief Operating --------------------------- Officer T. Gaylon Layfield, III /S/ Wallace B. Millner, III Vice Chairman and Chief Financial Officer --------------------------- (Principal Financial Officer) Wallace B. Millner, III /S/ W. H. Catlett, Jr. Executive Vice President and Controller --------------------------- (Principal Accounting Officer) W. H. Catlett, Jr. /S/ J. Henry Butta Director --------------------------- J. Henry Butta - ---------------------------- Director Norwood H. Davis, Jr.
17 SIGNATURES TITLE ---------- ----- /S/ William C. DeRusha Director --------------------------- William C. DeRusha /S/ Robert M. Freeman Director --------------------------- Robert M. Freeman /S/ C. Stephenson Gillispie, Jr. Director --------------------------- C. Stephenson Gillispie, Jr. - ---------------------------- Director Bruce C. Gottwald, Jr. /S/ William R. Harvey Director --------------------------- William R. Harvey, Ph.D. /S/ Elizabeth G. Helm Director --------------------------- Elizabeth G. Helm /S/ Robert M. Heyssel, M.D. Director --------------------------- Robert M. Heyssel, M.D. /S/ Henry A. Rosenberg, Jr. Director --------------------------- Henry A. Rosenberg, Jr. /S/ Louis B. Thalheimer Director --------------------------- Louis B. Thalheimer 18 EXHIBITS TO SIGNET BANKING CORPORATION ANNUAL REPORT ON FORM 10-K DATED DECEMBER 31, 1996 COMMISSION FILE NO. 1-6505 19 EXHIBIT INDEX
Page Number or Exhibit Incorporation by Number Description Reference to - --------- ----------- ----------------- 2.1 Separation, Distribution and Indemnity Exhibit 3.1 to Annual Report on Form 10-K for Agreement the fiscal year ended December 31, 1994 2.2 Retained Portfolio, Origination, Servicing Exhibit 3.1 to Annual Report on Form 10-K for and Management Agreement the fiscal year ended December 31, 1994 3.1 Articles of Incorporation Exhibit 3.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 3.2 Bylaws Exhibit 3.2 to Annual Report on Form 10-K for the fiscal year ended December 31, 1995 4.1 Instruments defining the rights of Exhibit 4-1, Registration No. 2-43731; security holders, including Indentures Exhibit 4-2, Registration No. 2-37919; Exhibit 4-3, Registration No. 2-97720; Exhibit 4-6, Registration No. 2-45986; Exhibit 4(a), Registration No. 2-97720; Exhibit 4(a), Registration Statement No. 33-4491; Exhibit 1 to Current Report on Form 8-K dated May 23, 1989; Exhibit 4.11 to Annual Report on Form 10-K for the fiscal year ended December 31, 1989 10.1 Executive Employee Supplemental Exhibit 10.4 to Annual Report on Form 10-K for Retirement Plan the fiscal year ended December 31, 1988 10.2 Form of Executive Employment Exhibit 10.8 to Annual Report on Form 10-K for Agreement between the Registrant the fiscal year ended December 31, 1989 and David L. Brantley, W.H. Catlett, Jr., Philip H. Davidson, Gordon Z. Holt, T. Gaylon Layfield, III, Malcolm S. McDonald, John McKenney III, Robert J. Merrick, Wallace B. Millner, III, Christopher Oddleifson, Keith A. Reynolds, H. Nathaniel Taylor, Kenneth H. Trout, Sara R. Wilson and Randolph W. Wyckoff 10.3 1983 Stock Option Plan Exhibit A to Proxy Statement for 1983 Annual Meeting of Shareholders 10.4 1985 Union Trust Bancorp Key Exhibit 10.13 to Annual Report on Form 10-K for Employee Stock Option Plan the fiscal year ended December 31, 1985 10.5 1992 Stock Option Plan (as amended Exhibit I to Proxy Statement for 1995 Annual January 24, 1995) Meeting of Shareholders 10.6 Executive Employee Excess Exhibit 10.14 to Annual Report on Form 10-K for Savings Plan the fiscal year ended December 31, 1987 10.7 Split Dollar Life Insurance Plan Exhibit 10.13 to Annual Report on Form 10-K for and Agreement the fiscal year ended December 31, 1989 20 10.8 Executive Employee Deferred Exhibit 10.15 to Annual Report on Form 10-K for Compensation Plan the fiscal year ended December 31, 1988 10.9 1988 Deferred Compensation Plan Exhibit 10.16 to Annual Report on Form 10-K for the fiscal year ended December 31, 1988 10.10 Excess Benefit Retirement Plan Exhibit 10.17 to Annual Report on Form 10-K for the fiscal year ended December 31, 1988 10.11 Annual Executive Incentive Exhibit I to Proxy Statement for 1994 Annual Compensation Plan Meeting of Shareholders 10.12 Executive Long-Term Incentive Plan Exhibit II to Proxy Statement for 1994 Annual Meeting of Shareholders 10.13 1994 Stock Incentive Plan Exhibit III to Proxy Statement for 1994 Annual Meeting of Shareholders 10.14 1996 Non-Employee Directors Stock Exhibit I to Proxy Statement for 1996 Annual Option Plan Meeting of Shareholders 11.1 Computation of Earnings per Share Page 22 13.1 1996 Annual Report to Shareholders Page 23 21.1 Subsidiaries of the Registrant Page 94 23.1 Consent of Independent Auditors, Ernst & Young LLP Page 96 27.1 Financial Data Schedule Page 97
21 EX-11 2 EXHIBIT 11.1 COMPUTATION OF EARNINGS Exhibit 11.1 SIGNET BANKING CORPORATION AND SUBSIDIARIES FORM 10-K COMPUTATION OF EARNINGS PER SHARE (dollars in thousands - except per share)
1996 1995 1994 ------------------ ------------------- ------------------ Common and common equivalent: Average shares outstanding 59,572,983 58,843,986 57,355,021 Dilutive stock options--based on the treasury stock method using average market price 1,029,866 953,732 500,034 ------------------ ------------------- ------------------ Shares used 60,602,849 59,797,718 57,855,055 ================== =================== ================== Net income applicable to Common Stock $ 124,927 $ 111,080 $ 149,834 ================== =================== ================== Per share amount $ 2.06 $ 1.86 $ 2.59 ================== =================== ================== Assuming full dilution: Average shares outstanding 59,572,983 58,843,986 57,355,021 Dilutive stock options--based on the treasury stock method using the period end market price, if higher than the average market price 1,099,471 982,435 507,906 ================== =================== ================== Shares used 60,672,454 59,826,421 57,862,927 ================== =================== ================== Net income applicable to Common Stock $ 124,927 $ 111,080 $ 149,834 ================== =================== ================== Per share amount $ 2.06 $ 1.86 $ 2.59 ================== =================== ==================
The calculations of common and common equivalent earnings per share and fully diluted earnings per share are submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although both are not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because there is dilution of less than 3%. The Registrant has elected to show fully diluted earnings per share in its financial statements. 22 EX-13 3 EXHIBIT 13.1 Exhibit 13.1 SIGNET BANKING CORPORATION AND SUBSIDIARIES Management's Discussion and ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1996 COMPARED TO 1995 INTRODUCTION Signet Banking Corporation ("Signet" or "the Company"), with headquarters in Richmond, Virginia, is a registered multi-state bank holding company whose stock is listed on the New York Stock Exchange under the symbol SBK. At December 31, 1996, Signet had assets of approximately $11.7 billion and provided interstate financial services through its principal subsidiary, Signet Bank, a Virginia banking corporation headquartered in Richmond. Signet Bank has banking offices in Virginia, Maryland and the District of Columbia. Signet Bank was formed by the 1995 merger of Signet Bank/Virginia and Signet Bank/Maryland. In 1996, Signet Bank N.A. also merged with Signet Bank. Signet engages in general commercial and consumer banking businesses and provides a full range of financial services to individuals, businesses and organizations through 239 banking offices, 248 automated teller machines, on-line INTERNET access and a 24-hour full-service Telephone Banking Center. Signet offers investment services including municipal bond, government, federal agency and money market sales and trading, foreign exchange trading, mutual funds and discount brokerage. In addition, it provides specialized services for trust, leasing, asset based lending, cash management, real estate and insurance. Signet's primary market area for its traditional banking business extends from Baltimore to Washington, south to Richmond, and on to Hampton Roads/Tidewater, Virginia. The Company markets several of its products nationally and is exploring the national marketing of other products. On February 28, 1995, Signet distributed all of the remaining Capital One Financial Corporation ("Capital One") common stock it held to Signet stockholders in a tax-free distribution (the "spin-off"). Related assets of $3.6 billion and equity of $0.4 billion were included in the spin-off at that time. The spin-off created two independent financial institutions, each pursuing separate long-term business strategies. In 1995, Signet began construction on a new operations center located close to Richmond, Virginia which was completed and fully occupied in the third quarter of 1996 at a total cost of approximately $55 million. In the second quarter of 1995, Signet acquired the assets of Sheffield Management Company and Sheffield Investments, Inc., managers and distributors of the Blanchard family of mutual funds. These funds are marketed nationally through direct mail. In the third quarter of 1995, Signet adopted Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting For Mortgage Servicing Rights." SFAS No. 122 requires that a mortgage banking enterprise recognize internally originated rights to service mortgage loans sold to others as separate assets. Upon adoption, Signet recognized pre-tax income of approximately $3.7 million. The impact of adoption on 1995 pre-tax income was $7.2 million (net of amortization). During 1996, Signet capitalized $10.0 million of originated mortgage servicing rights. On October 20, 1995, Signet's Board of Directors raised the quarterly dividend by 3 cents to $0.20 per common share. The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," on January 1, 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. SFAS No. 121 also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of the carrying amount or the fair value less selling costs. Adoption of SFAS No. 121 did not have a material impact on the Company's financial position or results of operations. On March 19, 1996, Signet's management discovered that the Company was one of several major financial institutions that were victims of fraudulent commercial loan transactions which occurred prior to 1996. The Company had loan outstandings related to these transactions of approximately $81 million. Federal authorities have informed the Company that there have been substantial recoveries of assets related to these transactions. Management recorded a $35 million commercial fraud loss in non-interest expense at December 31, 1995 ("the fraud loss") and recorded the estimated probable recovery amount of $46 million in other assets as a receivable. The receivable represents an amount management believes is likely to be recovered based on current facts and circumstances. The amount of the recovery was based on the Company's share of known claims to the total amount held by federal authorities, less associated costs. The recovery amount is subject to change, even in the near term, as additional assets are recovered and/or additional claims are asserted. Management continues to believe the $35 million charge to 1995 earnings is adequate to cover estimated losses related to these fraudulent transactions based on currently available 17 information, but is unable to predict the timing of the recovery. The Company will vigorously pursue all other sources of recovery, but currently is unable to determine the probability or amount of additional recoveries. On October 17, 1996, Signet announced that it was initiating a wide-ranging business redesign project, subsequently named ADVANCE, to accelerate the Company's transformation from a traditional regional bank to a national, information-based, financial services company. ADVANCE began in late 1996 with a comprehensive seven-month review to be followed by an eighteen to twenty-four month implementation period. The principal goals of ADVANCE are to align Signet's processes and procedures more closely with strategies and to enhance revenue by shifting focus from products to customers. Management expects improved profitability as a result of ADVANCE. The Company has engaged Aston Associates, a financial services consulting firm specializing in process redesign, to assist Signet employees in the effort. Aston has recently completed highly successful redesign engagements for two other large banking organizations. The results of this project are expected to be announced late in the 1997 second quarter. On October 25, 1996, Signet's Board of Directors increased the quarterly dividend by 5 percent to $0.21 per common share. The following discussion of the 1996 operating results and financial condition at December 31, 1996 is intended to help readers analyze the accompanying Consolidated Financial Statements and related Notes. Certain consolidated financial information is located in Tables 27 through 33. In addition to the discussion of consolidated information, pro forma data are provided for the same periods where it is meaningful to discuss the Company's results excluding Capital One. Consolidated and pro forma results are the same for time periods subsequent to February 28, 1995, the date of the spin-off. SUMMARY OF PERFORMANCE Signet reported consolidated net income for 1996 of $124.9 million, or $2.06 per share, compared with $111.1 million, or $1.86 per share, in 1995. Consolidated earnings for the year ended December 31, 1995 included the results of Capital One for the two months prior to the spin-off on February 28, 1995 and the $35 million fraud loss. Net income increased 6% in 1996 from $118.3 million in 1995, excluding Capital One and the fraud loss. Earnings per share rose 4% from $1.98 in 1995, excluding Capital One and the fraud loss. The return on assets ("ROA") and the return on common stockholders' equity ("ROE") for the year ended December 31, 1996 were 1.10% and 14.35%, respectively, down slightly from 1.12% and 14.65% for the same ratios in 1995, excluding Capital One and the fraud loss. Taxable equivalent net interest income totaled $477.0 million for 1996, a 5% decline from the $503.8 million consolidated results for 1995, but down only $1.7 million, or less than one percent from the 1995 level, on a pro forma basis. The net yield margin for 1996 was 4.73%, a 34 basis point decline from the 5.07% for the prior year, on a pro forma basis. This decline in the net yield margin was primarily due to a deterioration in the net interest spread. The provision for loan losses of $73.9 million represented more than double the 1995 level of $34.8 million, on a pro forma basis. The increase in the provision was tied to growth in the consumer loans, primarily the loan-by-check portfolio. On a pro forma basis, non-interest operating income was $80.8 million, or 42%, higher in 1996 than in 1995, due to a rise in consumer loan servicing and service charge income as the total amount of securitized assets rose significantly. During 1996, Signet recognized net securities gains of $5.0 million, up from $1.8 million in 1995. Non-interest expense decreased $78.8 million from the previous year due in large part to the $35 million fraud loss and the spin-off. On a pro forma basis, non-interest expense rose slightly in spite of the fraud loss largely due to an increase in performance based pay. Table 1 shows selected financial data for the past four years on a pro forma basis. INCOME STATEMENT ANALYSIS Net Interest Income Taxable equivalent net interest income, a primary contributor to earnings, was $477.0 million for 1996, a decline of $26.8 million, or 5%, from the $503.8 million for 1995. The decline in net interest income reflected the impact of the spin-off. On a pro forma basis, taxable equivalent net interest income was down only $1.7 million in 1996. The discussion of net interest income should be read in conjunction with Table 2--Net Interest Income Analysis and Table 8--Average Balance Sheet, both of which were prepared on a pro forma basis. Average earning assets totaled $10.1 billion for 1996, up $176 million from the previous year's consolidated amount. Average earning assets were up $648 million, or 7%, from $9.4 billion for 1995, on a pro forma basis. Loan securitizations reduced earning assets by transferring assets off the balance sheet. Adding average securitized loans to both years' pro forma average earning assets and adjusting for loans to be sold to Capital One, in accordance with previously agreed upon terms of the spin-off, resulted in a 14% increase in managed earning assets year-over-year, up to $10.7 billion. All the major loan categories experienced increases in average balances in 1996 except the consumer and real estate-commercial mortgage categories. Average on-balance sheet consumer loans fell $132 million due to the securitizations. However, on a managed basis, average consumer loans grew $565 million, or 22%. The real 18 TABLE 1 SELECTED FINANCIAL DATA (excluding Capital One)
- ------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ Summary of Operations (dollars in thousands-except per share) Net interest income-taxable equivalent $476,984 $478,670 $358,740 $353,230 Less: taxable equivalent adjustment 8,224 10,603 13,706 15,753 - ------------------------------------------------------------------------------------------------------------------ Net interest income 468,760 468,067 345,034 337,477 Provision for loan losses 73,851 34,786 (16,229) 13,256 - ------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 394,909 433,281 361,263 324,221 Non-interest operating income 274,556 193,780 195,205 193,817 Securities available for sale gains 5,021 532 3,413 3,913 Investment securities gains 1,257 46 405 - ------------------------------------------------------------------------------------------------------------------ Total non-interest income 279,577 195,569 198,664 198,135 Non-interest expense(1) 485,318 484,520 488,309 444,036 - ------------------------------------------------------------------------------------------------------------------ Income before income taxes 189,168 144,330 71,618 78,320 Applicable income taxes(2) 64,241 48,769 15,775 14,391 - ------------------------------------------------------------------------------------------------------------------ Net income $124,927 $ 95,561 $ 55,843 $ 63,929 - ------------------------------------------------------------------------------------------------------------------ Per common share: Net income $ 2.06 $ 1.60 $ 0.97 $ 1.12 Cash dividends declared 0.81 0.79 1.00 0.80 Book value at year-end 15.38 14.59 12.69 14.06 Average common shares outstanding (in thousands) 60,672 59,826 57,863 56,920 - ------------------------------------------------------------------------------------------------------------------ Selected Average Balances (dollars in millions) Assets $ 11,364 $ 10,607 $ 8,839 $ 9,328 Earning assets 10,095 9,447 7,802 8,339 Loans (net of unearned income) 5,908 5,765 4,554 4,387 Managed consumer loan portfolio 3,097 2,532 1,785 1,472 Deposits 7,589 7,282 7,436 7,733 Interest bearing liabilities 8,670 8,055 6,282 6,973 Common stockholders' equity 870 808 818 775 - ------------------------------------------------------------------------------------------------------------------ Selected Year-End Balances (dollars in millions) Assets $ 11,720 $ 10,978 $ 9,859 $ 9,858 Earning assets 10,409 9,443 8,825 8,882 Loans (net of unearned income) 6,355 5,416 5,696 4,448 Managed consumer loan portfolio 3,366 2,807 2,295 1,563 Deposits 7,887 7,593 7,343 7,821 Interest bearing liabilities 8,499 8,024 7,331 7,376 Common stockholders' equity 924 864 744 796 - ------------------------------------------------------------------------------------------------------------------ Operating Ratios Net income to: Average common stockholders' equity(3) 14.35% 11.83% 6.83% 9.10% Average assets(3) 1.10 0.90 0.63 0.69 Efficiency ratio excluding foreclosed property expense (3) 64.82 72.08 88.28 78.69 Stockholders' equity to assets at year-end 7.88 7.87 7.54 8.07 Loans to deposits (average) 77.86 79.17 61.24 56.73 Net loan losses to average loans 1.13 0.87 0.55 0.75 Net interest spread(4) 4.14 4.44 3.96 3.75 Net yield margin(4) 4.73 5.07 4.59 4.24 At year-end: Allowance for loan losses to loans 2.15 2.39 2.67 4.27 Allowance for loan losses to non-performing loans 483.02 337.05 583.37 256.71 ==================================================================================================================
(1) 1994 included $43.2 million of restructuring charges. 1995 included the $35.0 million fraud loss. (2) Income taxes applicable to net securities available for sale gains and investment securities gains were as follows: 1996--$1.8 million, 1995--$0.7 million, 1994--$1.2 million; and 1993--$1.5 million. (3) The 1995 ROE and ROA excluding the fraud loss were 14.65% and 1.12%, respectively. The 1995 efficiency ratio excluding the fraud loss and foreclosed property expense was 66.88%. The 1994 ROE and ROA excluding restructuring charges were 10.26% and .95%, respectively. The 1994 efficiency ratio excluding restructuring/spin-off charges and foreclosed property expense was 80.30%. (4) Net interest spread and net yield margin were calculated on a taxable equivalent basis, using the federal income tax rate and state tax rates, as applicable, reduced by the nondeductible portion of interest expense. 19 TABLE 2 NET INTEREST INCOME ANALYSIS (excluding Capital One) taxable equivalent basis (1)
- ------------------------------------------------------------------------------------------------------------------------------------ 1996 vs 1995 1995 vs 1994 Year Ended ----------------------------- Year Ended -------------------------------- December 31 Increase Change due to (3) December 31 Increase Change due to (3) (in thousands) 1996 1995 (Decrease) Volume Rates 1994 (Decrease) Volume Rates - ------------------------------------------------------------------------------------------------------------------------------------ Interest income: Loans, including fees(2) $536,782 $541,780 $ (4,998) $ 13,342 $(18,340) $373,602 $168,178 $ 108,650 $59,528 Securities available for sale 179,078 125,492 53,586 52,593 993 72,826 52,666 23,716 28,950 Investment securities 28,669 (28,669) (28,669) 28,200 469 5,929 (5,460) Other earning assets 123,776 124,228 (452) 9,399 (9,851) 88,217 36,011 (1,159) 37,170 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 839,636 820,169 19,467 54,687 (35,220) 562,845 257,324 130,975 126,349 - ------------------------------------------------------------------------------------------------------------------------------------ Interest expense: Interest bearing deposits 229,763 216,014 13,749 9,362 4,387 179,311 36,703 (4,439) 41,142 Federal funds and repurchase agreements 114,688 105,290 9,398 18,811 (9,413) 3,213 102,077 101,668 409 Other short-term borrowings 3,174 (3,174) (3,174) 4,896 (1,722) (1,115) (607) Long-term borrowings 18,201 17,021 1,180 2,634 (1,454) 16,685 336 (104) 440 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 362,652 341,499 21,153 25,807 (4,654) 204,105 137,394 66,073 71,321 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $476,984 $478,670 $ (1,686) $ 31,618 $(33,304) $358,740 $119,930 $80,209 $ 39,721 ====================================================================================================================================
(1) Total income from earning assets includes the effects of taxable equivalent adjustments using the federal income tax rate and state tax rates, as applicable, reduced by the nondeductible portion of interest expense. (2) Includes fees on loans of approximately $19,673, $19,322 and $14,019 for 1996, 1995 and 1994, respectively. (3) The change in interest due to both volume and rates has been allocated in proportion to the relationship of the absolute dollar amounts of the change in each. The changes in income and expense are calculated independently for each line in the schedule. The totals for the volume and rate columns are not the sum of the individual lines. estate-commercial mortgage loan category declined $135 million, reflecting the continued successful efforts of the Company to reduce its commercial real estate exposure. Investment securities declined from a $323.9 million average for 1995, on a pro forma basis, reflecting the reclassification of all of the Company's investment securities to securities available for sale in December, 1995, as allowed by implementation guidance for SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Average securities available for sale increased $708 million from 1995. A portion of this increase resulted from the reclassification noted above. See a more detailed discussion of Earning Assets elsewhere in this Report. Average interest bearing liabilities rose 8% to $8.7 billion for 1996, up from $8.1 billion for 1995, on a pro forma basis. Declines in savings accounts and other short-term borrowings were more than offset by growth in interest bearing demand, savings certificates, large denomination certificates, and foreign deposit categories as well as federal funds and repurchase agreements and long-term borrowings. Savings accounts included deposits held on behalf of Capital One as collateral for Capital One's secured card product until the end of June, 1996. Approximately $462 million of these deposits were transferred to another financial institution in the first quarter of 1996 and the remaining $237 million were transferred to Capital One at the end of the second quarter of 1996. In 1996, average core deposits of $7.3 billion rose 3% from the prior year and represented 72% of average earning assets and 123% of average loans. Non-interest bearing demand deposits rose 4%, on average, during 1996. See a more comprehensive discussion of Funding elsewhere in this Report. The net interest spread of 4.14% for 1996 fell from the 4.44% reported for the previous year, on a pro forma basis. The decline resulted from funding rates falling more slowly than the decline in yields on earning assets. One reason funding rates fell more slowly than the yields on earning assets is that Signet is using its direct mail expertise to grow core deposits, some of which offer a relatively high interest rate initially. The overall yield on earning assets for 1996 was 8.32%, down 36 basis points from 1995, while the rate paid for interest bearing liabilities amounted to 4.18%, down only 6 basis points from the previous year. The net yield margin fell 34 basis points in 1996 to 4.73% from 5.07% for 1995, on a pro forma basis. The drop in the net yield margin was the net result of several factors, as analyzed in Table 3. An approximate basis point impact was calculated for each item noted. Signet uses various off-balance sheet interest rate derivatives as an integral part of its asset and liability management and trading activities. For Signet, variable rate assets generally exceed variable rate liabilities. To manage the resulting interest rate risk, Signet enters into derivative transactions. Derivative contracts, used for interest rate risk management purposes, (decreased)/increased interest on earning assets by ($6.7) million, 20 TABLE 3 ANALYSIS OF CHANGE IN NET YIELD MARGIN -- 1996 VERSUS 1995 (excluding Capital One) - ------------------------------------------------------------- Net yield margin for the year ended December 31, 1995 5.07% Higher average securities (securities available for sale and investment securities combined) (0.13) Lower yield on loans held for securitization (0.08) Higher average commercial loans (0.07) Lower average and yield on consumer loans (0.06) Higher average/decline in yield on Federal funds and resale agreements -- net (0.05) Lower funding costs 0.05 - ------------------------------------------------------------- Net yield margin for the year ended December 31, 1996 4.73% ============================================================= ($14.0) million and $13.4 million and decreased borrowing costs by $16.0 million, $20.3 million and $39.0 million for 1996, 1995 and 1994, respectively. The overall increase in the net yield margin as a result of these instruments amounted to 9, 5 and 52 basis points for 1996, 1995 and 1994, respectively. For a more detailed description and discussion of derivative income and expense impact on net income, refer to the Derivatives and Other Off-Balance Sheet Risk section elsewhere in this Report. Loan securitizations also have an effect on net interest income and the net yield margin. For a detailed analysis of this effect, see the discussion of Consumer Loan Growth and Table 11 elsewhere in this Report. Provision and Allowance for Loan Losses (on a pro forma basis) The provision for loan losses is the periodic expense of maintaining an adequate allowance to absorb anticipated future losses, net of recoveries, in the existing loan portfolio. In evaluating the adequacy of the provision and the allowance for loan losses, management takes into consideration several factors including national and local economic trends and conditions; weighted average historical losses; trends in delinquencies, bankruptcies and non-performing loans; trends in watch list growth/reduction; off-balance sheet credit risk; known deterioration and concentrations of credit; effects of any changes in lending policies and procedures; credit evaluations; and the experience and ability of lending management and staff. Commercial and real estate loan charge-offs are recorded when any loan or portions of loans are determined to be uncollectible. Consumer loans, other than credit card, typically are charged off when they are six months past due, while credit card loans are typically charged off when they are six months past due and a minimum payment has not been received for 60 days. Consumer loans are also charged off when the customer declares bankruptcy. Once a loan has been charged off, Signet continues to pursue the collection of principal and interest. Table 4 provides a four-year comparison of activity in the pro forma allowance for loan losses along with details by loan category of the charge-offs and recoveries. The provision for loan losses totaled $73.9 million for 1996 compared with $34.8 million in 1995. The increase resulted primarily from growth and increased losses in the loan-by-check portfolio, primarily from loans from 1995 and early 1996 solicitations as they matured. Net charge-offs rose to $66.8 million for 1996, compared with $50.0 million for the prior year. In 1995, $13.9 million of the charge-offs resulted from the bulk sale of commercial real estate related loans for which there was sufficient allowance already established. These sales were part of Signet's strategy to reduce its overall commercial real estate exposure. Commercial loan net charge-offs increased slightly when comparing 1996 with 1995 due to a higher level of recoveries in 1995. Strong credit quality and the generally favorable economic climate kept the commercial loan net charge-offs at a relatively low amount. The 1995 commercial loan charge-offs included $1.3 million related to the loan sale in the second quarter. Consumer loan net charge-offs rose in 1996 as Signet experienced a $7.5 million rise in loan-by-check risk test charge-offs and a $20.8 million increase in other loan-by-check charge-offs. The loan-by-check risk test charge-offs were on loans generated from direct mail solicitations in late 1994 as Signet ran controlled tests to determine the criteria to be used in future loan-by-check solicitations. See footnote 1 to Table 4 for more detailed information on the loan-by-check charge-offs. The allowance for loan losses at December 31, 1996 was $136.7 million, or 2.15% of year-end loans, compared with the 1995 year-end allowance of $129.7 million, or 2.39% of loans. The 1996 year-end allowance for loan losses equated to 4.8 times year-end non-performing loans and 3.5 times year-end non-performing assets, up from December 31, 1995 when the allowance for loan losses amounted to 3.4 times non-performing loans and 2.4 times non-performing assets. The rise in the level of the allowance reflected a higher allocation for the growing consumer loan portfolio, primarily in the loan-by-check category. Signet's allocated allowance for loan losses for all loan categories is detailed in Table 5. Management allocates a specific amount to classified commercial and real estate loans which are individually reviewed. Classified loans represent those loans in which contractual repayment of principal and interest is questionable. The credit worthiness of the borrower, the adequacy of the underlying collateral and the impact of business and economic conditions upon the borrower are all evaluated monthly. These factors lead to the risk ratings applied to these loans which assist in the related allowance allocation. The consumer loan portfolio receives an overall allocation based on such factors as current and anticipated economic conditions, historical charge-off and recovery rates and trends in delinquencies. Signet separates consumer loan portfolios into homogeneous segments, and forecasts losses based on the projected migration of delinquent accounts within each segment. 21 TABLE 4 CHANGES IN ALLOWANCE FOR LOAN LOSSES (excluding Capital One)
- ----------------------------------------------------------------------------------------------------------------------- Year Ended December 31 - ----------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- Balance at beginning of year $129,702 $152,003 $189,797 $209,543 Provision for loan losses 73,851 34,786 (16,229) 13,256 Transfer to loans held for securitization/sale (7,132) Addition arising from acquisition 3,327 Loans charged-off: Consumer (1) 54,332 32,386 2,652 1,850 Commercial 3,647 5,740 9,827 17,832 Real estate-construction 6,033 1,143 9,746 26,890 Real estate-mortgage(2) 7,542 18,627 20,360 5,720 - ----------------------------------------------------------------------------------------------------------------------- Total loans charged-off 71,554 57,896 42,585 52,292 Recoveries of loans previously charged-off: Consumer(1) 1,994 1,509 1,101 1,338 Commercial 1,884 4,570 5,997 13,138 Real estate-construction 311 1,496 6,037 4,259 Real estate-mortgage(2) 519 366 4,558 555 - ----------------------------------------------------------------------------------------------------------------------- Total recoveries 4,708 7,941 17,693 19,290 - ----------------------------------------------------------------------------------------------------------------------- Net loans charged-off 66,846 49,955 24,892 33,002 - ----------------------------------------------------------------------------------------------------------------------- Balance at end of year $136,707 $129,702 $152,003 $189,797 ======================================================================================================================= Net charge-offs to average loans: Consumer 2.51% 1.39% 0.10% 0.04% Commercial 0.06 0.04 0.18 0.22 Real estate 1.55 1.95 2.15 2.45 - ----------------------------------------------------------------------------------------------------------------------- Total 1.13% 0.87% 0.55% 0.75% - ----------------------------------------------------------------------------------------------------------------------- Allowance for loans losses to net loans at year-end 2.15% 2.39% 2.67% 4.27% ======================================================================================================================= (1) Consumer includes loan-by-check net charge-offs as noted below: Loan-by-check risk tests $ 24,229 $ 16,763 $ 8 Other loan-by-check 24,334 3,575 222 - ----------------------------------------------------------------------------------------------------------------------- Total loan-by-check net charge-offs $ 48,563 $ 20,338 $ 230 - ----------------------------------------------------------------------------------------------------------------------- Average loan-by-check: Loan-by-check risk tests $126,789 $211,192 $25,795 Other loan-by-check 678,672 218,401 33,749 - ----------------------------------------------------------------------------------------------------------------------- Total loan-by-check $805,461 $429,593 $59,544 - ----------------------------------------------------------------------------------------------------------------------- Net loan losses as a percentage of average Loans-by-check: Loan-by-check risk tests 19.11% 7.94% 0.03% Other loan-by-check 3.59 1.64 0.66 - ----------------------------------------------------------------------------------------------------------------------- Total loan-by-check 6.03% 4.73% 0.39% =======================================================================================================================
(2) Real estate-mortgage includes real estate-commercial mortgage and real estate-residential mortgage. Real estate-residential mortgage charge-offs and recoveries were not significant for the periods presented. TABLE 5 ALLOWANCE FOR LOAN LOSSES ALLOCATION (excluding Capital One)
- ---------------------------------------------------------------------------------------------------------------------------- December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993 ----------------------- ----------------------- ---------------------- ----------------------- Percentage of Percentage of Percentage of Percentage of Loans in Each Loans in Each Loans in Each Loans in Each Allowance Category to Allowance Category to Allowance Category to Allowance Category to (dollars in thousands) Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans - ---------------------------------------------------------------------------------------------------------------------------- Consumer $ 79,592 34.96% $ 49,825 31.45% $ 25,577 41.22% $ 3,514 27.59% Commercial 30,741 52.45 26,367 55.52 34,041 42.74 33,618 51.05 Real estate* 21,326 12.59 40,123 13.03 60,532 16.04 83,315 21.36 Unallocated 5,048 13,387 31,853 69,350 - ---------------------------------------------------------------------------------------------------------------------------- Total $136,707 100.00% $129,702 100.00% $152,003 100.00% $ 189,797 100.00% ============================================================================================================================
* Real estate loans include real estate-construction, real estate-commercial mortgage and real estate-residential mortgage loans. Real estate-residential has an insignificant amount of allowance allocated to it because of the minimal credit risk associated with that type of loan. 22 The remaining loan portfolios (unclassified commercial and real estate loans) are allocated allowance by applying historical loss information to the loan portfolios and taking into consideration other factors listed above. The overall allocation is not a prediction of future charge-off trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur since the total allowance is a general allowance applicable to the entire loan portfolio. Management continuously refines this process and believes that the allowance for loan losses is adequate to cover anticipated losses in the loan portfolio under current economic conditions. Non-Interest Income (on a pro forma basis) A significant portion of Signet's revenue is derived from non-interest related sources including service charges on deposit accounts, consumer loan servicing income and service charge income, trust and other financial services income and other income. Signet's business strategies continued to emphasize non-interest operating income sources. Table 6 details the various components of non-interest income for the past four years on a pro forma basis. Non-interest income for 1996 was $279.6 million, up 43% from $195.6 million for 1995 and included $5.0 million ($3.3 million after-tax) and $0.5 million ($0.3 million after-tax), for 1996 and 1995, respectively, of securities available for sale gains. Signet recognized nominal gains on investment securities during 1995, as certain securities were called for redemption. Non-interest operating income rose $80.8 million to $274.6 million for 1996, a 42% increase versus 1995. Several factors contributed to the increase. Consumer loan servicing income and service charge income, which includes ongoing gains and servicing income on securitized assets, rose $37.8 million, or 287%, from 1995 primarily due to an approximately $411 million increase in average securitized consumer loans since the prior year. Signet recognized a $9.3 million gain on the securitization of student loans in the fourth quarter of 1996 compared with a $9.6 million gain on the securitization of home equity loans during the fourth quarter of 1995. See Note P to Consolidated Financial Statements for more details on securitizations and this important source of non-interest income. Service charges on deposit accounts remained relatively level from year to year. Trust and other financial services income, which totaled $40.7 million, was up 26% from last year primarily due to a rise in annuity product commissions and mutual fund investment management fees. Mortgage servicing and origination income totaled $32.3 million for 1996 compared with $22.4 million in 1995, an increase of 44%, as a result of a rise in the volume of mortgage loans originated and purchases of mortgage loan servicing rights. During 1996, residential mortgage production totaled $1.1 billion, which was 44% higher than the 1995 level primarily due to a lower residential mortgage rate environment. However, in December, 1996, Signet sold its residential mortgage loan production offices resulting in a small gain. The Company will retain mortgage servicing activities. The Company's mortgage servicing portfolio grew to $7.3 billion at TABLE 6 NON-INTEREST INCOME (excluding Capital One)
- ------------------------------------------------------------------------------------------------------------------------ Percent Change Year Ended Increase Year Ended December 31 (Decrease) December 31 - ------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) 1996 1995 1996/1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------ Service charges on deposit accounts $67,709 $ 68,231 (1)% $ 66,141 $64,471 Consumer loan servicing income and service charge income 50,927 13,163 287 26,834 30,656 Trust and investment management income 40,729 32,340 26 28,085 24,702 Gain on securitization of loans 9,254 9,562 (3) Mortgage servicing and origination 32,303 22,429 44 18,661 24,210 Trading profits (losses) 29,279 11,969 145 (268) (1,396) Other service charges and fees 15,459 12,293 26 13,441 13,825 Gains (losses) on sale of mortgage loans 6,756 7,178 (6) (3,276) (3,987) Gain on sale of mortgage servicing 6,499 977 N/M 6,000 Intercompany reimbursements from Capital One N/M 26,378 27,524 Other 15,641 15,638 N/M 13,209 13,812 - ------------------------------------------------------------------------------------------------------------------------ Non-interest operating income 274,556 193,780 42 195,205 193,817 Securities available for sale gains 5,021 532 N/M 3,413 3,913 Investment securities gains 1,257 N/M 46 405 - ------------------------------------------------------------------------------------------------------------------------ Total non-interest income $279,577 $195,569 43% $198,664 $198,135 ========================================================================================================================
23 year-end 1996, up from $6.6 billion at December 31, 1995. Other service charges and fees, which consisted primarily of ATM fees ($4.1 million), fees related to commercial and standby letters of credit ($3.7 million), checkbooks ($3.2 million) and safe deposit box rentals ($2.3 million) totaled $15.5 million, up 26% versus 1995. Trading profits derived from services performed as a dealer bank for customers and from profits and losses earned on securities trading and securities arbitrage positions improved to $29.3 million for 1996 up from $12.0 million in 1995. Results from sales of mortgage loans experienced a decline from $7.2 million in 1995 to $6.8 million in 1996. The impact of adopting of SFAS No. 122 mentioned earlier and gains from the sale of approximately $29 million and $179 million adjustable rate mortgage loans in December 1996 and 1995, respectively, are recorded in this category. Gains on sales of mortgage servicing rights amounted to $6.5 million in 1996, a significant increase from $1.0 million in 1995. The remaining portion of non-interest operating income, which included venture capital income and miscellaneous income from other sources, amounted to $15.6 million for 1996, level with the prior year. Non-Interest Expense (on a pro forma basis) Non-interest expense for 1996 totaled $485.3 million, relatively the same as 1995. Excluding the 1995 fraud loss, non-interest expenses were up $35.8 million, or 8%, from the prior year primarily due to higher staff expense. Table 7 details the various categories of non-interest expense for the past four years on a pro forma basis. Signet's efficiency ratio (the ratio of non-interest expense to taxable equivalent operating income) was 64.58% for 1996, compared with 72.05% for 1995, on a pro forma basis. Excluding the fraud loss and foreclosed property expense from non-interest expense changes the ratio to 64.82% and 66.88% for the two respective years. As a result of ADVANCE, management expects an improvement in the efficiency ratio with an increase in revenues and a decline in expenses. The Company anticipates taking a restructuring charge in the second quarter of 1997 related to ADVANCE. Staff expense (salaries and employee benefits), the largest component of non-interest expense, totaled $254.9 million, a 13% increase from 1995. Staff expenses rose year-over-year primarily due to an increase in average full-time employees. From December 31,1995 to December 31, 1996, the number of full-time employees actually declined 3% as a result of Signet selling its mortgage production offices in December of 1996. Certain of the non-interest expense categories reflected the costs associated with increased business volume. The $4.1 million increase in supplies and equipment expense as well as the $5.4 million rise in external data processing expense were attributable to servicing the expanded consumer loan base. Public relations, sales and advertising expense rose $4.6 million, or 29%, to $20.5 million as Signet expanded its consumer loan solicitation programs. This strategy was implemented to increase account growth and outstandings and has required significant out-of-pocket expenses to launch large scale but carefully planned national solicitations. The Company's solicitation strategy, which uses extensive testing, is designed to improve the efficiency of the TABLE 7 NON-INTEREST EXPENSE (excluding Capital One)
- ---------------------------------------------------------------------------------------------------------------------------- Percent Change Year Ended Increase Year Ended (dollars in thousands) December 31 (Decrease) December 31 - ---------------------------------------------------------------------------------------------------------------------------- 1996 1995 1996/1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Salaries $ 213,120 $ 181,030 18% $ 186,216 $ 173,710 Employee benefits 41,807 44,014 (5) 50,039 55,492 - ---------------------------------------------------------------------------------------------------------------------------- Total staff expense 254,927 225,044 13 236,255 229,202 Supplies and equipment 40,280 36,170 11 34,045 32,587 Occupancy 38,335 38,484 N/M 41,869 39,094 External data processing services 32,473 27,115 20 27,660 27,344 Travel and communications 24,502 24,544 N/M 22,758 17,800 Commercial fraud loss 35,000 N/M Restructuring charge N/M 43,212 Public relations, sales and advertising 20,499 15,941 29 13,469 14,912 Professional services 14,412 16,176 (11) 16,905 14,096 Credit and collection 5,386 2,044 164 2,368 4,321 FDIC assessment 2,243 8,806 (75) 16,754 18,253 Foreclosed property-- net (1,830) (220) N/M (699) 13,575 Other 54,091 55,416 (2) 33,713 32,852 - ---------------------------------------------------------------------------------------------------------------------------- Total non-interest expense $ 485,318 $ 484,520 N/M % $ 488,309 $ 444,036 ============================================================================================================================
24 solicitation process, thereby improving opportunities to create value by controlling credit exposure and creating higher probabilities for successful growth. The success of this strategy is witnessed by the growth in the total managed consumer loan portfolio from $1.6 billion at December 31, 1993 to $3.4 billion at December 31, 1996. Professional services experienced a $1.8 million, or 11%, decline year-to-year. The $6.6 million, or 75%, drop in deposit insurance assessment from the Federal Deposit Insurance Corporation ("FDIC") reflects the decline in the rates charged by the FDIC effective June 1, 1995. Included in the 1996 FDIC assessment was a one-time $1.6 million charge for the Savings Association Insurance Fund recapitalization. Signet Bank is "well capitalized" under FDIC regulations and, as a result, pays the lowest FDIC insurance premium rate. Income Taxes (on a pro forma basis) Income tax expense for 1996 was $64.2 million as compared with $48.8 million for 1995. This represented an effective tax rate of 34.0% for 1996, relatively unchanged from the 33.8% for 1995. Note K to the Consolidated Financial Statements reconciles reported income tax expense to the amount computed by applying the federal statutory rate to income before income taxes. BALANCE SHEET REVIEW (on a pro forma basis) Earning Assets Average earning assets totaled $10.1 billion for 1996, as shown in Table 8--Average Balance Sheet, a 7% increase from the 1995 level. The portfolios experiencing the largest declines were investment securities ($324 million) and interest bearing deposits with other banks ($22 million), while the federal funds sold and securities purchased under agreements to resell, securities available for sale and the loan portfolios increased by $50 million, $708 million and $143 million, respectively. A more detailed discussion of the various earning asset categories follows. Loans Loans (net of unearned income) for 1996, averaged $5.9 billion, an increase of $143 million, or 2%, from the 1995 level. The securitization of $481 million of home equity loans in December 1995 had minimal impact on the 1995 average and therefore distorts the comparison of on-balance sheet loan balances. Including securitized assets and loans held for securitization, average managed loans grew $841 million, or 14%, from 1995 to 1996. Average balances increased in the commercial, real estate-construction and real estate-residential mortgage loan categories, while the consumer and real estate-commercial mortgage loan average balances declined. Consumer loan balances declined due to the securitizations. The composition of the loan portfolio has been significantly altered over the past few years by strong growth in commercial and consumer loans, reflecting positive response to Signet's innovative product offerings. In addition, Signet reduced its overall average commercial real estate loan exposure by $110 million during 1996. At year-end, Signet had no commercial loans outstanding to borrowers in the same or related industries which, in total, exceeded ten percent of total loans. Approximately half of the loan portfolio is secured, including all real estate related loans, leases, and a portion of the consumer and commercial loan portfolios. Signet reviews each of these prospective credits in order to determine an adequate level of security or collateral prior to making the loan. The type of collateral will vary and range from liquid assets to real estate. The Company's access to collateral, in the event of borrower default, is assured through adherence to lending laws and the Company's sound lending standards and credit monitoring procedures. The unsecured portion includes commercial, guaranteed student, loan-by-check and credit card loans. The various on-balance sheet loan categories for the past four year-ends are detailed in Table 9. Consumer loans averaged $2.1 billion for 1996, a 6% decline from 1995, and represented 35% of the total loan portfolio. The decline in the average balance was due to securitizing $481 million of home equity loans in December 1995. On a managed basis, consumer loans averaged $3.1 billion for 1996, a $565 million, or 22%, increase from 1995. This category consists of student, home equity, installment (primarily loan-by-check), credit card and other consumer loan types. The increase in managed consumer loans was concentrated in student loans and installment loans generated by Signet's information-based strategy. The growth was achieved through a variety of attractive products offered to carefully targeted customer segments. Table 12 illustrates the effectiveness of Signet's ability to implement growth strategies in the consumer loan markets in 1996. Risks faced by the Company include the possibility of (i) future economic downturns causing an increase in credit losses and (ii) an increasing number of consumers defaulting on payments or seeking protection under bankruptcy laws, resulting in accounts being charged off as uncollectible. Commercial loans, which represented 51% of the total average loan portfolio, averaged $3.0 billion for 1996, an increase of 14% from last year, as Signet successfully grew its leasing portfolio and targeted certain specialized industries. Signet's commercial loan portfolio is oriented toward a diverse group of middle market borrowers. These loans are predominately in the manufacturing, wholesaling, services and real estate industries. Signet also markets to certain specialized industries, such as media and health care. The specialized industries are targeted based on industry expertise along with prospects for profitability. The credit risk associated with middle market and 25 TABLE 8 AVERAGE BALANCE SHEET (excluding Capital One)
- --------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Average Income\ Yield\ Average Income\ Yield\ Average Income\ Yield\ (dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate - --------------------------------------------------------------------------------------------------------------------------- Assets Earning assets (tax equivalent basis):(1) Interest bearing deposits with other banks $ 9,659 $ 486 5.03% $31,649 $1,903 6.01% $249,866 $ 11,441 4.58% Federal funds and resale agreements 637,131 35,172 5.52 587,333 35,452 6.04 920,591 42,279 4.59 Trading account securities 512,798 32,460 6.33 476,361 30,800 6.47 287,192 21,487 7.48 Loans held for securitization 303,499 25,027 8.25 303,123 32,316 10.66 Loans held for sale 309,362 30,631 9.90 253,758 23,757 9.36 200,712 13,010 6.48 Securities available for sale 2,414,209 179,078 7.42 1,705,966 125,492 7.36 1,327,896 72,826 5.48 Investment securities-taxable 208,711 15,055 7.21 65,350 4,305 6.59 Investment securities-nontaxable 115,221 13,614 11.82 197,231 23,895 12.12 Loans (net of unearned income):(2) Consumer 2,081,167 225,491 10.83 2,213,646 244,485 11.04 1,497,056 128,570 8.59 Commercial 3,002,766 238,232 7.93 2,633,370 209,765 7.97 2,148,726 165,372 7.70 Real estate-construction 249,261 24,202 9.71 224,597 23,263 10.36 249,353 21,007 8.42 Real estate-commercial mortgage 317,232 29,280 9.23 452,392 44,275 9.79 560,542 50,254 8.97 Real estate-residential mortgage 258,013 19,577 7.59 241,038 19,992 8.29 97,855 8,399 8.58 - --------------------------------------------------------------------------------------------------------------------------- Total loans 5,908,439 536,782 9.09 5,765,043 541,780 9.40 4,553,532 373,602 8.20 - --------------------------------------------------------------------------------------------------------------------------- Total earning assets 10,095,097 $839,636 8.32% 9,447,165 $820,169 8.68% 7,802,370 $562,845 7.21% - --------------------------------------------------------------------------------------------------------------------------- Non-rate related assets: Cash and due from banks 496,627 522,774 493,490 Allowance for loan losses (128,504) (138,655) (175,199) Premises and equipment (net) 194,315 172,119 189,894 Other assets 706,729 603,964 528,153 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $11,364,264 $10,607,367 $8,838,708 ============================================================================================================================ Liabilities and Stockholders' Equity Interest bearing liabilities: Deposits: Interest bearing demand $2,625,049 $ 82,207 3.13% $2,395,017 $74,086 3.09% $2,639,388 $ 67,694 2.56% Savings accounts 884,829 28,031 3.17 1,283,696 48,738 3.80 1,019,068 33,461 3.28 Savings certificates 2,166,840 102,204 4.72 1,852,542 81,345 4.39 1,981,823 66,352 3.35 Large denomination certificates 161,674 9,083 5.62 105,390 5,498 5.22 159,027 7,382 4.64 Foreign 151,474 8,238 5.44 106,029 6,347 5.99 86,657 4,422 5.10 - ---------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 5,989,866 229,763 3.84 5,742,674 216,014 3.76 5,885,963 179,311 3.05 Federal funds and repurchase agreements 2,385,502 114,688 4.81 2,003,775 105,290 5.25 68,041 3,213 4.72 Other short-term borrowings 55,654 3,174 5.70 74,286 4,896 6.59 Long-term borrowings 294,741 18,201 6.18 253,319 17,021 6.72 254,917 16,685 6.55 - ---------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 8,670,109 362,652 4.18% 8,055,422 341,499 4.24% 6,283,207 204,105 3.25% - ---------------------------------------------------------------------------------------------------------------------------- Non-interest bearing liabilities: Demand deposits 1,599,048 1,538,928 1,549,629 Other liabilities 224,646 205,342 187,995 Common stockholders' equity 870,461 807,675 817,877 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $11,364,264 $10,607,367 $8,838,708 ============================================================================================================================ Net interest income /spread $476,984 4.14% $478,670 4.44% $ 358,740 3.96% - ---------------------------------------------------------------------------------------------------------------------------- Interest income to average earning assets 8.32% 8.68% 7.21% Interest expense to average earning assets 3.59 3.61 2.62 - ---------------------------------------------------------------------------------------------------------------------------- Net yield margin 4.73% 5.07% 4.59% ============================================================================================================================
(1) Includes the effects of taxable equivalent adjustments, using the federal income tax rate and state tax rates, as applicable, reduced by the nondeductible portion of interest expense. (2) For the purpose of these computations, nonaccrual loans are included in the daily average loan amounts. Also, interest income includes fees on loans of approximately $19,673, $19,322 and $14,019 for 1996, 1995 and 1994, respectively. 26 TABLE 9 SUMMARY OF TOTAL LOANS (excluding Capital One)
- ---------------------------------------------------------------------------------------- December 31 - ---------------------------------------------------------------------------------------- (in thousands) 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------- Loans: Consumer $2,300,558 $1,751,274 $2,384,178 $1,243,080 Commercial 3,451,230 3,090,904 2,472,620 2,299,973 Real estate--construction 244,653 236,103 209,183 309,842 Real estate--commercial mortgage 254,060 366,698 526,956 581,529 Real estate--residential mortgage 329,466 122,584 191,508 71,411 - ---------------------------------------------------------------------------------------- Total $6,579,967 $5,567,563 $5,784,445 $4,505,835 ========================================================================================
specialized industry borrowers is principally influenced by general economic conditions and the resulting impact on the borrower's operations. In addition, the Company faces the risk of diminishing collateral values. Collateralization for commercial loans primarily consists of liquid assets, trading assets and capital assets, and is determined on a case-by-case basis. Real estate-construction loans averaged $249 million, an increase of 11%, or $25 million, from the 1995 average. This category represented less than 5% of the average loan portfolio for 1996. During 1996 and 1995, the Company sold portfolios of real estate related loans totaling $43 million and $55 million, respectively. The 1995 sale accounted for approximately $13.9 million of net charge-offs. The real estate loan sales impacted the real estate-construction loan ($6 million in 1995) and real estate-commercial mortgage loan ($43 million in 1996 and $49 million in 1995) categories. The credit risk associated with real estate lending is principally influenced by real property markets and the resulting impact on the borrower's operations. A primary risk associated with the real estate business involves the possibility of future economic downturns in the real property markets causing an increase in credit losses. Signet maintains loan-to-value maximums of 80% for construction and commercial mortgage loans. The maximum loan-to-value collateral limits have been established to meet the Company's goals in targeting percentages based on diversification strategy, market conditions and economic conditions. Real estate-commercial mortgage loans represented less than 6% of the average loan portfolio in 1996. This category averaged $317 million, a 30% decline from 1995. The portfolio consisted of $198 million of commercial mortgage loans and $119 million of mini-permanent (interim) mortgage loans compared with $254 million and $198 million for the respective loan types in 1995. Construction loans typically are converted to mini-permanent mortgage loans when the related project is generating sufficient cash to cover debt service, and permanent financing, for various reasons, is not desired or obtainable at the present time. Real estate-commercial mortgage loans decreased partially as a result of the sale of approximately $43 million in 1996 and $49 million in 1995 of these loans. Real estate-residential mortgage loans increased $17 million, or 7%, from 1995 to average $258 million even though Signet sold approximately $179 million of adjustable rate residential mortgage loans in December, 1995 and an additional $27 million in December, 1996. The 1995 sale resulted in a $3.1 million gain as management anticipated a rise in prepayments on this portfolio as rates declined. It is the Company's policy to maintain average loan-to-value maximums of 85% for real estate-residential mortgages. Loans above 80% have mortgage insurance. Table 10 shows the maturities of selected loan categories at year-end 1996. Loans, as a result of maturities, monthly payments, sales and securitizations, provide an important source of liquidity. See discussion on Liquidity elsewhere in this Report. Unused loan commitments related primarily to commercial loans TABLE 10 MATURITIES OF SELECTED LOANS December 31, 1996
- ------------------------------------------------------------------------------------------------- Maturing - ------------------------------------------------------------------------------------------------- Within After One Year But After (in thousands) One Year Within Five Years Five Years Total - ------------------------------------------------------------------------------------------------- Commercial $1,145,696 $1,548,857 $756,677 $3,451,230 Real estate--construction 139,870 104,320 463 244,653 Real estate--commercial mortgage 82,826 103,326 67,908 254,060 - ------------------------------------------------------------------------------------------------- Total $1,368,392 $1,756,503 $825,048 $3,949,943 =================================================================================================
For interest sensitivity purposes, $1,288,845 of the amounts due after one year are fixed rate loans and $1,292,706 are variable rate loans. 27 and excluding credit card loans were approximately $3.2 billion at year-end 1996, up from $2.7 billion at year-end 1995. Consumer Loan Growth In 1994, Signet expanded its use of information-based strategies which significantly increased growth in the consumer loan portfolio. This technique involved generating a data base of potentially creditworthy customers for particular products and then following up with direct mail solicitations. Much of the growth was in a new product, loan-by-check, whereby customers received a direct-mail solicitation in the form of a check for a specified loan amount. To activate the loan, customers simply endorse and present the check at their local bank. Signet also is beginning to apply information-based strategies to home equity, student and small business loans. Solicitations in these areas are in testing stages. These tests are designed to help Signet develop products that are both appealing to customers and economically profitable for the Company. As a result of these solicitations, from December 31, 1994 to December 31, 1996, the installment loan portfolio (primarily loan-by-check) grew $635 million; the student loan portfolio (including $395 million of securitized loans) increased $303 million; and the home equity loan portfolio (including $407 million of securitized loans) was up $77 million. During the second quarter of 1996, management delayed some of its national marketing programs in order to examine market conditions and further calibrate the models used for targeting customers. Signet focused its efforts on improving product design and delivery and on developing new customer management techniques to improve account profitability. TABLE 11 IMPACT OF CONSUMER LOAN SECURITIZATIONS (excluding Capital One)
- ------------------------------------------------------------------------------------------------------------------------ Year Ended December 31 - -------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- Statement of Income Net interest income $ 468,760 $ 468,067 $ 345,034 $ 337,477 Provision for loan losses 73,851 34,786 (16,229) 13,256 Non-interest income 279,577 195,569 198,664 198,135 Non-interest expense 485,318 484,520 488,309 444,036 - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 189,168 $ 144,330 $ 71,618 $ 78,320 ========================================================================================================================== Adjustments for Securitizations Net interest income $ 48,401 $ 31,734 $ 42,722 $ 45,789 Provision for loan losses 10,291 11,709 15,106 17,642 Non-interest income (45,716) (29,587) (27,616) (28,147) Non-interest expense - -------------------------------------------------------------------------------------------------------------------------- Increase (decrease) to income before income taxes $ (7,606) $ (9,562) $ 0 $ 0 ========================================================================================================================== Adjustments for Loans To Be Sold to Capital One Net interest income $ (8,379) $ (9,559) $ (2,638) $ 0 Provision for loan losses 0 (18,522) (1,043) 0 Non-interest income 8,379 (8,963) 1,595 0 Non-interest expense - -------------------------------------------------------------------------------------------------------------------------- Increase (decrease) to income before income taxes $ 0 $ 0 $ 0 $ 0 ========================================================================================================================== Managed Statement of Income (adjusted) Net interest income $ 508,782 $ 490,242 $ 385,118 $ 383,266 Provision for loan losses 84,142 27,973 (2,166) 30,898 Non-interest income 242,240 157,019 172,643 169,988 Non-interest expense 485,318 484,520 488,309 444,036 - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 181,562 $ 134,768 $ 71,618 $ 78,320 ========================================================================================================================== As reported (excluding Capital One): Average earning assets $10,095,097 $9,447,165 $7,802,370 $8,339,320 Return on assets 1.10% 0.90% 0.63% 0.69% Net yield margin 4.73% 5.07% 4.59% 4.24% On a managed basis: Average earning assets $10,658,885 $9,338,467 $8,089,158 $8,659,320 Return on assets 1.01% 0.85% 0.61% 0.66% Net yield margin 4.85 5.36 4.93 4.61 Yield on managed consumer loan portfolio 10.95% 10.90% 10.03% 10.15% ==========================================================================================================================
28 In order to facilitate the growth in the consumer loan portfolio, the Company has securitized portions of the portfolio. Table 11 indicates the impact of securitizations on income, average assets, return on assets and net yield margin for the past four years. Securitization is an off-balance sheet funding technique which transforms a pool of loans into marketable securities. The loans are generally transferred to a trust and interests in the trust are sold to public or private investors for cash. In a securitization, the gain on the initial sale of the loans is limited to the loans existing at the date of sale and should not include amounts related to future loans to be sold according to the terms of the securitization agreements. For loans with a relatively short life (such as credit card receivables), no gain or loss is recorded at the time of sale. Rather, the net of interest income, fee income, charge-offs and the investors' coupon payments becomes servicing income for Signet and is recorded each month as earned. Therefore, amounts that would previously have been reported as interest income, loan service charges and provision for loan losses are instead reported in non-interest income as consumer loan servicing income. The change in the method of income recognition has a minimal impact on the Company's earnings. Because loan losses are absorbed against these cash flows, the Company's consumer loan servicing income over the term of the transaction may vary depending upon the credit performance of the securitized loans. However, the Company's exposure is generally contractually limited to these cash flows. For loans with a longer average life (such as equity lines of credit and student loans), a gain is recorded at the time of sale equal to the present TABLE 12 MANAGED CONSUMER LOAN PORTFOLIO (excluding Capital One)
- ----------------------------------------------------------------------------------------------------------------------- December 31 - ----------------------------------------------------------------------------------------------------------------------- (in thousands) 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- Average balances: Installment loans $1,036,642 $697,660 $268,928 $221,699 Student loans 785,198 784,423 649,520 409,371 Home equity loans 135,954 411,364 462,315 452,789 Credit card 59,649 234,706 30,822 Other loans 63,724 85,493 85,471 68,198 - ----------------------------------------------------------------------------------------------------------------------- Sub-total average consumer loan portfolio 2,081,167 2,213,646 1,497,056 1,152,057 - ----------------------------------------------------------------------------------------------------------------------- Consumer loans held for sale 148,592 124,056 Credit card loans held for securitization 7,598 68,465 Home equity loans held for securitization 82,603 Student loans held for securitization 295,901 152,055 - ----------------------------------------------------------------------------------------------------------------------- Total average on-balance sheet portfolio 2,533,258 2,640,825 1,497,056 1,152,057 Securitized home equity loans 441,048 34,242 Securitized student loans 5,382 Securitized credit card loans 265,950 267,116 335,007 320,000 - ----------------------------------------------------------------------------------------------------------------------- Total securitized consumer loans 712,380 301,358 335,007 320,000 Less loans to be sold to Capital One (148,592) (410,056) (48,219) - ----------------------------------------------------------------------------------------------------------------------- Total average managed consumer loan portfolio $3,097,046 $2,532,127 $1,783,844 $1,472,057 ======================================================================================================================= Period-end balances: Installment loans $1,212,492 $810,999 $577,105 $225,766 Student loans 756,340 709,583 848,099 526,730 Home equity loans 181,879 87,348 511,947 434,101 Credit card 69,287 81,532 339,270 Other loans 80,560 61,812 107,757 56,483 - ----------------------------------------------------------------------------------------------------------------------- Sub-total period-end consumer loan portfolio 2,300,558 1,751,274 2,384,178 1,243,080 - ----------------------------------------------------------------------------------------------------------------------- Consumer loans held for sale 240,902 Credit card loans held for securitization 89,700 Student loans held for securitization 300,000 - ----------------------------------------------------------------------------------------------------------------------- Total period-end on-balance sheet portfolio 2,300,558 2,381,876 2,384,178 1,243,080 Securitized home equity loans 406,776 480,702 Securitized student loans 394,691 Securitized credit card loans 263,889 185,000 428,333 320,000 - ----------------------------------------------------------------------------------------------------------------------- Total securitized consumer loans 1,065,356 665,702 428,333 320,000 Less loans to be sold to Capital One (240,902) (517,295) - ----------------------------------------------------------------------------------------------------------------------- Total period-end managed consumer loan portfolio $3,365,914 $2,806,676 $2,295,216 $1,563,080 =======================================================================================================================
29 value of the anticipated future net cash flows. For revolving transactions other than credit card, gains are also recorded on subsequent sales. Management intends to continue this securitization strategy in the future. The managed consumer loan portfolio is comprised of consumer loans, consumer loans held for securitization and securitized consumer loans, less loans to be sold to Capital One in accordance with previously agreed upon terms of the spin-off. Securitized consumer loans are not assets of the Company and, therefore, are not shown on the balance sheet. Signet's managed consumer loan portfolio increased by $559 million, or 20%, from December 31, 1995 to December 31, 1996, as indicated in Table 12. Securities The securities portfolio consists of trading account securities, securities available for sale and investment securities. If the Company has the positive intent and ability to hold securities until maturity, they are classified as investment securities and carried at amortized historical cost. Otherwise, securities are classified either as available for sale, which are carried at market with unrealized gains and losses recorded through adjustments to stockholders' equity, or as trading account securities and carried at market with unrealized gains and losses recorded through earnings, depending on management's asset/liability strategy, liquidity needs or objectives. The accounting policy for securities is described in Note A to Consolidated Financial Statements. In December, 1995, Signet reclassified the entire investment securities portfolio to the available for sale category. Investment securities for 1995 averaged $324 million. At December 31, 1996, trading account securities consisted of $510 million of government securities, $34 million of asset-backed securities and $2 million of other securities which includes derivative contracts. Trading account securities averaged $513 million in 1996, up 8% from the $476 million level in 1995. Securities available for sale are used as part of management's asset/liability strategy and may be sold in response to changes in interest rates, resultant prepayment risk and other factors dictated by the strategy. These securities consist principally of U.S. Treasury and mortgage-backed securities. All mortgage-backed securities are subject to prepayment risk since the mortgages related to these securities can prepay at any time without penalty. This risk occurs when interest rates decline, causing the securities to lose value since the term and, therefore, the interest stream of the securities has shortened due to prepayments. The fixed rate mortgage-backed and treasury securities are subject to interest rate risk. Therefore, when interest rates fall, these fixed rate securities gain value. At December 31, 1996, the net unrealized gains, net of tax, related to securities available for sale, totaled $15.1 million, down from $45.2 million at the prior year-end, primarily from a decline in the value of mortgage-backed securities and U.S. Treasury obligations due to rising interest rates. Securities available for sale for 1996 averaged $2.4 billion, an increase of $708 million over the 1995 level, on a pro forma basis. Approximately $233 million of securities were reclassified from investment securities to securities available for sale in December, 1995, as noted above. The U.S. Treasury securities portfolio totaled $302 million at year-end 1996, down from $574 million at the end of 1995. At December 31, 1996, the securities available for sale portfolio (excluding securities having no maturity) had a remaining average maturity of approximately six years and unrealized gains of $28.3 million and unrealized losses of $9.8 million. The average life of the mortgage-backed securities portfolio extended approximately two years from last year-end due to prepayment assumptions related to an increase in long-term Treasury rates. When rates rise, prepayments decline and the average life is extended. Table 13 shows the maturities of the securities available for sale portfolio and the weighted average yields to maturity of such securities. At December 31, 1996, all CMOs and mortgage-backed pass-through securities held by Signet were issued or backed by federal agencies. At the end of the past two years, Signet did not have any investments with a single issuer (except for TABLE 13 SECURITIES AVAILABLE FOR SALE December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------ Maturities - ------------------------------------------------------------------------------------------------------------------------------------ Within 1 Year 1-5 Years 6-10 Years After 10 Years Total (dollars in thousands) Fair Value Yield Fair Value Yield Fair Value Yield Fair Value Yield Fair Value Yield - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Government and agency obligations -- Mortgage-backed securities $ 25,616 7.12% $203,344 8.38% $1,906,462 7.43% $2,135,422 7.52% Other 175,570 6.80 76,398 7.02 50,352 7.01 302,320 6.89 States and political subdivisions 11,968 10.09 6,695 11.66 4,121 11.17 22,784 10.75 Other 13,369 6.76 63,845 6.98 $85,540 6.88% 162,754 6.28 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 226,523 7.01% $350,282 7.89% $1,960,935 7.43% $85,540 6.88% $2,623,280 7.40% ====================================================================================================================================
The yields shown are actual weighted average interest rates at year-end on a taxable equivalent basis using the federal income tax rate and state tax rates, as applicable, reduced by the nondeductible portion of interest expense. 30 U.S. Government and agency obligations which are separately disclosed in this Report) which aggregated greater than ten percent of stockholders' equity. Other Earning Assets Other earning assets are comprised of interest bearing deposits with other banks, federal funds sold and securities purchased under agreements to resell, loans held for securitization and loans held for sale. Included in the loans held for sale category were loans held by Signet on behalf of Capital One under previously agreed upon terms of the spin-off. By the end of the third quarter of 1996, all of these loans had transferred to Capital One. Other earning assets averaged $1.3 billion in 1996, up $84 million, or 7%, from $1.2 billion in 1995, on a pro forma basis. These earning assets reflect the normal process of balancing Signet Bank's reserve position; dealer activities, in which money market instruments are bought and then sold to customers; and, for a short period of time, holding loans and/or securities to be sold in the secondary market. These investments are generally short-term, high quality and very liquid (see Liquidity discussion) and, consequently, have yields generally lower than loans or investment securities. The level of these investments can vary from year-to-year, as they are used to manage interest rate risk, to take advantage of short-term interest rate opportunities and provide liquidity. RISK ELEMENTS (on a pro forma basis) Non-Performing Assets Non-performing assets include non-accrual loans, restructured loans and foreclosed properties. Table 14 provides details on the various components of non-performing assets for the last four year-ends. Non-accrual loans are loans on which interest accruals have been suspended. Signet discontinues interest accruals on commercial and real estate loans when they become contractually past due 90 days as to principal or interest payments, or when other internal or external factors indicate that collection of principal or interest is doubtful. Occasionally, exceptions are made to this policy if supporting collateral is adequate and the loan is in the process of collection. Consumer loans, other than credit card, typically are charged off when they are six months past due, while credit card loans typically are charged off when the loan is six months past due and a minimum payment has not been received for 60 days; therefore, these loans are not usually placed in non-accruing status. See the discussion of risks associated with the consumer loan portfolio discussed in the Loans section. Restructured loans are loans on which a concession (such as a reduction in interest rate below the current market rate for new debt with similar risks) is granted to a borrower. Foreclosed properties are generated when Signet takes possession of the collateral. TABLE 14 NON-PERFORMING ASSETS(excluding Capital One)
- -------------------------------------------------------------------------------------- December 31 - -------------------------------------------------------------------------------------- (dollars in thousands) 1996 1995 1994 1993 - -------------------------------------------------------------------------------------- Non-accrual loans: Commercial $ 8,850 $ 9,033 $10,548 $42,303 Consumer 2,404 1,572 1,708 2,191 Real estate-construction 2,842 2,988 5,490 17,837 Real estate-mortgage* 14,207 24,888 7,310 6,523 - -------------------------------------------------------------------------------------- Total non-accrual loans 28,303 38,481 25,056 68,854 Restructured loans: Commercial 1,609 Real estate-construction 1,000 3,470 - -------------------------------------------------------------------------------------- Total restructured loans 1,000 5,079 - -------------------------------------------------------------------------------------- Total non-performing loans 28,303 38,481 26,056 73,933 Foreclosed properties 10,497 15,822 22,480 48,295 Less foreclosed property reserve (5,742) - -------------------------------------------------------------------------------------- Total foreclosed properties 10,497 15,822 22,480 42,553 - -------------------------------------------------------------------------------------- Total non-performing assets $38,800 $54,303 $48,536 $116,486 - -------------------------------------------------------------------------------------- Percentage to loans (net of unearned) and foreclosed properties 0.61% 1.00% 0.85% 2.59% Allowance for loan losses to: Non-performing loans 483.02% 337.05% 583.37% 256.71% Non-performing assets 352.34 238.85 313.18 162.94 ======================================================================================
* Real estate-mortgage includes real estate-commercial mortgage and real estate-residential mortgage. Real estate-residential mortgage non-accrual loans were not significant for the periods presented. 31 Non-performing assets at year-end 1996 totaled $38.8 million, or 0.61 % of loans and foreclosed properties. This compares with $54.3 million, or 1.00 %, respectively, at the end of 1995. Overall non-performing real estate assets declined $16.2 million during the year, including $5.3 million of foreclosed properties. Foreclosed properties totaled $10.5 million at the end of 1996, and were equal to 27% of total non-performing assets and 38% of non-performing real estate assets. Signet sold $11.0 million of foreclosed properties during 1996. Accruing loans past due 90 days or more as to principal or interest payments totaled $71.4 million and $66.4 million at the end of 1996 and 1995, respectively. The details of these past due loans are displayed in Table 15. The past due commercial and real estate loans were in the process of collection and were adequately collateralized. Also, more than 99% of the 1996 past due student loans were indirectly government guaranteed and do not represent material loss exposure to Signet. At year-end 1996, management was monitoring $29.1 million of loans for which the ability of the borrower to comply with present repayment terms was uncertain. These loans were not included in the Table 15 disclosure. They are followed closely, and management at present believes that the allowance for loan losses is adequate to cover anticipated losses that may be attributable to these loans. Interest recorded as income on year-end non-accrual and restructured loans was $0.7 million, $0.9 million and $0.5 million for 1996, 1995 and 1994, respectively, compared with interest income of $3.1 million, $4.1 million and $3.4 million for the same periods which would have been recorded had these loans performed in accordance with their original terms. The pre-tax costs of carrying (funding) an average of $16.8 million of foreclosed properties in 1996, $15.0 million in 1995 and $34.1 million in 1994 were approximately $0.7 million, $0.6 million and $1.1 million, respectively, when calculated by applying an average annual cost of funds to the outstanding balance. These amounts have been calculated using historical rates, and may not necessarily reflect improved earnings on a prospective basis, as these funds may be reemployed at different rates. FUNDING (on a pro forma basis) Deposits Signet offers a diverse range of products including interest bearing and non-interest bearing demand, savings and certificates of deposits, both domestic and foreign. The Company competes for deposits with other commercial banks, savings banks, savings and loan associations, the bond and stock market and other providers of non-bank financial services, including money market funds, credit unions, mutual funds and other deposit gathering institutions. Average deposits totaled $7.6 billion for 1996, up 4% from 1995. Core deposits averaged $7.3 billion for 1996, up 3% from 1995. These deposits represent Signet's largest and most important funding source due to their relatively low cost and reasonably stable nature. This source of funding also enhances the Company's overall liquidity position. The only core deposit category which experienced a decline was savings, which fell $399 million. Savings accounts included deposits held on behalf of Capital One as collateral for Capital One's secured card product until the end of June, 1996. Approximately $462 million of these deposits were transferred to another financial institution in the first quarter of 1996 and the remaining $237 million were transferred to Capital One at the end of the second quarter of 1996. These transfers caused the decline in average savings accounts. Non-interest bearing demand deposits rose $60 million, interest bearing demand increased $230 million and savings certificates were up $314 million. Signet is using its direct mail expertise to grow core deposits. At December 31, 1996, a total of approximately $515 million of interest bearing demand deposits had been obtained in that manner. The competition among financial institutions for these deposits and increased consumer awareness TABLE 15 ACCRUING LOANS PAST DUE 90 DAYS OR MORE (excluding Capital One) - ------------------------------------------------------------------------ December 31 - ------------------------------------------------------------------------ (dollars in thousands) 1996 1995 1994 1993 - ------------------------------------------------------------------------ Commercial $ 6,334 $ 6,326 $ 5,433 $ 2,641 Consumer: Student loans 35,763 32,308 22,654 19,694 Credit card 2,180 5,118 3,289 Loan-by-check-risk tests 5,890 8,812 Loan-by-check-other 9,272 2,424 177 Other consumer 2,356 2,068 1,192 1,179 - ------------------------------------------------------------------------ Total consumer 55,461 50,730 27,312 20,873 Mortgage 7,508 9,200 5,464 5,989 Construction 2,181 115 2,363 11,133 - ------------------------------------------------------------------------ Total $71,484 $66,371 $40,572 $40,636 ======================================================================== 32 have effectively increased the relative cost of and reduced the overall benefits received from these deposits. Purchased deposits (large denomination certificates and foreign deposits) averaged $313 million for 1996, a rise of $102 million, or 48%, from the prior year. Large denomination certificates are principally sold to existing corporate customers. The demand for such funds depends upon the Company's varying financing needs. As a result, the interest rates are based on market competition for these funds. Table 16 shows the maturity composition of large denomination certificates at year-end 1996. TABLE 16 MATURITIES OF DOMESTIC LARGE DENOMINATION CERTIFICATES ($100,000 OR MORE) December 31, 1996 - ---------------------------------------------------------- (in thousands) Balance Percent - ---------------------------------------------------------- 3 months or less $137,196 60% Over 3 through 6 months 33,721 15 Over 6 through 12 months 33,873 15 Over 12 months 24,089 10 - ---------------------------------------------------------- Total $228,879 100% ========================================================== The majority of foreign deposits are in denominations of $100,000 or more. Short-Term and Long-Term Borrowings Short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements, commercial paper, Treasury tax and loan deposits, Federal Reserve borrowings and short-term borrowings from other banks. This category of borrowings is an accessible source of moderately priced funds and is an important financing vehicle for Signet's balance sheet management. Signet supplements its funding sources in the short-term money market and through securitizations. Short-term borrowings have an original maturity of less than one year. This category rose $326 million from 1995 to average $2.4 billion in order to fund the growth in loans. See Note E to Consolidated Financial Statements for further details on this source of funds. Long-term borrowings represent a very stable, although relatively expensive, source of funds and have been used to provide Tier II capital to Signet's subsidiaries, for acquisitions and for general corporate purposes. This category averaged $295 million for 1996, a $41 million increase from 1995. During the second quarter of 1996, Signet Bank established a $2.5 billion Senior and Subordinated Bank Note facility due from 30 days to 30 years from date of issue. A total of $150 million of subordinated bank notes had been issued under the facility at December 31, 1996. Signet has $50 million of floating rate subordinated notes maturing in 1997. Note F to Consolidated Financial Statements provides a detailed analysis of long-term borrowings at December 31, 1996 and 1995. Stockholders' Equity Stockholders' equity provides a source of permanent funding, allows for future growth and assists the Company in withstanding unforeseen adverse developments. At December 31, 1996, stockholders' equity totaled $924 million, an increase of $60 million, or 7%, from the previous year-end level of $864 million. The increase reflects net retained income for 1996 of $77 million and the issuance of common stock through investor and employee stock purchase plans, as well as the stock option plans, which, in total, added an additional $14 million in net proceeds to equity. The change in net unrealized gains on securities available for sale, net of tax, decreased equity by $30 million. At the time of the spin-off, Signet's stockholders' equity was reduced by $383 million, the amount of Capital One's stockholders' equity less minority interest (see Note T to the Consolidated Financial Statements). This generally reduced Signet's capital ratios; however, the ratios remained strong and Signet Bank is "well-capitalized" under regulatory guidelines (see discussion on Capital Analysis). At December 31, 1996, the net unrealized gains, net of tax, related to securities available for sale, totaled $15.1 million. Signet has no plans at present to sell these securities. The dividends declared during 1996 of $48.3 million represented an annual rate of $0.81 per share. On October 20, 1995, Signet's Board of Directors raised the quarterly dividend by 3 cents to $0.20 per common share. On October 25, 1996, Signet's Board of Directors increased the quarterly dividend by 5 percent to $0.21 per common share. The principal sources of dividends to be paid to shareholders are dividends and interest from Signet Bank. Various state and federal laws and policies limit the ability to pay dividends to shareholders and the ability of Signet Bank to pay dividends to the Company. Under applicable regulatory restrictions, Signet Bank was able to pay dividends to the Company at December 31, 1996. Capital Analysis A primary management objective is to sustain its strong capital position to merit the confidence of customers, the investing public, banking regulators and stockholders. A strong capital position enables the Company to withstand unforeseen adverse developments and take advantage of profitable investment opportunities. Capital adequacy is defined as the amount of capital needed to maintain future asset growth and to absorb losses. Regulators consider a range of factors when determining capital adequacy, such as the organization's size, quality and stability of earnings, risk diversification, management expertise, asset quality, liquidity and internal controls. Management reviews the various capital measures monthly and takes appropriate action to ensure they are within established internal and external guidelines. Management believes 33 TABLE 17 RISK-BASED AND OTHER CAPITAL DATA
- -------------------------------------------------------------------------------------------------- December 31 - ------------------------------------------------------------------------------------------------- 1996 1995 - ------------------------------------------------------------------------------------------------- (dollars in thousands--except per share) Balance Percent Balance Percent - ------------------------------------------------------------------------------------------------- Qualifying common stockholders' equity $ 908,982 $ 815,342 Less goodwill and other disallowed intangibles (52,163) (58,881) - ------------------------------------------------------------------------------------------------- Total Tier I capital 856,819 10.78% 756,461 9.82% Qualifying debt 211,667 114,534 Qualifying allowance for loan losses 99,793 96,751 - ------------------------------------------------------------------------------------------------- Total Tier II capital 311,460 3.92 211,285 2.74 - ------------------------------------------------------------------------------------------------- Total risked-based capital $1,168,279 14.70 $ 967,746 12.56 - ------------------------------------------------------------------------------------------------- Total risk-adjusted assets $7,946,546 $7,707,111 - ------------------------------------------------------------------------------------------------- Leverage ratio 7.43 6.93 - ------------------------------------------------------------------------------------------------- Tangible Tier I leverage ratio 6.72 6.36 - ------------------------------------------------------------------------------------------------- December 31 - ------------------------------------------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------- Other Ratios: Common equity to assets (excluding Capital One) 7.88% 7.87% 7.54% Internal equity capital generation rate 8.81 7.44 8.86 Common dividend payout ratio 39.32 42.55 38.61 Book value per share $15.38 $14.59 $18.96 ===============================================================================
Signet's current capital and liquidity positions are strong and its capital position is adequate to support its business areas. Table 17 details certain risk-based and other capital data. Note J to Consolidated Financial Statements provides a detailed analysis of risk-based ratios at December 31, 1996 and 1995. The Federal Reserve Board has issued capital guidelines which are sensitive to credit risk factors (including off-balance sheet exposure). Emphasis is placed on common stockholders' equity in relationship to total assets adjusted for risk. The focus is principally on credit risk, but does include certain interest rate and market risks when assigning risk categories. The risk-based capital guidelines define capital as either core capital (Tier I) or supplementary capital (Tier II). These guidelines require banking organizations to meet a minimum total capital ratio of 8%, with at least 4% Tier I Capital. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires federal banking agencies to take prompt corrective action in respect to depository institutions that do not meet minimum capital requirements. FDICIA established five capital tiers: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A depository institution's capital tier depends upon the relationship of its capital levels to various relevant capital measures, which include a risk-based capital measure and a leverage ratio capital measure, and certain other factors. As of December 31, 1996, Signet's banking subsidiary, Signet Bank, met the well-capitalized criteria. As detailed in Table 17, the Company's consolidated risk-based capital ratios at December 31, 1996 were 14.70% and 10.78% for Total Capital and Tier I Capital, respectively. The Federal Reserve Board also requires a minimum leverage ratio of 3%. For most corporations, including Signet, the minimum leverage ratio is 3% plus an additional cushion of at least 100 to 200 basis points depending upon risk profiles and other factors. The leverage ratio is calculated by dividing Tier I Capital by the current quarter's total average assets less goodwill and other disallowed intangibles. Signet's leverage ratio at December 31, 1996 was 7.43%. The improvement in these capital ratios from December 31,1995 reflects the impact of issuing $150 million of subordinated bank notes. The Company's total stockholders' equity to assets ratio improved from 7.87% at December 31, 1995 to 7.88% at year-end 1996. For informational purposes, Table 18 details the components of Signet's intangible assets for the past four years and the estimated amortization for the next five years. The increase in goodwill during 1995 was due to the acquisition of the assets of Sheffield Management Company and Sheffield Investments, Inc. 34 TABLE 18 INTANGIBLE ASSETS (excluding Capital One) - -------------------------------------------------------------------------- December 31 - -------------------------------------------------------------------------- (in thousands) 1996 1995 1994 1993 - -------------------------------------------------------------------------- Goodwill $ 47,341 $ 53,125 $37,247 $22,833 Core deposit premiums 9,352 12,685 16,019 11,730 Mortgage servicing rights 82,597 58,668 29,431 12,847 - -------------------------------------------------------------------------- Total intangible assets $139,290 $124,478 $82,697 $47,410 ========================================================================== The amortization of goodwill and core deposit premiums is expected to be approximately $9,125 annually over the next five years. DERIVATIVE AND OTHER OFF-BALANCE SHEET RISK Signet has used financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers, to reduce its own exposure to fluctuations in interest rates and to participate in trading activities. These financial instruments include commitments to extend credit, standby and commercial letters of credit, mortgages sold with recourse and interest rate contracts, including forwards, futures, options and interest rate swaps, caps and floors. These instruments involve, to varying degrees, elements of credit or interest rate risk in excess of the amount recognized in the balance sheet. Signet uses the same credit policies for off-balance sheet items as it does for on-balance sheet instruments. Interest rate swaps, where the Company generally makes variable rate payments and receives fixed rate payments, were entered into to manage the interest rate risk in the Company's existing balance sheet mix. During 1996, the Company's interest rate swaps decreased income on earning assets by $7.5 million and reduced borrowing costs by $17.5 million for a net pre-tax impact of $10.0 million. Of the existing interest rate swaps, $1.9 billion of notional value will mature by 1999 and the rest will mature by 2006. Interest rate floors, with average strike prices of approximately 6% tied to the three-month LIBOR, increased income on earning assets by $0.9 million in 1996. Interest rate floors were purchased to hedge variable rate assets against decreases in interest rates. Maturity dates on the interest rate floors range from 1997-1999. Interest rate caps, with average strike prices of approximately 8.0% tied to the three-month LIBOR, increased borrowing costs by $1.8 million in 1996. Interest rate caps were purchased to hedge variable rate liabilities against increases in interest rates. All interest rate caps matured by the end of 1996. Futures contracts were purchased to hedge interest rate changes on securities available for sale and savings certificates. During 1996, gains and losses on closed contracts had an immaterial impact on income on securities available for sale and expense on savings certificates. As the derivative contracts mature, management will determine the necessity to enter into additional contracts at that time. Refer to Table 19 for a roll forward schedule of interest rate swap activity. The impact of derivative activity on liquidity is discussed in the Liquidity discussion. Refer to Note N and Note O to Consolidated Financial Statements for further details of off-balance sheet risk. Discussion of the impact of derivative income on operations is included in Note A to Consolidated Financial Statements and the Interest Rate Sensitivity discussion. TABLE 19 INTEREST SWAPS - -------------------------------------------------------------------- Synthetic Trading (notional in millions) Alteration(a) Dealer(b) Total - -------------------------------------------------------------------- Balance At December 31, 1994 $3,324 $277 $3,601 Additions 6,670 196 6,866 Expirations 1,005 203 1,208 Transferred to Capital One 6,165 6,165 - -------------------------------------------------------------------- Balance at December 31, 1995 2,824 270 3,094 Additions 611 209 820 Expirations 1,268 97 1,365 - -------------------------------------------------------------------- Balance at December 31, 1996 $2,167 $382 $2,549 ==================================================================== (a) Impacts interest rate sensitivity. Synthetic alteration is risk-management tool used to change the nature of an interest earning asset or interest bearing liability from fixed rate to variable rate or vice versa. (b) Impacts trading income. INTEREST RATE SENSITIVITY Signet's interest rate sensitivity position is managed by the Asset and Liability Committee ("ALCO") and monitored through the use of simulations on rate sensitive pre-tax income. Interest rate sensitivity is the relationship between changes in market interest rates and changes in rate sensitive income due to the repricing characteristics of assets and liabilities. For example, in periods of rising rates, banking businesses will experience wider spreads as consumer deposit costs lag increases in market interest rates. Improved spreads due to the lag in pricing on consumer deposits will be partially offset to the extent that the funding cost on the investment portfolio increases. ALCO routinely uses derivatives such as interest rate swaps to manage the Company's interest rate risk. ALCO, in managing interest rate sensitivity, also uses simulations to measure the impact that market changes and alternative strategies might have on net interest income and other income exposed to changing rates. Current period maturity, repricing information and projected balance sheet strategies are used to simulate rate sensitivity. The lag effect of consumer deposit rates, determined through historical analysis and forecasting techniques, is also modeled. These simulations show that an immediate and sustained 100 basis point change in interest rates would have less than a 2% impact on rate sensitive income over the next twelve months, reflecting Signet's conservative balance sheet strategy. ALCO operates under a 35 TABLE 20 INTEREST RATE SENSITIVITY December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------- 1-30 31-60 61-90 91-180 Within 180 Days- >1 Year- Over (dollars in millions) Days Days Days Days 180 Days 1 Year 5 Years 5 Years - ---------------------------------------------------------------------------------------------------------------------------- Earning assets: Securities available for sale $ 80 $ 166 $ 20 $ 103 $ 369 $ 178 $1,135 $ 941 Loans 3,488 46 181 108 3,823 366 1,182 984 Other earning assets 1,363 16 1,379 10 41 - ---------------------------------------------------------------------------------------------------------------------------- Total earning assets 4,931 228 201 211 5,571 554 2,358 1,925 Interest bearing liabilities: Deposits: Savings(1) 2,218 2,218 1,389 Other time 214 167 134 306 821 468 1,182 58 Short-term borrowings 1,916 26 13 1 1,956 3 4 Long-term borrowings 50 100 150 100 150 - ---------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 4,348 243 247 307 5,145 471 2,675 208 Non-rate related assets and liabilities, net 1,015 894 - ---------------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap 583 (15) (46) (96) 426 83 (1,332) 823 Impact of interest rate swaps, futures, floors and caps (586) (126) (1,095) (700) (2,507) 351 1,966 190 Impact of securitizations and repricing(2) (135) (135) 135 - ---------------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap adjusted for impact of securitizations, interest rate swaps, futures, floors and caps(2) (138) (141) (1,141) (796) (2,216) 434 769 $1,013 - ---------------------------------------------------------------------------------------------------------------------------- Adjusted interest sensitivity gap as a percentage of total assets (1.18)% (1.20)% (9.74)% (6.79)% (18.91)% 3.70 % 6.56 % 8.64% Cumulative adjusted interest sensitivity gap $(138) $ (279) $(1,420) $(2,216) $(2,216) $(1,782) $(1,013) - ---------------------------------------------------------------------------------------------------------------------------- Adjusted cumulative interest sensitivity gap as a percentage of total assets (1.18)% (2.38)% (12.12)% (18.91)% (18.91)% (15.20)% (8.64)% ============================================================================================================================
(1) Historical rate sensitivity analysis shows that interest checking and statement savings, while technically subject to immediate withdrawal, actually have shown repricings and run-off characteristics that generally fall within 1-5 years. A similar analysis has been done with money market savings and money market checking and these products have been adjusted accordingly. (2) Some of the coupons on securitizations are tied to commercial paper and LIBOR rates and, therefore, are shown in the earliest period for repricing. While the income from securitizations is booked in non-interest income, it is shown in this chart as it is impacted by rate movements. policy designed to limit the impact of a sudden 100 basis point change in interest rates to no more than a 5% change in rate sensitive income over a twelve month period. During 1996, as well as at year-end, Signet positioned itself for a declining rate environment. While Table 20 shows a basic 180-day net asset position of $426 million at December 31, 1996, the Company has taken steps to limit its exposure to declining interest rates through the use of derivative products. Execution of these off-balance sheet interest rate and hedging instruments resulted in a 180-day net liability position of $2.2 billion, or 19% of total assets. At December 31, 1996, the notional value of the Company's derivative products for the purpose of managing interest rate risk were $2.2 billion of interest rate swaps and $650 million of interest rate floors. LIQUIDITY Liquidity is the ability to meet present and future financial obligations either through the sale or maturity of existing assets or by the acquisition of additional funds through liability management. Both the coordination of asset and liability maturities and effective liability management are important to the maintenance of liquidity. Stable core deposits and other interest bearing funds, accessibility to local, regional and national funding sources and readily marketable assets are all important determinants of liquidity. Table 21 reflects certain liquidity ratios for the past three year-ends, on a pro forma basis. Asset liquidity is generally provided by interest bearing deposits with other banks, federal funds sold and securities purchased under agreements to resell, securities available for sale, loans held for sale and trading account securities. Liability liquidity is measured by the Company's ability to obtain deposits and purchased funds at favorable rates and in adequate amounts and by the length of maturities. Since core deposits are the most stable source of liquidity a bank can have because they are government insured, the high level of average core deposits during 1996 maintained the Company's strong liquidity 36 TABLE 21 LIQUIDITY RATIOS (excluding Capital One) - ---------------------------------------------------------- December 31 - ---------------------------------------------------------- 1996 1995 1994 - ---------------------------------------------------------- Ratio of liquid assets to: Purchased funds 175.3% 198.0% 194.0% Loans 72.7 85.4 58.0 Assets 39.4 42.1 33.5 ========================================================== position. Signet's 1996 average loan balances were entirely funded with core deposits. Signet's equity base, as noted earlier, also provides a stable source of funding. The parent company has not recently relied on the capital markets for funding. The parent company has $50 million principal amount of Floating Rate Subordinated Notes due in 1997 which will be paid off with existing excess cash. As mentioned previously, during the second quarter of 1996, Signet Bank established a $2.5 billion Senior and Subordinated Bank Note facility due from 30 days to 30 years from date of issue. A total of $150 million of subordinated bank notes had been issued under the facility at December 31, 1996. For 1996, cash and cash equivalents increased $285 million primarily due to a rise in federal funds sold and securities purchased under resale agreements which more than offset a decline in cash and due from banks. Cash provided by operations was $1.3 billion for this time period resulting mainly from net proceeds from sales of loans held for sale and from securitization of consumer loans. Cash used by investing activities amounted to $1.5 billion principally due to purchases of securities available for sale and an increase in loans, more than offsetting proceeds from sales and maturities of securities available for sale. Cash provided by financing activities amounted to $465 million due to an increase in deposits, short-term borrowings and issuing the subordinated bank notes. The Company's future liquidity may be affected by derivative activities. Potential losses are limited to counterparty risk in situations where Signet is owed money; that is, when Signet holds contracts with positive fair values. The Company's net unrealized gain as of December 31, 1996 was $38.8 million. The Company does not expect any losses from counterparties failing to meet their obligations. Also, at December 31, 1996, the Company had unrealized losses on derivative transactions totaling $23.9 million, which if terminated would require a cash outlay. Signet presently has no intention to terminate these contracts. There are no credit concerns related to the Company's obligations and it expects to meet those obligations without default. Inflation Since interest rates and inflation rates do not always move in concert, the effect of inflation on banks may not necessarily be the same as on other businesses. A bank's asset and liability structure differs significantly from that of manufacturing and other concerns in that virtually all assets and liabilities are of a monetary nature. Inflation affects a bank's lending activities. Since inflation tends to drive the costs of goods and services higher, the level of customers' financing needs usually rises to keep pace. As loan demand increases, competition for variable funds may raise the base rate charged for these funds. Banks then are faced with increased credit risk as borrowers experience greater exposure to financial risk from the higher rates. In such cases, banks place more emphasis on the adequacy of the allowance for loan losses. As a result, continued inflation increases the overall cost of doing business, both directly and indirectly. Fair Value The requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," are included in Note R to Consolidated Financial Statements. Since interest rates, credit risks and other dimensions of fair value of the Company's assets, liabilities and off-balance sheet instruments change rapidly and, since this disclosure excludes some aspects of the Company's overall fair value, Note R should not be viewed as an indication of the Company's overall market value. Furthermore, certain valuation techniques used in developing Note R require assumptions and forecasts of cash flows. While Note R complies with SFAS No. 107, these assumptions and other subjective determinations should be considered when interpreting the data. Recent Accounting Pronouncements SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," was issued in September 1996. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996; thus, Signet will adopt the statement beginning January 1, 1997. The effect of adopting SFAS No. 125 for existing transactions is not expected to have a material impact on the Company's financial position or results of operations. The Company is unable to complete an assessment of the potential financial statement impact of applying the statement to future transactions because the Company participates in a variety of transfers of financial assets, and each transaction structure is unique. 37 SIGNET BANKING CORPORATION AND SUBSIDIARIES Management's Discussion and ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1995 COMPARED TO 1994 On February 28, 1995, Signet completed the spin-off of substantially all of its credit card business. On March 19, 1996, Signet's management discovered that the Company was one of several major financial institutions that were victims of fraudulent commercial loan transactions which occurred prior to 1996. Management recorded a $35 million commercial fraud loss in non-interest expense at December 31, 1995 ("the fraud loss") and recorded the estimated probable recovery amount of $46 million in other assets as a receivable. For a more detailed discussion of the spin-off and the fraud loss, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations -- 1996 Compared To 1995. In addition to the discussion of consolidated information, pro forma data is provided where it was meaningful to discuss the Company's results excluding Capital One. Consolidated and pro forma results are the same for time periods subsequent to February 28, 1995. Income Statement Analysis Signet reported consolidated net income for 1995 of $111.1 million, or $1.86 per share, compared with $149.8 million, or $2.59 per share, in 1994. Consolidated earnings for the year ended December 31, 1995 included the results of Capital One for the two months prior to the spin-off on February 28, 1995 and the $35 million fraud loss. The 1994 consolidated net income reflected a full year of Capital One's operations as well as special pre-tax charges of $92.2 million for restructuring and for terminating certain data processing contracts. Included in the restructuring charges were costs related to an early retirement plan, employee severance and facilities consolidation. On a pro forma basis, 1995 net income increased 71% from $55.8 million to $95.6 million. Pro forma earnings per share rose 65% from $0.97 in 1994 to $1.60. The pro forma 1995 performance reflected a substantial increase in net interest income, primarily resulting from strong growth in the Company's consumer and commercial loan portfolios. The return on assets ("ROA") and the return on common stockholders' equity ("ROE") for the year ended December 31, 1995 were 1.00% and 12.79%, respectively, compared with 1.31% and 14.33% for the same respective ratios in 1994. The pro forma profitability measures reflected the rise in earnings in 1995, resulting in an ROA of 0.90% and an ROE of 11.83%. These ratios compare favorably with the 0.63% ROA and 6.83% ROE achieved in 1994, on a pro forma basis. Taxable equivalent net interest income totaled $503.8 million for 1995, a decline of $19.9 million, or 4%, from the $523.7 million recorded in 1994. The decline in net interest income reflected the impact of the spin-off. On a pro forma basis, taxable equivalent net interest income rose $119.9 million in 1995 to $478.7 million primarily due to an improved mix and a higher level of on-balance sheet average earning assets. The pro forma net yield margin for 1995 was 5.07%, a 48 basis point increase from the 4.59% for 1994. This increase in the net yield margin was primarily due to an improvement in the net interest spread. Higher yields and growth in commercial and consumer loans more than offset the rise in funding rates to raise the net yield margin. The pro forma net interest spread of 4.44% for 1995 rose significantly from the 3.96% reported for 1994. The increase resulted from funding rates rising less than the increase in yields on earning assets. The overall yield on earning assets for 1995 was 8.68%, up 147 basis points from 1994, while the rate paid for interest bearing liabilities amounted to 4.24%, up 99 basis points from the previous year. Non-interest operating income totaled $277.5 million for 1995, a 51% decline from the $564.6 million for 1994. The drop resulted from a sharp decline in credit card servicing and service charge income due to the spin-off. On a pro forma basis, non-interest operating income amounted to $193.8 million for 1995, a decline of $1.4 million, or less than 1% versus 1994. Two primary reasons for this drop were: 1) prior to the spin-off the entire credit card portfolio retained by Signet was securitized causing the pro forma consumer loan servicing and service charge income to be $13.7 million higher in 1994; and 2) intercompany reimbursements from Capital One for various fixed non-interest expenses prior to the Separation totaled $26.4 million. Signet recognized a $9.6 million gain on the securitization of home equity loans during the fourth quarter of 1995. During 1995, Signet recognized net securities gains of $1.8 million, down from $3.5 million in 1994. Non-interest expense decreased $282.4 million from the previous year due in large part to the restructuring and data processing contract termination charges of $92.2 million and the spin-off. On a pro forma basis, non-interest expense also fell, primarily due to the restructuring charges in 1994, offset in part by the fraud loss in 1995. Declines in staff-related expenses were more than offset by increases in costs associated with expanded marketing and testing initiatives throughout the Company. Signet's pro forma efficiency ratio (the ratio of non-interest expense to taxable equivalent operating income) was 72.05% for 1995, compared with 88.15% for 1994. Excluding the 1995 fraud loss and the 1994 38 restructuring charges, other one-time spin-off related expenses and foreclosed property expense from non-interest expense changed the ratio to 66.88% and 80.30% for the two respective years. In the third quarter of 1994, Signet's Board of Directors approved a comprehensive core bank improvement plan to reduce the efficiency ratio through cost reductions and revenue initiatives. In conjunction with the plan, Signet recorded a restructuring charge of $43.2 million ($28.1 million after-tax, or $0.48 per share). The charge included approximately $15.6 million for increased retiree medical and pension benefits related to an early retirement program in which 225 employees participated; about $13.0 million of accelerated retiree medical and pension obligations and anticipated severance benefits for approximately 750 employees; and about $14.6 million related to the writedown of bank-owned properties and lease terminations due to the expected facilities abandonment related to the reduction in employees. As of December 31, 1995, the amounts actually paid and charged against the restructuring liability were approximately $7.0 million for severance payments to approximately 700 employees, $2.5 million for payments made under the early retirement program and approximately $7.0 million for lease termination and other facilities related costs. As a result of implementing the cost reduction measures, the number of full-time equivalent employees excluding Capital One fell 7% from December 31, 1993. Staff expense (salaries and employee benefits), the largest component of non-interest expense, totaled $225.0 million, a 5% decline from 1994. Salaries dropped 3% and benefits expense fell 12% year-over-year primarily due to the decline in the number of employees mentioned above and favorable experience in benefits expense during 1995. Certain of the non-interest expense categories reflected the costs associated with increased business volume. The $2.1 million increase in supplies and equipment expense was attributable to servicing the expanded consumer loan base. Public relations, sales and advertising expense rose $2.5 million, or 18%, to $15.9 million as Signet expanded its consumer loan solicitation program. Occupancy expense decreased $3.4 million, or 8%, from year-to-year, due to the restructuring mentioned earlier. The $8.0 million, or 47%, drop in deposit insurance assessment from the Federal Deposit Insurance Corporation ("FDIC") reflected the decline in the rates charged by the FDIC effective June 1, 1995. Other non-interest expense rose 64% from 1994 to 1995 primarily due to various servicing agreements with Capital One. These agreements cover servicing for Signet's credit card portfolio, solicitation expense paid by Capital One on Signet's behalf and payment of the difference between the secured card deposits' stated and agreed upon rates. The provision for loan losses of $38.7 million represented a significant rise from the 1994 level of $14.5 million. On a pro forma basis, the provision for loan losses totaled $34.8 million for 1995 compared with provision reversals of $16.2 million in 1994. The increase resulted primarily from growth and increased losses in the consumer loan portfolio. On a pro forma basis, net charge-offs doubled to $50.0 million for 1995, compared with $24.9 million for the prior year. In 1995, $13.9 million of the charge-offs resulted from the bulk sale of commercial real estate related loans for which there was sufficient allowance. Of the $30.1 million in real estate gross charge-offs in 1994, approximately $21.0 million were the result of the sale of $102 million of commercial real estate related loans. Commercial loan net charge-offs declined when comparing 1995 with 1994 due to improved credit quality and the generally favorable economic climate. Commercial net charge-offs for the Company totaled $1.2 million, a $2.6 million decrease from the previous year. The 1995 commercial loan charge-offs included $1.3 million related to the loan sale in the second quarter. Consumer loan net charge-offs rose in 1995 as Signet experienced higher charge-offs related to certain risk tests conducted for its "loan-by-check" product. These charge-offs were on loans generated from direct mail solicitations in late 1994 as Signet ran controlled tests to determine the criteria to be used when Signet expands loan-by-check solicitations. The allowance for loan losses at December 31, 1995 was $129.7 million, or 2.39% of year-end loans, compared with the pro forma 1994 year-end allowance of $152.0 million, or 2.67% of loans. At December 31, 1995, Signet's loans that were considered to be impaired under SFAS No. 114 were comprised of $32.6 million of non-accrual loans for which the related allowance for loan losses was $10.6 million. The average recorded investment in impaired loans during the year ended December 31, 1995 was approximately $28.8 million. Collateral dependent loans, which were measured at the fair value of the loan's collateral, made up the majority of impaired loans at December 31, 1995. For the year ended December 31, 1995, no interest income was recorded on non-accrual loans. All interest receipts on impaired loans were applied to the principal. Pro forma income tax expense for 1995 was $48.8 million as compared with $15.8 million for 1994. This represented an effective tax rate of 33.8% for 1995 and 22.0% for 1994. The significant increase in the effective tax rate was attributable to a decline in the ratio of tax exempt income as a percentage of pre-tax income. Pre-tax income grew dramatically and total tax exempt income dropped from year-to-year as a majority of the municipal bonds have been called. 39 Balance Sheet Review (on a pro forma basis) On a pro forma basis, average earning assets amounted to $9.4 billion compared with $7.8 billion for 1994, a 21% increase. Adding average securitized loans to both years' pro forma average earning assets and adjusting for loans to be sold to Capital One, in accordance with previously agreed upon terms of the spin-off, resulted in a 15% increase in managed earning assets year-over-year. The portfolios experiencing the largest declines were federal funds sold and securities purchased under agreements to resell ($333 million) and interest bearing deposits with other banks ($218 million), while the securities available for sale and the loan portfolios increased by $378 million and $1.2 billion, respectively. Loans (net of unearned income) for 1995, averaged $5.8 billion, an increase of $1.2 billion, or 27%, from the 1994 level. The consumer, commercial and real estate mortgage-residential loan categories experienced increases in average balances in 1995. Decreases occurred in the real estate-construction and real estate-commercial mortgage categories of the loan portfolio, reflecting the continued successful efforts of the Company to reduce its commercial real estate exposure. The composition of the loan portfolio has been significantly altered over the past three years by strong growth in commercial and consumer loans reflecting positive response to Signet's innovative product offerings. In addition, Signet reduced its overall average commercial real estate loan exposure by $133 million during 1995. Commercial loans, which represented 46% of the total average loan portfolio, averaged $2.6 billion for 1995, an increase of 23% from last year. Consumer loans averaged $2.2 billion for 1995, a 48% increase from 1994, and represented 38% of the total loan portfolio. Real estate-construction loans averaged $225 million, a decrease of 10%, or $25 million, from the 1994 average. Real estate-commercial mortgage loans represented less than 8% of the average loan portfolio in 1995. This category averaged $452 million, a 19% decrease from 1994. Real estate-commercial mortgage loans decreased partially as a result of the sale of approximately $49 million in 1995 and $29 million in 1994 of these loans for which there was sufficient allowance. Real estate-residential mortgage loans increased $143 million, or 146%, from 1994 to average $241 million as a result of growth in mortgages originated by Signet and loans acquired in the Pioneer acquisition. In December, 1995, Signet sold approximately $179 million of adjustable rate mortgage loans at a $3.1 million gain as management anticipated a rise in prepayments on this portfolio as rates declined. Trading account securities averaged $476 million in 1995, up 66% from the $287 million level in 1994. Investment securities rose $61 million on average over 1994 reflecting the purchase of U. S. Government and agency obligations in the fourth quarter of 1994. In December, 1995, as allowed by implementation guidance for SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company reclassified all of its investment securities to securities available for sale. Securities available for sale for 1995 averaged $1.7 billion, an increase of $378 million over the 1994 level. Approximately $233 million of securities were reclassified from investment securities to securities available for sale in December, 1995, as noted above. At December 31, 1995, the securities available for sale portfolio (excluding securities having no maturity) had a remaining average maturity of approximately four years and unrealized gains of $78.8 million and unrealized losses of $12.3 million. Average interest bearing liabilities rose 28% to $8.1 billion for 1995, on a pro forma basis. Declines in interest bearing demand, savings certificates, large denomination certificates, other short-term borrowings and long-term borrowings were more than offset by growth in savings accounts, foreign deposits, federal funds and repurchase agreements. Included in savings accounts were deposits held on behalf of Capital One as collateral for Capital One's secured card product. In 1995, average core deposits of $7.1 billion declined less than 2% from the prior year and represented 75% of average earning assets and 123% of average loans. The mix in core deposits changed as depositors responded to volatile interest rates by shortening maturities and transferring from savings certificates into interest bearing demand products. Pro forma non-interest bearing demand deposits declined less than 1%, on average, during 1995. Risk Elements (on a pro forma basis) Non-performing assets at year-end 1995 totaled $54.3 million, or 1.0% of loans and foreclosed properties. This compares with $48.5 million, or 0.85%, respectively, at the end of 1994. Overall non-performing real estate assets increased $8.4 million although foreclosed properties dropped $6.7 million. Foreclosed properties totaled $15.8 million at the end of 1995, and were equal to 29% of total non-performing assets and 36% of non-performing real estate assets. Signet sold $9.2 million of foreclosed properties during 1995. The reserve for foreclosed properties was eliminated at December 31, 1994 since management deemed foreclosed properties to be fairly valued on the balance sheet. Accruing loans past due 90 days or more as to principal or interest payments totaled $66.4 million and $40.6 million at the end of 1995 and 1994, respectively. Of the 1995 past due student loans, $30.7 million, or 95%, were indirectly government guaranteed and did not represent material loss exposure to Signet. At year-end 1995, management was monitoring $17.1 million of loans for which the ability of the borrower to comply with present repayment terms was uncertain. These loans were not included in the above disclosure. Funding and Capital (on a pro forma basis) Average deposits totaled $7.3 billion for 1995, down 2% from 1994. Core deposits averaged $7.1 billion for 1995, virtually unchanged from 1994. Short-term borrowings rose $1.9 billion from 1994 to average $2.1 billion in order to fund 40 the growth in loans. Long-term borrowings averaged $253 million for 1995, a decline of only $1.6 million from 1994. At December 31, 1995, stockholders' equity totaled $864 million, an increase of $120 million, or 16%, from the previous year-end pro forma level of $744 million. The increase reflects net retained income for 1995 of $72 million and the issuance of common stock through investor and employee stock purchase plans, as well as the stock option plan, which in total added an additional $13 million in net proceeds to equity. At the time of the spin-off, Signet's stockholders' equity was reduced by $383 million, the amount of Capital One's stockholders' equity less minority interest. Effective January 1, 1994, Signet adopted SFAS No. 115, which requires that securities classified as available for sale be reported at fair value with unrealized gains and losses reported as a component of retained earnings, net of tax. At December 31, 1995, the net unrealized gains, net of tax, related to securities available for sale, totaled $45.2 million, primarily from a rise in the value of mortgage-backed securities and U.S. Treasury obligations. The dividends declared during 1995 of $46.5 million represented an annual rate of $0.79 per share. On October 20, 1995, reflecting its confidence in the Company's growth plans and improving profitability, Signet's Board of Directors raised the quarterly dividend by 3 cents to $0.20 per common share. The Company's risk-based capital ratios at December 31, 1995 were 12.56% and 9.82% for Total Capital and Tier I Capital, respectively. Signet's leverage ratio at December 31, 1995 was 6.93%. The decline in these capital ratios from December 31,1994 reflects the impact of the spin-off. However, on a pro forma basis, the Company's total stockholders' equity to assets ratio improved from 7.54% at December 31, 1994 to 7.87% at year-end 1995. =============================================================================== SIGNET BANKING CORPORATION AND SUBSIDIARIES 1996 FOURTH QUARTER ANALYSIS Tables 22 through 25, on the following pages, contain selected quarterly financial data for the years ended December 31, 1996 and 1995. In addition to the presentation of consolidated information, pro forma data is provided for the first quarter of 1995 where it was meaningful to disclose the Company's results excluding Capital One. Since Capital One was spun off on February 28, 1995, consolidated and pro forma results are the same for all of 1996 and the second, third and fourth quarters of 1995. Consolidated net income for the 1996 fourth quarter was $33.6 million, or $.55 per share, compared with $9.0 million, or $.15 per share, for the fourth quarter of 1995. The 1996 fourth quarter included a $9.3 million gain from the securitization of $405 million of student loans. The 1995 fourth quarter included the $35.0 million fraud loss, as noted previously, as well as a $9.6 million gain related to the securitization of $481 million of equity line loans. The fourth quarter 1996 results represent a 6% increase in net income from the 1995 fourth quarter net income of $31.8 million, or $.53 per share, excluding the fraud loss. The quarter ended December 31, 1996 ROA of 1.15% and ROE of 14.69% compares favorably with the fourth quarter 1995 ROA of 0.33% and ROE of 4.18%. The equity-to-assets ratio was 7.88% at December 31, 1996, up from 7.74% and 7.87% at the end of the third quarter of 1996 and year-end 1995, respectively. Total revenues (net interest income and non-interest income) for the quarter were $206.3 million, up 11% from the previous quarter and up 12% from the 1995 fourth quarter. Taxable equivalent net interest income totaled $119.0 million for the 1996 fourth quarter, up slightly compared with the $117.4 million reported in the fourth quarter of 1995. The net yield margin for the fourth quarter of 1996 was 4.56%, a 14 basis point decline from the third quarter of 1996, primarily the result of higher funding costs and lower yields on earning assets. The net interest spread of 3.93% for the fourth quarter of 1996 declined 18 basis points from the third quarter of 1996. The fourth quarter 1996 net yield margin decreased 22 basis points from 4.78% in the fourth quarter of 1995. The decline in the net yield margin was principally the result of a deterioration in the net interest spread from 4.16% to 3.93%, as the yield on earning assets fell while funding rates on core deposits rose. The lower yield on earning assets from the same quarter last year was partly due to the securitization of higher yielding home equity line and credit card loans. Derivative contracts, used for interest rate risk management purposes, reduced interest on earning assets by $1.7 million, $1.8 million and $3.2 million, and decreased borrowing costs by $4.5 million, $3.7 million and $3.3 million for the fourth quarter of 1996, third quarter of 1996 and fourth quarter of 1995, respectively. The overall increase in the net yield margin as a result 41 of these instruments amounted to 4 and 7 basis points for the fourth and third quarters of 1996, respectively. Interest rate derivative products had minimal impact on the fourth quarter 1995 net yield margin. The $29.8 million provision for loan losses in the fourth quarter of 1996 exceeded net charge-offs by $8.3 million for the same period and represented an $11.2 million increase from the 1995 fourth quarter level of $18.6 million. The increase in the provision was tied to the growth in consumer loans, primarily the loan-by-check portfolio. The Company provided $19.0 million for the allowance for loan losses in the 1996 third quarter. Net charge-offs amounted to $21.6 million in the fourth quarter of 1996, a $4.6 million rise from the third quarter 1996 level of $17.0 million and up $6.0 million from $15.6 million in the fourth quarter of 1995. The increase in net charge-offs from the third quarter of 1996 was primarily caused by a $2.4 million increase in charge-offs on real estate loans for which sufficient specific allowance had already been provided and a $2.1 million increase in loan-by-check charge-offs. The increase in net charge-offs from the prior year's fourth quarter was primarily caused by a $4.3 million rise in loan-by-check charge-offs along with a $6.3 million increase in real estate loan net charge-offs partially offset by a $3.1 million drop in commercial loan net charge-offs. The allowance for loan losses at December 31, 1996 was $136.7 million, or 2.15% of year-end loans, up from $129.7 million, or 2.39% of loans at December 31, 1995 and the September 30, 1996 allowance of $128.5 million, or 2.08% of loans. The December 31, 1996 allowance for loan losses equaled 4.8 times non-performing loans and 3.5 times non-performing assets, an improvement from December 31, 1995 when the allowance for loan losses amounted to 3.4 times non-performing loans and 2.4 times non-performing assets. The rise in the level of the allowance from year-end 1995 resulted primarily from an increase in the allocation for consumer loans, principally the loan-by-check portfolio. Non-interest income for the fourth quarter of 1996 totaled $89.6 million, a $21.4 million, or 31%, increase over the fourth quarter of 1995 and the third quarter of 1996. Several factors contributed to the increase in non-interest income in the fourth quarter of 1996 compared to the same quarter of 1995. Consumer loan servicing and service charge income, which includes ongoing gains and servicing income on securitized assets, increased $5.6 million primarily due to the securitization of home equity line loans in December 1995 and credit card loans in early 1996. Non-interest income for the fourth quarter of 1996 benefited from strong trading profits, which were up $13.7 million from the same period last year. Trust and other financial services income increased $1.2 million, or 13%, primarily from a rise in annuity product commissions and mutual fund investment management fees. Both year's fourth quarters benefited from gains from securitizations. The 1996 fourth quarter included a $9.3 million gain from securitizing $405 million of student loans. Gains were realized in the fourth quarter of 1995 related to the home equity line securitization ($9.6 million) and the sale of approximately $179 million of adjustable rate mortgage loans ($3.1 million). In December, 1996, Signet sold its residential mortgage loan production offices for a small gain. The $21.4 million rise in non-interest income from the third to the fourth quarter of 1996 resulted mainly from a $9.8 million rise in trading profits as well as the $9.3 million gain from the securitization of $405 million of student loans. Signet also realized a $5.5 million increase in securities available for sale gains from quarter to quarter. The third quarter of 1996 included $6.8 million of revenues earned by Signet's specialty commercial groups. Non-interest expense for the fourth quarter of 1996 totaled $125.3 million, an increase of $8.1 million, or 7%, from the fourth quarter of 1995 (excluding the fraud loss) reflecting continued investment in people and systems to build the infrastructure for information based businesses. The largest increase was $11.0 million in staff expense resulting primarily from an increase in the average number of full-time employees and higher incentives due to excellent trading profits. The 1996 year-end number of employees was down from the previous year-end as Signet sold its residential mortgage loan production offices in mid-December of 1996. The $1.7 million rise in external data processing services, the $1.1 million increase in supplies and equipment expense as well as a $0.3 million jump in credit and collection expenses were attributable to servicing the expanded consumer loan base. Non-interest expense rose $2.5 million, or 2%, from the third to the fourth quarter of 1996 largely as a result of higher staff expenses. A $2.9 million increase in salaries, mainly from higher incentives due to the outstanding trading profits along with a $1.3 million rise in benefits expense due to a year-to-date change in estimate in the third quarter as health care claims were more favorable than originally projected, caused staff expenses to be up $4.2 million. The one-time $1.6 million charge for the Savings Association Insurance Fund recapitalization recorded in the third quarter partially offset the rise in staff expenses. Signet's efficiency ratio of 62% for the fourth quarter of 1996 was a slight improvement from the 63% reported for the fourth quarter of 1995, excluding the fraud loss. In addition, this ratio improved from 65% for the third quarter of 1996. Income tax expense for the fourth quarter of 1996 was $17.5 million, compared with the fourth quarter 1995 expense of $3.9 million and third quarter 1996 expense of $15.1 million. The Company's effective tax rate was approximately 34% for the 1996 third and fourth quarters. The lower tax amount 42 and percentage for the fourth quarter of 1995 was attributable to the fraud loss which caused pre-tax income to be unusually low. Non-taxable income represented a higher percentage of the 1995 fourth quarter pre-tax income, thus driving the tax rate down to 30%. Average earning assets totaled $10.4 billion for the fourth quarter of 1996, up $646 million, or 7%, from the fourth quarter of 1995 and up a modest $187 million from the $10.2 billion reported for the third quarter of 1996. Adding average securitized loans to both years' quarterly average earning assets and adjusting for loans to be sold to Capital One, in accordance with previously agreed upon terms of the spin-off, reflected a 13% increase in managed earning assets from the fourth quarter of 1995 compared with the fourth quarter of 1996. Loans (net of unearned income) for the fourth quarter of 1996 averaged $6.3 billion, up $722 million, or 13%, from the fourth quarter 1995 and up $392 million, or 7%, from the third quarter of 1996. Including securitized assets and loans held for securitization, managed loans grew $253 million during the quarter and totaled approximately $7.4 billion at December 31, 1996. From September 30, 1996, to December 31, 1996, the managed consumer loan portfolio increased $149 million, or 5%, as the installment loan portfolio (primarily loan-by-check) grew $84 million and the student loan portfolio (including student loans held for securitization and securitized) increased $31 million. The average amount of commercial loans increased $129 million when comparing the fourth quarter of 1996 to the prior quarter, as Signet continues to successfully grow its leasing portfolio and target certain specialized industries. Investment securities declined from a $206 million average in the fourth quarter of 1995 to zero in the fourth quarter of 1996, reflecting the reclassification of all of the Company's investment securities to securities available for sale in December, 1995, as allowed by implementation guidance for SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Average securities available for sale increased $557 million, or 29%, in the fourth quarter of 1996 compared with the average for the same quarter of 1995. Approximately $206 million of this increase resulted from the reclassification of investment securities to securities available for sale in December, 1995, as noted above. Interest bearing liabilities averaged $8.9 billion in the fourth quarter of 1996, up $514 million, or 6%, from the fourth quarter of 1995. The increase came from a $370 million rise in average deposits and a $147 million increase in average long-term debt, as Signet Bank issued $150 million of subordinated bank notes in 1996. Average non-interest bearing demand deposits remained relatively level at $1.6 billion when comparing the fourth quarter of 1996 to the same quarter of 1995. Non-performing assets at December 31, 1996 totaled $38.8 million, or 0.61% of loans and foreclosed properties, down from $54.3 million, or 1.00%, at December 31, 1995 and $43.9 million, or 0.71%, at September 30, 1996. Accruing loans contractually past due 90 days or more as to principal or interest payments totaled $71.5 million, $66.4 million and $78.0 million as of December 31, 1996, December 31, 1995 and September 30, 1996, respectively. At December 31, 1996, stockholders' equity totaled $924 million, an increase of $35 million, or 4%, from the September 30, 1996 level of $889 million as net income, the issuance of common stock and net unrealized gains on securities available for sale exceeded dividends declared. Unrealized gains and losses, net of tax, on securities available for sale increased equity by $9.7 million in the fourth quarter of 1996. The dividends declared during the fourth quarter of 1996 were $11.8 million or $0.21 per common share. 43 TABLE 22 SELECTED QUARTERLY FINANCIAL INFORMATION - -------------------------------------------------------------------------------- Due to the significance of the spin-off of Capital One on February 28, 1995, pro forma financial information for the first quarter of 1995 is provided below to illustrate Signet's financial results and other data assuming the spin-off occurred prior to January 1, 1995. Consolidated and pro forma results are the same for time periods subsequent to February 28, 1995.
- --------------------------------------------------------------------------------------------- 1996 Fourth Third Second First Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------- Consolidated (dollars in thousands-except per share) Earnings Interest income $ 212,561 $ 211,043 $ 206,226 $ 201,582 Interest expense 95,842 92,609 88,853 85,348 - --------------------------------------------------------------------------------------------- Net interest income 116,719 118,434 117,373 116,234 Provision for loan losses 29,800 19,000 13,794 11,257 - --------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 86,919 99,434 103,579 104,977 Non-interest operating income (1) 84,667 68,758 63,707 57,424 Securities gains (losses) 4,894 (629) 164 592 Non-interest expense(2) 125,337 122,855 121,511 115,615 - --------------------------------------------------------------------------------------------- Income before income taxes (benefit) 51,143 44,708 45,939 47,378 Applicable income taxes (benefit) 17,498 15,102 15,458 16,183 - --------------------------------------------------------------------------------------------- Net income 33,645 29,606 30,481 31,195 Net income excluding the commercial fraud loss 33,645 29,606 30,481 31,195 Per Common Share Net income $ 0.55 $ 0.49 $ 0.50 $ 0.52 Net income excluding the commercial fraud loss 0.55 0.49 0.50 0.52 - --------------------------------------------------------------------------------------------- Pro Forma (excluding Capital One): Earnings Net interest income (taxable equivalent)$ 118,992 $ 120,492 $ 119,122 $ 118,378 Net interest income 116,719 118,434 117,373 116,234 Net income 33,645 29,606 30,481 31,195 Net income excluding the commercial fraud loss(3) 33,645 29,606 30,481 31,195 Per Common Share Net income $ 0.55 $ 0.49 $ 0.50 $ 0.52 Net income excluding the commercial fraud loss(3) 0.55 0.49 0.50 0.52 Book value 15.38 14.89 14.48 14.39 At Period-end Earning assets $10,408,563 $10,172,640 $10,227,741 $10,372,978 Loans (net of unearned income) 6,354,886 6,172,067 5,912,220 5,794,051 Core Deposits 7,615,196 7,469,693 7,195,218 7,325,134 Number of common stockholders 15,111 15,164 15,137 15,176 Full-time employees 3,862 4,201 4,221 4,119 Part-time employees 941 955 1,003 954 Ratios Return on average assets 1.15% 1.03% 1.08% 1.13% Return on average common stockholders' equity 14.69 13.63 14.47 14.60 Efficiency ratio(4) 62.31 64.92 66.16 66.23 Net interest spread 3.93 4.11 4.19 4.32 Net yield margin 4.56 4.70 4.75 4.91 Total stockholders' equity to assets 7.88 7.74 7.48 7.19 Average Shares Outstanding (in thousands) 61,089 60,738 60,502 60,357 Credit Quality Data Non-performing assets $ 38,800 $ 43,851 $ 54,864 $ 47,203 Accruing loans past due 90 days or more 81,750 78,033 70,762 65,199 Net charge-offs(5) 21,552 16,983 13,785 14,526 Allowance for loan losses to: Non-performing loans 483.02% 441.17% 371.73% 395.64% Non-performing assets 352.34 292.95 230.46 267.85 Net loans 2.15 2.08 2.14 2.18 Non-performing assets to loans and foreclosed properties 0.61 0.71 0.92 0.81 Net loan losses to average loans 1.36 1.15 0.95 1.04 =============================================================================================
- -------------------------------------------------------------------------------------------- 1995 Fourth Third Second First Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------- Consolidated (dollars in thousands-except per share) Earnings Interest income $ 206,989 $ 206,743 $ 202,735 $ 249,532 Interest expense 91,394 89,799 85,289 106,283 - -------------------------------------------------------------------------------------------- Net interest income 115,595 116,944 117,446 143,249 Provision for loan losses 18,604 8,681 4,250 7,180 - -------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 96,991 108,263 113,196 136,069 Non-interest operating income (1) 67,666 46,363 42,692 120,758 Securities gains (losses) 454 731 247 357 Non-interest expense(2) 152,191 109,507 111,444 190,926 - -------------------------------------------------------------------------------------------- Income before income taxes (benefit) 12,920 45,850 44,691 66,258 Applicable income taxes (benefit) 3,894 15,707 15,005 24,033 - -------------------------------------------------------------------------------------------- Net income 9,026 30,143 29,686 42,225 Net income excluding the commercial fraud loss 31,776 30,143 29,686 42,225 Per Common Share Net income $ 0.15 $ 0.50 $ 0.50 $ 0.71 Net income excluding the commercial fraud loss 0.53 0.50 0.50 0.71 - -------------------------------------------------------------------------------------------- Pro Forma (excluding Capital One): Earnings Net interest income (taxable equivalent)$ 117,443 $ 119,482 $ 120,401 $ 121,344 Net interest income 115,595 116,944 117,446 118,082 Net income 9,026 30,143 29,686 26,706 Net income excluding the commercial fraud loss(3) 31,776 30,143 29,686 26,706 Per Common Share Net income $ 0.15 $ 0.50 $ 0.50 $ 0.45 Net income excluding the commercial fraud loss(3) 0.53 0.50 0.50 0.45 Book value 14.59 14.27 13.90 13.15 At Period-end Earning assets $ 9,443,028 $ 9,911,356 $ 9,514,318 $ 9,337,761 Loans (net of unearned income) 5,416,028 5,509,437 5,684,427 5,647,599 Core Deposits 7,413,414 7,173,040 7,106,437 7,113,166 Number of common stockholders 15,166 15,134 15,259 15,374 Full-time employees 3,974 3,900 3,743 3,759 Part-time employees 1,021 1,049 1,133 1,029 Ratios Return on average assets 0.33% 1.11% 1.14% 1.06% Return on average common stockholders' equity 4.18 14.51 15.00 14.34 Efficiency ratio(4) 63.47 65.99 68.67 69.95 Net interest spread 4.16 4.32 4.50 4.83 Net yield margin 4.78 4.96 5.14 5.42 Total stockholders' equity to assets 7.87 7.59 7.70 7.36 Average Shares Outstanding (in thousands) 60,230 60,146 59,760 59,163 Credit Quality Data Non-performing assets $ 54,303 $ 51,504 $ 57,447 $ 41,597 Accruing loans past due 90 days or more 66,371 66,232 54,538 42,919 Net charge-offs(5) 15,623 12,964 18,593 2,775 Allowance for loan losses to: Non-performing loans 337.05% 339.92% 297.24% 574.88% Non-performing assets 238.85 251.77 237.60 364.76 Net loans 2.39 2.35 2.40 2.69 Non-performing assets to loans and foreclosed properties 1.00 0.93 1.01 0.73 Net loan losses to average loans 1.12 0.89 1.27 0.19 ============================================================================================
(1) The fourth quarters of 1996 and 1995 included gains on securitization of loans of $9.3 million and $9.6 million, respectively. (2) The first quarter of 1995 included $29.1 million of credit card solicitation charges. The fourth quarter of 1995 included the $35.0 million fraud loss. (3) The fourth quarter of 1995 included the $35.0 million fraud loss. (4) The efficiency ratio has been adjusted to exclude the fraud loss and foreclosed property expense. (5) The second quarter of 1995 included approximately $13.9 million of charge-offs related to the sale of approximately $55.0 million of real estate related loans for which there was sufficient allowance. The "Consolidated" section of the above schedule is a tabulation of the Company's unaudited quarterly results of operations for the years ended December 31, 1996 and 1995. The Company's common shares are traded on the New York Stock Exchange under the symbol SBK. In addition, shares may be traded in the over-the-counter stock market. 44 TABLE 23 QUARTER-END BALANCE SHEET TREND
- ----------------------------------------------------------------------------------------- (in thousands) 12/31/96 9/30/96 6/30/96 3/31/96 - ----------------------------------------------------------------------------------------- Assets Cash and due from banks $ 566,520 $ 592,307 $ 533,728 $ 477,370 Interest bearing deposits with other banks 3,200 2,211 1,977 2,479 Federal funds sold and resale agreements 777,999 589,590 599,027 1,048,139 Trading account securities 546,372 478,631 546,756 487,206 Loans held for securitization 300,000 300,000 300,000 Loans held for sale 102,826 110,005 320,316 297,147 Securities available for sale 2,623,280 2,520,136 2,547,445 2,443,956 Investment securities Loans: Consumer 2,300,558 2,221,244 2,016,363 2,086,519 Commercial 3,451,230 3,325,278 3,209,292 3,011,812 Real estate--construction 244,653 250,140 255,822 250,046 Real estate mortgage--commercial 254,060 275,995 332,856 359,445 Real estate mortgage--residential 329,466 311,169 258,996 232,322 - ----------------------------------------------------------------------------------------- Gross loans 6,579,967 6,383,826 6,073,329 5,940,144 Less: Unearned income (225,081) (211,759) (161,109) (146,093) Allowance for loan losses (136,707) (128,459) (126,442) (126,433) - ----------------------------------------------------------------------------------------- Net loans 6,218,179 6,043,608 5,785,778 5,667,618 Premises and equipment (net) 184,413 191,402 195,410 201,690 Interest receivable 107,504 101,958 116,767 106,094 Due from broker 299,645 Other assets 590,125 562,711 578,609 562,325 - ----------------------------------------------------------------------------------------- Total assets $11,720,418 $11,492,559 $11,525,813 $11,893,669 ========================================================================================= Liabilities Non-interest bearing deposits $ 1,751,238 $ 1,774,901 $ 1,669,006 $ 1,713,563 Interest bearing deposits: Interest bearing demand 2,955,576 2,739,923 2,530,148 2,585,045 Savings accounts 651,544 669,062 705,910 961,171 Savings certificates 2,256,838 2,285,807 2,290,154 2,065,355 Large denomination certificates 228,879 204,940 146,500 126,077 Foreign 43,267 159,446 138,168 291,382 - ----------------------------------------------------------------------------------------- Total interest bearing deposits 6,136,104 6,059,178 5,810,880 6,029,030 - ----------------------------------------------------------------------------------------- Total deposits 7,887,342 7,834,079 7,479,886 7,742,593 Securities sold under repurchase agreements 1,467,565 1,356,190 1,767,963 1,228,482 Federal funds purchased 495,171 799,376 948,969 1,002,344 Other short-term borrowings Long-term borrowings 400,014 400,018 250,021 252,974 Interest payable 30,507 31,134 26,010 24,873 Due to broker 300,000 600,812 Other liabilities 215,704 182,288 190,616 186,938 - ----------------------------------------------------------------------------------------- Total liabilities 10,796,303 10,603,085 10,663,465 11,039,016 Stockholders' Equity Common stock 300,387 298,622 297,819 296,936 Capital surplus, net 209,327 207,180 204,763 202,513 Retained earnings 399,268 378,204 360,529 341,946 Unrealized gains on securities available for sale, net of deferred taxes 15,133 5,468 (763) 13,258 - ----------------------------------------------------------------------------------------- Total stockholders' equity 924,115 889,474 862,348 854,653 - ----------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $11,720,418 $11,492,559 $11,525,813 $11,893,669 =========================================================================================
- ---------------------------------------------------------------------------------------- (in thousands) 12/31/95 9/30/95 6/30/95 3/31/95 - ---------------------------------------------------------------------------------------- Assets Cash and due from banks $ 599,113 $ 498,193 $ 529,205 $ 541,946 Interest bearing deposits with other banks 3,129 1,712 14,610 33,523 Federal funds sold and resale agreements 460,217 425,305 638,641 772,865 Trading account securities 478,723 464,950 439,737 490,266 Loans held for securitization 389,700 750,000 450,300 150,000 Loans held for sale 361,260 267,535 259,372 159,224 Securities available for sale 2,333,971 2,195,180 1,651,554 1,692,387 Investment securities 297,237 375,677 391,897 Loans: Consumer 1,751,274 1,776,434 2,116,882 2,229,957 Commercial 3,090,904 2,982,401 2,820,339 2,577,674 Real estate--construction 236,103 237,271 227,531 211,097 Real estate mortgage--commercial 366,698 406,102 433,701 505,717 Real estate mortgage--residential 122,584 248,145 224,433 225,477 - ---------------------------------------------------------------------------------------- Gross loans 5,567,563 5,650,353 5,822,886 5,749,922 Less: Unearned income (151,535) (140,916) (138,459) (102,323) Allowance for loan losses (129,702) (129,672) (136,497) (151,729) - ---------------------------------------------------------------------------------------- Net loans 5,286,326 5,379,765 5,547,930 5,495,870 Premises and equipment (net) 192,431 180,549 166,731 160,672 Interest receivable 104,437 98,000 90,190 75,082 Due from broker Other assets 768,558 534,689 458,370 513,994 - ---------------------------------------------------------------------------------------- Total assets $10,977,865 $11,093,115 $10,622,317 $10,477,726 ======================================================================================== Liabilities Non-interest bearing deposits $ 1,726,378 $ 1,603,922 $ 1,647,309 $ 1,533,797 Interest bearing deposits: Interest bearing demand 2,441,125 2,402,077 2,358,788 2,405,637 Savings accounts 1,395,514 1,338,824 1,291,289 1,224,393 Savings certificates 1,850,397 1,828,217 1,809,051 1,949,339 Large denomination certificates 129,711 99,890 99,020 100,987 Foreign 49,846 80,318 96,084 183,337 - ---------------------------------------------------------------------------------------- Total interest bearing deposits 5,866,593 5,749,326 5,654,232 5,863,693 - ---------------------------------------------------------------------------------------- Total deposits 7,592,971 7,353,248 7,301,541 7,397,490 Securities sold under repurchase agreements 1,124,105 1,153,479 1,229,433 1,202,629 Federal funds purchased 780,193 1,285,918 816,946 521,295 Other short-term borrowings 105,408 Long-term borrowings 253,033 253,129 253,222 253,550 Interest payable 19,460 23,455 18,030 26,047 Due to broker 125,000 Other liabilities 219,154 181,514 185,140 199,831 - ---------------------------------------------------------------------------------------- Total liabilities 10,113,916 10,250,743 9,804,312 9,706,250 Stockholders' Equity Common stock 296,044 295,244 294,175 293,298 Capital surplus, net 200,093 197,911 195,899 193,986 Retained earnings 322,614 325,416 305,296 285,603 Unrealized gains on securities available for sale, net of deferred taxes 45,198 23,801 22,635 (1,411) - ---------------------------------------------------------------------------------------- Total stockholders' equity 863,949 842,372 818,005 771,476 - ---------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $10,977,865 $11,093,115 $10,622,317 $10,477,726 ========================================================================================
45 TABLE 24 QUARTERLY AVERAGE BALANCE SHEET TREND (excluding Capital One)
- ------------------------------------------------------------------------------------------------ Three Months Ended - ------------------------------------------------------------------------------------------------ (in thousands) 12/31/96 9/30/96 6/30/96 3/31/96 - ------------------------------------------------------------------------------------------------ Assets Earning assets Interest bearing deposits with other banks $ 14,779 $ 8,322 $ 2,862 $ 12,633 Federal funds sold and resale agreements 621,548 632,373 703,429 591,396 Trading account securities 516,477 534,483 493,912 506,040 Loans held for securitization 283,696 300,000 300,000 330,557 Loans held for sale 145,687 322,318 381,530 389,569 Securities available for sale 2,488,683 2,477,984 2,379,317 2,309,330 Investment securities-taxable Investment securities-nontaxable Loans (net of unearned income): Consumer 2,298,475 2,061,732 2,055,518 1,906,768 Commercial 3,161,213 3,031,863 2,923,535 2,892,389 Real estate--construction 248,339 250,921 252,540 245,237 Real estate mortgage--commercial 272,376 291,124 348,219 357,989 Real estate mortgage--residential 339,652 292,405 234,634 164,087 - ------------------------------------------------------------------------------------------------ Total loans 6,320,055 5,928,045 5,814,446 5,566,470 - ------------------------------------------------------------------------------------------------ Total earning assets 10,390,925 10,203,525 10,075,496 9,705,995 Non-rate related assets: Cash and due from banks 469,854 473,638 514,523 529,040 Allowance for loan losses (132,385) (126,539) (126,569) (128,503) Premises and equipment (net) 189,320 194,211 197,471 196,314 Other assets 692,199 684,580 685,761 764,784 - ------------------------------------------------------------------------------------------------ Total assets $11,609,913 $11,429,415 $11,346,682 $11,067,630 - ------------------------------------------------------------------------------------------------ Liabilities and Stockholders' Equity Interest bearing liabilities: Deposits: Interest bearing demand $ 2,830,942 $ 2,654,412 $ 2,537,684 $ 2,474,573 Savings accounts 658,926 687,441 949,193 1,248,406 Savings certificates 2,269,278 2,288,185 2,158,040 1,949,398 Large denomination certificates 227,394 180,640 126,537 111,194 Foreign 144,797 187,614 179,726 93,435 - ------------------------------------------------------------------------------------------------ Total interest bearing deposits 6,131,337 5,998,292 5,951,180 5,877,006 Federal funds and repurchase agreements 2,335,823 2,507,844 2,491,809 2,205,733 Other short-term borrowings Long-term borrowings 400,016 274,419 250,606 252,991 - ------------------------------------------------------------------------------------------------ Total interest bearing liabilities 8,867,176 8,780,555 8,693,595 8,335,730 Non-interest bearing liabilities: Demand deposits 1,577,660 1,570,541 1,574,282 1,674,258 Other liabilities 253,806 214,518 231,798 198,254 Common stockholders' equity 911,271 863,801 847,007 859,388 - ------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $11,609,913 $11,429,415 $11,346,682 $11,067,630 ================================================================================================
- --------------------------------------------------------------------------------------------- Three Months Ended - --------------------------------------------------------------------------------------------- (in thousands) 12/31/95 9/30/95 6/30/95 3/31/95 - --------------------------------------------------------------------------------------------- Assets Earning assets Interest bearing deposits with other banks $ 7,077 $ 8,136 $ 22,799 $ 89,749 Federal funds sold and resale agreements 538,752 469,512 532,922 812,447 Trading account securities 469,665 464,254 553,080 418,011 Loans held for securitization 623,801 425,543 153,300 1,667 Loans held for sale 369,802 312,734 234,107 94,718 Securities available for sale 1,932,161 1,712,148 1,679,836 1,494,844 Investment securities-taxable 154,857 230,852 235,514 214,027 Investment securities-nontaxable 50,812 106,860 146,867 157,609 Loans (net of unearned income): Consumer 1,824,487 2,182,724 2,349,345 2,505,854 Commercial 2,863,087 2,747,241 2,553,554 2,362,850 Real estate--construction 242,094 230,364 217,685 207,805 Real estate mortgage--commercial 387,273 423,622 480,112 520,340 Real estate mortgage--residential 281,250 241,066 236,107 204,888 - ---------------------------------------------------------------------------------------------- Total loans 5,598,191 5,825,017 5,836,803 5,801,737 - ---------------------------------------------------------------------------------------------- Total earning assets 9,745,118 9,555,056 9,395,228 9,084,809 Non-rate related assets: Cash and due from banks 543,776 533,901 509,633 503,217 Allowance for loan losses (125,658) (133,144) (144,407) (151,757) Premises and equipment (net) 188,689 174,691 164,536 160,217 Other assets 630,085 625,258 561,476 598,458 - ---------------------------------------------------------------------------------------------- Total assets $10,982,010 $10,755,762 $10,486,466 $10,194,944 ============================================================================================== Liabilities and Stockholders' Equity Interest bearing liabilities: Deposits: Interest bearing demand $ 2,406,323 $ 2,379,104 $ 2,378,621 $ 2,416,303 Savings accounts 1,372,400 1,315,832 1,255,593 1,188,584 Savings certificates 1,800,643 1,791,296 1,876,689 1,943,788 Large denomination certificates 104,933 100,367 92,660 123,864 Foreign 77,306 116,204 146,829 83,737 - ---------------------------------------------------------------------------------------------- Total interest bearing deposits 5,761,605 5,702,803 5,750,392 5,756,276 Federal funds and repurchase agreements 2,338,713 2,201,617 1,950,959 1,512,558 Other short-term borrowings 30,098 195,275 Long-term borrowings 253,085 253,174 253,427 253,596 - ---------------------------------------------------------------------------------------------- Total interest bearing liabilities 8,353,403 8,157,594 7,984,876 7,717,705 Non-interest bearing liabilities: Demand deposits 1,584,375 1,557,185 1,497,770 1,515,423 Other liabilities 188,036 216,792 210,092 206,520 Common stockholders' equity 856,196 824,191 793,728 755,296 - ---------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $10,982,010 $10,755,762 $10,486,466 $10,194,944 ==============================================================================================
46 TABLE 25 QUARTERLY INCOME TREND (excluding Capital One)
- ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) 12/31/96 9/30/96 6/30/96 3/31/96 12/31/95 9/30/95 6/30/95 3/31/95 - ------------------------------------------------------------------------------------------------------------------------------------ Interest income: Loans, including fees: Consumer $ 62,188 $ 55,516 $ 54,725 $ 53,062 $ 52,026 $ 60,296 $ 62,068 $ 70,095 Commercial 61,509 59,691 56,568 55,352 56,128 53,703 50,358 46,365 Real estate--construction 5,991 6,085 6,064 6,062 6,402 6,080 5,628 5,152 Real estate--commercial mortgage 5,552 6,036 7,710 8,150 8,856 9,358 11,276 12,131 Real estate--residential mortgage 6,496 5,701 4,176 3,204 5,628 5,011 5,074 4,279 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans, including fees 141,736 133,029 129,243 125,830 129,040 134,448 134,404 138,022 Interest bearing deposits with other banks 183 106 43 154 102 127 358 1,316 Federal funds sold and resale agreements 8,648 8,793 9,543 8,188 8,025 7,166 8,232 12,029 Trading account securities 8,090 8,383 7,865 8,122 7,736 7,410 8,936 6,718 Loans held for securitization 5,611 6,005 5,992 7,419 14,262 11,561 6,420 73 Loans held for sale 2,525 8,441 9,579 10,086 8,635 7,785 5,858 1,479 Securities available for sale 45,768 46,286 43,961 41,783 35,442 31,963 31,342 26,512 Investment securities--taxable 2,797 4,190 4,257 3,811 Investment securities--nontaxable 950 2,093 2,928 3,139 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 212,561 211,043 206,226 201,582 206,989 206,743 202,735 193,099 Interest expense: Interest bearing demand 24,688 21,230 18,209 18,080 18,677 18,667 18,643 18,099 Savings accounts 4,399 4,607 7,530 11,495 13,426 12,785 11,800 10,727 Savings certificates 27,047 27,227 25,395 22,535 21,381 22,070 20,747 17,147 Large denomination certificates 3,261 2,566 1,731 1,525 1,451 1,332 1,186 1,529 Foreign 1,961 2,583 2,415 1,279 1,138 1,721 2,235 1,253 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest on deposits 61,356 58,213 55,280 54,914 56,073 56,575 54,611 48,755 Securities sold under repurchase agreements 19,085 19,329 17,084 14,511 16,343 14,689 13,880 11,732 Federal funds purchased 9,238 10,939 12,693 11,809 14,874 14,211 12,266 7,295 Other short-term borrowings 413 2,761 Long-term borrowings 6,163 4,128 3,796 4,114 4,104 4,324 4,119 4,474 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 95,842 92,609 88,853 85,348 91,394 89,799 85,289 75,017 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 116,719 118,434 117,373 116,234 115,595 116,944 117,446 118,082 Provision for loan losses 29,800 19,000 13,794 11,257 18,604 8,681 4,250 3,251 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 86,919 99,434 103,579 104,977 96,991 108,263 113,196 114,831 Non-interest income: Service charges on deposit accounts 17,198 17,180 17,100 16,231 16,816 17,732 17,212 16,471 Consumer loan servicing and service charge income 12,056 11,439 15,276 12,156 6,468 2,511 1,633 2,551 Trust and other financial services income 10,708 10,308 10,108 9,605 9,460 8,680 7,104 7,096 Gain on securitization of loans 9,254 9,562 Other 35,451 29,831 21,223 19,432 25,360 17,440 16,743 10,941 - ------------------------------------------------------------------------------------------------------------------------------------ Non-interest operating income 84,667 68,758 63,707 57,424 67,666 46,363 42,692 37,059 Securities available for sale gains (losses) 4,894 (629) 164 592 20 166 244 102 Investment securities gains 434 565 3 255 - ------------------------------------------------------------------------------------------------------------------------------------ Total non-interest income 89,561 68,129 63,871 58,016 68,120 47,094 42,939 37,416 Non-interest expense: Salaries 57,513 54,605 52,302 48,700 48,932 45,792 43,668 42,638 Employee benefits 10,129 8,811 10,466 12,401 7,723 10,517 12,076 13,698 Supplies and equipment 10,654 10,036 9,985 9,605 9,513 9,384 8,715 8,558 Occupancy 9,576 9,045 9,520 10,194 9,572 9,635 9,434 9,843 External data processing services 9,002 7,992 8,333 7,146 7,289 6,868 6,748 6,210 Travel and communications 5,645 6,231 6,706 5,920 7,208 6,138 5,604 5,594 Commercial fraud loss 35,000 Other 22,818 26,135 24,199 21,649 26,954 21,173 25,199 24,837 - ------------------------------------------------------------------------------------------------------------------------------------ Total non-interest expense 125,337 122,855 121,511 115,615 152,191 109,507 111,444 111,378 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 51,143 44,708 45,939 47,378 12,920 45,850 44,691 40,869 Applicable income taxes 17,498 15,102 15,458 16,183 3,894 15,707 15,005 14,163 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 33,645 $ 29,606 $ 30,481 $ 31,195 $ 9,026 $ 30,143 $ 29,686 $ 26,706 - ------------------------------------------------------------------------------------------------------------------------------------
47 TABLE 26 STATEMENT OF CONSOLIDATED INCOME (excluding Capital One)
- ----------------------------------------------------------------------------------------------------------------------- Year Ended December 31 - ----------------------------------------------------------------------------------------------------------------------- (in thousands) (unaudited) 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- Interest income: Loans, including fees: Consumer $225,491 $244,485 $128,570 $ 87,286 Commercial 233,120 206,554 163,195 157,157 Real estate--construction 24,202 23,262 20,977 31,570 Real estate--commercial mortgage 27,448 41,621 47,520 44,830 Real estate--residential mortgage 19,577 19,992 8,399 7,634 - ----------------------------------------------------------------------------------------------------------------------- Total loans, including fees 529,838 535,914 368,661 328,477 Interest bearing deposits with other banks 486 1,903 11,441 12,031 Federal funds sold and resale agreements 35,172 35,452 42,279 23,196 Trading account securities 32,460 30,800 21,487 31,297 Loans held for securitization 25,027 32,316 Loans held for sale 30,631 23,757 13,010 16,875 Securities available for sale 177,798 125,259 72,113 17,064 Investment securities-taxable 15,055 4,305 93,538 Investment securities-nontaxable 9,110 15,843 21,390 - ----------------------------------------------------------------------------------------------------------------------- Total interest income 831,412 809,566 549,139 543,868 Interest expense: Interest bearing demand 82,207 74,086 67,694 68,007 Savings accounts 28,031 48,738 33,461 24,079 Savings certificates 102,204 81,345 66,352 58,514 Large denomination certificates 9,083 5,498 7,382 10,970 Foreign 8,238 6,347 4,422 6,627 - ----------------------------------------------------------------------------------------------------------------------- Total interest on deposits 229,763 216,014 179,311 168,197 Securities sold under repurchase agreements 70,009 56,644 Federal funds purchased 44,679 48,646 3,213 Other short-term borrowings 3,174 4,896 21,513 Long-term borrowings 18,201 17,021 16,685 16,681 - ----------------------------------------------------------------------------------------------------------------------- Total interest expense 362,652 341,499 204,105 206,391 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 468,760 468,067 345,034 337,477 Provision for loan losses 73,851 34,786 (16,229) 13,256 - ----------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 394,909 433,281 361,263 324,221 Non-interest income: Service charges on deposit accounts 67,709 68,231 66,141 64,471 Consumer loan servicing and service charge income 50,927 13,163 26,834 30,656 Trust and investment management income 40,729 32,340 28,085 24,702 Gain on securitization of loans 9,254 9,562 Other 105,937 70,484 74,145 73,988 - ----------------------------------------------------------------------------------------------------------------------- Non-interest operating income 274,556 193,780 195,205 193,817 Securities available for sale gains 5,021 532 3,413 3,913 Investment securities gains 1,257 46 405 - ----------------------------------------------------------------------------------------------------------------------- Total non-interest income 279,577 195,569 198,664 198,135 Non-interest expense: Salaries 213,120 181,030 186,216 173,710 Employee benefits 41,807 44,014 50,039 55,492 Supplies and equipment 40,280 36,170 34,045 32,587 Occupancy 38,335 38,484 41,869 39,094 External data processing services 32,473 27,115 27,660 27,344 Travel and communications 24,502 24,544 22,758 17,800 Commercial fraud loss 35,000 Restructuring charges 43,212 Other 94,801 98,163 82,510 98,009 - ----------------------------------------------------------------------------------------------------------------------- Total non-interest expense 485,318 484,520 488,309 444,036 - ----------------------------------------------------------------------------------------------------------------------- Income before income taxes 189,168 144,330 71,618 78,320 Applicable income taxes 64,241 48,769 15,775 14,391 - ----------------------------------------------------------------------------------------------------------------------- Net income $124,927 $ 95,561 $ 55,843 $ 63,929 =======================================================================================================================
48 TABLE 27 SELECTED FINANCIAL DATA(1)
- ---------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------- Summary of Operations (dollars in thousands-except per share) Net interest income-taxable equivalent $476,984 $503,837 $523,717 $545,093 $454,912 $420,026 Less: taxable equivalent adjustment 8,224 10,603 13,706 15,753 19,302 22,056 - ---------------------------------------------------------------------------------------------------------------------- Net interest income 468,760 493,234 510,011 529,340 435,610 397,970 Provision for loan losses (2) 73,851 38,715 14,498 47,286 67,794 287,484 - ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 394,909 454,519 495,513 482,054 367,816 110,486 Non-interest operating income (3) 274,556 277,479 564,624 361,118 280,988 248,537 Securities available for sale gains 5,021 532 3,413 3,913 10,504 94,666 Investment securities gains (losses) 1,257 46 405 (17,951) (1,445) - ---------------------------------------------------------------------------------------------------------------------- Total non-interest income 279,577 279,268 568,083 365,436 273,541 341,758 Non-interest expense (4) 485,318 564,068 846,423 598,316 499,239 508,925 - ---------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) 189,168 169,719 217,173 249,174 142,118 (56,681) Applicable income taxes (benefit) (5) 64,241 58,639 67,339 74,760 32,918 (30,934) - ---------------------------------------------------------------------------------------------------------------------- Net income (loss) $124,927 $111,080 $149,834 $174,414 $109,200 $(25,747) ====================================================================================================================== Per common share: Net income (loss) $ 2.06 $ 1.86 $ 2.59 $ 3.06 $ 1.96 $ (0.48) Cash dividends declared (6) 0.81 0.79 1.00 0.80 0.45 0.30 Book value at year-end 15.38 14.59 18.96 17.04 14.77 13.17 Average shares outstanding (in thousands) 60,672 59,826 57,863 56,920 55,727 53,994 - ---------------------------------------------------------------------------------------------------------------------- Selected Average Balances (dollars in millions) Assets $ 11,364 $ 11,134 $ 11,469 $ 11,617 $ 11,168 $ 11,534 Earning assets 10,095 9,919 10,152 10,553 10,181 10,538 Loans (net of unearned income) 5,908 6,120 6,408 6,206 5,618 6,071 Deposits 7,589 7,367 7,747 7,733 7,886 8,362 Long-term borrowings 295 233 255 287 298 318 Interest bearing liabilities 8,670 8,501 8,606 9,121 9,000 9,506 Common stockholders' equity 870 868 1,046 889 768 750 - ---------------------------------------------------------------------------------------------------------------------- Selected Year-End Balances (dollars in millions) Assets $ 11,720 $ 10,978 $ 12,931 $ 11,849 $ 12,093 $ 11,239 Earning assets 10,409 9,443 11,479 10,745 11,010 9,443 Loans (net of unearned income) 6,355 5,416 7,924 6,310 5,809 5,884 Deposits 7,887 7,593 7,822 7,821 7,823 8,481 Long-term borrowings 400 253 254 266 298 299 Interest bearing liabilities 8,499 8,024 9,846 9,167 9,684 9,031 Common stockholders' equity 924 864 1,111 965 827 712 - ---------------------------------------------------------------------------------------------------------------------- Operating Ratios Net income to: Average common stockholders' equity 14.35% 12.79% 14.33% 19.62% 14.22% N/M Average assets 1.10 1.00 1.31 1.50 0.98 N/M Stockholders' equity to assets (average) 7.66 7.80 9.12 7.65 6.88 6.50% Loans to deposits (average) 77.86 83.07 82.72 80.26 71.24 72.60 Net loan losses to average loans 1.13 0.87 0.71 0.91 2.34 2.03 Net interest spread (7) 4.14 4.45 4.63 4.76 4.05 3.40 Net yield margin (7) 4.73 5.08 5.16 5.17 4.47 3.98 At year-end: Allowance for loan losses to loans 2.15 2.39 2.78 4.01 4.57 5.60 Allowance for loan losses to non- performing loans 483.02 337.05 846.32 342.63 228.25 156.84 - ----------------------------------------------------------------------------------------------------------------------
(1) Signet spun off Capital One on February 28, 1995. The amounts of pre-tax income related to Capital One were as follows: 1995--$27.4 million; 1994--$146.8 million; 1993--$170.9 million; 1992--$48.9 million; and 1991--$53.5 million. (2) 1991 included a special provision of $146.6 million to accelerate the reduction of real estate assets. (3) 1996 included a $9.3 million gain on securitization of student loans, 1995 included a $9.6 million gain on securitization of home equity loans and $7.2 million related to the implementation of SFAS No. 122. (4) 1993, 1992 and 1991 included provisions of $7.4 million, $15.5 million and $71.9 million, respectively, to the reserve for foreclosed properties, which had December 31, 1993, 1992 and 1991 balances of $5.7 million, $10.6 million and $41.6 million, respectively. 1995, 1994, 1993, 1992, and 1991 included $29.1 million, $100.9 million, $55.8 million, $23.1 million, and $14.6 million, respectively, of Capital One credit card solicitation expenses. 1994 included a $49.0 million contract termination fee and $43.2 million of restructuring charges. 1995 included the $35.0 million fraud loss. (5) Income taxes (benefit) applicable to net securities available for sale gains and investment securities gains (losses) were as follows: 1996--$1.8 million; 1995--$0.7 million; 1994--$1.2 million; 1993--$1.5 million; 1992--($2.5) million; and 1991--$32.9 million. Additionally, 1992 included $6.3 million of recaptured alternative minimum tax. (6) In March, 1991, Signet announced that, thereafter, its dividend declaration would be made in the month following the end of each quarter instead of in the last month of each quarter. As a result, 1991 included only three dividend declarations; however, four dividend payments were made. (7) Net interest spread and net yield margin were calculated on a taxable equivalent basis, using the federal income tax rate and state tax rates, as applicable, reduced by the nondeductible portion of interest expense. 49 TABLE 28 NET INTEREST INCOME ANALYSIS taxable equivalent basis (1)
- ------------------------------------------------------------------------------------------------------------------------------------ 1996 vs 1995 1995 vs 1994 Year Ended ------------ Year Ended ------------ December 31 Increase Change due to (3) December 31 Increase Change due to (3) (in thousands) 1996 1995 (Decrease) Volume Rates 1994 (Decrease) Volume Rates - ------------------------------------------------------------------------------------------------------------------------------------ Interest income: Loans, including fees:(2) Consumer $225,491 $292,024 $(66,533) $(53,312) $(13,221) $342,670 $(50,646) $(86,336) $35,690 Commercial 238,232 209,765 28,467 29,422 (955) 165,372 44,393 38,501 5,892 Real estate--construction 24,202 23,263 939 2,456 (1,517) 21,007 2,256 (2,252) 4,508 Real estate--commercial mortgage 29,280 44,275 (14,995) (12,584) (2,411) 50,254 (5,979) (10,281) 4,302 Real estate--residential mortgage 19,577 19,992 (415) 1,349 (1,764) 8,399 11,593 11,882 (289) - ------------------------------------------------------------------------------------------------------------------------------------ Total loans 536,782 589,319 (52,537) (19,932) (32,605) 587,702 1,617 (27,043) 28,660 Interest bearing deposits with other banks 486 2,025 (1,539) (1,255) (284) 11,512 (9,487) (12,269) 2,782 Federal funds and resale agreements 35,172 38,732 (3,560) (374) (3,186) 44,294 (5,562) (17,472) 11,910 Trading account securities 32,460 30,800 1,660 2,333 (673) 21,487 9,313 12,555 (3,242) Loans held for securitization 25,027 36,448 (11,421) (3,526) (7,895) 41,015 (4,567) (9,625) 5,058 Loans held for sale 30,631 23,757 6,874 5,439 1,435 13,010 10,747 3,972 6,775 Securities available for sale 179,078 126,717 52,361 51,005 1,356 73,409 53,308 24,415 28,893 Investment securities--taxable 15,190 (15,190) (15,190) 4,395 10,795 10,341 454 Investment securities--nontaxable 13,614 (13,614) (13,614) 23,895 (10,281) (9,695) (586) - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 839,636 876,602 (36,966) 15,385 (52,351) 820,719 55,883 (19,254) 75,137 Interest expense: Interest bearing demand 82,207 74,086 8,121 7,123 998 67,694 6,392 (7,513) 13,905 Savings accounts 28,031 48,738 (20,707) (13,483) (7,224) 33,461 15,277 9,513 5,764 Savings certificates 102,204 81,345 20,859 14,470 6,389 61,377 19,968 (4,169) 24,137 Large denomination certificates 9,083 11,669 (2,586) (1,997) (589) 14,527 (2,858) (6,516) 3,658 Foreign 8,238 6,347 1,891 2,519 (628) 10,071 (3,724) (6,893) 3,169 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest on deposits 229,763 222,185 7,578 6,029 1,549 187,130 35,055 (11,395) 46,450 Federal funds and repurchase agreements 114,688 109,961 4,727 15,714 (10,987) 65,894 44,067 17,530 26,537 Other short-term borrowings 15,302 (15,302) (15,302) 27,293 (11,991) (16,091) 4,100 Long-term borrowings 18,201 25,317 (7,116) (4,520) (2,596) 16,685 8,632 7,566 1,066 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 362,652 372,765 (10,113) 7,446 (17,559) 297,002 75,763 (3,673) 79,436 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $476,984 $503,837 $(26,853) $ 8,711 $(35,564) $523,717 $(19,880) $(11,861) $(8,019) ====================================================================================================================================
(1) Total income from earning assets includes the effects of taxable equivalent adjustments using the federal income tax rate and state tax rates, as applicable, reduced by the nondeductible portion of interest expense. (2) Includes fees on loans of approximately $19,673, $25,938 and $30,497 for 1996, 1995, and 1994, respectively. (3) The change in interest due to both volume and rates has been allocated in proportion to the relationship of the absolute dollar amounts of the change in each. The changes in income and expense are calculated independently for each line in the schedule. The totals for the volume and rate columns are not the sum of the individual lines. 50 TABLE 29 CHANGES IN ALLOWANCE FOR LOAN LOSSES
- ----------------------------------------------------------------------------------------------------------------------- Year Ended December 31 - ------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------ Balance at beginning of year $129,702 $220,519 $253,313 $265,536 $329,371 Provision for loan losses 73,851 38,715 14,498 47,286 67,794 Transfer to loans held for securitization/sale (7,871) (4,869) (2,902) Addition arising from acquisition 3,327 Transfer to Capital One Financial Corporation (68,516) Loans charged-off: Consumer 54,332 37,483 34,600 41,475 48,185 Commercial 3,647 5,740 9,827 17,832 33,238 Real estate--construction 6,033 1,143 9,746 26,890 58,406 Real estate--mortgage * 7,542 18,627 20,360 5,720 15,140 - ------------------------------------------------------------------------------------------------------------------------ Total loans charged-off 71,554 62,993 74,533 91,917 154,969 Recoveries of loans previously charged-off: Consumer 1,994 3,416 12,191 17,358 15,488 Commercial 1,884 4,570 5,997 13,138 6,992 Real estate--construction 311 1,496 6,037 4,259 523 Real estate--mortgage * 519 366 4,558 555 337 - ------------------------------------------------------------------------------------------------------------------------ Total recoveries 4,708 9,848 28,783 35,310 23,340 - ------------------------------------------------------------------------------------------------------------------------ Net loans charged-off 66,846 53,145 45,750 56,607 131,629 - ------------------------------------------------------------------------------------------------------------------------ Balance at end of year $136,707 $129,702 $220,519 $253,313 $265,536 ======================================================================================================================== Net charge-offs to average loans: Consumer 2.51% 1.33% 0.67% 0.81% 1.71% Commercial 0.06 0.04 0.18 0.22 1.17 Real estate 1.55 1.95 2.15 2.45 4.93 - ------------------------------------------------------------------------------------------------------------------------ Total 1.13% 0.87% 0.71% 0.91% 2.34% - ------------------------------------------------------------------------------------------------------------------------ Allowance for loans losses to net loans at year-end 2.15% 2.39% 2.78% 4.01% 4.57% ========================================================================================================================
* Real estate-mortgage includes real estate-commercial mortgage and real estate-residential mortgage. Real estate-residential mortgage charge-offs and recoveries were not significant for the periods presented. TABLE 30 ALLOWANCE FOR LOAN LOSSES ALLOCATION
- ----------------------------------------------------------------------------------------------------- December 31, 1996 December 31, 1995 December 31, 1994 ----------------- ----------------- ----------------- Percentage of Percentage of Percentage of Loans in Each Loans in Each Loans in Each Allowance Category to Allowance Category to Allowance Category to (dollars in thousands) Amount Total Loans Amount Total Loans Amount Total Loans - ----------------------------------------------------------------------------------------------------- Consumer (1) $ 79,592 34.96% $ 49,825 31.45% $ 94,093 57.56% Commercial 30,741 52.45 26,367 55.52 34,041 30.86 Commercial-special (2) Real estate (3) 21,326 12.59 40,123 13.03 60,532 11.58 Real estate--special (2) Unallocated 5,048 13,387 31,853 - ----------------------------------------------------------------------------------------------------- Total $136,707 100.00% $129,702 100.00% $220,519 100.00% =====================================================================================================
- --------------------------------------------------------------------------- December 31, 1993 December 31, 1992 ----------------- ----------------- Percentage of Percentage of Loans in Each Loans in Each Allowance Category to Allowance Category to (dollars in thousands) Amount Total Loans Amount Total Loans - --------------------------------------------------------------------------- Consumer (1) $ 67,030 48.77% $ 59,501 41.32% Commercial 33,618 35.87 33,930 36.87 Commercial-special (2) 0.24 1,064 0.34 Real estate (3) 25,684 11.31 19,056 14.30 Real estate--special (2) 57,631 3.81 98,924 7.17 Unallocated 69,350 53,061 - --------------------------------------------------------------------------- Total $253,313 100.00% $ 265,536 100.00% =========================================================================== (1) On February 28, 1995, Signet transferred $68,516 of allowance for loan losses to Capital One in conjunction with the spin-off. (2) Allowance allocated to an accelerated real estate asset reduction program which was established in 1991 and successfully terminated at the beginning of 1994. (3) Real estate loans include real estate--construction, real estate--commercial mortgage and real estate--residential mortgage loans. Real estate--residential has an insignificant amount of allowance allocated to it because of the minimal credit risk associated with that type of loan. 51 TABLE 31 AVERAGE BALANCE SHEET
- ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Average Income\ Yield\ Average Income\ Yield\ Average Income\ Yield\ (dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate - ----------------------------------------------------------------------------------------------------------------------------------- Assets Earning assets (tax equivalent basis):(1) Interest bearing deposits with other banks $ 9,659 $ 486 5.03% $ 33,750 $ 2,025 6.00% $ 251,266 $ 11,512 4.58% Federal funds and resale agreements 637,131 35,172 5.52 643,386 38,732 6.02 970,300 44,294 4.56 Trading account securities 512,798 32,460 6.33 476,361 30,800 6.47 287,192 21,487 7.48 Loans held for securitization 303,499 25,027 8.25 338,877 36,448 10.76 432,581 41,015 9.48 Loans held for sale 309,362 30,631 9.90 253,758 23,757 9.36 200,712 13,010 6.48 Securities available for sale 2,414,209 179,078 7.42 1,726,886 126,717 7.34 1,338,449 73,409 5.48 Investment securities--taxable 210,893 15,190 7.20 66,829 4,395 6.58 Investment securities--nontaxable 115,221 13,614 11.82 197,231 23,895 12.12 Loans (net of unearned income):(2) Consumer 2,081,167 225,491 10.83 2,568,796 292,024 11.37 3,351,159 342,670 10.23 Commercial 3,002,766 238,232 7.93 2,633,370 209,765 7.97 2,148,726 165,372 7.70 Real estate--construction 249,261 24,202 9.71 224,597 23,263 10.36 249,353 21,007 8.42 Real estate--commercial mortgage 317,232 29,280 9.23 452,392 44,275 9.79 560,542 50,254 8.97 Real estate--residential mortgage 258,013 19,577 7.59 241,038 19,992 8.29 97,855 8,399 8.58 - ----------------------------------------------------------------------------------------------------------------------------------- Total loans 5,908,439 536,782 9.09 6,120,193 589,319 9.63 6,407,635 587,702 9.17 - ----------------------------------------------------------------------------------------------------------------------------------- Total earning assets 10,095,097 $839,636 8.32 9,919,325 $876,602 8.84 10,152,195 $820,719 8.08 - ----------------------------------------------------------------------------------------------------------------------------------- Non-rate related assets: Cash and due from banks 496,627 523,224 501,821 Allowance for loan losses (128,504) (149,681) (241,633) Premises and equipment (net) 194,315 188,974 242,933 Other assets 706,729 652,515 813,312 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 11,364,264 $11,134,357 $11,468,628 =================================================================================================================================== Liabilities and Stockholders' Equity Interest bearing liabilities: Deposits: Interest bearing demand $ 2,625,049 $ 82,207 3.13% $2,395,017 $ 74,086 3.09% $ 2,639,388 $ 67,694 2.56% Savings accounts 884,829 28,031 3.17 1,283,695 48,738 3.80 1,019,068 33,461 3.28 Savings certificates 2,166,840 102,204 4.72 1,854,091 81,345 4.39 1,981,823 61,377 3.10 Large denomination certificates 161,674 9,083 5.62 196,798 11,669 5.93 318,659 14,527 4.56 Foreign 151,474 8,238 5.44 106,029 6,347 5.99 236,765 10,071 4.25 - --------------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 5,989,866 229,763 3.84 5,835,630 222,185 3.81 6,195,703 187,130 3.02 Federal funds and repurchase agreements 2,385,502 114,688 4.81 2,071,944 109,961 5.31 1,677,884 65,894 3.93 Other short-term borrowings 228,572 15,302 6.69 477,424 27,293 5.72 Long-term borrowings 294,741 18,201 6.18 364,713 25,317 6.94 254,917 16,685 6.55 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 8,670,109 362,652 4.18 8,500,859 372,765 4.39 8,605,928 297,002 3.45 - ----------------------------------------------------------------------------------------------------------------------------------- Non-interest bearing liabilities: Demand deposits 1,599,048 1,531,553 1,550,902 Other liabilities 224,646 233,495 265,899 Common stockholders' equity 870,461 868,450 1,045,899 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $11,364,264 $11,134,357 $11,468,628 ==================================================================================================================================== Net interest income/spread $476,984 4.14% $503,837 4.45% $523,717 4.63% - ------------------------------------------------------------------------------------------------------------------------------------ Interest income to average earning assets 8.32% 8.84% 8.08% Interest expense to average earning assets 3.59 3.76 2.92 - ------------------------------------------------------------------------------------------------------------------------------------ Net yield margin 4.73% 5.08% 5.16% ====================================================================================================================================
(1) Includes the effects of taxable equivalent adjustments, using the federal income tax rate and state tax rates, as applicable, reduced by the nondeductible portion of interest expense. (2) For the purpose of these computations, nonaccrual loans are included in the daily average loan amounts. Also, interest income includes fees on loans of approximately $19,673, $25,938 and $30,497 for 1996, 1995 and 1994, respectively. 52 TABLE 32 NON-PERFORMING ASSETS AND PAST DUE LOANS
- ---------------------------------------------------------------------------------------------------------- December 31 - ---------------------------------------------------------------------------------------------------------- (dollars in thousands) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------- Non-accrual loans: Commercial $ 8,850 $ 9,033 $10,548 $ 42,303 $ 25,470 Consumer 2,404 1,572 1,708 2,191 808 Real estate--construction 2,842 2,988 5,490 17,837 52,051 Real estate-mortgage* 14,207 24,888 7,310 6,523 7,341 - ---------------------------------------------------------------------------------------------------------- Total non-accrual loans 28,303 38,481 25,056 68,854 85,670 Restructured loans: Commercial 1,609 8,099 Real estate--construction 1,000 3,470 22,568 - ---------------------------------------------------------------------------------------------------------- Total restructured loans 1,000 5,079 30,667 - ---------------------------------------------------------------------------------------------------------- Total non-performing loans 28,303 38,481 26,056 73,933 116,337 Foreclosed properties 10,497 15,822 22,480 48,295 75,403 Less foreclosed property reserve (5,742) (10,625) - ---------------------------------------------------------------------------------------------------------- Total foreclosed properties 10,497 15,822 22,480 42,553 64,778 Total non-performing assets $38,800 $54,303 $48,536 $116,486 $181,115 Percentage to loans (net of unearned) and foreclosed properties 0.61% 1.00% 0.61% 1.83% 3.08% Allowance for loan losses to: Non-performing loans 483.02% 337.05% 846.32% 342.63% 228.25% Non-performing assets 352.34 238.85 454.34 217.46 146.61 - ---------------------------------------------------------------------------------------------------------- Accruing loans past due 90 days or more $71,484 $66,371 $65,333 $ 58,891 $ 64,835 ==========================================================================================================
* Real estate--mortgage includes real estate--commercial mortgage and real estate--residential mortgage. Real estate--residential mortgage non-accrual loans were not significant for the periods presented. TABLE 33 SUMMARY OF TOTAL LOANS
- --------------------------------------------------------------------------------------------------------------------------- December 31 - --------------------------------------------------------------------------------------------------------------------------- (in thousands) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------- Loans: Consumer $2,300,558 $1,751,274 $4,612,633 $3,105,824 $2,423,176 Commercial 3,451,230 3,090,904 2,472,620 2,299,973 2,181,218 Real estate--construction 244,653 236,103 209,183 309,842 549,001 Real estate--commercial mortgage 254,060 366,698 526,956 581,529 632,072 Real estate--residential mortgage 329,466 122,584 191,508 71,411 77,844 - --------------------------------------------------------------------------------------------------------------------------- Total $6,579,967 $5,567,563 $8,012,900 $6,368,579 $5,863,311 ===========================================================================================================================
53 SIGNET BANKING CORPORATION AND SUBSIDIARIES Consolidated BALANCE SHEET
December 31 - -------------------------------------------------------------------------------------------------------------------------- (dollars in thousands--except per share) 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 566,520 $ 599,113 Interest bearing deposits with other banks 3,200 3,129 Federal funds sold and securities purchased under resale agreements 777,999 460,217 Trading account securities 546,372 478,723 Loans held for securitization 389,700 Loans held for sale 102,826 361,260 Securities available for sale 2,623,280 2,333,971 Loans: Consumer 2,300,558 1,751,274 Commercial 3,451,230 3,090,904 Real estate--construction 244,653 236,103 Real estate--commercial mortgage 254,060 366,698 Real estate--residential mortgage 329,466 122,584 - -------------------------------------------------------------------------------------------------------------------------- Gross loans 6,579,967 5,567,563 Less: Unearned income (225,081) (151,535) Allowance for loan losses (136,707) (129,702) - -------------------------------------------------------------------------------------------------------------------------- Net loans 6,218,179 5,286,326 - -------------------------------------------------------------------------------------------------------------------------- Premises and equipment (net) 184,413 192,431 Interest receivable 107,504 104,437 Other assets 590,125 768,558 - -------------------------------------------------------------------------------------------------------------------------- Total assets $ 11,720,418 $10,977,865 ========================================================================================================================== Liabilities Non-interest bearing deposits $ 1,751,238 $ 1,726,378 Interest bearing deposits: Interest bearing demand 2,955,576 2,441,125 Savings accounts 651,544 1,395,514 Savings certificates 2,256,838 1,850,397 Large denomination certificates 228,879 129,711 Foreign 43,267 49,846 - -------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 6,136,104 5,866,593 - -------------------------------------------------------------------------------------------------------------------------- Total deposits 7,887,342 7,592,971 - -------------------------------------------------------------------------------------------------------------------------- Securities sold under repurchase agreements 1,467,565 1,124,105 Federal funds purchased 495,171 780,193 Long-term borrowings 400,014 253,033 Interest payable 30,507 19,460 Due to broker 300,000 125,000 Other liabilities 215,704 219,154 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities 10,796,303 10,113,916 - -------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity Common Stock, par value $5 per share; Authorized 100,000,000 shares, issued and outstanding 60,077,489 (1996), and 59,208,745 (1995) 300,387 296,044 Capital surplus, net 209,327 200,093 Retained earnings 399,268 322,614 Unrealized gains on securities available for sale, net of deferred taxes 15,133 45,198 - -------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 924,115 863,949 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $11,720,418 $10,977,865 ==========================================================================================================================
See notes to consolidated financial statements. 54 SIGNET BANKING CORPORATION AND SUBSIDIARIES Statement of CONSOLIDATED INCOME
Year Ended December 31 - ----------------------------------------------------------------------------------------------------------------------------- (in thousands--except per share) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Interest income: Loans, including fees: Consumer $225,491 $292,024 $342,670 Commercial 233,120 206,554 163,195 Real estate--construction 24,202 23,262 20,977 Real estate--commercial mortgage 27,448 41,621 47,520 Real estate--residential mortgage 19,577 19,992 8,399 - ----------------------------------------------------------------------------------------------------------------------------- Total loans, including fees 529,838 583,453 582,761 Interest bearing deposits with other banks 486 2,025 11,512 Federal funds sold and resale agreements 35,172 38,732 44,294 Trading account securities 32,460 30,800 21,487 Loans held for securitization 25,027 36,448 41,015 Loans held for sale 30,631 23,757 13,010 Securities available for sale 177,798 126,484 72,696 Investment securities 24,300 20,238 - ----------------------------------------------------------------------------------------------------------------------------- Total interest income 831,412 865,999 807,013 Interest expense: Interest bearing demand 82,207 74,086 67,694 Savings accounts 28,031 48,738 33,461 Savings certificates 102,204 81,345 61,377 Large denomination certificates 9,083 11,669 14,527 Foreign 8,238 6,347 10,071 - ----------------------------------------------------------------------------------------------------------------------------- Total interest on deposits 229,763 222,185 187,130 Securities sold under repurchase agreements 70,009 56,739 37,712 Federal funds purchased 44,679 53,222 28,182 Other short-term borrowings 15,302 27,293 Long-term borrowings 18,201 25,317 16,685 - ----------------------------------------------------------------------------------------------------------------------------- Total interest expense 362,652 372,765 297,002 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income 468,760 493,234 510,011 Provision for loan losses 73,851 38,715 14,498 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 394,909 454,519 495,513 Non-interest income: Service charges on deposit accounts 67,709 68,231 66,141 Consumer loan servicing and service charge income 50,927 94,389 410,605 Trust and investment management income 40,729 32,584 29,401 Gain on securitization of loans 9,254 9,562 Other 105,937 72,713 58,477 - ----------------------------------------------------------------------------------------------------------------------------- Non-interest operating income 274,556 277,479 564,624 Securities available for sale gains 5,021 532 3,413 Investment securities gains 1,257 46 - ----------------------------------------------------------------------------------------------------------------------------- Total non-interest income 279,577 279,268 568,083 Non-interest expense: Salaries 213,120 196,093 257,297 Employee benefits 41,807 48,657 66,188 Supplies and equipment 40,280 42,138 54,862 Occupancy 38,335 40,595 47,059 External data processing services 32,473 29,951 50,026 Travel and communications 24,502 32,103 57,543 Capital One credit card solicitation 29,050 100,886 Commercial fraud loss 35,000 Contract termination 49,000 Restructuring charges 43,212 Other 94,801 110,481 120,350 - ------------------------------------------------------------------------------------------------------------------------------- Total non-interest expense 485,318 564,068 846,423 - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes (Capital One Financial Corporation amounted to $0, $27,407 and $146,827, respectively) 189,168 169,719 217,173 Applicable income taxes 64,241 58,639 67,339 - ------------------------------------------------------------------------------------------------------------------------------- Net income $124,927 $111,080 $149,834 =============================================================================================================================== Earnings per common share $ 2.06 $ 1.86 $ 2.59 Cash dividends declared per share 0.81 0.79 1.00 Average common shares outstanding 60,672 59,826 57,863 ===============================================================================================================================
See notes to consolidated financial statements. 55 Signet Banking Corporation and Subsidiaries Statement of CONSOLIDATED CASH FLOWS
Year ended December 31 - --------------------------------------------------------------------------------------------------------------------------- (in thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 124,927 $ 111,080 $ 149,834 Adjustments to reconcile net income to net cash (used) provided by operating activities: Provision for loan losses 73,851 38,715 14,498 Provision and writedowns on foreclosed property 455 1,924 1,536 Depreciation and amortization 42,260 35,366 44,055 Securities available for sale gains (5,021) (532) (3,413) Other (gains) losses, net (45,289) (29,966) 3,498 Increase in interest receivable (3,067) (5,880) (14,439) (Increase) decrease in other assets 194,036 (564,983) (170,009) Increase in interest payable 11,047 9,799 2,873 Increase in other liabilities 199,905 64,851 268,010 Proceeds from securitization of consumer loans 508,960 673,256 2,393,936 Proceeds from sales of loans held for sale 30,850,963 36,741,671 24,552,546 Purchases and originations of loans held for sale (30,585,773) (37,026,247) (26,597,903) Proceeds from sales of trading account securities 19,297,376 16,352,644 15,690,746 Purchases of trading account securities (19,335,746) (16,466,358) (15,654,476) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 1,328,884 (64,660) 681,292 Investing Activities Proceeds from maturities of investment securities 180,725 64,542 Purchases of investment securities (25,510) (213,057) Proceeds from sales of securities available for sale 1,439,853 1,033,081 1,380,809 Proceeds from maturities of securities available for sale 299,218 621,509 2,289,363 Purchases of securities available for sale (2,081,983) (2,760,830) (3,188,560) Net increase in loans (1,127,154) (1,228,969) (1,700,052) Recoveries of loans previously charged-off 4,708 9,848 28,783 Purchases of premises and equipment (19,727) (70,639) (75,210) Purchases of mortgage servicing rights (23,633) (31,590) (18,784) Acquisition of Sheffield Management Company and Sheffield Investments, Inc. (20,996) - --------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (1,508,718) (2,293,371) (1,432,166) Financing Activities Net increase in deposits 294,371 394,356 900 Net increase (decrease) in short-term borrowings 58,438 (342,369) 687,644 Increase in Capital One Financial Corporation long-term debt prior to spin-off 1,388,153 Proceeds from issuance of long-term debt 150,000 Payments on long-term debt (3,019) (608) (12,511) Net issuance of common stock 13,577 4,084 75,972 Payment of cash dividends (48,273) (46,489) (57,192) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 465,094 1,397,127 694,813 - --------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 285,260 (960,904) (56,061) Cash and cash equivalents at beginning of period 1,062,459 2,023,363 2,079,424 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 1,347,719 $ 1,062,459 $ 2,023,363 - --------------------------------------------------------------------------------------------------------------------------- Supplemental disclosures Interest paid $ 352,125 $ 385,072 $ 294,130 Income taxes paid 24,672 21,455 47,091 Transfer of loans to foreclosed property 6,736 5,790 10,112 Transfer of loans to loans held for securitization 989,700 2,000,000 ==========================================================================================================================
See notes to consolidated financial statements. 56 SIGNET BANKING CORPORATION AND SUBSIDIARIES Statement of CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------------- Common Stock Unrealized Total ------------------ Capital Deferred Gains/(Losses) Retained Stockholders' (dollars in thousands--except per share) Shares Amount Surplus Compensation on Securities Earnings Equity - -------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1993 56,608,578 $283,043 $133,038 $548,581 $964,662 Adjustment to beginning balance for change in accounting method for net unrealized gain on securities available for sale, net of tax $16,147 $29,987 29,987 Net income 149,834 149,834 Issuance of Common Stock Related to acquisition 1,514,286 7,571 51,708 59,279 Other 513,895 2,570 14,123 16,693 Cash dividends--Common Stock-- $1.00 a share (57,192) (57,192) Change in net unrealized losses on securities available for sale, net of tax benefit of $27,880 (51,784) (51,784) - ----------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1994 58,636,759 293,184 198,869 (21,797) 641,223 1,111,479 Net income 111,080 111,080 Issuance of Common Stock 830,463 4,152 8,431 12,583 Purchase of Common Stock (258,477) (1,292) (7,207) (8,499) Cash dividends--Common Stock-- $.79 a share (46,489) (46,489) Spin-off of Capital One Financial Corporation (383,200) (383,200) Change in net unrealized gains on securities available for sale, net of tax of $36,074 66,995 66,995 - ----------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1995 59,208,745 296,044 200,093 45,198 322,614 863,949 Net income 124,927 124,927 Issuance of Common Stock 763,124 3,815 9,696 13,511 Restricted stock awards 105,620 528 2,627 $(3,155) Amortization of deferred compensation 66 66 Cash dividends--Common Stock-- $.81 a share (48,273) (48,273) Change in net unrealized gains on securities available for sale, net of tax benefit of $16,189 (30,065) (30,065) - ------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 1996 60,077,489 $300,387 $212,416 $(3,089) $15,133 $399,268 $924,115 ==============================================================================================================================
See notes to consolidated financial statements. 57 SIGNET BANKING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands-except per share) NOTE A SIGNIFICANT ACCOUNTING POLICIES Signet Banking Corporation ("Signet" or the "Company") engages in general commercial and consumer banking and provides a full range of financial services to individuals, businesses and organizations. Signet offers investment services including municipal bond, government, federal agency and money market sales and trading, foreign exchange trading, mutual funds and discount brokerage. In addition, it provides specialized services for trust, leasing, asset-based lending, cash management, real estate and insurance. Signet's primary market area for its traditional banking business extends from Baltimore to Washington, south to Richmond, and on to Hampton Roads/Tidewater, Virginia. The Company markets several of its products nationally and is exploring the national marketing of certain other products. The consolidated financial statements of Signet and subsidiaries are prepared in conformity with generally accepted accounting principles and prevailing practices of the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The following is a summary of the significant accounting and reporting policies used in preparing the financial statements. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," on January 1, 1996. The Statement requires that long-lived assets and certain identifiable intangibles to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In determining the recoverability of an asset, the enterprise should estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted cash flows is less than the carrying amount of the asset, an impairment loss would be recognized. The Statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less selling costs. Adoption of the Statement did not have a material impact on the Company's financial position or results of operations. Consolidation and Reclassifications: The consolidated financial statements include the accounts of Signet, including Signet Bank, its principal banking subsidiary. Capital One Financial Corporation is included in the financial statements through February 28, 1995, at which time the spin-off to share-holders was completed. All significant intercompany balances and transactions have been eliminated. Certain prior years' amounts have been reclassified to conform to the 1996 presentation. Statement of Consolidated Cash Flows: Cash and cash equivalents, as presented in the statement of cash flows, includes cash and due from banks, interest bearing deposits with other banks, and federal funds sold and securities purchased under resale agreements. Trading Instruments: Financial instruments (including trading account securities and derivatives) used for trading purposes are recorded in the consolidated balance sheet at fair value at the reporting date. Realized and unrealized changes in fair values are recognized in other non-interest income in the period in which the changes occur. Trading instruments included in the consolidated balance sheet are comprised primarily of government securities and asset-backed securities. Interest revenue arising from these trading instruments is included in the statement of consolidated operations as part of total interest income. The increase in net unrealized income on all trading activities during 1996 and 1995 was $6,349 and $1,875, respectively. Loans Held For Sale and Securitization: Loans held for sale and securitization are carried at the lower of aggregate cost or market value. 58 NOTE A SIGNIFICANT ACCOUNTING POLICIES CONTINUED Securities Available For Sale: Securities available for sale represent those securities not classified as either investment securities or trading account securities. Securities available for sale includes securities for which the primary objective is to realize a holding gain, and/or securities held for indefinite periods of time and not intended to be held until maturity. Securities held for indefinite periods of time include securities that may be sold in response to changes in interest rates and/or significant prepayment risks. Securities available for sale are carried at market value, with unrealized gains and losses recorded in retained earnings. When securities are sold, the adjusted costs of the specific securities sold are used to compute gains or losses on the sales. In December 1995, the Company reclassified all of its investment securities, with a carrying value of $232,864 and a fair value of $238,918, to securities available for sale as allowed by implementation guidance for SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The reclassification resulted in an unrealized gain of $6,054 which was recorded in equity, net of tax. Loans: Interest on loans is computed by methods which generally result in level rates of return on principal amounts outstanding. It is management's practice to cease accruing interest on commercial and real estate loans when payments are 90 days delinquent. However, management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest, and the loan is in the process of collection. Consumer loans, other than credit card, typically are charged off when the loan is six months past due, while credit card loans typically are charged off when the loan is six months past due and a minimum payment has not been received for 60 days. Consumer loans are also charged off when the customer declares bankruptcy. Loan origination and commitment fees and certain direct loan origination costs are deferred and generally amortized as adjustments of the related loans' yields over their contractual lives except for certain loans (e.g., home equity lines), which consider anticipated prepayments in establishing an economic life. Credit card loan annual membership fees and direct origination costs are deferred and amortized over one year on a straight-line basis. Deferred fees (net of deferred costs) on credit card loans were $1,002 and $1,194 at December 31, 1996 and 1995, respectively. Allowance for Loan Losses: The allowance for loan losses is maintained to absorb anticipated future losses, net of recoveries, in the existing loan portfolio. The provision for loan losses is the periodic cost of maintaining an adequate allowance. In evaluating the adequacy of the allowance for loan losses, management takes into consideration the following factors: the condition of industries and geographic areas experiencing or expected to experience particular economic adversities; historical charge-off and recovery activity (noting any particular trend changes over recent periods); trends in delinquencies, bankruptcies and non-performing loans; trends in loan volume and size of credit risks; any irrevocable commitments to extend funds; the degree of risk in the composition of the loan portfolio; current and anticipated economic conditions; credit evaluations; and underwriting policies. In 1995, Signet adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." In accordance with these statements, impaired loans, other than consumer loans and small balance commercial loans excluded by the statement, are measured and reported based on the present value of expected cash flows discounted at the loan's effective interest rate, or at the fair value of the loan's collateral if the loan is collateral dependent. Impaired loans are specifically reviewed loans for which it is probable that Signet will be unable to collect all amounts due according to the terms of the loan agreement. A valuation allowance is required to the extent that the measure of impaired loans is less than the recorded investment. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in thousands-except per share) NOTE A SIGNIFICANT ACCOUNTING POLICIES CONTINUED Interest receipts on impaired loans are applied in a manner consistent with Signet's policy for non-accrual loans. For the years ended December 31, 1996 and 1995, no interest income was recorded on non-accrual loans. All interest receipts on impaired loans were applied to the principal. Premises and Equipment: Premises and equipment are stated at cost, less allowances for depreciation and amortization of $177,715 and $173,336 at December 31, 1996 and 1995, respectively. Depreciation and amortization expense are generally computed using the straight-line method. Interest costs of $520 and $689 in 1996 and 1995, respectively, related to the construction of major operating facilities were capitalized using a weighted average interest rate. Foreclosed Property: Real estate acquired in satisfaction of a loan is included in other assets and stated at the lower of (1) fair value minus estimated costs to sell; or (2) cost, defined as the fair value of the asset on the date of foreclosure. Intangible Assets: Goodwill, representing the excess of purchase price over the fair value of net assets acquired, is amortized on a straight-line basis over periods not exceeding fifteen years. Other acquired intangible assets such as deposit base intangibles are amortized on a straight-line basis over the expected periods of benefit. Preferred Stock: The Company is authorized to issue, in series, up to 5,000,000 shares of Preferred Stock with a par value of $20 per share. Risk Management Instruments: The Company enters into a variety of interest rate contracts, primarily interest rate swaps, to manage its interest rate exposure through the use of synthetic alteration. Synthetic alteration changes the nature of an interest-earning asset or interest-bearing liability from fixed rate to variable rate or vice versa. These instruments are not marked to market. Related income or expense, including amortization of purchase premiums or settlement gains or losses is recorded as an adjustment to the yield of the related interest-earning asset or interest-bearing liability over the periods covered by the contracts. If an existing asset or liability designated for such accounting treatment matures, is sold, extinguished, or terminated, the risk management instrument is either redesignated to another existing or anticipated asset or liability or terminated. If a risk management instrument designated for such accounting treatment is related to an anticipated transaction that is no longer likely to occur, the instrument is either redesignated to another existing or anticipated asset or liability or terminated. If an instrument is terminated because the related assets or liabilities no longer exist or an anticipated transaction will not occur, any gain or loss is recognized into income; otherwise, any gain or loss is deferred and amortized as an adjustment to the yield of the designated asset or liability over the remaining periods originally covered by the contract. The Company may, from time to time, use interest rate swaps to manage the interest rate risk associated with securitizations. Income or expense from these swaps is recorded on an accrual basis along with securitization income in non-interest income. Sales and Servicing of Loans: Signet periodically securitizes and sells loans, primarily consumer loans such as credit card receivables, home equity lines, student loans, and residential mortgage loans. Signet records these transactions as sales in accordance with SFAS No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse." Gains on the initial sale of securitized loans are limited to the amounts related to loans existing at the time of sale and do not include amounts related to future loans expected to be sold during the reinvestment period. Due to the relatively short average life of credit card loans, no gain or loss is recorded at the time of sale. Rather, loan servicing fees, which represent credit card interest and fees in excess of interest paid to certificate holders, credit losses, and other trust expenses, are recorded over the life of the transaction as earned. Transaction expenses are deferred and amortized over the reinvestment period of the transaction as a reduction of loan servicing fees. For home equity line and student loan securitizations, which have substantially longer average lives, a gain or loss is recorded at the 60 NOTE A SIGNIFICANT ACCOUNT POLICIES CONTINUED time of the sale equal to the present value of the anticipated future net cash flows, net of transaction expenses and any unamortized deferred loan origination costs. For securitizations with revolving features, other than credit card, present value gains on subsequent sales are also recorded. The majority of Signet's mortgage loan sales are in the secondary market with servicing retained. During the third quarter of 1995, the Company elected to adopt SFAS No. 122, "Accounting for Mortgage Servicing Rights." In accordance with the statement, the cost of mortgage loans purchased or originated with a definitive plan to sell the loans and retain the mortgage servicing rights is allocated between the loans and the servicing rights based on their estimated fair values at the purchase or origination date. In determining the estimated fair value of the mortgage servicing rights, Signet utilizes a discounted cash flow model which incorporates assumptions such as prepayment speeds of the underlying loans, default rates, servicing income, servicing costs, and inflation factors. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. For the purpose of evaluating and measuring impairment of capitalized mortgage servicing rights, Signet uses the predominant risk characteristics of loan type and interest rate. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights in each stratum exceed their fair values and is recorded through a valuation allowance. No valuation allowance was necessary at December 31, 1996 or 1995 for any capitalized mortgage servicing rights. The effect of adopting SFAS No. 122 on the Company's consolidated financial statements was an increase in pre-tax income of approximately $7.2 million (net of amortization). During 1996, Signet capitalized $10.0 million of originated mortgage servicing rights. In addition to originated mortgage servicing rights, Signet capitalized $23.6 and $31.6 million of purchased mortgage servicing rights in 1996 and 1995, respectively. Amortization expense related to mortgage servicing rights was $9.5, $5.6 and $2.2 million for 1996, 1995 and 1994, respectively. At December 31, 1996, Signet's portfolio of capitalized mortgage servicing rights totaled $82.6 million and had a market value of $109.1 million. Stock-Based Compensation: The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25") and related Interpretations in accounting for its employee stock options and stock awards because the alternative fair value accounting recommended by SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of option valuation models that were not developed for valuing employee stock options. Under APB No. 25, no compensation expense is recognized for the Company's stock option plans and stock purchase plan. Income Taxes: Prepaid and deferred income taxes are provided for timing differences between income and expense for financial reporting purposes and for income tax purposes. Earnings Per Share: Earnings per share were based on the average number of shares outstanding and applicable equivalents (stock options). Recent Accounting Pronouncements: SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," was issued in 1996. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets, including securitizations, and extinguishments of liabilities. The statement is effective for such transactions occurring after December 31, 1996. Subsequent to the issuance of SFAS No. 125, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125," was issued. SFAS No. 127 defers for one year the effective date of accounting for secured borrowings and collateral, repurchase agreements, dollar-roll, securities lending, and similar transactions. Signet will adopt the requirements of SFAS No. 125 beginning January 1, 1997, except for the deferred requirements, which Signet will adopt beginning January 1, 1998. The effect of adopting SFAS No. 125 for existing transactions is not expected to have a material impact on the Company's financial position or results of operations. The Company is unable to complete an assessment of the potential financial statement impact of applying the statement to future transactions because the Company participates in a variety of transfers of financial assets, and each transaction structure is unique. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in thousands-except per share) NOTE B CASH AND DUE FROM BANKS The domestic bank subsidiaries are required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those reserve balances were approximately $41,430 and $87,477 for the years ended December 31, 1996 and 1995, respectively. NOTE C SECURITIES AVAILABLE FOR SALE Securities available for sale are summarized as follows:
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value - ----------------------------------------------------------------------------------------------- December 31, 1996 U.S. Government and agency obligations-- Mortgage-backed securities $2,124,019 $19,199 $ (7,796) $2,135,422 Other 298,175 4,145 302,320 Obligations of states and political subdivisions 22,244 540 22,784 Other 160,347 4,415 (2,008) 162,754 - ----------------------------------------------------------------------------------------------- $2,604,785 $28,299 $ (9,804) $2,623,280 =============================================================================================== December 31, 1995 U.S. Government and agency obligations-- Mortgage-backed securities $ 1,478,517 $52,301 $1,530,818 Other 562,815 20,468 $ (8) 583,275 Obligations of states and political subdivisions 53,031 1,671 (6) 54,696 Other 173,137 4,343 (12,298) 165,182 - ----------------------------------------------------------------------------------------------- $ 2,267,500 $78,783 $(12,312) $2,333,971 =============================================================================================== December 31, 1994 U.S. Government and agency obligations-- Mortgage-backed securities $ 633,338 $(26,335) $ 607,003 Other 461,140 $ 11 (3,274) 457,877 Obligations of states and political subdivisions 110 6 116 Other 184,703 1,603 (9,606) 176,700 - ----------------------------------------------------------------------------------------------- $ 1,279,291 $ 1,620 $(39,215) $1,241,696 ===============================================================================================
The cost and fair values of securities available for sale by contractual maturity, except mortgage-backed securities for which an expected average life based on prepayment assumptions is used, at December 31, 1996 are shown below: Fair Cost Value - ------------------------------------------------------------------------ Due in one year or less $ 225,454 $ 226,523 Due after one year through five years 345,227 350,282 Due after five years through ten years 1,950,375 1,960,935 Due after ten years 83,729 85,540 - ------------------------------------------------------------------------ $2,604,785 $2,623,280 ======================================================================== 62 NOTE C SECURITIES AVAILABLE FOR SALE CONTINUED Securities available for sale with aggregate book values of approximately $2,093,763, $1,476,767 and $623,743 at December 31, 1996, 1995 and 1994, respectively, were pledged to secure public deposits, repurchase agreements and other banking transactions. Gross gains of $20,610, $2,610 and $6,152, and gross losses of $15,589, $2,078 and $2,739 were realized on those sales for 1996, 1995 and 1994, respectively. Gross gains of $-0-, $1,257 and $113 and gross losses of $-0-, $-0-, and $67 were realized on called investment securities for 1996, 1995 and 1994, respectively. NOTE D ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR FORECLOSED PROPERTY The following is a summary of changes in the allowance for loan losses: Year Ended December 31 1996 1995 1994 - -------------------------------------------------------------------------------- Balance at beginning of year $129,702 $220,519 $253,313 Provision for loan losses 73,851 38,715 14,498 Net deduction arising in purchase/sale transactions (7,871) (1,542) Transfer to Capital One Financial Corporation (68,516) Losses 71,554 62,993 74,533 Recoveries 4,708 9,848 28,783 - -------------------------------------------------------------------------------- Net loan losses 66,846 53,145 45,750 - -------------------------------------------------------------------------------- Balance at end of year $136,707 $129,702 $220,519 ================================================================================ The following is a summary of changes in the reserve for foreclosed property: Year Ended December 31 1994 - ---------------------------------------------------------------- Balance at beginning of year $5,742 Reductions to reserve credited to expense (1,764) Writedowns of foreclosed property (3,978) - ---------------------------------------------------------------- Balance at end of year $ 0 ================================================================ At December 31, 1996, Signet's loans that were considered to be impaired under SFAS No. 114 were comprised of $22,529 of non-accrual loans for which the related allowance for credit losses was $4,305. The average recorded investment in impaired loans during the year ended December 31, 1996 was approximately $24,684. At December 31, 1995, Signet's loans that were considered to be impaired under SFAS No. 114 were comprised of $32,617 of non-accrual loans for which the related allowance for credit losses was $10,598. The average recorded investment in impaired loans during the year ended December 31, 1995 was approximately $28,830. Collateral dependent loans, which were measured at the fair value of the loan's collateral, made up the majority of impaired loans at December 31, 1996 and 1995. Interest recorded as income on year-end non-accrual and restructured loans was $0.7 million, $0.9 million and $0.5 million for 1996, 1995 and 1994, respectively, compared with interest income of $3.1 million, $4.1 million and $3.4 million for the same periods which would have been recorded had these loans performed in accordance with their original terms. 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in thousands-except per share) NOTE E SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM BORROWINGS The following is a summary of short-term borrowings for the years ended December 31, 1996, 1995 and 1994:
Maximum Average Outstanding Weighted Interest at Any Outstanding Average Average Rate at Month End at Year End Outstanding Interest Rate Year End - -------------------------------------------------------------------------------------------------- 1996 Repurchase agreements $ 1,871,996 $ 1,467,565 $ 1,545,179 4.5% 5.4% Federal funds 1,108,257 495,171 840,323 5.3 6.0 - ------------------------------------------------------------------------------------------------ Total $ 1,962,736 $ 2,385,502 4.8% 5.5% ================================================================================================ 1995 Repurchase agreements $ 1,494,736 $ 1,124,105 $ 1,172,410 4.8% 4.8% Federal funds 1,285,918 780,193 899,534 5.9 5.3 Commercial Paper 88,626 -- 13,579 5.1 -- Bridge financing facility 1,000,000 -- 170,136 7.1 -- Other short-term borrowings 167,034 -- 44,855 5.5 -- - ------------------------------------------------------------------------------------------------ Total $ 1,904,298 $ 2,300,514 5.4% 5.0% ================================================================================================ 1994 Repurchase agreements $ 1,218,035 $ 875,458 $ 1,015,595 3.7% 4.5% Federal funds 1,273,862 881,693 662,289 4.3 4.6 Commercial paper 147,372 108,664 126,903 3.6 5.3 Bridge financing facility 1,700,000 1,300,000 175,342 7.1 6.6 Other short-term borrowings 372,054 146,955 175,178 5.8 5.4 - ------------------------------------------------------------------------------------------------ Total $ 3,312,770 $ 2,155,307 4.3% 5.8% ================================================================================================
The weighted average interest rate is calculated by dividing annual interest expense by the daily average outstanding principal balance. The Company's policy related to repurchase agreements is to maintain control of the underlying securities. In connection with the Separation (described in Note T), Capital One Bank obtained a syndicated bank loan facility (the "Bridge Financing Facility") to meet its interim funding and liquidity needs. The initial amount of borrowing under the Bridge Financing Facility was approximately $1.7 billion at 60 basis points over LIBOR before financing costs. In December 1994, Capital One reduced the Bridge Financing Facility by $400 million through new funding sources, primarily large denomination certificates. In early 1995, the Bridge Financing Facility was further reduced by bank notes with longer maturities. In conjunction with the spin-off on February 28, 1995, the Bridge Financing Facility was transferred to Capital One and was no longer a source of funding for Signet. 64 NOTE F LONG-TERM BORROWINGS Long-term borrowings consisted of the following: December 31 1996 1995 - ------------------------------------------------------------------------- Notes and mortgages (5-11 3/5%): $ 14 $ 3,033 Subordinated notes: 7 4/5% due 2006 150,000 9 5/8% due 1999 100,000 100,000 Floating Rate (3 month LIBOR + 3/16) due 1998 100,000 100,000 Floating Rate (3 month LIBOR + 1/8) due 1997 50,000 50,000 - ------------------------------------------------------------------------- 400,000 250,000 - ------------------------------------------------------------------------- $400,014 $253,033 ========================================================================= In 1996 Signet Bank established a $2.5 billion Senior and Subordinated Bank Note facility, due from 30 days to 30 years from date of issue. A total of $150,000 of Subordinated Bank Notes due in 2006 had been issued under the facility at December 31, 1996. Interest on the Notes is payable semiannually on March 15 and September 15. The Notes are not redeemable prior to their maturity. As part of the Company's asset-liability management, an interest rate swap of $150,000 notional value was purchased. This transaction in effect converts the debt from 7 4/5% to six-month LIBOR. The interest rate swap matures on September 15, 2006 in conjunction with the Notes. The Company has $100,000 principal amount of unsecured 9 5/8% Subordinated Notes due in 1999. Interest on the Notes is payable semiannually on June 1 and December 1. The Notes are not redeemable prior to their maturity. As part of the Company's asset-liability management, an interest rate swap of $100,000 notional value was purchased. This transaction in effect converts the debt from 9 5/8% to three-month LIBOR. The interest rate swap matures on June 1, 1999 in conjunction with the Notes. The Company has $100,000 principal amount of Floating Rate Subordinated Notes due in 1998. The Notes are redeemable at the option of the Company at their principal amount plus accrued interest. The interest rate is determined quarterly based on the London interbank offered quotations for three-month U.S. dollar deposits. The Company has $50,000 principal amount of Floating Rate Subordinated Notes due in 1997. The Notes are redeemable at the option of the Company at their principal amount plus accrued interest. The interest rate is determined quarterly based on the London interbank offered quotations for three-month U.S. dollar deposits. There were no premises at December 31, 1996 subject to liens relating to notes and mortgages. Maturities of long-term borrowings in the aggregate for the next five years are as follows: 1997 $ 50,014 1998 100,000 1999 100,000 2000 0 2001 0 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in thousands-except per share) NOTE G COMMON STOCK At December 31, 1996, the Company had reserved 4,563,325 shares of its Common Stock for issuance in connection with stock option, employee and investor stock purchase plans. The following is a summary of the number of shares of Common Stock issued: Year Ended December 31 1996 1995 1994 - -------------------------------------------------------------------------------- Investor stock purchase plan 317,962 327,539 263,180 Employee stock purchase plan 154,060 143,821 114,057 Stock option plan 291,102 359,103 136,658 Acquisition of Pioneer Financial Corporation 1,514,286 Restricted Stock Awards 105,620 - -------------------------------------------------------------------------------- Total 868,744 830,463 2,028,181 ================================================================================ Under the Investor Stock Purchase Plan, 290,422 shares of Common Stock were reserved at December 31, 1996. The plan provides that the price of the Common Stock will be 95% of market value at the time of purchase through dividend reinvestment and 100% of market value at the time of purchase through optional cash contributions. Each outstanding share of the Company's Common Stock contains one Preferred Share Purchase Right. Each right will entitle stockholders to buy one two-hundredth of a share of a new Series of Preferred Stock at an exercise price of $70. Each two-hundredth of a share of the new Preferred Stock has terms designed to approximate the economic equivalent of one share of Common Stock. The rights will be exercisable only if a person or group acquires 20% or more of the Company's Common Stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 20% or more of the Common Stock. The rights, which do not have voting privileges, expire in 1999, but may be redeemed by the Company prior to that time under certain circumstances, for $0.01 per right. These rights should not interfere with a business combination approved by the Company's Board of Directors; however, they could cause substantial dilution to a person or group attempting to acquire the Company without conditioning the offer on redemption of the rights or acquiring a substantial number of the rights. Until the rights become exercisable, they have no dilutive effect on earnings per share. NOTE H EMPLOYEE BENEFIT PLANS The Company and its subsidiaries have a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's career average earnings. The Company's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company may determine to be appropriate from time to time. Approximately 95% of the plan assets at December 31, 1996 were invested in listed stocks and bonds. Another 1% was invested in a money market fund sponsored by an affiliate. Net periodic pension cost included the following components: 1996 1995 1994 - ------------------------------------------------------------------------------- Service cost-benefits earned during the period $ 5,884 $ 4,870 $ 7,379 Interest cost on projected benefit obligation 6,354 7,912 6,737 Actual return on plan assets (10,812) (18,683) 5,548 Net amortization and deferral 3,132 8,047 (14,256) - ------------------------------------------------------------------------------- Net periodic pension cost $ 4,558 $ 2,146 $ 5,408 =============================================================================== 66 NOTE H EMPLOYEE BENEFIT PLANS CONTINUED The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheet: December 31 1996 1995 - ------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $ (88,481) $(88,366) =============================================================================== Accumulated benefit obligation $ (97,489) $(96,228) =============================================================================== Projected benefit obligation $ (97,489) $(96,228) Plan assets, at fair value 100,299 98,352 - ------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 2,810 2,124 Unrecognized net asset (3,784) (4,731) Unrecognized prior service cost 1,891 2,092 Unrecognized net loss 17,612 21,502 - ------------------------------------------------------------------------------- Net pension asset $ 18,529 $ 20,987 =============================================================================== Assumptions used were as follows: 1996 1995 1994 - ------------------------------------------------------------------------------- Discount rates 7.50% 7.00% 8.50% Rates of increase in compensation levels of employees 5.00 5.00 5.00 Expected long-term rate of return on plan assets 8.50 9.50 8.75 Assumption changes, a rise in the number of employees, and an increase in the unfunded liability resulted in a $1.3 million, $0.6 million and $0.4 million increase, respectively, in net periodic pension cost from 1995 to 1996. The excess of contribution over service cost, the spin-off of Capital One and a reduction in the workforce due to restructuring resulted in a $1.9 million, $1.3 million and $0.4 million decline, respectively, in net periodic pension cost from 1994 to 1995. The impact of the change in assumptions for 1994 to 1995 was immaterial. The Company sponsors a contributory savings plan and a profit sharing plan. The savings plan allows substantially all full time employees to participate while the profit sharing plan allows participation after satisfaction of service requirements. The Company matches a portion of the contribution made by employees, which is based upon a percent of defined compensation, to the savings plan. The profit sharing contribution is based upon the return on equity of the Company. The Company's expense was $8,343, $15,908 and $23,729 in 1996, 1995 and 1994 under these plans, respectively. The Company's expense declined from 1995 to 1996 due to a drop in the return on equity, excluding the commercial fraud loss. The Company sponsors postretirement defined benefit plans that provide medical and life insurance benefits to retirees. Employees who retire after age 55 with 10 years of service are eligible to participate. The postretirement health care plan is contributory for participants who retire after June 1, 1991 with retiree contributions adjusted annually and contains other cost sharing features such as deductibles and coinsurance. The life insurance is noncontributory. The accounting for the health care plan anticipates future cost-sharing changes to the written plan that are consistent with the Company's expressed intent to increase retiree contributions annually in accordance with increases in health care costs. The Company's policy is to fund the cost of medical benefits in amounts determined at the discretion of management. 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in thousands-except per share) NOTE H EMPLOYEE BENEFIT PLANS CONTINUED The following table sets forth the plans' combined funded status reconciled with the amount shown in the Company's consolidated balance sheet:
December 31 1996 1995 - ----------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $(28,792) $(35,326) Fully eligible active plan participants (662) (869) Other active plan participants (1,767) (2,807) - ----------------------------------------------------------------------------------------------- (31,221) (39,002) Plan assets at fair value, primarily listed stocks and bonds 5,623 5,767 - ----------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets (25,598) (33,235) Unrecognized transition obligation 20,364 24,162 Unrecognized net loss (19,101) (13,492) - ----------------------------------------------------------------------------------------------- Accrued postretirement benefit cost $(24,335) $(22,565) ===============================================================================================
Net periodic postretirement benefit cost includes the following components: Year Ended December 31 1996 1995 1994 - -------------------------------------------------------------------------------- Service cost $ 840 $ 807 $1,457 Interest cost 2,647 3,470 3,758 Actual return on plan assets (731) ( 960) (74) Amortization of transition obligation over 20 years 1,373 1,652 2,010 Net amortization and deferral (359) (8) (385) - -------------------------------------------------------------------------------- Net periodic postretirement benefit cost $3,770 $4,961 $6,766 ================================================================================ For measurement purposes, a 5.50% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1996 for all participants; the rate was assumed to remain at that level thereafter. The $8 million decline in the accumulated postretirement benefit obligation from 1995 to 1996 resulted primarily from the decrease in the assumed rate of increase of per capita health care cost. For 1995, a 9.50% and 7.60% annual rate of increase in the per capita cost of covered health care benefits was assumed for participants under 65 years of age and 65 years and over, respectively; the rate was assumed to decrease gradually to 5% in 2005 and remain at that level thereafter. For 1994, an 11% and 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for participants under 65 years of age and 65 years and over, respectively; the rate was assumed to decrease gradually to 6.50% in 2005 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation for the medical plans as of December 31, 1996 and 1995 by $2.8 million and $4.3 million, respectively, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1996 by $0.3 million, 1995 by $0.5 million and 1994 by $0.6 million. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.50%, 7.00% and 8.50% for 1996, 1995 and 1994, respectively. The expected long-term rate of return on plan assets, after estimated income taxes, was 8.50%, 9.50% and 8.75% for 1996, 1995 and 1994, respectively. In 1995, a $2.4 million reduction in postemployment expense resulted from a change in medicare to primary/secondary status for those employees eligible for medicare and a decrease in the long-term disability population. No related expense was reported in 1996 and 1994. The Company has a Flexible Benefits Plan for its employees. The plan allows employees to select their benefit options, including medical coverage, disability insurance and paid leave. The plan enables the Company to better 68 NOTE H EMPLOYEE BENEFIT PLANS CONTINUED manage its rising health care costs, as well as provide employees more choice in the selection of their benefits package. As described in Note L, in 1994 Signet implemented a comprehensive core bank improvement plan. As a result of restructuring the Company, charges of $9.0 million and $10.5 million relating to the Pension Plan and Postretirement Benefits other than Pensions, respectively, were reported on the income statement under restructuring charges in 1994. NOTE I STOCK PLANS At December 31, 1996, Signet had five stock-based compensation plans, which are described in the following paragraphs. In accordance with APB No. 25, no compensation expense has been recognized for the Company's stock option plans and stock purchase plan. Had compensation expense for the Company's five stock-based compensation plans been determined based on the fair value at the grant date, consistent with the method in SFAS No.123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the following pro forma amounts(1): 1996 1995 - ------------------------------------------------------------- Net income As reported $124,927 $111,080 Pro forma 122,843 108,895 Earnings per share As reported $ 2.06 $ 1.86 Pro forma 2.03 1.82 ============================================================= (1) SFAS No. 123 is applicable only to options granted subsequent to December 31, 1994; therefore, this information is not required for 1994. Stock Option Plans: Signet maintains three stock option plans. Some executives still hold options granted under the 1983 Stock Option Plan ("1983 Plan"), but the Company can no longer grant options under this plan. The 1992 Stock Option Plan ("1992 Plan") authorizes the Company to grant options or stock appreciation rights to key personnel for up to 4,000,000 shares of Common Stock. Under the 1996 Non-Employee Directors Stock Option Plan ("1996 Plan"), the Company may grant options to non-employee members of the Board of Directors for up to 300,000 shares of Common Stock. Under all three plans, the exercise price of each option equals the market price of the Common Stock on the grant date and an option's maximum term is ten years. The options have no vesting period, but exercise is restricted for six months from the grant date. The 1983 Plan and the 1992 Plan permit reload options. Under a reload option, an employee satisfies the exercise price by tendering to the Company already owned shares (rather than cash), and the Company automatically grants a new option at the current market price for each previously owned share tendered. The reload option is subject to the same restrictions on exercisability as those of the underlying option possessing the reload feature. In 1995, special stock options were granted to executives under the 1992 Plan, following the spin-off of Capital One ("Special Grant"). Sixty percent of the options vest if the Company achieves certain market-to-book performance goals relative to the 100 largest U.S. banks based on asset size. Additional 20% vesting occurs if, before February 28, 2000, and at least 12 months after attaining prior vesting milestones, the market-to-book performance goals are again achieved. If the Company fails to achieve all market-to-book performance goals, the unvested options become vested and exercisable on March 1, 2002. The exercise price of each option, which has a ten-year maximum term, equals the market price of the Common Stock on the grant date. Effective February 28, 1995, the date of the Capital One spin-off, the number of options outstanding and the option prices were adjusted, so the value of options would not change. 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in thousands-except per share) NOTE I STOCK PLANS CONTINUED The fair value of each option was estimated at the grant date using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for all stock option plan grants in 1996 and 1995, respectively: dividend yields of 2.91% and 3.03%; and expected volatilities of 23.1% and 37.1%. For the 1992 Plan, risk-free interest rates of 6.2% and 5.4% were used for 1996 and 1995, respectively. For the 1996 Plan and the Special Grant, risk-free interest rates of 6.41% and 5.52%, respectively, were used. Expected lives of 5 years for the 1992 Plan options and 8 years for the Special Grant options and the 1996 Plan options were assumed. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the use of highly subjective assumptions, including the expected volatility of the stock price. Because the Company's stock option plans have characteristics significantly different from traded options, and because changes in the subjective assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options. A summary of the Company's stock option activity and related information for all stock option plans for the years ended December 31, 1996, 1995, and 1994, is as follows:
1996 1995 1994 - ----------------------------------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Shares Exercise Shares Exercise Shares Exercise (000) Price (000) Price (000) Price - ----------------------------------------------------------------------------------------------------- Outstanding at beginning of year 2,387,643 $13.84 1,060,331 $21.35 1,033,508 $16.81 Granted 302,363 24.34 740,290 21.53 219,027 36.70 Exercised (372,523) 11.98 (456,368) 11.66 (191,304) 14.19 Expired (2,200) 23.88 (32,279) 16.98 (900) 36.56 Adjustment for Capital One spin-off 1,075,669 12.03 - ----------------------------------------------------------------------------------------------------- Outstanding at end of year 2,315,283 $15.32 2,387,643 $13.84 1,060,331 $21.35 Options exercisable at year-end 1,754,888 $14.26 1,844,296 $12.53 1,052,158 $21.24 Weighted-average fair value of options granted during the year $ 5.67 $ 5.84 --(2) =====================================================================================================
(2) SFAS No. 123 is applicable only to options granted subsequent to December 31, 1994; therefore, this information is not required for 1994. 70 NOTE I STOCK PLANS CONTINUED The following table summarizes information about stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable - ---------------------------------------------------------------------------------------------- Weighted- Weighted- Weighted Range of Number Average Average Number Average Exercise Outstanding Remaining Exercise Exercisable Exercise Prices at 12/31/96 Contractual Life Price at 12/31/96 Price - ---------------------------------------------------------------------------------------------- $ 1.90 - 6.50 100,166 2.14 years $ 4.65 100,166 $ 4.65 6.91 -10.15 407,152 3.31 7.58 407,152 7.58 11.36 -16.76 684,353 6.99 14.02 684,353 14.02 17.24 -25.75 1,080,500 8.07 19.58 552,860 20.99 26.00 -30.19 43,112 9.65 27.17 10,357 26.20 - ---------------------------------------------------------------------------------------------- $ 1.90 -30.19 2,315,283 6.69 $15.32 1,754,888 $14.26 ==============================================================================================
At December 31, 1996 and 1995, options for 2,319,961 and 2,576,873 shares, respectively, of Common Stock were available for future grants under the 1992 Plan. Under the 1996 Plan, options for 290,000 shares of Common Stock were available for future grants at December 31, 1996. Restricted Stock Awards: Under the 1994 Stock Incentive Plan, the Company may award up to 300,000 shares of Common Stock to employees in management positions. On December 9, 1996, the Company awarded 105,620 shares of Common Stock to employees. These awards vest 25% one year from the award date and the remaining 75% two years from the award date. Compensation expense recognized in 1996 related to these awards was $66. The fair value of each award is the market price of the Common Stock on the award date. The weighted-average fair value of awards granted during 1996 was $29.875. At December 31, 1996 and 1995, 194,380 and 300,000 shares, respectively, of Common Stock were available for future awards. Employee Stock Purchase Plan: Under the Employee Stock Purchase Plan, the Company is authorized to issue up to 1,088,500 shares of Common Stock to its full-time employees. Under the plan, employees purchased 154,060 and 143,821 shares of Common Stock in 1996 and 1995, respectively. At December 31, 1996 and 1995, 407,403 and 561,463 shares, respectively, of Common Stock were available for purchase by employees under this plan. NOTE J DIVIDENDS AND CAPITAL ADEQUACY Certain regulatory restrictions exist regarding the ability of the subsidiaries to transfer funds to the Parent Company in the form of cash dividends, loans or advances. At December 31, 1996, approximately $106,984 and $4,380 of the retained earnings of Signet Bank and Signet Trust Company, respectively, and approximately $9,196 of the retained earnings of the nonbank subsidiaries were available for payment of dividends to the Parent Company, without prior approval by regulatory authorities. The regulatory authorities may also consider factors such as the level of current and expected earnings stream, maintenance of an adequate loan loss reserve and an adequate capital base when determining amounts available for the payment of dividends. The restricted net assets of the domestic bank subsidiaries amounted to $745,696 at December 31, 1996. As of December 31, 1996, the most recent notification from the Federal Reserve Board categorized Signet Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized Signet Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in thousands-except per share) NOTE J DIVIDENDS AND CAPITAL ADEQUACY CONTINUED institution's category. Management believes, as of December 31, 1996, that the Company and Signet Bank meet all capital adequacy requirements to which they are subject. The Company's and Signet Bank's capital amounts and ratios are presented in the table below:
"Well Capitalized" Requirements - --------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------- As of December 31, 1996: Total Capital to Risk Weighted Assets Consolidated $1,168,279 14.70% $794,655 10.0% Signet Bank 1,049,228 13.33 786,851 10.0 Tier I Capital to Risk Weighted Assets Consolidated 856,819 10.78 476,793 6.0 Signet Bank 800,398 10.17 472,111 6.0 Tier I Capital to Average Assets (Leverage Ratio) Consolidated 856,819 7.43 576,644 5.0 Signet Bank 800,398 6.93 577,457 5.0 =================================================================================================== As of December 31, 1995: Total Capital to Risk Weighted Assets Consolidated $ 967,746 12.56% $770,712 10.0% Signet Bank 824,718 10.97 751,872 10.0 Tier I Capital to Risk Weighted Assets Consolidated 756,461 9.82 462,427 6.0 Signet Bank 627,847 8.35 451,123 6.0 Tier I Capital to Average Assets (Leverage Ratio) Consolidated 756,461 6.93 546,157 5.0 Signet Bank 627,847 5.88 534,266 5.0 ===================================================================================================
NOTE K INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows: December 31 1996 1995 - ------------------------------------------------------------------ Deferred tax assets: Allowance for loan losses $ 49,949 $ 46,646 Foreclosed property 2,705 4,305 Commercial fraud loss 12,355 12,250 Other 29,556 32,779 - ------------------------------------------------------------------ Total deferred tax assets 94,565 95,980 Deferred tax liabilities: Leasing 113,942 94,995 Unrealized gains on securities 8,205 24,341 Other 26,588 28,646 - ------------------------------------------------------------------ Total deferred tax liabilities 148,735 147,982 - ------------------------------------------------------------------ Net deferred tax liabilities $(54,170) $(52,002) ================================================================== 72 NOTE K INCOME TAXES CONTINUED Differences between applicable income taxes (benefit) and the amount computed by applying statutory income tax rates are summarized as follows: Year Ended December 31 1996 1995 1994 - ------------------------------------------------------------------------- Amounts at statutory rates $66,209 $59,402 $76,011 Effect of: Tax exempt income (5,036) (6,774) (8,582) State taxes net of federal benefit 3,741 5,246 2,248 Other (673) 765 (2,338) - ------------------------------------------------------------------------- Applicable income taxes $64,241 $58,639 $67,339 - ------------------------------------------------------------------------- Taxes currently payable $46,939 $35,180 $33,156 Deferred income taxes 17,302 23,459 34,183 - ------------------------------------------------------------------------- Applicable income taxes $64,241 $58,639 $67,339 ======================================================================== Applicable income taxes include $1,847 in 1996, $677 in 1995 and $1,243 in 1994 relating to securities available for sale gains and investment securities gains. The components of income tax expense are as follows: Year Ended December 31 1996 1995 1994 ----------------------------------------------------------------- Current Deferred Current Deferred Current Deferred - ------------------------------------------------------------------------------ Federal $44,001 $14,485 $32,468 $18,101 $34,396 $29,484 State 2,938 2,817 2,712 5,358 (1,240) 4,699 - ------------------------------------------------------------------------------ $46,939 $17,302 $35,180 $23,459 $33,156 $34,183 ============================================================================== NOTE L RESTRUCTURING AND CONTRACT TERMINATION CHARGES In the third quarter of 1994, Signet's Board of Directors approved a comprehensive core bank improvement plan aimed at reducing Signet's efficiency ratio through cost reductions and revenue initiatives in order to enhance its competitive position. This impacted employees and operations throughout the organization. The consolidated statement of income for 1994 includes a pretax charge of $43.2 million related to the plan. The charge included approximately $15.6 million primarily for increased retiree medical and pension benefits related to an early retirement program in which 225 employees participated, approximately $13.0 million of accelerated retiree medical and pension expense and anticipated severance benefits for approximately 750 employees, and approximately $14.6 million related to the writedown of bank-owned properties and lease termination costs due to the expected abandonment of facilities resulting from the reduction in employees. As of December 31, 1996, the restructuring plan had been completed and Signet had reduced the restructuring liability by approximately $7.0 million for severance payments to approximately 700 employees, $2.5 million for payments made under the early retirement program and approximately $12.8 million for lease termination and other facilities related costs. In addition, $19.5 million was transferred from the restructuring liability to Signet's pension benefit liability and postretirement benefit liability (See Footnote H) and $1.4 million was reversed in conjunction with the conclusion of the program. Also, in conjunction with the anticipated Capital One spin-off, Signet recorded a special pretax charge of $49.0 million for terminating data processing contracts related to the credit card business in 1994. This charge was included in Capital One's financial results. As the contract termination charge was paid in 1994, no related liability remains. 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in thousands-except per share) NOTE M OTHER NON-INTEREST INCOME AND EXPENSE The following schedule represents the items comprising other non-interest income and expense:
Year Ended December 31 1996 1995 1994 - -------------------------------------------------------------------------------------------------- Other non-interest income: Mortgage servicing and origination $ 32,303 $ 22,429 $ 18,661 Trading profits (losses) 29,279 11,969 (268) Other service charges and fees 15,459 12,293 13,592 Gains (losses) on sales of mortgage loans 6,756 7,178 (3,276) Gain on sale of mortgage servicing 6,499 977 6,000 Other 15,641 17,867 23,768 - -------------------------------------------------------------------------------------------------- Total $105,937 $ 72,713 $ 58,477 ================================================================================================== Other non-interest expense: Public relations, sales and advertising $ 20,499 $ 18,054 $ 16,662 Professional services 14,412 19,920 26,108 Credit and collection 5,386 3,790 11,646 Taxes and licenses other than payroll and income 3,516 3,896 3,448 FDIC assessment 2,243 8,981 16,754 Insurance 1,700 1,614 1,783 Other 47,045 54,226 43,949 - -------------------------------------------------------------------------------------------------- Total $ 94,801 $110,481 $120,350 ==================================================================================================
NOTE N DERIVATIVE FINANCIAL INSTRUMENTS The Company is party to derivative financial instruments with off-balance sheet risk in the normal course of business to reduce its own exposure to fluctuations in interest rates, to participate in trading activities and to meet the financing needs of customers. These instruments include forward and futures contracts; options; and interest rate swaps, caps and floors. In general terms, derivative financial instruments are contracts or agreements whose value can be linked to interest rates, exchange rates, security prices or financial indices. These instruments involve, to varying degrees, elements of credit or interest rate risk in excess of the amount recognized in the balance sheet. The Company attempts to limit its credit risk by dealing with creditworthy counterparties, obtaining collateral where appropriate and utilizing master netting arrangements in accordance with FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts." The Company's credit exposure that results from entering into derivative financial instruments is limited to the current fair value of contracts with a positive fair value expected to be received from counterparties. The Company does not expect any counterparties to fail to meet their obligations. The market risk of derivative financial instruments arises from the potential for changes in value due to fluctuations in interest and foreign exchange rates. 74 NOTE N DERIVATIVE FINANCIAL INSTRUMENTS CONTINUED
December 31 - --------------------------------------------------------------------------------------------------------------------------- 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Average Average (in thousands (in millions) Carrying Fair Fair (in millions) Carrying Fair Fair except where noted) Notional (a) Value (b) Value (c) Value Notional (a) Value (b) Value (c) Value - --------------------------------------------------------------------------------------------------------------------------- Derivative Financial Instruments: Held for trading: Forward and futures contracts $ 814 $(1,253) $(1,253) $ (32) $ 1,300 $ (7) $ (7) $ 944 Interest rate swap agreements 382 5,367 5,367 3,149 270 803 803 698 Interest rate caps, floors and options(d) 1,207 1,016 1,016 2,307 478 (50) (50) 4,064 Held for purposes other than trading: Forward and futures contracts 89 59 59 111 (1,476) (1,476) Interest rate swap agreements 2,167 16,841 2,824 33,549 Interest rate caps and floors(e) 650 5,396 1,006 950 10,179 14,680
(a) The contract or notional amounts of the financial derivative instruments shown in the table are in millions and represent the extent of involvement the Company has in particular classes of instruments and may exceed the actual amount of credit risk involved at December 31, 1996 and 1995, respectively. (b) Carrying values in the table are included in the statement of financial position under the following captions: forward and futures contracts are included in interest bearing deposits with other banks, trading account securities, loans held for sale and other assets; interest rate swaps are included in interest receivable and other assets; interest rate caps and floors are included in other assets; purchased options are included in loans held for sale and other assets; and sold options are included in other liabilities. (c) Fair values for forward and futures contracts and interest rate caps and floors and options are based on quoted market prices. The fair value of interest rate swaps is the estimated amount that the Company would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. (d) Includes (notional) purchased interest rate caps and purchased options which have no credit risk of $964 and $213 at December 31, 1996 and 1995, respectively. (e) Includes (notional) purchased interest rate caps and floors which have no credit risk of $650 and $950 at December 31, 1996 and 1995, respectively. Futures contracts are legal agreements to buy or sell a standardized quantity of a commodity or standardized financial instrument at a specified future date and price. Futures contracts are traded on organized exchanges. Forward contracts are legal contracts between two parties to purchase and sell a specific quantity of a financial instrument or commodity at a price specified now, with delivery and settlement at a specified future date. Exchange traded futures do not have any credit risk; however, risks related to futures and forwards traded over-the-counter arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities values and interest rates. While in theory futures and forwards represent obligations to make or take delivery, in fact most are closed out by taking an exact but opposite position in the same contract. Cash requirements of futures and forwards include receipt/payment of cash for the sale or purchase of the contracts. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Entering into interest rate swap agreements involves not only the risk of dealing with counterparties and their ability to meet the terms of the contracts but also the interest rate risk associated with unmatched positions. 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in thousands-except per share) NOTE N DERIVATIVE FINANCIAL INSTRUMENTS CONTINUED Interest rate caps are tools used to manage exposure to interest rate risk by modifying the rate sensitivity of selected liabilities by setting an upper limit on a certain interest rate index. The Company typically pays a fee for the cap and receives the amount by which the actual rate exceeds the contractual rate, if any. Interest rate floors are tools to manage exposure to interest rate risk by modifying the rate sensitivity of selected assets by setting a lower limit on a certain interest rate index. The Company typically pays a fee for the floor and receives the amount by which the contractual rate exceeds the actual rate, if any. Cash flows from swaps, caps and floors are received or paid on the established contract dates. Options are contracts that give the holder the right to buy (call) or sell (put) a specified quantity of an asset from/to the issuer of such a contract at a fixed price within a specified period of time. As a writer of options, the Company receives a premium at the outset and then bears the risk of an unfavorable change in the price of the financial instrument underlying the option. The Company maintains active trading positions in derivative financial instruments. All trading derivative types and on-balance sheet instruments are managed in the aggregate. Trading positions in derivative financial instruments are carried at fair value and changes in fair values are reflected in trading income as they occur. Net trading gains/(losses) in earnings on derivative financial instruments totaled $19,453, ($32,590) and ($22,168) in the years ended December 31, 1996, 1995 and 1994, respectively. See Note M for total trading income. The Company manages the potential credit exposure through careful evaluation of counterparty credit standing, collateral agreements, and other contract provisions. The potential credit exposure from future market movements is evaluated by using models that take into consideration possible changes over time in interest rates and other relevant factors. The Company's principal objective in holding or issuing derivatives for purposes other than trading is asset-liability management. The operations of the Company are subject to a risk of interest-rate fluctuations to the extent there is a difference between the amount of the Company's interest-earning assets and the amount of interest-bearing liabilities that mature or reprice in specified periods. The main objective of the Company's asset-liability management activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest-rate and liquidity risk and facilitating the funding needs of the Company. To achieve that objective, the Company uses a combination of derivative financial instruments. The majority of the asset-liability management activities involve the use of interest rate swaps whereby fixed rate assets are converted to variable rate assets or fixed rate liabilities are converted to variable rate liabilities. Derivatives held or issued for purposes other than trading are not marked to market. Related income or expense including amortization of purchase premiums or settlement gains or losses are recorded as an adjustment to the yield of the related interest earning asset or interest bearing liability over the periods covered by the contracts. If an instrument is terminated, any gain or loss is deferred and amortized as an adjustment to the yield of the designated assets or liabilities over the remaining periods originally covered by the contract. The Company also acts as an intermediary in arranging interest rate swaps, caps and floors. As an intermediary, the Company becomes a principal in the exchange of interest payments between the parties and, therefore, is exposed to loss should one of the parties default. The Company minimizes the risk by performing normal credit reviews on its customers. As a writer of interest rate caps and floors, the Company receives a fee at the outset and then bears the risk of an unfavorable change in interest rates. The Company minimizes its exposure to interest rate risk by entering into offsetting positions that essentially counterbalance each other. These activities are immaterial to operations. 76 NOTE O COMMITMENTS AND CONTINGENCIES The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These instruments include commitments to extend credit, standby and commercial letters of credit and recourse obligations. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Company attempts to limit its credit risk by dealing with creditworthy counterparties and obtaining collateral where appropriate. Off-Balance Sheet Items December 31 (in millions) 1996 1995 - -------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit (unused)-net $4,562 $3,505 Standby and commercial letters of credit 304 318 Mortgage loans sold with recourse 4 15 ================================================================================ The fair value of commercial lending related letters of credit and commitments reflects the amount Signet would have to pay a counterparty to assume these obligations and was $10,496 and $10,209 at December 31, 1996 and 1995, respectively. These amounts were estimated as the amount of fees currently charged to enter into similar agreements, taking into account the present creditworthiness of the counterparties. Commitments to extend credit include the unused portions of commitments that obligate a bank to extend credit in the form of loans, participations in loans or similar transactions. Commitments to extend credit would also include loan proceeds that a bank is obligated to advance, such as loan draws, construction progress payments, rotating or revolving credit arrangements (other than credit cards and related plans), or similar transactions. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the counterparty. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby and commercial letters of credit are conditional commitments issued by the Company, and unless discussed otherwise, have the same characteristics as discussed for commitments. Standby letters of credit are instruments issued by the Company which represent an obligation to guarantee payments on certain transactions. If a customer defaulted on loan payments, the issuer of the letter would be called upon to make payments. Standby letters of credit represent contingent liabilities; therefore, they are not included on the Company's balance sheet. Commercial letters of credit are conditional commitments on the part of a bank to provide payment on drafts drawn in accordance with the terms of a document. A commercial letter of credit is issued to specifically facilitate trade or commerce. Under the terms of a commercial letter of credit, as a general rule, drafts will be drawn when the underlying transaction is consummated as intended. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral deemed necessary by the Company upon extension of credit is based on management's credit evaluation of the counterparty and the particular transaction. Collateral held varies but may include accounts receivable, marketable securities, deposit accounts, inventory and property, plant and equipment. Credit risk (the possibility that a loss may occur from the failure of another party to perform according to the terms of a contract) exists to the extent of the contract amount in the case of commitments and letters of credit. No significant losses are anticipated as a result of these transactions. The Company sells residential mortgage loans with recourse to the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Company (FHLMC). Mortgages are collateralized by 1-4 family residential homes. The Company's policy is for an average 85% loan-to-value ratio upon inception of the loan. Loans above 80% have mortgage insurance. It is not practicable to separately estimate the value of mortgage loans sold with recourse due to the excessive cost involved. These values are included in the loans held for sale valuation (see Note R for further discussion). 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in thousands-except per share) NOTE O COMMITMENTS AND CONTINGENCIES CONTINUED Certain premises are leased under agreements which expire at various dates through 2051, without taking into consideration renewal options available to the lessee. Many of these leases require the lessee to pay property taxes, insurance premiums, cost of maintenance and other costs. In some cases, rentals are subject to increase in relation to a cost of living index. Total rental expense amounted to approximately $21,003 in 1996, $22,827 in 1995 and $21,947 in 1994. Future minimum rental commitments as of December 31, 1996 for all non-cancelable operating leases with initial or remaining terms of one year or more amounted to $113,050 and rental commitments for the next five years are as follows: 1997 $18,466 1998 18,368 1999 15,055 2000 12,514 2001 10,414 The Company has entered into several agreements under which certain data processing services, including management of the Company's data center and installation of various new application systems, will be provided by outside parties. The cost of these services is determined by volume considerations, in addition to an agreed base rate, for remaining terms up to five years. On March 19, 1996, Signet's management discovered that the Company was one of several major financial institutions that were victims of fraudulent commercial loan transactions which occurred prior to 1996. The Company had loan outstandings related to these transactions of approximately $81 million. Federal authorities have informed the Company that there have been substantial recoveries of assets related to these transactions. Management recorded a $35 million commercial fraud loss in non-interest expense at December 31, 1995 and recorded the estimated probable recovery amount of $46 million in other assets as a receivable. The receivable represents an amount management believes is likely to be recovered based on current facts and circumstances. The amount of the recovery was based on the Company's share of known claims to the total amount held by federal authorities, less associated costs. The recovery amount is subject to change, even in the near term, as additional assets are recovered and/or additional claims are asserted. Management continues to believe the $35 million charge to 1995 earnings is adequate to cover estimated losses related to these fraudulent transactions based on currently available information, but is unable to predict the timing of the recovery. The Company will vigorously pursue all other sources of recovery, but currently is unable to determine the probability or amount of additional recoveries. 78 NOTE P Securitizations Signet periodically securitizes loans, primarily consumer loans such as credit card receivables, home equity lines and student loans. In accordance with these agreements, a fixed amount of cash or excess servicing fees may be required to be set aside to cover credit losses and is included in other assets. Recourse obligations related to these transactions are not material. Amounts related to these securitizations are as follows:
Credit Home Equity Student Card Lines Loans - --------------------------------------------------------------------------------------------- 1996 Initial amount securitized $ 90,000 $404,591 Initial gain recorded 9,254 Gain on additional sales of receivables $ 7,576 Receivables outstanding at December 31 263,889 406,896 428,435 Amount set aside to absorb credit losses at December 31 5,288 6,317 - --------------------------------------------------------------------------------------------- 1995 Initial amount securitized 185,000 480,702 Initial gain recorded 9,562 Receivables outstanding at December 31 185,000 480,702 - --------------------------------------------------------------------------------------------- 1994 Initial amount securitized* 2,398,801 =============================================================================================
* In conjunction with the spin-off of Capital One, Signet's rights and obligations under substantially all of its credit card securitization agreements entered into before February 28, 1995, as well as any related assets and liabilities were transferred to Capital One Bank. NOTE Q CONCENTRATIONS OF RISK During 1996 and 1995, the Company maintained a concentration of business activities with customers located within Virginia, Maryland and the District of Columbia. As of December 31, 1996 and 1995, the Company held approximately $2.6 billion and $2.4 billion, respectively, in U.S. Government sponsored and U.S. Government agency financial instruments, which have little, if any, credit risk. In addition, as of December 31, 1996 and 1995, the Company had $1.3 billion and $1.2 billion, respectively, of credit exposure in manufacturing industries. Credit exposure in servicing industries was $1.4 billion for both December 31, 1996 and 1995. The Company's current commercial lending policies are strongly oriented toward diversified middle market borrowers. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, marketable securities, deposit accounts, inventory, property, plant and equipment, real estate and income-producing commercial properties. Signet has a contract with Electronic Data Systems ("EDS") under which EDS manages Signet's information services, including the data center, telecommunications, systems and programming. EDS is the primary provider of computer services for Signet. The contract terminates in 2001. 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in thousands-except per share) NOTE R DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. See Note N - Derivative Financial Instruments for fair value information on Signet's derivatives.
December 31 ------------------------------------------------ 1996 1995 ------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------------------------------------------- The estimated fair values of the Company's financial instruments required to be disclosed under SFAS No. 107: Assets: Cash and due from banks(a) $ 566,520 $ 566,520 $ 599,113 $ 599,113 Interest bearing deposits with other banks(a)(e) 3,200 3,200 3,129 3,129 Federal funds sold and securities purchased under resale agreements(a) 777,999 777,999 460,217 460,217 Trading account securities(b)(e) 547,473 547,473 478,705 478,705 Loans held for securitization(a) 389,700 389,700 Loans held for sale(a)(b)(e) 102,767 102,767 362,736 362,736 Securities available for sale(b) 2,623,280 2,623,280 2,333,971 2,333,971 Loans(c)(f) 5,828,994 5,883,318 4,920,793 4,960,403 Interest receivable(a)(e) 107,425 107,425 104,259 104,259 Other assets(a)(e)(g) 77,761 77,761 126,894 126,894 Liabilities: Non-interest bearing deposits(a) 1,751,238 1,751,238 1,726,378 1,726,378 Interest bearing deposits(d) 6,136,104 6,159,097 5,866,593 5,865,813 Securities sold under repurchase agreements(a) 1,467,565 1,467,565 1,124,105 1,124,105 Federal funds purchased(a) 495,171 495,171 780,193 780,193 Long-term borrowings(b)(d) 400,014 414,054 253,033 262,920 Interest payable(a) 30,507 30,507 19,460 19,460 Due to broker(a) 300,000 300,000 125,000 125,000 Other liabilities(a)(e)(g) 1,372 1,372 2,149 2,149 ========================================================================================================
(a) The carrying amount approximates fair value. (b) Fair values are based on published market prices or dealer quotes. (c) For credit card and equity line receivables with short-term and/or variable characteristics, the total receivables outstanding approximates fair value. This amount excludes any value related to account relationship. The fair value of other types of loans is estimated by discounting the future cash flows using the comparable risk-free rate and adjusting for credit risk and operating costs. (d) The fair value of demand deposits, savings accounts and money market deposits with no defined maturity, by SFAS No. 107 definition, is the amount payable on demand at the reporting date. The fair value of certificates of deposit and some long term debt is estimated by discounting the future cash flows using the current rates at which similar liabilities would be incurred. (e) Carrying values in the table are included in the statement of financial position under the indicated captions, except for certain derivative amounts (see Note N). (f) As required by SFAS No. 107, lease receivables (net of unearned income) with a carrying value totaling $389,185 and $365,533 at December 31, 1996 and 1995, respectively, are excluded. The carrying values are net of the allowance for loan losses and related unearned income. (g) Only financial instruments as defined by SFAS No. 107 are included in this category. 80 NOTE S SIGNET BANKING CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL INFORMATION December 31 Balance Sheet 1996 1995 - --------------------------------------------------------------------- Assets Securities available for sale $ 144 $ 10,646 Commercial loans 777 Advances to bank subsidiaries 231,131 215,929 Investments in: Bank subsidiaries 875,030 812,110 Non-bank subsidiaries 41,035 39,026 Other assets 30,492 39,503 - --------------------------------------------------------------------- $1,177,832 $1,117,991 ===================================================================== Liabilities Long-term borrowings-subordinated notes $ 250,000 $ 250,000 Other liabilities 3,717 4,042 - --------------------------------------------------------------------- Total liabilities 253,717 254,042 Common Stockholders' Equity 924,115 863,949 - --------------------------------------------------------------------- $1,177,832 $1,117,991 ===================================================================== Year Ended December 31 Statement of Income 1996 1995 1994 - -------------------------------------------------------------------------------- Income: Dividends from bank subsidiaries $ 56,088 $ 57,651 $ 75,531 Interest from: Bank subsidiaries 13,799 14,240 10,545 Non-bank subsidiaries 2 50 286 Others 191 1,357 4,528 Other income--net 2,361 2,538 5,562 - -------------------------------------------------------------------------------- 72,441 75,836 96,452 Expense: Interest 16,295 18,429 20,983 Non-interest 2,374 2,594 4,489 - -------------------------------------------------------------------------------- 18,669 21,023 25,472 ================================================================================ Income before income taxes benefit and equity in undistributed net income of subsidiaries 53,772 54,813 70,980 Applicable income taxes benefit (559) (806) (1,204) - -------------------------------------------------------------------------------- 54,331 55,619 72,184 Equity in undistributed net income: Bank subsidiaries 69,262 39,380 66,101 Non-bank subsidiaries 1,334 16,081 11,549 - -------------------------------------------------------------------------------- Net income $124,927 $111,080 $149,834 =============================================================================== 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in thousands-except per share) NOTE S SIGNET BANKING CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL INFORMATION CONTINUED
Year Ended December 31 Statement of Cash Flows 1996 1995 1994 - ------------------------------------------------------------------------------------------------------- Operating Activities Net Income $124,927 $111,080 $149,834 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (70,596) (55,461) (77,650) Realized securities available for sale (gains) losses (16) 418 (459) Decrease (increase) in other assets 10,379 26,389 (8,160) (Decrease) increase in other liabilities (604) (4,239) 454 - ------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 64,090 78,187 64,019 Investing Activities Decrease (increase) in interest bearing deposits with other banks 110,000 (55,000) Proceeds from sales of securities available of sale 19,904 47,552 3,662 Purchases of securities available for sale (9,961) (39,469) (Increase) decrease in advances to subsidiaries (15,202) (11,052) 100,683 Increase in investment in subsidiaries (24,913) (37,721) (56,535) Net decrease (increase) in loans 777 3,354 (4,131) - ------------------------------------------------------------------------------------------------------- Net cash (used) provided by investing activities (29,395) 72,664 (11,321) Financing Activities Decrease in commercial paper (108,664) (59,824) Decrease in long-term borrowings (11,943) Proceeds from issuance of common stock 13,577 4,084 75,972 Payment of cash dividends (48,273) (46,489) (57,192) - ------------------------------------------------------------------------------------------------------- Net cash used by financing activities (34,696) (151,069) (52,987) - ------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents (1) (218) (289) Cash and cash equivalents at beginning of year 1 219 508 - ------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 0 $ 1 $ 219 ======================================================================================================= Supplemental disclosures Interest paid $ 16,016 $ 18,327 $ 20,692 Income taxes (received) paid (3,707) (27,453) 5,288 Distribution of common stock of Capital One Financial Corporation 383,200
The long-term borrowings mature over the next three years as follows: 1997--$50,000, 1998--$100,000, 1999--$100,000. 82 NOTE T SPIN-OFF CAPITAL ONE FINANCIAL CORPORATION ("CAPITAL ONE") On February 28, 1995, Signet distributed all of the remaining Capital One common stock it held to Signet stockholders in a tax free distribution (the "spin-off"). Related assets of $3.6 billion and equity of $0.4 billion were included in the spin-off at that time. Subsequent to February 28,1995, Capital One's results of operations and financial position are excluded from Signet's. On February 28, 1995, $6.2 billion (notional) of interest rate swaps were transferred to Capital One. Various agreements existed between Signet and Capital One. These included basic servicing agreements, an agreement to hold secured card deposits on behalf of Capital One which amounted to $679,101 at December 31,1995 and which transferred to Capital One in 1996, and an agreement to hold non-card consumer loans, amounting to $240,902 at December 31,1995, which were sold to Capital One in 1996. The net amount Signet paid to Capital One related to these agreements since the spin-off was $22,324. Capital One summary financial data follows:
February 28 December 31 1995 1994 - --------------------------------------------------------------------------------------------------- Federal funds sold $ 304,500 $ 300,000 Loans held for securitization 450,000 Securities available for sale 351,425 99,070 Net loans 2,088,554 2,159,939 Other assets 444,809 513,537 - --------------------------------------------------------------------------------------------------- Total assets $3,639,288 $3,072,546 =================================================================================================== Deposits $ 622,898 $ 452,201 Short-term borrowings 1,066,103 2,040,688 Bank notes 1,388,158 22,000 Other liabilities 69,257 83,100 - --------------------------------------------------------------------------------------------------- Total liabilities 3,146,416 2,597,989 Stockholders' equity [includes minority interest of $109,672 (1995) and $106,900 (1994)] 492,872 474,557 - --------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $3,639,288 $3,072,546 ===================================================================================================
Two Months Ended Year Ended February 28, December 31, 1995 1994 - --------------------------------------------------------------------------------------------------- Net interest income $ 25,167 $ 164,977 Provision for loan losses 3,929 30,727 - --------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 21,238 134,250 Non-interest income 87,679 396,902 Non-interest expense (1994 includes a $49,000 contract termination fee) 81,510 384,325 - --------------------------------------------------------------------------------------------------- Income before income taxes 27,407 146,827 Applicable income taxes 9,870 51,564 - --------------------------------------------------------------------------------------------------- Net income $ 17,537 $ 95,263 ===================================================================================================
83 Report of ERNST & YOUNG LLP, INDEPEDENT AUDITORS Stockholders and Board of Directors Signet Banking Corporation We have audited the accompanying consolidated balance sheet of Signet Banking Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Signet Banking Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Richmond, Virginia January 22, 1997 84 SIGNET BANKING CORPORATION AND SUBSIDIARIES Consolidating BALANCE SHEET
Signet Banking Signet Signet Banking December 31, 1996 Corporation Bank Other Corporation (in thousands) (unaudited) (Parent Company) Consolidated Subsidiaries Eliminations Consolidated - --------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 566,520 $11,989 $ (11,989) $ 566,520 Interest bearing deposits with other banks 3,200 3,200 Fed funds sold and resale agreements 777,999 777,999 Trading account securities 544,294 2,078 546,372 Loans held for sale 102,527 299 102,826 Securities available for sale $ 144 2,638,412 4,984 (20,260) 2,623,280 Loans 6,579,967 6,579,967 Less: Unearned Income (225,081) (225,081) Allowance for loan losses (136,707) (136,707) - --------------------------------------------------------------------------------------------------------------------------- Net loans 6,218,179 6,218,179 Premises and equipment 180,763 3,650 184,413 Other assets 1,177,688 635,415 32,392 (1,147,866) 697,629 - --------------------------------------------------------------------------------------------------------------------------- $1,177,832 $11,664,109 $58,592 $(1,180,115) $11,720,418 - --------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Non-interest bearing deposits $ 1,763,227 $ (11,989) $ 1,751,238 Interest bearing deposits 6,291,104 (155,000) 6,136,104 - --------------------------------------------------------------------------------------------------------------------------- Total deposits 8,054,331 (166,989) 7,887,342 Other short-term borrowings 2,058,662 (95,926) 1,962,736 Long-term borrowings $ 250,000 150,014 400,014 Other liabilities 3,717 538,933 $ 4,695 (1,134) 546,211 Stockholders' equity 924,115 862,169 53,897 (916,066) 924,115 - --------------------------------------------------------------------------------------------------------------------------- $1,177,832 $11,664,109 $58,592 $(1,180,115) $11,720,418 - ---------------------------------------------------------------------------------------------------------------------------
Statement of CONSOLIDATING INCOME
Year ended December 31, 1996 (in thousands) (unaudited) - --------------------------------------------------------------------------------------------------------------------------- Interest income $ 13,754 $ 832,805 $ 396 $ (15,543) $ 831,412 Interest expense 16,056 362,046 2 (15,452) 362,652 - --------------------------------------------------------------------------------------------------------------------------- Net interest income (expense) (2,302) 470,759 394 (91) 468,760 Provision for loan losses 73,851 73,851 - --------------------------------------------------------------------------------------------------------------------------- Net interest income (expense) after provision for loan losses (2,302) 396,908 394 (91) 394,909 Non-interest operating income 2,345 229,333 43,317 (439) 274,556 Securities gains (losses) 16 5,013 (8) 5,021 Non-interest expense 2,375 445,255 38,191 (503) 485,318 - --------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) (2,316) 185,999 5,520 (35) 189,168 Applicable income taxes (benefit) (559) 62,784 2,051 (35) 64,241 - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (1,757) $ 123,215 $ 3,469 $ 124,927 - ---------------------------------------------------------------------------------------------------------------------------
85 SIGNET BANK Consolidating BALANCE SHEET
Signet Bank Excluding December 31, 1996 Signet Mortgage Signet Mortgage (in thousands) (unaudited) Corporation Corporation Eliminations Signet Bank - --------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 566,520 $ 3,161 $ (3,161) $ 566,520 Fed funds sold and resale agreements 777,999 777,999 Trading account securities 544,294 544,294 Loans held for sale 6,960 95,567 102,527 Securities available for sale 2,638,054 358 2,638,412 Loans 6,574,758 5,209 6,579,967 Less: Unearned Income (225,081) (225,081) Allowance for loan losses (136,707) (136,707) - --------------------------------------------------------------------------------------------------------------------------- Net loans 6,212,970 5,209 6,218,179 Investment in subsidiary 19,689 (19,689) Premises and equipment 178,443 2,320 180,763 Advances to affiliates--net 162,454 (162,454) Other assets 548,092 87,323 635,415 - --------------------------------------------------------------------------------------------------------------------------- $11,655,475 $193,938 $(185,304) $11,664,109 - --------------------------------------------------------------------------------------------------------------------------- Liabilities Non-interest bearing deposits $ 1,766,304 $ 84 $ (3,161) $ 1,763,227 Interest bearing deposits 6,291,104 6,291,104 - --------------------------------------------------------------------------------------------------------------------------- Total deposits 8,057,408 84 (3,161) 8,054,331 Advances from affiliates--net 162,454 (162,454) Other short-term borrowings 2,008,662 2,008,662 Long-term borrowings 200,014 200,014 Other liabilities 526,399 11,711 538,110 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities 10,792,483 174,249 (165,615) 10,801,117 Stockholders' Equity Common stock 68,242 750 (750) 68,242 Capital surplus 429,354 500 (500) 429,354 Retained earnings 365,396 18,439 (18,439) 365,396 - --------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 862,992 19,689 (19,689) 862,992 - --------------------------------------------------------------------------------------------------------------------------- $11,655,475 $193,938 $(185,304) $11,664,109 ===========================================================================================================================
Statement of CONSOLIDATING INCOME
Year ended December 31, 1996 (in thousands) (unaudited) - --------------------------------------------------------------------------------------------------------------------------- Interest income $ 824,551 $ 8,254 $ 832,805 Interest expense 353,678 8,368 362,046 - --------------------------------------------------------------------------------------------------------------------------- Net interest income (expense) 470,873 (114) 470,759 Provision for loan losses 73,797 54 73,851 - --------------------------------------------------------------------------------------------------------------------------- Net interest income (expense) after provision for loan losses 397,076 (168) 396,908 Non-interest operating income 182,454 46,879 229,333 Securities gains 5,013 5,013 Non-interest expense 403,472 41,783 445,255 - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 181,071 4,928 185,999 Applicable income taxes 60,851 1,933 62,784 - --------------------------------------------------------------------------------------------------------------------------- Net income $ 120,220 $ 2,995 $ 123,215 - ---------------------------------------------------------------------------------------------------------------------------
86 Signet STOCK INFORMATION The Common Stock of SIGNET BANKING CORPORATION is traded on the New York Stock Exchange under the symbol "SBK." Issues and Conversions March 29, 1965 2:1 stock split distributed to shareholders of record on March 17. November 20, 1969 3:2 stock split distributed to shareholders of record on October 20. July 20, 1984 2:1 stock split distributed to shareholders of record on June 29. July 14, 1986 Union Trust Bancorp (UTB) of Baltimore acquired at an exchange rate of 2.05 Signet shares for each UTB share. July 27, 1993 2:1 stock split distributed to shareholders of record on July 6. September 1, 1994 Pioneer Financial Corporation (PION) of Chester, Virginia, acquired at an exchange rate of .6232 Signet shares for each PION share. November 22, 1994 Capital One Financial Corporation (COF) established and 7,125,000 COF shares sold through an Initial Public Offering. February 28, 1995 Signet's interest in Capital One Financial Corporation spun off in a tax-free distribution to Signet shareholders of record on February 10. March 1, 1995 Signet share price adjusted to reflect the spin-off of Capital One.
Quarterly Per Share Information First quarter 1995 data include Signet's ownership of Capital One Financial Corporation through February 28, 1995
1995 First Quarter Second Quarter Third Quarter Fourth Quarter Price Range 7 5/8-36 5/8 20 1/8-23 1/4 21 1/2-28 22-28 Book Value $13.15 $13.90 $14.27 $14.59 E.P.S. .45 .50 .50 .53 Dividends Declared .25 .17 .17 .20 Average Common Shares and Equivalents (000s) 59,142 59,669 60,146 60,230 1996 First Quarter Second Quarter Third Quarter Fourth Quarter Price Range 21 3/8-27 1/4 23 1/4-27 21-29 25-30 3/4 Book Value $14.39 $14.48 $14.89 $15.38 E.P.S. .52 .50 .49 .55 Dividends Declared .20 .20 .20 .21 Average Common Shares and Equivalents (000s) 60,357 60,502 60,738 61,089
Total Return to Shareholders in 1996 Value of 1 Signet share on December 31, 1995 $23.75 Cash dividends paid by Signet in 1996 .81 Value of 1 Signet share on December 31, 1996 30.75 - -------------------------------------------------------------------------------- $31.56 Total Annual Return to Shareholders in 1996 32.9% Annual Return of S&P 500 in 1996 20.3% Total Return of Keefe, Bruyette & Woods 50 Bank Index in 1996 41.5% 90 EX-21 4 EXHIBIT 21.1 1996 SUBSIDIARIES OF SIGNET Exhibit 21.1 1996 SUBSIDIARIES OF SIGNET BANKING CORPORATION
Subsidiary Place of Incorporation - ---------- ---------------------- Signet Banking Corporation Elgin Corporation Virginia Signet Commercial Credit Corporation Virginia General Finance Service Corporation Pennsylvania The Budget Plan Company of Virginia Virginia Signet Insurance Services, Inc. Virginia Signet Investment Banking Company Virginia Signet Financial Services, Inc. Virginia Signet Trust Company Virginia Signet Realty, Inc. Maryland Signet Strategic Capital Corporation Virginia Signet Student Loan Corporation Virginia Virtus Capital Management, Inc. Maryland Signet Bank Virginia DOPWO, Inc. Virginia 800 Building Corporation Virginia F H Crossings, Ltd. Virginia F H Properties, No. 4, Inc. Virginia F H Properties, No, 6, Inc. Virginia F H Properties, No. 7, Inc. Virginia F H Properties, No. 9, Inc. Virginia F H Properties, No. 10, Inc. Virginia F H Properties, No. 11, Inc. Virginia F H Properties, No. 13, Inc. Virginia MWG VII, Inc. Virginia PFR Corporation Virginia Pioneer Development Corporation Virginia Pioneer Properties, I Virginia Signet Bank (Bahamas), Ltd. Bahamas Second Eleutheran Investment Co., Ltd. Bahamas Signet Business Leasing Corporation Virginia Signet Lending Services, Inc. Tennessee Signet Mortgage Corporation Virginia Signet Municipal LeaseCorp. Virginia Signet Residential Finance Corporation Virginia Signet Second Mortgage Corporation Virginia Landexco, Inc. Maryland NP Corporation Maryland EEI Holding's Corporation, Inc. Maryland RE IV, Inc. Maryland RE VIII, Inc. Maryland RE IX, Inc. Maryland RE XI, Inc. Maryland RE XV, Inc. Maryland SM II, Inc. Maryland SM III, Inc. Maryland SM IV, Inc. Maryland SM V, Inc. Maryland SM VI, Inc. Maryland SM VII, Inc. Maryland SM VIII, Inc. Maryland SM IX, Inc. Maryland SM X, Inc. Maryland SM XI, Inc. Maryland SM XII, Inc. Maryland SM XIII, Inc. Maryland SM XIV, Inc. Maryland SM XV, Inc. Maryland SM XVI, Inc. Maryland NP No. 3 Corporation Maryland NP No. 4 Corporation Maryland NP No. 5 Corporation Maryland NP No. 7 Corporation Maryland NP No. 8 Corporation Maryland NP No. 9 Corporation Maryland NP No. 10 Corporation Maryland St. Paul Realty, Inc. Maryland Signet Equipment Company Maryland Signet Leasing and Financial Corporation Maryland Signet Loan Company/Pennsylvania Pennsylvania UTC Prop. No. 2, Inc. Maryland UTC Prop. No. 3, Inc. Maryland UTC Prop. No. 4, Inc. Maryland UTC Prop. No. 5, Inc. Maryland UTC Prop. No. 6, Inc. Maryland Wharton & Bennett, Inc. Maryland
December 31, 1996 EX-23 5 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements of Signet Banking Corporation, or most recent post-effective amendments thereto, filed prior to March 14, 1997, of our report dated January 22, 1997, with respect to the consolidated financial statements of Signet Banking Corporation included in the 1996 Annual Report to Shareholders incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1996: - Form S-8 (2-82600) - Form S-3 (33-4491) - Form S-8 (33-2498) - Form S-3 (33-21963) - Form S-8 (33-43190) - Form S-3 (33-28089) - Form S-8 (33-10637) - Form S-3 (2-92081) - Form S-8 (33-47591) - Form S-3 (33-54803) - Form S-8 (33-47590) - Form S-8 (33-57455) - Form S-8 (33-022996) ERNST & YOUNG LLP Richmond, Virginia March 14, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1996 DEC-31-1996 566,250 3,200 777,999 546,372 102,826 0 0 6,579,967 136,707 11,720,418 7,887,342 1,962,736 546,211 400,014 0 0 300,387 623,728 11,720,418 529,838 0 301,574 831,412 229,763 362,652 468,760 73,851 5,021 485,318 189,168 189,168 0 0 124,927 2.06 2.06 4.73 28,303 71,484 0 0 129,702 71,554 4,708 136,707 131,659 0 5,048
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