-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, jLTGJGRFPkAF00zbFTSokJ3KtyMtO+KiY/MniKXF+KO+MEHs+90aYdh85FljTmfq bdcRwTN7b/0d1vDOske5bA== 0000916641-94-000140.txt : 19941116 0000916641-94-000140.hdr.sgml : 19941116 ACCESSION NUMBER: 0000916641-94-000140 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19941030 FILED AS OF DATE: 19941114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGNET BANKING CORP CENTRAL INDEX KEY: 0000009659 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 546037910 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06505 FILM NUMBER: 94559384 BUSINESS ADDRESS: STREET 1: 7 N EIGHTH ST STREET 2: PO BOX 25970 CITY: RICHMOND STATE: VA ZIP: 23260 BUSINESS PHONE: 8047472000 MAIL ADDRESS: STREET 1: 7 N EIGHTH ST STREET 2: PO BOX 25970 CITY: RICHMOND STATE: VA ZIP: 23260 FORMER COMPANY: FORMER CONFORMED NAME: BANK OF VIRGINIA CO DATE OF NAME CHANGE: 19860717 FORMER COMPANY: FORMER CONFORMED NAME: VIRGINIA COMMONWEALTH BANKSHARES INC DATE OF NAME CHANGE: 19721020 FORMER COMPANY: FORMER CONFORMED NAME: VIRGINIA COMMONWEALTH CORP DATE OF NAME CHANGE: 19701113 10-Q 1 SIGNET 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities Act of 1934 for the quarterly period ended September 30, 1994 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act for the transition period from _______ to _______. Commission file number 1-6505 SIGNET BANKING CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-6037910 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7 North Eighth Street, Richmond, Virginia 23219 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 804 747-2000 Not Applicable Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common Shares outstanding as of October 31, 1994 - 58,494,653 Page 1 of 27 Index SIGNET BANKING CORPORATION AND SUBSIDIARIES September 30, 1994
Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheet 3 Statement of Consolidated Income 4 Statement of Changes in Consolidated Stockholders' Equity 5 Statement of Consolidated Cash Flows 6 Supplemental Notes to Quarterly Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 26 SIGNATURES 26 2 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet (dollars in thousands-except per share) (unaudited)
September [ZW] 30 December 31 [ZW] 1994 1993 1993 [ZW] Assets Cash and due from banks $ 453,020 [ZW] $ 485,052 $ 463,358 Interest bearing deposits with other banks [ZW] 239,274 259,183 540,312 Federal funds sold and securities purchased under resale agreements 1,090,348 [ZW] 1,004,196 1,075,754 Trading account securities [ZW] 279,245 302,439 379,638 Credit card loans held for securitization [ZW] 151,198 750,000 Loans held for sale [ZW] 128,613 260,972 421,361 Securities available for sale [ZW] 1,113,371 290,937 248,163 Investment securities 203,021 [ZW] 1,892,681 1,769,615 Loans: Commercial 2,282,334 [ZW] 2,177,796 2,299,973 Credit card 1,742,622 [ZW] 1,348,928 1,808,515 Other consumer 1,667,110 [ZW] 1,258,463 1,297,309 Real estate-construction [ZW] 218,500 370,695 309,842 Real estate-commercial mortgage [ZW] 532,391 584,505 581,529 Real estate-residential mortgage [ZW] 133,084 71,252 71,411 Gross loans 6,576,041 [ZW] 5,811,639 6,368,579 Less: Unearned income [ZW] (64,886) (49,787) (58,267) Allowance for loan losses (225,359) [ZW] (254,706) (253,313) Net loans 6,285,796 [ZW] 5,507,146 6,056,999 Premises and equipment (net) [ZW] 253,791 201,164 216,524 Interest receivable [ZW] 80,491 106,101 84,118 Other assets [ZW] 767,065 630,574 593,380 Total assets (Credit Card Business amounted to $ 2,246,106, $2,233,168 and $1,991,207, respectively) $11,045,233 [ZW] $11,690,445 $11,849,222 Liabilities Non-interest bearing deposits $ 1,592,825 $ [ZW] 1,464,676 $ 1,544,852 Interest bearing deposits: Money market and interest checking [ZW] 1,011,484 988,042 1,039,215 Money market savings 1,500,611 [ZW] 1,679,387 1,745,066 Savings accounts [ZW] 1,095,370 818,748 880,072 Savings certificates 2,039,352 [ZW] 2,316,182 2,051,300 Large denomination certificates [ZW] 216,428 303,696 347,820 Foreign [ZW] 195,010 199,815 212,288 Total interest bearing deposits 6,058,255 [ZW] 6,305,870 6,275,761 Total deposits 7,651,080 [ZW] 7,770,546 7,820,613 Securities sold under repurchase agreements 904,723 [ZW] 1,074,448 1,281,645 Federal funds purchased [ZW] 610,081 770,339 942,969 Commercial paper [ZW] 118,928 135,637 168,488 Other short-term borrowings [ZW] 160,221 471,299 232,024 Long-term borrowings [ZW] 253,729 280,008 266,152 Interest payable [ZW] 28,036 39,430 28,205 Other liabilities [ZW] 235,349 222,708 144,464 Total liabilities 9,962,147 [ZW] 10,764,415 10,884,560 Stockholders' Equity Common Stock, $5 par value; Authorized 100,000,000 shares, issued and outstanding 58,477,850, 56,504,131 and 56,608,578 shares, respectively [ZW] 292,389 282,521 283,043 Capital Surplus [ZW] 195,704 130,872 133,038 Retained Earnings [ZW] 594,993 512,637 548,581 Total stockholders' equity [ZW] 1,083,086 926,030 964,662 $11,045,233 [ZW] $11,690,445 $11,849,222
3 Statement of Consolidated Income (in thousands-except per share) (unaudited)
Three Months [ZW] Ended Nine Months Ended September [ZW] 30 September 30 1994 [ZW] 1993 1994 1993 [ZW] Loans, including fees: Commercial $ 40,539 $ [ZW] 38,069 $120,858 $116,804 Credit card 46,952 [ZW] 55,103 150,983 167,445 Other consumer 35,825 [ZW] 24,407 87,780 71,953 Real estate-construction 5,298 [ZW] 7,190 15,774 25,095 Real estate-commercial mortgage 12,707 [ZW] 10,952 34,869 33,941 Real estate-residential mortgage 1,917 [ZW] 1,878 5,247 5,898 Total loans, including fees 143,238 [ZW] 137,599 415,511 421,136 Interest bearing deposits with other banks 2,851 [ZW] 2,709 8,374 9,099 Federal funds sold and resale agreements 11,602 [ZW] 5,753 25,226 16,863 Trading account securities 5,062 [ZW] 6,800 15,449 24,705 Credit card loans held for securitization 13,181 [ZW] 22,992 38,904 23,270 Loans held for sale 2,270 [ZW] 4,766 11,146 10,790 Securities available for sale 15,949 [ZW] 4,188 56,185 13,715 Investment securities-taxable 311 [ZW] 22,451 1,003 72,025 Investment securities-nontaxable 3,758 [ZW] 5,278 12,284 16,269 Total interest income 198,222 [ZW] 212,536 584,082 607,872 Interest expense: Money market and interest checking 5,842 [ZW] 5,607 16,999 17,036 Money market savings 10,918 [ZW] 10,957 33,617 34,437 Savings accounts 8,656 [ZW] 6,262 23,355 17,458 Savings certificates 14,820 [ZW] 14,991 41,863 45,662 Large denomination certificates 3,115 [ZW] 2,897 9,974 7,775 Foreign 2,385 [ZW] 2,014 6,678 4,328 Total interest on deposits 45,736 [ZW] 42,728 132,486 126,696 Securities sold under repurchase agreements 9,342 [ZW] 9,431 27,617 33,049 Federal funds purchased 5,540 [ZW] 7,924 19,002 16,242 Other short-term borrowings 3,751 [ZW] 8,364 10,949 19,162 Long-term borrowings 4,131 [ZW] 4,167 12,180 13,139 Total interest expense 68,500 [ZW] 72,614 202,234 208,288 Net interest income 129,722 [ZW] 139,922 381,848 399,584 Provision for loan losses 3,000 [ZW] 12,501 11,498 37,010 Net interest income after provision for loan losses 126,722 [ZW] 127,421 370,350 362,574 Non-interest income: Credit card servicing income 91,883 [ZW] 30,319 245,889 90,619 Credit card service charges 16,802 [ZW] 20,275 50,816 46,837 Service charges on deposit accounts 16,234 [ZW] 16,222 50,037 48,403 Trust income 4,747 [ZW] 4,452 14,417 13,453 Other 21,992 [ZW] 14,247 55,299 42,152 Non-interest operating income 151,658 [ZW] 85,515 416,458 241,464 Securities available for sale gains [ZW] 140 3,193 1,665 Investment securities gains (losses) [ZW] 22 2 (1) 151 Total non-interest operating income 151,820 [ZW] 85,517 419,650 243,280 Non-interest expense: Salaries 68,028 [ZW] 53,811 192,314 153,610 Employee benefits 17,354 [ZW] 13,909 53,405 44,347 Credit card solicitation 24,200 [ZW] 13,727 69,837 40,237 Travel and communications 14,499 [ZW] 8,866 41,362 25,147 Supplies and equipment 13,502 [ZW] 10,863 38,596 29,695 External data processing services 13,049 [ZW] 9,547 36,456 25,335 Occupancy 13,038 [ZW] 10,760 34,604 29,728 Contract termination [ZW] 49,000 49,000 Restructuring charge [ZW] 33,619 33,619 Other 30,525 [ZW] 26,033 86,355 80,283 Total non-interest expense 276,814 [ZW] 147,516 635,548 428,382 Income before income taxes (benefit) (Credit Card Business amounted to $(1,529), $49,235 and $105,751 and $108,467, respectively) 1,728 [ZW] 65,422 154,452 177,472 Applicable income taxes (benefit) (1,734) [ZW] 19,659 47,492 53,002 Net income $ 3,462 $ [ZW] 45,763 $106,960 $124,470 Earnings per common share $ 0.05 $ [ZW] 0.80 $ 1.86 $ 2.19 Cash dividends declared per share 0.25 [ZW] 0.20 0.75 0.55 Average common shares outstanding 57,898 [ZW] 57,010 57,504 56,864
4 Statement of Changes in Consolidated Stockholders' Equity (in thousands) (unaudited)
[ZW] Common Capital Retained [ZW] Stock Surplus Earnings [ZW] Nine Months Ended September 30, 1994 Balance at beginning of [ZW] period $283,043 [ZW] $133,038 $ 548,581 Net [ZW] income [ZW] 106,960 Issuance of Common Stock Related to [ZW] acquisition [ZW] 7,571 51,714 [ZW] Other [ZW] 1,775 10,952 Cash [ZW] dividends [ZW] (42,582) Adjustment to beginning balance for change in accounting method for net unrealized gain on securities available for sale, net of tax of [ZW] $16,147 29,987 Change in net unrealized losses on securities available for sale, net of tax benefit of [ZW] $25,821 (47,953) Balance at end of [ZW] period $292,389 [ZW] $195,704 $ 594,993 Nine Months Ended September 30, 1993 Balance at beginning of [ZW] period $139,904 [ZW] $126,282 $ 560,446 Net [ZW] income [ZW] 124,470 Issuance of Common [ZW] Stock 1,925 [ZW] 4,590 Cash [ZW] dividends [ZW] (30,933) Stock split in the form of a dividend declared June 23, [ZW] 1993 [ZW] 140,692 (140,692) Change in valuation allowance-marketable equity [ZW] securities (654) Balance at end of [ZW] period $282,521 [ZW] $130,872 $ 512,637
5 Statement of Consolidated Cash Flows (in thousands) (unaudited)
Nine Months Ended [ZW] September 30 [ZW] 1994 1993 Operating Activities Net income $ 106,960 [ZW] $ 124,470 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses [ZW] 11,498 37,010 Provision and writedowns on foreclosed property [ZW] 1,414 4,524 Depreciation and amortization [ZW] 32,328 27,340 Investment securities losses (gains) [ZW] 1 (151) Securities available for sale gains [ZW] (3,193) (1,665) Decrease (increase) in interest receivable [ZW] 3,627 (5,249) Increase in other assets [ZW] (183,179) (95,404) (Decrease) increase in interest payable [ZW] (169) 11,820 Increase in other liabilities [ZW] 90,886 101,319 Increase in loans held for securitization [ZW] (151,198) (750,000) Proceeds from securitization of credit card loans 1,843,936 [ZW] 1,186,580 Proceeds from sales of loans held for sale 18,438,000 [ZW] 7,927,870 Purchases and originations of loans held for sale (19,989,188) [ZW] (9,160,338) Proceeds from sales of trading account securities 11,306,019 [ZW] 8,934,766 Purchases of trading account securities (11,205,626) [ZW] (8,568,894) Net cash provided (used) by operating activities [ZW] 302,116 (226,002) Investing Activities Proceeds from maturities of investment securities [ZW] 50,137 321,559 Purchases of investment securities [ZW] (102) (142,848) Proceeds from sales of securities available for sale [ZW] 1,361,970 31,982 Proceeds from maturities of securities available for sale [ZW] 2,241,243 31,589 Purchases of securities available for sale [ZW] (2,967,120) (6,000) Net increase in loans [ZW] (264,492) (27,109) Recoveries of loans previously charged-off [ZW] 24,196 26,039 Purchases of premises and equipment [ZW] (61,031) (22,402) Net cash provided by investing activities [ZW] 384,801 212,810 Financing Activities Net decrease in deposits [ZW] (169,533) (52,768) Net decrease in short-term borrowings [ZW] (831,175) (544,117) Repayment of long-term debt [ZW] (12,422) (17,954) Issuance of common stock [ZW] 72,012 6,515 Payment of cash dividends [ZW] (42,582) (30,933) Net cash used by financing activities [ZW] (983,700) (639,257) Decrease in cash and cash equivalents [ZW] (269,783) (652,449) Cash and cash equivalents at beginning of period 2,079,424 [ZW] 2,400,880 Cash and cash equivalents at end of period $ 1,782,641 $ [ZW] 1,748,431
6 Supplemental Notes to Quarterly Financial Statements (dollars in thousands) (unaudited) General The accompanying financial statements (unaudited) reflect all adjustments which are, in the opinion of management, necessary for a fair presentation. All such adjustments are of a normal recurring nature. The financial statements have been prepared based on the accounting policies as described in the 1993 annual report and as noted below, except certain amounts which have been reclassified for prior periods to conform to the 1994 presentation format. Statement of Consolidated Cash Flows Cash and cash equivalents, as presented in this statement, includes cash and due from banks, interest bearing deposits with other banks and federal funds sold and securities purchased under resale agree-ments. Cash paid for interest during the nine months ended September 30, 1994 and 1993 was $202,404 and $196,468, respectively. Cash paid for income taxes for the same time periods was $46,754 and $37,413, respectively. During the nine months ended September 30, 1994 and 1993, $7,950 and $32,721, respectively, was transferred from loans to foreclosed property. Securities Available for Sale Effective January 1, 1994, the Company adopted the Financial Accounting Standard Board's Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under SFAS No. 115, debt securities classified as investment securities are required to be carried at amortized cost. Debt and equity securities classified as securities available for sale are required to be reported at fair value with unrealized gains and losses reported in a separate component of stockholders' equity, net of tax. At adoption, securities totaling $1.5 billion were reclassified from investment securities to securities available for sale. Securities available for sale are summarized as follows:
September 30, 1994 September 30, [ZW] 1993 December 31, 1993 Fair [ZW] Fair Fair Cost Value Cost [ZW] Value Cost Value [ZW] U.S. Government and agency obligations- Mortgage-backed securities $ 608,709 $ 590,488 $ 90,556 $ [ZW] 96,640 $ 47,672 $ 50,795 Other 398,264 397,174 199,531 [ZW] 201,250 199,641 201,125 State and political subdivisions 14,242 14,618 Other 119,796 111,091 850 [ZW] 850 850 850 Total $1,141,011 $1,113,371 $290,937 [ZW] $298,740 $248,163 $252,770
Investment Securities Investment securities are summarized as follows:
September 30, 1994 September 30, [ZW] 1993 December 31, 1993 Fair [ZW] Fair Fair Cost Value Cost [ZW] Value Cost Value [ZW] U.S. Government and agency obligations- Mortgage-backed securities $ 566,621 $ [ZW] 573,556 $ 461,345 $ 466,151 Other 925,592 [ZW] 923,993 925,225 964,482 State and political subdivisions $182,951 $190,923 269,952 [ZW] 290,527 258,815 277,456 Other 20,070 20,070 130,516 [ZW] 128,626 124,230 121,142 Total $203,021 $210,993 $1,892,681 [ZW] $1,916,702 $1,769,615 $1,829,231
See Securities Available for Sale footnote for discussion of SFAS No. 115. Income Taxes Differences between the effective rate of income taxes and the statutory rate arise principally from non-taxable interest on investments and loans. 7 Supplemental Notes to Quarterly Financial Statements (continued) (dollars in thousands) (unaudited) Securitizations The Company has securitized $1,848,801 of credit card receivables in the first nine months of 1994. These transactions were recorded as sales in accordance with SFAS No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse." At September 30, 1994, $5,138,457 of receivables were outstanding under all securitizations. Proceeds from the sales in 1994 totaled $1,843,936. Recourse obligations related to these transactions are not material. Excess servicing fees related to the securitizations are recorded over the life of each sale transaction. The excess servicing fee is based upon the difference between finance charges received from the cardholders less the yield paid to investors, credit losses and a normal servicing fee, which is also retained by the Company. In accordance with the sale agreements, a fixed amount of excess servicing fees are set aside to absorb credit losses. The amount available to absorb credit losses is included in other assets and was $147,410 at September 30, 1994. Recent Accounting Statements The Financial Accounting Standards Board recently issued Statement No. 114, "Accounting by Creditors for Impairment of a Loan." The new statement, which is effective for financial statements issued for fiscal years beginning after December 15, 1994, requires impaired loans be measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the loan's observable market value or the fair market value of the collateral if the loan is collateral dependent. The new statement also requires troubled debt restructurings involving a modification of terms be remeasured in a similar manner. The Company is currently evaluating the impact that Statement No. 114 will have on the Company's future results of operations and financial position. However, management does not expect that this statement will have a materially adverse impact on future results of operations or financial position. Signet Credit Card Business (A Division of Signet Bank/Virginia) Signet Banking Corporation ("Signet") conducts its credit card business through a division (the "Division") of a wholly owned subsidiary, Signet Bank/Virginia ("SBV"). Application has been made to regulatory authorities to establish a separate limited purpose credit card bank ("Capital One Bank"). Subsequent to regulatory approvals SBV will transfer its credit card business (exclusive of a SBV retained credit card portfolio of approximately $335 million) to this newly formed Capital One Bank and Signet will establish Capital One Financial Corporation (the "Company"), a separate holding company. The stock in Capital One Bank will be distributed by SBV to Signet and then contributed by Signet to the Company. It is anticipated that the Company will undertake an initial public offering of its shares of common stock. Subsequent to the initial public offering, Signet intends, subject to the satisfaction of certain conditions set forth in the Separation Agreement to be entered into between Signet, SBV and the Company, to distribute the remaining shares in the Company to the shareholders of Signet in the first quarter of 1995. The accompanying historical financial statements reflect Signet's credit card business assets and liabilities to be transferred (except the Due to Parent) and results of its operations. SBV will contribute to Capital One Bank up to $360 million of equity capital. The amount so contributed by SBV will be reduced below $360 million to the extent the net proceeds of the initial public offering exceed $100 million.The accompanying historical financial statements reflect neither the establishment of Capital One Bank, the contribution of the credit card business by SBV to Capital One Bank, the establishment of the Company, nor the distribution of Capital One Bank by SBV to Signet and the contribution to the Company all of which are planned to take place subsequent to the date of these financial statements. The following further describes the basis of preparation of the accompanying financial statements: (1) The statements include interest expense paid on borrowings from SBV. For purposes of constructing the accompanying financial statements, three funding pools (short-term, medium-term and long-term pools) were assumed, each with costs based on the average relevant historical rates paid by Signet. (2) The accompanying historical financial statements also include an allocation of expenses for data processing, accounting, audit, human resources, corporate secretary, treasury, legal and other administrative support provided by Signet. Such expenses were allocated based on actual usage or using other allocation methods which, in the opinion of management, approximate actual usage. Management believes the allocation methods are reasonable. Certain services currently provided by affiliates are expected to continue on a transitional basis. (3) Additionally, SBV retained a credit card portfolio of approximately $335 million for all periods presented that is associated with its deposit customer base. The financial statements assume the Division assessed SBV a normal servicing fee for servicing this retained portfolio for all periods presented. 8 Supplemental Notes to Quarterly Financial Statements (dollars in thousands) (unaudited) Signet Credit Card Business (A Division of Signet Bank/Virginia) (continued) Assets and Liabilities to be Transferred
[ZW] September 30 December 31 [ZW] 1994 1993 1993 - - [ZW] Assets Cash and due from banks $ 1,941 [ZW] $ 180 $ 955 Credit card loans held for securitization [ZW] 151,198 750,000 Credit card loans [ZW] 1,790,737 1,404,403 1,862,744 Less: Allowance for loan losses [ZW] (68,516) (63,516) (63,516) Net loans [ZW] 1,722,221 1,340,887 1,799,228 Premises and equipment (net) [ZW] 51,078 24,333 32,679 Interest receivable [ZW] 10,007 14,224 8,293 Accounts receivable from securitizations [ZW] 263,884 65,050 107,048 Other assets [ZW] 45,777 38,494 43,004 Total assets $2,246,106 [ZW] $2,233,168 $1,991,207 Liabilities Due to Parent (will not be transferred) $1,903,721 [ZW] $2,059,881 $1,791,464 Other liabilities [ZW] 102,190 33,895 30,864 Total liabilities $2,005,911 [ZW] $2,093,776 $1,822,328 Statement of Operations
Three Months [ZW] Ended Nine Months Ended September [ZW] 30 September 30 1994 [ZW] 1993 1994 1993 [ZW] Interest income $ 61,905 [ZW] $79,986 $195,352 $196,770 Interest expense 21,350 [ZW] 23,251 62,977 52,023 Net interest income 40,555 [ZW] 56,735 132,375 144,747 Provision for loan losses 8,162 [ZW] 7,216 24,594 28,154 Net interest income after provision for loan losses 32,393 [ZW] 49,519 107,781 116,593 Non-interest income: Credit card servicing income 84,505 [ZW] 23,362 225,888 67,749 Credit card fees 16,661 [ZW] 20,275 50,422 46,837 Other 3,362 [ZW] 2,053 8,542 5,310 Total non-interest income 104,528 [ZW] 45,690 284,852 119,896 Non-interest expense: Salaries and employee benefits 26,710 [ZW] 13,242 68,589 37,591 Credit card solicitation 24,200 [ZW] 13,727 69,837 40,237 Contract termination [ZW] 49,000 49,000 Other 38,540 [ZW] 19,005 99,456 50,194 Total non-interest expense 138,450 [ZW] 45,974 286,882 128,022 Income (loss) before income taxes (benefit) (1,529) [ZW] 49,235 105,751 108,467 Applicable income taxes (benefit) (535) [ZW] 17,370 37,013 38,533 Net income (loss) $ (994) [ZW] $31,865 $ 68,738 $ 69,934
9 Signet Banking Corporation Financial Highlights (dollars in thousands-except per share)
Three Months [ZW] Ended Nine Months Ended September 30 [ZW] Percent September 30 Percent 1994 1993 [ZW] Change 1994 1993 Change [ZW] Earnings Net interest income (taxable equivalent) $133,177 $144,084 [ZW] (7.6)% $ 392,106 $ 411,547 (4.7)% Net interest income 129,722 139,922 [ZW] (7.3) 381,848 399,584 (4.4) Net income 3,462 45,763 [ZW] (92.4) 106,960 124,470 (14.1) Per Common Share Net income $.05 $ .80 [ZW] (93.7) $ 1.86 $ 2.19 (15.1) Cash dividends declared .25 .20 [ZW] 25.0 .75 .55 36.4 Book value 18.52 16.39 13.0 Period-end price 34.50 34.50 -- Average Balance Assets $10,971,450 $12,034,558 [ZW] (8.8) $11,259,824 $11,622,840 (3.1) Earning assets 9,632,783 10,970,422 [ZW] (12.2) 10,002,131 10,588,336 (5.5) Loans (net of unearned income) 6,080,017 6,210,335 [ZW] (2.1) 6,219,301 6,250,964 (.5) Deposits 7,635,425 7,822,546 [ZW] (2.4) 7,739,229 7,716,097 .3 Core deposits 7,154,496 7,283,376 [ZW] (1.8) 7,195,533 7,283,181 (1.2) Common stockholders' equity 1,064,431 906,956 [ZW] 17.4 1,029,750 872,230 18.1 Managed credit card portfolio* 6,823,748 3,830,688 [ZW] 78.1 6,201,125 3,153,093 96.7 Common shares outstanding 57,898,078 57,010,088 [ZW] 1.6 57,503,856 56,863,540 1.1 Ratios Return on assets .13% 1.51% [ZW] (91.4) 1.27% 1.43% (11.2) Return on common stockholders' equity 1.29 20.02 [ZW] (93.6) 13.89 19.08 (27.2) Net yield margin 5.49 5.21 [ZW] 5.4 5.24 5.20 .8 Allowance for loan losses to: Non-performing loans 589.84 471.00 25.2 Non-performing assets 342.19 222.41 53.9 Net loans 3.46 4.42 (21.7) Non-performing assets to loans and foreclosed properties 1.01 1.97 (48.7) Common equity to assets 9.81 7.92 23.9 At Period-end Assets $11,045,233 $11,690,445 (5.5) Earning assets 9,716,225 10,522,260 (7.7) Loans (net of unearned income) 6,511,155 5,761,852 13.0 Deposits 7,651,080 7,770,546 (1.5) Core deposits 7,239,642 7,267,035 (.4) Common stockholders' equity 1,083,086 926,030 17.0 Non-performing assets 65,857 114,520 (42.5) Managed credit card portfolio * 7,032,277 4,285,508 64.1 Number of common stockholders 15,462 14,543 6.3 Full-time employees 6,284 5,442 15.5 Part-time employees 1,288 1,196 7.7
*The managed credit card portfolio includes credit card loans, credit card loans held for securitization and securitized credit card loans. The Common Stock of Signet Banking Corporation is traded on the New York Stock Exchange under the symbol "SBK". 10 Table 1 Selected Quarterly Financial Information
3rd Qtr 2nd [ZW] Qtr 1st Qtr 4th Qtr 3rd Qtr 1994 [ZW] 1994 1994 1993 1993 [ZW] Summary of Operations (dollars in thousands-except per share) Net interest income (taxable equivalent) $ 133,177 $ [ZW] 128,279 $ 130,650 $ 133,546 $ 144,084 Taxable equivalent adjustment 3,455 [ZW] 3,369 3,434 3,790 4,162 Net interest income 129,722 [ZW] 124,910 127,216 129,756 139,922 Provision for loan losses 3,000 [ZW] 2,999 5,499 10,276 12,501 Net interest income after provision for loan losses 126,722 [ZW] 121,911 121,717 119,480 127,421 Non-interest income 151,820 [ZW] 139,467 128,363 122,156 85,517 Non-interest expense(1) 276,814 [ZW] 186,625 172,109 169,934 147,516 Income before income taxes(benefit) 1,728 [ZW] 74,753 77,971 71,702 65,422 Applicable income taxes(benefit) (1,734) [ZW] 24,368 24,858 21,758 19,659 Net income $ 3,462 $ [ZW] 50,385 $ 53,113 $ 49,944 $ 45,763 Per share: (2) Net income $ 0.05 $ [ZW] 0.88 $ 0.93 $ 0.87 $ 0.80 Cash dividends declared 0.25 [ZW] 0.25 0.25 0.25 0.20 Average shares outstanding 57,898,078 [ZW] 57,357,940 57,247,462 57,087,297 57,010,088 Selected Average Balances (dollars in millions) Assets $ 10,971 $ [ZW] 11,501 $ 11,310 $ 11,601 $ 12,035 Earning assets 9,633 [ZW] 10,267 10,112 10,447 10,970 Investment securities 208 [ZW] 226 247 1,790 1,840 Loans (net of unearned income) 6,080 [ZW] 6,344 6,235 6,074 6,210 Deposits 7,635 [ZW] 7,769 7,815 7,782 7,823 Core deposits 7,154 [ZW] 7,209 7,224 7,189 7,283 Interest bearing liabilities 8,121 [ZW] 8,699 8,511 8,945 9,516 Stockholders' equity 1,064 [ZW] 1,017 1,007 939 907 Managed credit card portfolio(2) 6,824 [ZW] 6,303 5,462 4,663 3,831 Ratios Return on average assets 0.13% [ZW] 1.76% 1.90% 1.71% 1.51% Return on average common stockholders' equity 1.29 [ZW] 19.87 21.39 21.09 20.02 Net loan losses to average loans 1.74 [ZW] 0.38 0.36 0.77 0.93 Net interest spread 4.96 [ZW] 4.51 4.77 4.65 4.81 Net yield margin 5.49 [ZW] 5.01 5.24 5.07 5.21 At period-end: Allowance for loan losses to: Non-performing loans 589.84 [ZW] 616.91 521.72 342.63 471.00 Non-performing assets 342.19 [ZW] 316.48 283.44 217.46 222.41 Net loans 3.46 [ZW] 4.29 4.19 4.01 4.42 Non-performing assets to loans and foreclosed properties 1.01 [ZW] 1.35 1.47 1.83 1.97 Total stockholders' equity to assets 9.81 [ZW] 9.58 8.83 8.14 7.92 Total stockholders; equity + allowance to loans 20.10 [ZW] 22.39 21.23 19.30 20.49
(1) The third and fourth quarters of 1993 included $13.7and $15.6 million of credit card solicitation expenses, respectively. The first, second, and third quarters of 1994 included $21.4, $24.2, and $24.2 million of credit card solicitation expense, respectively. (2) The managed credit card portfolio includes credit card loans, credit card loans held for securitization and securitized credit card loans. 11 Table 2 Net Interest Income Analysis Taxable Equivalent Basis(in thousands)
Third Quarter 1994 Compared Third Quarter [ZW] 1994 Compared YTD September 1994 Compared with Third Quarter 1993 with Second [ZW] Quarter 1994 with YTD September 1993 Increase Change due to* Increase [ZW] Change due to* Increase Change due to* (Decrease) Rate Volume (Decrease) [ZW] Rate Volume (Decrease) Rate Volume [ZW] Interest income: Loans, including fees $ 5,876 $3,883 $ 1,993 $ 5,418 [ZW] $10,878 $ (5,460) $ (5,513) $ (3,366) $ (2,147) Securities available for sale 11,936 (53) 11,989 (405) [ZW] 2,045 (2,450) 43,073 (1,402) 44,475 Investment securities (24,754) 448 (25,202) (560) [ZW] (28) (532) (77,314) 730 (78,044) Other earning assets (8,079) 4,388 (12,467) (2,370) [ZW] 2,380 (4,750) 14,259 5,758 8,501 Total interest income (15,021) 9,599 (24,620) 2,083 [ZW] 13,881 (11,798) (25,495) 8,499 (33,994) Interest expense: Interest bearing deposits 3,008 2,814 194 1,259 [ZW] 1,928 (669) 5,790 12,182 (6,392) Fed funds and repurchase agreements (2,473) 4,258 (6,731) (3,628) [ZW] 579 (4,207) (2,672) 7,370 (10,042) Other short-term borrowings (4,613) (596) (4,017) (394) [ZW] (80) (314) (8,213) (1,843) (6,370) - -Long-term borrowings (36) 460 (496) (52) [ZW] (50) (2) (959) 832 (1,791) Total interest expense (4,114) 5,790 (9,904) (2,815) [ZW] 1,417 (4,232) (6,054) 11,216 (17,270) Net interest income $ (10,907) $5,550 $ (16,457) $ 4,898 [ZW] $12,654 $ (7,756) $ (19,441) $ 3,241 $(22,682)
* The change in interest due to both volume and rates has been allocated in proportion to the relationship of the absolute dollar amount of the changes in each. The changes in income and expense are calculated independently for each line in the schedule. The totals for the volume and rate columns are not the sum of the individual lines. Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction Signet Banking Corporation ("Signet" or "the Company"), with headquarters in Richmond, Virginia, is a registered multi-bank, multi-state holding company listed on the NewYork Stock Exchange under the symbol SBK. At September 30, 1994, Signet had assets of $11.0 billion and operated banking subsidiaries (250 full-service banking offices and 252 automated teller machines) in Virginia (Signet Bank/Virginia), Maryland (Signet Bank/Maryland) and Washington, D.C. (Signet Bank, N.A.) and several non-banking subsidiaries. The Company has gained national prominence as an issuer and servicer of credit cards. Signet's primary market area extends from Baltimore to Washington, south to Richmond, and on to Hampton Roads/Tidewater Virginia. Signet's credit card business operates nationally. On October 25, 1994, Signet filed an amended registration statement with the Securities and Exchange Commission which describes plans to spin-off substantially all of its credit card business. Under such plans, designated assets and liabilities of Signet Bank/Virginia's credit card division will be transferred to Capital One Bank, a newly chartered limited purpose credit card bank. Capital One Bank will, in conjunction with the transfer, become a wholly- owned subsidiary of Capital One Financial Corporation, a wholly-owned subsidiary of Signet (the "Separation"). It is anticipated that accounts representing approximately $335 million, or 5%, of the managed credit card portfolio will be retained by Signet. Concurrent with the Separation, up to approximately 13% of the outstanding shares of common stock of Capital One Financial Corporation (the "Common Stock") will be offered in an initial public offering. Signet intends to distribute all of the Common Stock it holds to its stockholders in a tax-free distribution in the first quarter of 1995 subject to the satisfaction of certain conditions. The Common Stock of Capital One Financial Corporation has been authorized for listing on the New York Stock Exchange, subject to official notice of issuance. It is anticipated that the spin-off will enhance shareholder value by creating two strong and independent financial institutions. During the third quarter of 1994, Signet completed the acquisition of Pioneer Financial Corporation, the parent company of Pioneer Federal Savings Bank, a $400 million financial institution located in Chester, Virginia. The transaction had an immaterial dilutive effect on Signet's earnings per share. Signet also announced a comprehensive program to improve the performance of its core banking businesses through initiatives to reduce costs and enhance revenues. In connection with the cost reduction measures and the spin-off, Signet recorded special pre-tax charges of $82.6 million for restructuring ($33.6 million) and for terminating certain data processing contracts ($49.0 million) in the third quarter. The following discussion should be read in conjunction with the accompanying financial statements, notes and other supplemental information contained in this document. 12 Earnings Analysis For the third quarter of 1994, consolidated net income totaled $3.5 million, or $.05 per share, after special pre-tax charges of $82.6 million for restructuring and for terminating certain data processing contracts. Included in the restructuring charges are costs related to an early retirement plan and employee severance. Year-to-date net income amounted to $107.0 million, or $1.86 per share. Adjusting for these charges, earnings for the quarter and the nine months would have been $57.2 million, or $.98 per share, and $160.7 million, or $2.79 per share, respectively. In 1993, Signet earned $45.8 million, or $.80 per share, for the third quarter, and $124.5 million, or $2.19 per share, for the nine months ended September 30. Excluding the special charges, net income for the 1994 quarter and nine months ended September 30 was up 25 percent and 29 percent respectively, over the same periods in 1993. The earnings for the 1994 third quarter compared with third quarter 1993 reflect growth in the consumer loan portfolio, an increase in non-interest income from credit card servicing income and a reduction in the loan loss provision due to improvement in asset quality. In addition, the Company continued its successful credit card solicitation program, which resulted in solicitation expenses for the 1994 third quarter of $24.2 million, increasing from $13.7 million in the third quarter of 1993. Also, during the quarter, Signet recognized nominal net gains on securities available for sale compared with no gains or losses during the same quarter last year. For the first nine months of 1994, credit card solicitation expenses were $69.8 million, compared with $40.2 million in the same period of 1993. Securities available for sale transactions resulted in net gains for the first nine months of 1994 totaling $3.2 million compared with $1.7 million of net gains for the same period last year. Key profitability ratios reflected the special pre-tax charges of $82.6 million for restructuring and for terminating certain data processing contracts in the third quarter of 1994. The return on assets (ROA) was .13% for the third quarter and 1.27% for the first nine months of 1994, while the return on common stockholders' equity (ROE) was 1.29% and 13.89% for the same respective periods. Considering Table 3 Analysis of Net Yield Margin Second Quarter 1994 versus Third Quarter 1994 - - Net Yield for Second Quarter 1994 5.01% Growth and higher yield of other consumer loans 0.26 Change in on balance sheet credit card (volume and yield-net) 0.16 Improved yield on earning assets and other factors 0.10 Higher funding costs (0.04) Net Yield for Third Quarter 1994 5.49% Signet's "normalized" performance excluding the special charges, the ROA was an impressive 2.07% in the third quarter and 1.91% for the first nine months of 1994 compared with 1.51% and 1.43% for the same periods in 1993. The "normalized" ROE was also strong at 21.13% for the third quarter and 20.80% for the first nine months of 1994 compared with 20.02% and 19.08% for the same periods in the prior year. These "normalized" profitability ratios represent a significant improvement over the comparable ROA and ROE ratios for the 1993 third quarter and first nine months. Net Interest Income Taxable equivalent net interest income, a principal component of earnings, totaled $133.2 million for the third quarter and $392.1 million for the first nine months of 1994, slightly lower than the same periods last year. The net yield margin for the third quarter and first nine months of 1994 increased 28 and 4 basis points from the same periods in 1993, respectively. The increase in the net yield margin from 1993 is primarily due to higher yields and growth in consumer loans other than credit card. The yield on the total on-balance sheet portfolio of credit card loans declined for the third quarter and first nine months of 1994 compared with the same periods of 1993. The decrease was due to rapid growth in low introductory rate credit card products. In most of its recent marketing programs, Signet has offered accounts with low introductory rates for some initial period which generally increase to a higher rate after the initial period expires. For selected introductory rate accounts, all or part of the rate increase following the initial period may be waived, leading to continued downward pressure on yields. Table 3 analyzes the change in the net yield margin from second quarter 1994 to third quarter 1994. An approximate basis point impact was calculated for each item noted. The increase in net interest spread and net interest margin from the second quarter of 1994 was primarily due to an increase in the outstanding balance and yield in other consumer loans and a higher yield on the total on-balance sheet portfolio of credit card loans. The on-balance sheet yield on credit card loans improved from 10.54% for the second quarter to 11.51% for the third quarter. The higher yield of the credit card portfolio was attributable to Signet securitizing lower yielding credit card loans and to repricing a portion of the portfolio as their introductory rate period expired. Signet uses various off-balance sheet interest rate derivatives as an integral part of its asset and liability management. For Signet's core business, variable rate assets generally exceed variable rate liabilities. To hedge against the resulting interest rate risk, Signet has entered into derivative transactions. At September 30, 1994, the notional values of the Company's derivative products for the purpose of hedging interest rate risk were $3.4 billion of interest rate swaps, $650 million of interest rate floors and $100 million of interest rate caps. Also, the Company has entered into a forward 13 Table 4 Statement of Changes in Allowance For Loan Losses (dollars in thousands)
Three Months [ZW] Ended Nine Months Ended September 30 June [ZW] 30 September 30 1994 1993 [ZW] 1994 1994 1993 [ZW] Balance at beginning of period $245,764 $258,571 $250,477 [ZW] $253,313 $265,536 Provision for loan losses 3,000 12,501 [ZW] 2,999 11,498 37,010 Transfer to loans held for securitization (350) (1,902) [ZW] (1,619) (4,719) (2,902) Addition arising from acquisition [ZW] 3,327 3,327 Loans charged off: Commercial 626 5,455 [ZW] 3,310 8,686 14,262 Credit card 6,764 9,515 [ZW] 7,831 22,883 30,051 Other consumer 434 805 [ZW] 573 1,647 2,239 Real estate-construction 8,831 [ZW] 6,383 8,831 21,712 Real estate-mortgage * 19,335 62 [ZW] 462 20,209 2,713 Total loans charged off 35,990 22,220 [ZW] 12,176 62,256 70,977 Recoveries of loans previously charged off: Commercial 737 1,084 [ZW] 1,490 5,355 9,297 Credit card 2,156 4,451 [ZW] 3,328 8,742 13,035 Other consumer 402 344 [ZW] 289 928 1,064 Real estate-construction 3,637 1,786 [ZW] 884 4,746 2,331 Real estate-mortgage * 2,676 91 [ZW] 92 4,425 312 Total recoveries 9,608 7,756 [ZW] 6,083 24,196 26,039 Net loans charged off 26,382 14,464 [ZW] 6,093 38,060 44,938 Balance at end of period $225,359 $254,706 $245,764 [ZW] $225,359 $254,706 Net loan losses (annualized) as a percentage of average loans: Commercial (0.02)% 0.83% [ZW] 0.35% 0.21% 0.32% Other consumer 0.01 0.15 [ZW] 0.08 0.07 0.13 Real estate 9.89 1.68 [ZW] (0.23) 2.90 2.48 Subtotal 1.92 0.86 [ZW] 0.14 0.72 0.84 Credit card 1.20 1.11 [ZW] 0.93 1.07 1.25 Total 1.74% 0.93% [ZW] 0.38% 0.82% 0.96% Allowance for loan losses to net loans at end of period [ZW] 4.29% 3.46% 4.42%
*Real estate-mortgage includes real estate-commercial mortgage and real estate-residential mortgage. Real estate-residential mortgage charge-offs and recoveries were not significant for the periods presented. 14 starting interest rate swap for a variable notional amount ranging from $4.8 billion to $0.6 billion from January 3, 1995 to April 13, 1995 which will be transferred to Capital One Bank in connection with the Separation. As a result of this transaction, the Company has mitigated the interest rate risk associated with funding credit card assets. Interest rate derivative products contributed 57 basis points to the third quarter 1994 margin compared with 53 basis points in the second quarter 1994. The total income from these contracts rose slightly from $13.6 million in the second quarter of 1994 to $13.8 million in the current quarter. Credit card securitizations also have an effect on net interest income and the net yield margin. Adjusting for all securitizations, net interest income in the third quarter of 1994 would have been $211.7 million, or 21% higher than the comparable 1993 figure of $175.4 million. For a detailed analysis of this effect, see the Credit Card Business section elsewhere in this report. Provision and Allowance for Loan Losses Reflecting the continued positive trends in credit quality, the provision for loan losses was $3.0 million for the third quarter of 1994 down significantly from $12.5 million for the same period last year and level with the approximately $3.0 million for the second quarter of 1994. For the third quarter of 1994, net charge-offs totaled $26.4 million, up from $14.5 million in the same quarter of 1993 and $6.1 million in the 1994 second quarter. In the third quarter of 1994, Signet sold $102 million of real estate related loans at a discount for which there was sufficient allocated reserve. The sale of these loans accounted for approximately $21 million of the third quarter net charge- offs. For the nine months, net charge-offs decreased from $44.9 million in 1993 to $38.1 million in 1994. As a percentage of average loans, third quarter net loan losses increased 81 basis points from the comparable period in 1993 and rose 136 basis points from the 1994 second quarter as a result of the loan sale. The percentage of net credit card losses to average credit card loans on-balance sheet increased to 1.20% for the third quarter of 1994 from 1.11% the same period in 1993 and from .93% in the 1994 second quarter. This increase reflects the aging of the on balance sheet credit card portfolio. Net losses for the first nine months of 1994 on the total managed credit card portfolio, which included securitized receivables, were 1.55% of average managed credit card loans, compared with 2.54% reported for the same period in 1993. The low level of credit card losses reflects management's attention to the diversification of the portfolio as well as the quality of Signet's credit card underwriting standards and collection efforts. The low credit card charge-off ratios are also influenced by the high growth in new accounts, some of which have not aged sufficiently to experience any significant charge-offs. At September 30, 1994, the reserve for foreclosed properties totaled $0.6 million, a decrease of $5.2 million from December 31, 1993, the result of write- downs on foreclosed properties taken in the first nine months of 1994. The allowance for loan losses at September 30, 1994 was $225.4 million, or 3.46% of net loans, compared with $254.7 million, or 4.42% of net loans, at September 30, 1993 and $245.8 million, or 4.29%, at June 30, 1994. The decrease from September 30, 1993 primarily reflected charge-offs taken on real estate related loans, the majority of which resulted from the real estate loan sale. In general, to determine the appropriate level of allowance for loan losses, management identifies and examines the commercial, real estate and large consumer loans warranting attention on a monthly basis and reviews factors such as the credit worthiness of the borrower, the adequacy of underlying collateral and the impact of business and economic conditions upon the borrower. Based on this information and action plans provided by the lending units, Signet's Credit Risk Management Division determines the aggregate level of the allowance according to the distribution of the loan risk classifications. The credit card portfolio receives an overall allocation based on such factors as current and anticipated economic conditions, historical charge-off and recovery rates and trends in delinquencies, projected charge-offs by loan solicitation tranche, bankruptcies and loan volume. Management believes that more recent credit card solicitations have produced higher credit quality accounts than past solicitations and that, as a result of improved economic conditions, the credit quality of the more seasoned credit card accounts has also improved. The remaining loan portfolio (unclassified commercial, real estate and consumer loans) receives a general allocation deemed to be reasonably necessary to provide for losses based on risk ratings and the factors listed above. The allocation shown in Table 5 is a general allowance applicable to the entire loan portfolio and should not be interpreted as a prediction of future charge-off trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance applicable to the entire loan portfolio. Management believes that the allowance for loan losses is adequate to cover anticipated losses in the loan portfolio under current economic conditions. Table 5 Allowance for Loan Loss Allocation (dollars in thousands) September 30, 1994 Percentage of Allowance Allowance to Loans Amount in Each Category Commercial $ 20,780 .94% Credit Card 68,500 3.93 Other Consumer 5,563 .33 Real Estate 72,764 8.23 Unallocated 57,752 Total $225,359 3.46% 15 Table 6 Non-Interest Income and Expense (dollars in thousands)
Three Months [ZW] Ended Nine Months Ended September [ZW] 30 June 30 September 30 1994 [ZW] 1993 1994 1994 1993 - - [ZW] Non-interest income: Credit card servicing income $ 91,883 $ 30,319 [ZW] $ 77,469 $245,889 $ 90,619 Credit card service charges 16,802 [ZW] 20,275 18,566 50,816 46,837 Service charges on deposit accounts 16,234 [ZW] 16,222 18,106 50,037 48,403 Trust income 4,747 [ZW] 4,452 4,601 14,417 13,453 Mortgage servicing and origination 4,117 [ZW] 6,229 4,869 14,363 16,117 Other service charges and fees 3,626 [ZW] 3,803 4,064 11,418 11,042 Gain on sale of mortgage servicing [ZW] 6,000 6,000 Trading profits (losses) 343 [ZW] (640) (266) (374) (645) Other 7,906 [ZW] 4,855 8,748 23,892 15,638 Non-interest operating income 151,658 [ZW] 85,515 136,157 416,458 241,464 Securities available for sale gains [ZW] 140 3,265 3,193 1,665 Investment securities gains (losses) [ZW] 22 2 45 (1) 151 Total non-interest income $151,820 $ 85,517 [ZW] $139,467 $419,650 $243,280 Non-interest expense: Salaries $ 68,028 $ 53,811 [ZW] $ 64,345 $192,314 $153,610 Employee benefits 17,354 [ZW] 13,909 17,989 53,405 44,347 Total staff expense 85,382 [ZW] 67,720 82,334 245,719 197,957 Credit card solicitation 24,200 [ZW] 13,727 24,250 69,837 40,237 Travel and communications 14,499 [ZW] 8,866 13,546 41,362 25,147 Supplies and equipment 13,502 [ZW] 10,863 13,095 38,596 29,695 External data processing services 13,049 [ZW] 9,547 12,128 36,456 25,335 Occupancy 13,038 [ZW] 10,760 10,855 34,604 29,728 Contract termination [ZW] 49,000 49,000 Restructuring charge [ZW] 33,619 33,619 Professional services 6,424 [ZW] 3,729 6,069 16,773 10,535 Public relations, sales and advertising 4,105 [ZW] 4,456 4,824 13,197 13,286 FDIC assessment 4,242 [ZW] 4,396 4,248 12,381 13,857 Credit and collection 3,323 [ZW] 2,877 3,088 9,064 7,725 Foreclosed property 595 [ZW] 1,256 810 1,189 9,080 Other 11,836 [ZW] 9,319 11,378 33,751 25,800 Total non-interest expense $276,814 $147,516 [ZW] $186,625 $635,548 $428,382
16 Non-Interest Income Total non-interest income was $151.8 million in the third quarter of 1994 compared with $85.5 million in the third quarter of 1993. This is an increase of $66.3 million, or 78%, from the previous year. The primary source of growth was the increase in credit card servicing income and a $6.0 million gain on the sale of mortgage servicing rights. Credit card servicing income rose $61.6 million, or 203%, from the 1993 third quarter to $91.9 million primarily as a result of the 1993 and 1994 securitizations. This category houses the income received from servicing the $5.1 billion of securitized credit card receivables ($500 million in September, 1990, $500 million in March, 1991, $1.2 billion in September, 1993, $1.1 billion in December, 1993, $1.2 billion in June, 1994 and approximately $600 million in September, 1994). Income from credit card service charges decreased $3.5 million, or 17%, for the third quarter of 1994 compared with the same time period in 1993. This decrease is attributable to the $729.0 million, or 26% decrease in average on-balance sheet credit card outstandings resulting from the securitizations. Mortgage servicing and origination fee income declined 34% and 15% from the third quarter of 1993 and second quarter of 1994, respectively, to $4.1 million as a result of a significant decrease in mortgage loan volume resulting from rising rates. For the third quarter of 1994, Signet recorded trading gains of $0.3 million, an improvement from $0.6 million of losses in the 1993 third quarter. In the third quarter of 1994, $0.1 million of net gains were recognized on transactions in the securities available for sale portfolio. There were no such net gains for the third quarter of 1993. Nominal net gains were recognized in the third quarter of 1994 and 1993 on investment securities that were called. For the first nine months of 1994 non-interest income grew $176.4 million or 72% from the same period of 1993 to $419.7 million. A $155.3 million increase in credit card servicing income due to the 1993 and 1994 securitizations, a $6.0 million gain on the sale of mortgage servicing rights and a $4.0 million increase in credit card service charges due to higher volume were the primary contributing factors for the growth in non-interest income. Non-Interest Expense Total non-interest expense for the third quarter and first nine months of 1994 was $276.8 million and $635.5 million, respectively, representing increases of 88% and 48% from the same periods in 1993. When comparing the third quarter and first nine months of 1994 to the same periods in 1993, increases occurred in all the major categories except foreclosed property, FDIC assessment and public relations, sales and advertising. The lower amount of foreclosed property expense in 1994 reflected lower writedowns/provisions and reduced costs to maintain and operate these properties. Much of the increase in non-interest expense was the result of the special charge of $82.6 million for restructuring and for terminating certain data processing contracts, as well as continuation of the credit card solicitation program and the growth in the credit card business. Excluding the restructuring charges, data processing contracts termination fee and direct costs related to credit card, non-interest expense during the third quarter and first nine months of 1994 rose 4% and 5%, respectively, compared with the same periods in 1993. Greater salary expense resulted mainly from increased staffing to support the significant growth in the credit card business. The number of full-time equivalent employees rose 15% from third quarter of 1993. Total salary and employee benefits increased $17.7 million and $47.8 million from the third quarter and first nine months of 1993 to the same periods in 1994. The overall increase in employee benefits reflected the increase in staff levels and the rising cost of medical insurance and other benefits. For the 1994 third quarter and first nine months, expenses associated with the credit card solicitation program were $24.2 million and $69.8 million, respectively, representing increases of $10.5 million and $29.6 million from the comparable periods of 1993. Subsequent to the Separation, Capital One Bank will be responsible for solicitation expenses associated with increasing Capital One Bank's credit card portfolio. Travel and communication expense for 1994 reflects not only an increase in the credit card area, but also increases related to student loan, home equity line and home mortgage solicitations. The other non-interest expense categories reflected the costs associated with increased business volume, primarily in the credit card business. Signet's efficiency ratio (the ratio of non-interest expense to taxable equivalent operating income) for the first nine months of 1994 was 78.3% compared with 65.4% for the same period in 1993. Excluding the restructuring charges, contract termination fee and foreclosed property expense from non- interest expense causes the ratio to fall to 59.4% and 57.8% for the respective time periods. Since charge-offs on securitized credit card loans reduce credit card servicing income, operating income, for the purpose of calculating the efficiency ratio, should exclude the negative impact of these charge-offs. Making this adjustment to revenue further reduces the ratio to 55.7% for 1994 compared with 54.4% for the first nine months of 1993. In an effort to lower the efficiency ratio, in July 1994, Signet's Board approved a plan implementing a comprehensive core bank improvement program that will focus on cost 17 reductions and revenue initiatives. Signet recorded special one-time charges of $82.6 million during the third quarter in connection with cost-reduction measures (principally an early retirement plan and employee severance) and termination of certain data processing services related to the separation of the credit card business. As a result of implementing the cost-reduction measures, the number of full-time equivalent employees fell 4% from June 30 to September 30, 1994. Further reductions are expected in the fourth quarter. In the fourth quarter, the Company expects to record additional restructuring charges of approximately $8 to $10 million as the consolidation of operations and facilities in Signet's core banking business is finalized. Income Taxes Signet recorded an income tax benefit of $1.7 million for the quarter and income tax expense of $47.5 million for the nine months ended September 30, 1994 compared with expenses of $19.7 million and $53.0 million for the same periods in 1993. The tax benefit in the third quarter resulted from the special charges of $82.6 million. The increase in tax expense for the nine months was principally due to the significant increase in taxable income and the continued decline in the level of tax-exempt income. The effective tax rate for the first nine months of 1994 was 30.7% compared with 29.9% for the first nine months of 1993. Financial Condition Earning assets averaged $9.6 billion for the third quarter and $10.0 billion for the first nine months of 1994, a decrease of 12% and 6% from the same respective periods last year. Average investment securities declined $1.6 billion, or 89%, and average securities available for sale rose $860 million from the prior year's third quarter as approximately $1.5 billion of securities were reclassified from investment securities to securities available for sale when Signet adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" at the beginning of 1994. Credit card loans held for securitization averaged $554.7 million for the third quarter 1994, down from $997.3 million for the previous year. These assets were reclassified from the credit card loan category in anticipation of credit card loan securitizations.Total loans averaged $6.1 billion for the quarter, reflecting a 2.1% decline from the third quarter in 1993. Average credit card loans on the balance sheet, including held for securitization, decreased 26% to $2.1 billion as a result of securitizing $3.0 billion in credit card loans since September 30, 1993. The $305.6 million rise in other consumer loans resulted primarily from a $235.5 million growth in student loans. The loan category experiencing the largest decline from the third quarter of 1993 was real estate-construction, down 45% to $229.6 million. Average real estate-commercial mortgage loans declined 5% to $564.4 million and real estate-residential mortgages were up 17% to $89.4 million as a result of loans acquired from Pioneer Financial Corporation. The decline in construction loans was principally the result of management's continued desire to reduce the level of risk real estate asset exposure. The real estate loan sale impacted the real estate-construction and real estate-commercial mortgage loan categories. The yield on earning assets was 8.31% for the quarter and 7.94% for the first nine months of 1994, compared with 7.84% and 7.83% in the prior year's respective periods. Average interest bearing liabilities totaled $8.1 billion in the third quarter, down 7% from the second quarter of 1994 and down 15% from the corresponding time period in 1993. Savings certificates decreased $448.5 million, or 19% and $456.6 million, or 19%, from the third quarter and first nine months of 1993, as depositors responded to lower interest rates by shortening the maturities of their investments and transferring their funds into money market and demand products. Additionally, money market savings declined $92.5 million, or 5%, and $96.7 million, or 5%, from the third quarter and first nine months of 1993, respectively. Deposit categories experiencing increases as a result of the factors noted above included money market and interest checking and savings accounts. Foreign deposits and large denomination certificates decreased $34.8 million and $23.4 million, respectively, from the third quarter of 1993. Average core deposits remained relatively stable when comparing third quarter and first nine months of 1994 with the same periods of 1993. Purchased funds, which include large denomination certificates, foreign deposits, federal funds and repurchase agreements and other short-term and long-term borrowings averaged $2.5 billion for the 1994 third quarter, down $1.2 billion from the comparable 1993 period and down $543 million from the second quarter of 1994. The lower level of purchased funds in the third quarter of 1994 compared with the second quarter resulted from temporarily funding the growth in credit card receivables prior to securitization. Subsequent to the Separation and the public offering of the Common Stock, it is anticipated that Capital One Bank will begin to assume responsibility for its funding needs. To transition Capital One Bank to financing on a permanent basis, a Bridge Financing Facility of up to $2.5 billion has been arranged. This will result in higher funding costs for Capital One Bank. The average rate on interest bearing liabilities rose 32 basis points when compared with the third quarter of 1993 due to a rise in market rates and lower income from derivative products. 18 Table 7 Consolidated Average Balance Sheet (dollars in thousands)
[ZW] Three Months Ended [ZW] September 30 [ZW] 1994 1993 Average [ZW] Income/ Yield/ Average Income/ Balance [ZW] Expense Rate Balance Expense [ZW] Assets Earning assets (tax equivalent basis):* Interest bearing deposits with other banks $ 243,888 [ZW] $ 2,851 4.57% $ 217,335 $ 2,709 Federal funds and resale agreements [ZW] 1,003,048 11,602 4.53 743,140 5,753 Trading account securities [ZW] 257,789 5,062 7.79 393,041 6,800 Loans held for securitization [ZW] 554,738 13,181 9.50 997,282 22,992 Loans held for sale [ZW] 127,542 2,270 6.96 272,735 4,791 Securities available for sale [ZW] 1,157,308 16,124 5.45 296,824 4,188 Investment securities-taxable [ZW] 20,984 311 5.93 1,568,534 22,505 Investment securities-nontaxable [ZW] 187,469 5,667 12.09 271,196 8,227 Loans (net of unearned income): Commercial [ZW] 2,149,870 41,220 7.61 2,097,666 38,422 Credit card [ZW] 1,534,093 46,952 12.24 1,820,507 55,103 Other consumer [ZW] 1,512,629 35,825 9.37 1,207,054 24,407 Real estate-construction [ZW] 229,590 5,306 9.04 416,432 7,196 Real estate-commercial mortgage [ZW] 564,423 13,389 9.41 592,539 11,727 Real estate-residential mortgage [ZW] 89,412 1,917 8.58 76,137 1,878 Total loans 6,080,017 [ZW] 144,609 9.44 6,210,335 138,733 Total earning assets 9,632,783 [ZW] $201,677 8.31% 10,970,422 $216,698 Non-rate related assets: Cash and due from banks [ZW] 501,289 459,887 Allowance for loan losses [ZW] (241,813) (259,042) Premises and equipment (net) [ZW] 248,569 201,794 Other assets [ZW] 830,622 661,497 Total assets [ZW] $10,971,450 $12,034,558 Liabilities and Stockholders' Equity Interest bearing liabilities: Deposits: Money market and interest checking $ 1,012,616 [ZW] $ 5,842 2.29% $ 957,086 $ 5,607 Money market savings [ZW] 1,618,108 10,918 2.68 1,710,605 10,957 Savings accounts [ZW] 1,042,726 8,656 3.29 795,048 6,262 Savings certificates [ZW] 1,937,671 14,820 3.03 2,386,207 14,991 Large denomination certificates [ZW] 274,959 3,115 4.43 298,358 2,897 Foreign [ZW] 205,970 2,385 4.53 240,812 2,014 Total interest bearing deposits [ZW] 6,092,050 45,736 2.98 6,388,116 42,728 Federal funds and repurchase agreements [ZW] 1,470,682 14,882 3.96 2,213,528 17,355 Other short-term borrowings [ZW] 304,970 3,751 4.81 628,094 8,364 Long-term borrowings [ZW] 253,773 4,131 6.37 285,992 4,167 Total interest bearing liabilities 8,121,475 [ZW] $ 68,500 3.35% 9,515,730 $ 72,614 Non-interest bearing liabilities: Demand deposits [ZW] 1,543,375 1,434,430 Other liabilities [ZW] 242,169 177,442 Common Stockholders' equity [ZW] 1,064,431 906,956 Total liabilities and stockholders' equity [ZW] $10,971,450 $12,034,558 Net interest income/spread [ZW] $133,177 4.96% $144,084 Interest income to average earning [ZW] assets [ZW] 8.31% Interest expense to average earning [ZW] assets [ZW] 2.82 Net yield [ZW] margin [ZW] 5.49%
*Includes the effects of taxable equivalent adjustments using a tax rate of 35%. 19
[ZW] Nine Months Ended June [ZW] 30 September 30 1994 [ZW] 1994 1993 Yield/ Average Income/ Yield/ Average Income/ [ZW] Yield/ Average Income/ Yield/ Rate Balance Expense Rate Balance Expense [ZW] Rate Balance Expense Rate [ZW] 4.88% $ 247,936 $ 2,952 4.71% $ 250,754 $ [ZW] 8,374 4.40% $ 265,815 $ 9,099 4.51% 3.03 856,757 8,674 4.01 823,814 [ZW] 25,226 4.04 735,030 16,863 3.03 6.86 272,872 4,747 6.98 272,145 [ZW] 15,449 7.59 532,351 24,705 6.20 9.22 755,494 17,848 9.45 552,329 [ZW] 38,904 9.39 339,744 23,270 9.13 6.87 212,378 3,115 5.80 231,268 [ZW] 11,146 6.36 209,039 10,903 6.88 5.52 1,351,368 16,529 4.84 1,425,643 [ZW] 56,788 5.25 313,057 13,715 5.78 5.74 20,942 307 5.86 22,916 [ZW] 1,003 5.84 1,663,639 72,245 5.80 12.13 205,078 6,231 12.15 203,961 [ZW] 18,543 12.12 278,697 24,615 11.78 7.27 2,108,076 40,103 7.63 2,133,242 [ZW] 122,309 7.67 2,085,524 117,836 7.55 12.11 1,941,897 53,255 10.97 1,766,782 [ZW] 150,983 11.39 1,808,999 167,445 12.34 8.04 1,384,050 26,681 7.70 1,406,142 [ZW] 87,780 8.31 1,185,891 71,953 8.10 6.76 262,844 5,248 7.90 261,718 [ZW] 15,795 7.96 479,809 25,108 6.90 7.85 573,203 12,390 8.67 572,674 [ZW] 36,793 8.59 612,123 36,180 7.90 9.87 74,312 1,514 8.15 78,743 [ZW] 5,247 8.88 78,618 5,898 10.00 8.86 6,344,382 139,191 8.80 6,219,301 [ZW] 418,907 9.01 6,250,964 424,420 9.08 7.84% 10,267,207 $199,594 7.80% 10,002,131 [ZW] $594,340 7.94% 10,588,336 $619,835 7.83% 499,712 [ZW] 496,765 448,177 (248,846) [ZW] (247,634) (265,787) 238,529 [ZW] 237,224 200,268 44,834 [ZW] 771,338 651,846 $11,501,436 [ZW] $11,259,824 $11,622,840 2.32% $ 1,022,071 $ 5,605 2.20% $ 1,018,734 $ [ZW] 16,999 2.23% $ 945,412 $ 17,036 2.41% 2.54 1,669,819 11,381 2.73 1,662,027 [ZW] 33,617 2.70 1,758,742 34,437 2.62 3.12 981,676 7,751 3.17 978,809 [ZW] 23,355 3.19 744,855 17,458 3.13 2.49 1,972,308 13,993 2.85 1,981,775 [ZW] 41,863 2.82 2,438,403 45,662 2.50 3.80 344,830 3,635 4.17 316,045 [ZW] 9,974 4.16 255,916 7,775 4.01 3.27 215,035 2,112 3.89 227,651 [ZW] 6,678 3.87 177,000 4,328 3.22 2.65 6,205,739 44,477 2.87 6,185,041 [ZW] 132,486 2.86 6,320,328 126,696 2.68 3.07 1,905,695 18,510 3.84 1,697,530 [ZW] 46,619 3.62 2,088,890 49,291 3.11 5.21 333,315 4,145 4.92 304,563 [ZW] 10,949 4.74 477,237 19,162 5.29 5.70 254,007 4,183 6.51 255,332 [ZW] 12,180 6.29 293,680 13,139 5.90 3.03% 8,698,756 $ 71,315 3.29% 8,442,466 [ZW] $202,234 3.20% 9,180,135 $208,288 3.03% 1,563,117 [ZW] 1,554,188 1,395,769 222,536 [ZW] 233,420 174,706 1,017,027 [ZW] 1,029,750 872,230 $11,501,436 [ZW] $11,259,824 $11,622,840 4.81% $128,279 4.51% [ZW] $392,106 4.74% $411,547 4.80% 7.84% [ZW] 7.80% 7.94% 7.83% 2.63 [ZW] 2.79 2.70 2.63 5.21% [ZW] 5.01% 5.24% 5.20%
20 Credit Card Business As noted earlier, designated assets of Signet Bank/Virginia's credit card division will be transferred to a new limited purpose bank which is intended to be spun-off. Excluded from such transfer will be approximately $335 million of credit card receivables located in Signet's regional market area. The following discussion gives no effect to these proposed transactions. The credit card industry is highly competitive and operates in a legal and regulatory environment increasingly focused on the cost of services charged to consumers. There is an increasing use of advertising, target marketing, pricing competition and incentive programs. The Company has responded to competition by targeting the origination of new accounts through the creation of products for multiple customer segments using various marketing channels. For example, Signet offers credit cards nationwide with different finance charge and fee combinations or other special features such as a balance transfer option. The Company approves prospective account holders through pre-approval in conjunction with full application underwriting procedures. Using information derived from proprietary statistical models, Signet matches prospective account holders who meet the various applicable underwriting criteria with an appropriate credit card product. The Company has invested heavily over the past five years in a sophisticated information-based strategy for originating and managing credit card accounts. Signet uses this strategy to develop improved credit risk models which management believes increase the credit quality of new solicitations. Signet's credit card business continues to benefit significantly from its information- based strategy. The managed credit Table 8 Managed Credit Card Portfolio Delinquencies* (dollars in thousands)
September 30 June 30 March [ZW] 31 December 31 September 30 1994 1994 [ZW] 1994 1993 1993 Number of Days Delinquent Delinquent [ZW] Delinquent Delinquent Delinquent Delinquent Amount Percent Amount Percent Amount [ZW] Percent Amount Percent Amount Percent [ZW] 30-59 days $ 76,133 1.07% $ 59,281 .89% $ 50,461 [ZW] .85% $ 52,099 1.01% $ 44,810 1.02% 60-89 days 37,615 .53 29,817 .44 27,575 [ZW] .46 28,236 .55 24,516 .56 90+ days 64,434 .91 52,124 .78 50,278 [ZW] .84 50,359 .98 48,881 1.12 Total $ 178,182 2.51% $ 141,222 2.11% $ 128,314 [ZW] 2.15% $ 130,694 2.54% $ 118,207 2.70%
* The portfolio for this schedule includes the managed credit card portfolio as well as an immaterial amount of credit line loans serviced on the bank card system. card portfolio (which includes securitized receivables) increased by $2.7 billion, or 64%, from September 30, 1993 and by $443.0 million, or 7%, from June 30, 1994. Absolute dollars of net loan losses, on a managed portfolio basis, also rose from $61.0 million for the first nine months of 1993 to $72.6 million for the same time period of 1994. However, the ratio of charge-offs to average loans fell from 2.54% for the first nine months of 1993 to 1.55% for 1994, as a result of the substantial increase in the size of the portfolio. Many of the new accounts may not have aged sufficiently to experience significant charge-offs. Signet also believes that the improved charge-off ratio is evidence of the high credit quality of the accounts obtained through the solicitation program, the improved credit quality of the more seasoned accounts in the portfolio as well as improved economic conditions. The ratio of managed credit card loans sixty days or more past due increased to 1.44% of related loans at September 30, 1994 from 1.22% at June 30, 1994, while the dollar amount rose to $102 million from $82 million at the same respective dates. Although the delinquency ratio has risen from the prior quarter-end, it remains at a level which is low for the industry, reflecting the high quality of the credit card portfolio. Usually, new accounts initially exhibit a rising trend of delinquency and credit losses which peaks and then declines to a more steady state of delinquency and losses. This steady state is generally reached within three years. Accordingly, there can be no assurance that Signet's managed loan portfolio will not experience increased levels of delinquency and losses as the average age of Signet's accounts increases. However, a large portion of the new accounts are balance transfer accounts, which, Signet believes, have characteristics resembling more seasoned accounts. Refer to Table 8 for a summary of delinquency data related to credit card loans. New account solicitations represent a diversity of product offerings, largely targeted at lower risk consumers. Management is committed to continually increasing sophistication in all areas of risk management. 21 Table 9 Managed Credit Card Portfolio (dollars in thousands)
[ZW] Three Months Ended September 30 [ZW] June 30 March 31 December 31 September 30 1994 [ZW] 1994 1994 1993 1993 [ZW] Period-end balances: On balance sheet loans held for securitization $ 151,198 $ [ZW] 750,000 $1,000,000 $ 750,000 On balance sheet loans 1,742,622 [ZW] 1,299,627 1,600,756 $1,808,515 1,348,928 Securitized loans 5,138,457 [ZW] 4,539,655 3,289,656 3,289,656 2,186,580 Total period-end managed portfolio $7,032,277 [ZW] $6,589,282 $5,890,412 $5,098,171 $4,285,508 Average balances: On balance sheet loans held for securitization $ 554,738 $ [ZW] 755,494 $ 344,445 $ 554,348 $ 997,283 On balance sheet loans 1,534,093 [ZW] 1,941,897 1,827,581 1,631,570 1,820,507 Securitized loans 4,734,917 [ZW] 3,605,589 3,289,656 2,476,613 1,012,898 Total average managed portfolio $6,823,748 [ZW] $6,302,980 $5,461,682 $4,662,531 $3,830,688
Signet's managed credit card portfolio is comprised of credit card loans, credit card loans held for securitization and securitized credit card receivables. Securitized credit card receivables are not assets of the Company and, therefore, are not shown on the balance sheet. See Table 9 for a summary of Signet's managed credit card portfolio. Securitization is the transformation of a pool of credit card receivables into marketable securities. Credit card receivables are transferred to a trust and interests in the trust are sold to investors for cash. The securitization of credit card receivables is an effective balance sheet management tool for facilitating the credit card growth. Such securitizations reduce the net yield margin and provision for loan losses and increase non-interest income, but the net effect on Signet's earnings is minimal, while increasing the return on assets. Signet's Credit Card Division services the related credit card accounts after the receivables are securitized. Because securitization changes Signet's involvement from that of a lender to that of a loan servicer, there is a change in how the revenue is reported on the income statement. For securitized receivables, amounts that would previously have been reported as interest income, credit card service charges and provision for loan losses are instead reported in non-interest income as credit card servicing income. Because credit losses are absorbed against these cash flows, Signet's credit card servicing income over the terms of these transactions may vary depending upon the credit performance of the securitized receivables. However, Signet's exposure to credit losses on the securitized receivables is contractually limited to these cash flows. Customers are attracted to credit card issuers largely on the basis of price, credit limit and other product features and, once an account is originated, customer loyalty may be limited. As a result, account attrition (losing accounts to competing card issuers) and balance attrition (losing account balances to competing card issuers) are both significant factors in the credit card industry. In most of Signet's recent marketing programs, Signet has offered accounts with introductory rates, which are generally at low levels during an introductory period (usually 12 to 16 months) and which generally revert to higher variable rates after the initial period expires; Signet may in its discretion waive all or part of the rate increase for selected accounts. Much of the growth in Signet's account origination and its managed loan portfolio in recent periods is attributable to customers who, attracted by Signet's low introductory rates, transferred balances from competing card issuers. The accounts in Signet's low introductory rate portfolio that reprice are subject to a significant risk of attrition, because cardholders who were initially attracted by Signet's low introductory rates may in turn transfer account balances to lower price products offered by competing card issuers. Future growth of the credit card portfolio is highly dependent upon the success of marketing programs and information-based strategies. Although management believes that opportunities exist for continued growth in account origination and balances, Signet's competitors are now attempting to employ many of the programs and strategies that Signet has utilized to attract accounts and encourage usage. Many of Signet's competitors have begun offering credit card products with interest rates and fee levels at or below those currently charged by Signet. As a result, growth in the Company's managed loan portfolio in recent months has been less than that achieved in prior fiscal periods. Signet has securitized a total of $5.1 billion of credit card receivables as of September 30, 1994. Table 10 indicates the impact of the securitizations on the statement of consolidated operations, average assets, return on assets and net yield margin. Signet plans to securitize additional credit card receivables during the 1994 fourth quarter. It is anticipated that after the Separation, Capital One Bank will continue to securitize credit card receivables. Signet may also utilize securitization with respect to its retained credit card receivables and other loan products. Signet has successfully implemented its information-based strategy to originate and manage credit card accounts. Signet has also employed this information-based strategy in other areas of the Company, such as educational lending, consumer lending, equity line and mortgage banking. During the first nine months of 1994, other consumer loans grew by $370 million as student loans rose $238 million, installment loans increased $79 million and equity lines advanced $53 million. While initial results are promising, it is too early to determine the ultimate success of this strategy. 22 Table 10 Impact of the Credit Card Securitizations (dollars in thousands)
[ZW] Three Months Ended September 30 June 30 [ZW] March 31 December 31 September 30 1994 1994 [ZW] 1994 1993 1993 [ZW] Statement of Consolidated Income (as reported) Net interest income $ 129,722 $ [ZW] 124,910 $ 127,216 $ 129,756 $ 139,922 Provision for loan losses 3,000 [ZW] 2,999 5,499 10,276 12,501 Non-interest income 151,820 [ZW] 139,467 128,363 122,156 85,517 Non-interest expense 276,814 [ZW] 186,625 172,109 169,934 147,516 Income before income taxes $ 1,728 $ [ZW] 74,753 $ 77,971 $ 71,702 $ 65,422 Securitizations Net interest income $ 81,996 $ [ZW] 72,943 $ 73,492 $ 61,006 $ 35,431 Provision for loan losses 19,343 [ZW] 17,755 16,116 15,959 13,783 Non-interest income (62,653) [ZW] (55,188) (57,376) (45,047) (21,648) Non-interest expense - [ZW] - - - - - Income before income taxes $ - $ - [ZW] $ - $ - $ - Managed Statement of Income (adjusted) Net interest income $ 211,718 $ 197,853 [ZW] $ 200,708 $ 190,762 $ 175,353 rovision for loan losses 22,343 [ZW] 20,754 21,615 26,235 26,284 Non-interest income 89,167 [ZW] 84,279 70,987 77,109 63,869 Non-interest expense 276,814 [ZW] 186,625 172,109 169,934 147,516 Income before income taxes $ 1,728 $ [ZW] 74,753 77,971 $ 71,702 $ 65,422 As reported: Average earning assets $9,632,783 $10,267,207 [ZW] $10,111,663 $10,446,944 $10,970,422 Return on assets 0.13% [ZW] 1.78% 1.90% 1.71% 1.51% Net yield margin 5.49 [ZW] 5.01 5.24 5.07 5.21 Including securitized credit cards: Average earning assets $14,367,700 $13,872,796 [ZW] $13,401,319 $12,923,557 $11,983,320 Return on assets 0.09% [ZW] 1.35% 1.48% 1.41% 1.39% Net yield margin 5.94 [ZW] 5.82 6.18 5.97 5.94 Yield on managed portfolio 12.04% [ZW] 11.97% 12.32% 12.85% 13.24%
Risk Elements Non-Performing Assets Non-performing assets include non-accrual loans, restructured loans and foreclosed properties. Non-performing assets declined $11.8 million or 15% from June 30, 1994. Non-performing assets represented 1.01% of loans and foreclosed properties at September 30, 1994, down from 1.35% and 1.97% at June 30, 1994 and September 30, 1993, respectively. Non-performing assets are at their lowest level since December 31, 1986. The allowance for loan losses equaled 590% of non-performing loans at September 30, 1994, down slightly from 617% at June 30, 1994 and up from 471% at September 30, 1993. The ratio of the allowance to non- performing assets also improved to 342% at September 30, 1994 from 316% at June 30, 1994 and 222% at September 30, 1993. Foreclosed properties totaled $27.7 million (net of reserve) at the end of the third quarter of 1994 and were equal to 42% of total non-performing assets and 59% of non-performing real estate assets. The gross foreclosed properties balance reflected an aggregate discount of approximately 52% from prior charge- offs and write-downs. Signet sold $13.4 million and $21.6 million of foreclosed properties during the third quarter and the first nine months of 1994, respectively. Accruing loans which are contractually past due 90 days or more as to principal or interest payments totaled $62.6 million at September 30, 1994. This is a 17% increase from the $53.7 million 1994 second quarter level, and representsa 6% improvement from the $66.7 million reported at September 30, 1993. The September 30, 1994 total was comprised of $6.7 million of commercial loans; $17.5 million of credit card loans; $19.5 million of other consumer loans (of which $15.6 million are student loan delinquencies which are government guaranteed and do not represent material loss exposure); $11.3 million of mortgage loans; and $7.6 million of construction loans. 23 Table 11 Non-performing Assets and Past Due Loans (dollars in thousands)
September 30 June 30 [ZW] December 31 1994 1993 1994 [ZW] 1993 Non-accrual loans: Commercial $16,361 $ 20,267 $17,258 $ [ZW] 42,303 Consumer 1,518 2,272 1,634 [ZW] 2,191 Real estate-construction 9,080 22,564 9,759 [ZW] 17,837 Real estate-mortgage* 9,064 7,350 7,512 [ZW] 6,523 Total non-accrual loans 36,023 52,453 36,163 [ZW] 68,854 Restructured loans: Commercial 1,184 425 2,675 [ZW] 1,609 Real estate-construction 1,000 1,200 1,000 [ZW] 3,470 Total restructured loans 2,184 1,625 3,675 [ZW] 5,079 Total non-performing loans 38,207 54,078 39,838 [ZW] 73,933 Legally foreclosed properties 27,004 56,725 38,257 [ZW] 37,938 In substance foreclosed properties 1,209 11,029 1,851 [ZW] 10,357 Less foreclosed property reserve (563) (7,312) (2,291) [ZW] (5,742) Total foreclosed properties 27,650 60,442 37,817 [ZW] 42,553 Total non-performing assets $65,857 $114,520 $77,655 [ZW] $116,486 Percentage to loans (net of unearned) and foreclosed properties 1.01% 1.97% [ZW] 1.35% 3.08% Allowance for loan losses to: Non-performing loans 589.84 471.00 616.91 [ZW] 228.25 Non-performing assets 342.19 222.41 316.48 [ZW] 146.61 Accruing loans past due 90 days or more $62,626 $ 66,695 $53,679 $ [ZW] 64,835
*Real estate-mortgage includes real estate-commercial mortgage and real estate-residential mortgage. Real estate-residential mortgage non-accrual loans were not significant for the periods presented. Real Estate Lending Signet's real estate-construction loan exposure at September 30, 1994 totaled $218.5 million, a 29% decline from the 1993 year-end level and a 41% decline from the September 30, 1993 level. Approximately $73 million of the decline from December 31, 1993 was due to the real estate loan sale. Of the total construction loan portfolio, approximately 44% was located in the Metro- Washington area. The largest type of construction financing was residential at 38%. Commercial mortgage loans totaled $532.4 million at September 30, 1994 and included $ 250.3 million of mini-permanent (interim) mortgage loans. Commercial mortgage loans declined $49 million since December 31, 1993, of which $29 million was due to the real estate loan sale. Stockholders' Equity Data At September 30, 1994, stockholders' equity totaled $1.1 billion, an increase of 17% from the previous year's level of $926 million. This increase reflects the earnings of the Company over the past year and the acquisition of Pioneer Financial Corporation. During the third quarter of 1994, Signet completed the acquisition of Pioneer Financial Corporation, the parent company of Pioneer Federal Savings Bank, a $400 million financial institution located in Chester, Virginia. The transaction was a tax-free exchange of stock. Pioneer's shareholders received .6232 shares of Signet common stock for each Pioneer share held. This resulted in Signet issuing approximately 1.5 million shares of common stock. The transaction had little dilutive effect on Signet's earnings per share. Effective January 1, 1994, Signet adopted the Financial Accounting Standard Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which requires that securities classified as available for sale be reported at fair value with unrealized gains and losses reported in a separate component of stockholders' equity, net of tax. At September 30, 1994, the net unrealized losses, net of tax, related to securities available for sale, totaled $27.6 million primarily from a reduction in the value of mortgage backed securities and U.S. Treasury obligations. Signet has no plans at present to sell these securities and recognize a loss. The Company's equity-to-assets ratio was a strong 9.81% at September 30, 1994, which is an improvement from 9.58% at June 30, 1994 and 7.92% at September 30, 1993. Signet's risk-adjusted capital ratios at September 30, 1994 remained strong at 12.71% and 15.98% for Tier I and Total Capital, respectively. Signet's leverage ratio at September 30, 1994 was 9.65%, an improvement from 8.94% at June 30, 1994. For most corporations, including Signet, the minimum leverage ratio is 3% plus an additional cushion of 100 to 200 basis points depending upon risk profiles and 24 Table 12 Selected Capital Data (dollars in thousands)
[ZW] September 30 September 30 December 31 [ZW] 1994 1993 1993 [ZW] Qualifying common stockholders' equity [ZW] $1,098,911 $ 926,030 $ 964,662 Less goodwill and other disallowed [ZW] intangibles (44,014) [ZW] (23,679) (23,404) Total Tier I capital [ZW] 1,054,897 902,351 941,258 Qualifying [ZW] debt [ZW] 166,400 225,927 222,607 Qualifying allowance for loan [ZW] losses 105,237 [ZW] 109,899 107,646 Total Tier II [ZW] capital [ZW] 271,637 335,826 330,253 Total risk-based capital [ZW] $1,326,534 $1,238,177 $1,271,511 Total risk-adjusted assets [ZW] $8,298,825 $8,647,106 $8,466,048 Ratios: Tier I [ZW] capital [ZW] 12.71% 10.44% 11.12% Total risk-based [ZW] capital [ZW] 15.98 14.32 15.02 Tier I [ZW] leverage [ZW] 9.65 7.51 8.13 Tangible Tier I [ZW] leverage [ZW] 9.30 7.30 7.88 Total stockholders' equity to [ZW] assets 9.81 [ZW] 7.92 8.14 Total stockholders' equity + allowance to [ZW] loans 20.10 [ZW] 20.49 19.30 Common dividend payout ratio [ZW] (year-to-date) 40.32 [ZW] 25.11 26.14 Book value per share [ZW] $ 18.52 $ 16.39 $ 17.04
other factors. At September 30, 1994, all of Signet's banking subsidiaries met the criteria established by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") for "well capitalized" institutions. Management anticipates that after the Separation referred to earlier, all of Signet's banking subsidiaries will continue to meet the "well capitalized" criteria. Interest Rate Sensitivity and Liquidity Signet's interest rate sensitivity position is managed by the Asset and Liability Committee ("ALCO") and monitored through the use of simulations on rate sensitive pre-tax income. Interest rate sensitivity is the relationship between changes in market interest rates and changes in rate sensitive income due to the repricing characteristics of assets and liabilities. For example, in periods of declining rates, earnings on the investment portfolio improve as funding costs decline. Improved spreads in the investment portfolio are offset by narrower spreads in the core banking businesses as changes in consumer deposit costs lag decreases in market interest rates. ALCO routinely uses derivatives such as interest rate swaps to insulate the Company against the possibility of sudden changes in interest rates. ALCO, in managing interest rate sensitivity, also uses simulations to better identify the impact that market changes and alternative strategies might have on net interest income. Given the timing of the Separation, interest rate sensitivity was evaluated on the Company excluding those assets which will transfer to Capital One Bank. Those simulations show that an immediate and sustained 100 basis point change in interest rates would have less than a 3% impact on rate sensitive income over the next twelve months. Asset liquidity is generally provided by interest earning assets other than investment securities held to maturity and loans. This group of interest-earning assets (interest bearing deposits with other banks, Federal funds sold and securities purchased under resale agreements, trading account securities, credit card loans held for securitization, loans held for sale and securities available for sale) totaled $3.0 billion, or 31% of earning assets at September 30, 1994. The loan portfolio is a secondary source of asset liquidity. Liability liquidity is measured by the Company's ability to obtain funds at favorable rates and in adequate amounts. Core deposits are the largest and most important funding source. These deposits totaled 111% of total loans as of September 30, 1994. Purchased funds consisted primarily of funds from local customers which are considered to be less volatile than other purchased liabilities and repurchase agreements. For the first nine months of 1994, cash and cash equivalents decreased by $297 million primarily as a result of a sharp decline in interest bearing deposits with other banks. Cash provided by operations was $302 million for this time period resulting mainly from proceeds from securitization of credit card loans. Cash provided by investing activities amounted to $385 million principally due to proceeds from sales and maturities of securities available for sale exceeding purchases. Cash used by financing activities amounted to $984 million as there was a decrease in short-term borrowings and deposits. 25 PART II. OTHER INFORMATION Item 6.Exhibits and Reports on Form 8-K (a)Exhibits: Exhibit 11 - Computation of Earnings Per Share (b)Reports on Form 8-K The Registrant filed a Current Report on Form 8-K, dated July 26, 1994, which announced plans to spin-off substantially all of its credit card business. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there-unto duly authorized. SIGNET BANKING CORPORATION (Registrant) Date: November 10, 1994 /s/ Wallace B. Millner, III Wallace B. Millner, III Senior Executive Vice President & Chief Financial Officer Date: November 10, 1994 /s/ W. H. Catlett, Jr. W. H. Catlett, Jr. Executive Vice President & Controller (Chief Accounting Officer) 26 EX-11 2 EXHIBIT 11 SIGNET BANKING CORPORATION AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE (dollar amounts - except per share - in thousands)
Three Months Nine Months Ended September 30 Ended September 30 1994 1993 1994 1993 Common and common equivalent: Average shares outstanding 57,401,869 56,415,623 56,956,229 56,207,960 Dilutive stock options-based on the treasury stock method using average market price 496,209 532,239 537,132 591,405 Shares used 57,898,078 56,947,862 57,493,361 56,799,365 Net income applicable to Common Stock $ 3,462 $ 45,763 $ 106,960 $ 124,470 Per share amount $ .05 $ .80 $ 1.86 $ 2.19 Assuming full dilution: Average shares outstanding 57,401,869 56,415,623 56,956,229 56,207,960 Dilutive stock options-based on the treasury stock method using the period end market price, if higher than average market price 496,209 594,465 547,627 655,580 Shares used 57,898,078 57,010,088 57,503,856 56,863,540 Net income applicable to Common Stock $ 3,462 $ 45,763 $ 106,960 $ 124,470 Per share amount $ .05 $ .80 $ 1.86 $ 2.19
The calculations of common and common equivalent earnings per share and fully diluted earnings per share are submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although both calculations are not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because there is dilution of less than 3%. The Registrant has elected to show fully diluted earnings per share in its financial statements. 27 EX-27 3 ARTICLE 9 FDS FOR 10-Q
9 1,000 9-MOS DEC-31-1994 SEP-30-1994 453,020 239,274 1,090,348 279,245 1,113,371 203,021 210,993 6,511,155 225,359 11,045,233 7,651,080 1,793,953 263,385 253,729 292,389 0 0 790,697 11,045,233 415,511 13,287 155,284 584,082 132,486 202,234 381,848 11,498 3,192 635,548 154,452 154,452 0 0 106,960 1.86 1.86 5.24 36,023 62,626 2,184 0 253,313 62,256 24,196 225,359 167,607 0 57,752
-----END PRIVACY-ENHANCED MESSAGE-----