-----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, tOYf1MQ9m+nloqJEWt4nEYsk8cWoTxJKCgkfoBMOiy5zos7BLDdct1kW5yvU9z9v FlZFF3DTGFLXG2O2zVQNJA== 0000916641-95-000072.txt : 19950616 0000916641-95-000072.hdr.sgml : 19950616 ACCESSION NUMBER: 0000916641-95-000072 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950323 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGNET BANKING CORP CENTRAL INDEX KEY: 0000009659 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 546037910 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06505 FILM NUMBER: 95522673 BUSINESS ADDRESS: STREET 1: 7 N EIGHTH ST STREET 2: PO BOX 25970 CITY: RICHMOND STATE: VA ZIP: 23260 BUSINESS PHONE: 8047472000 MAIL ADDRESS: STREET 1: 7 N EIGHTH ST STREET 2: PO BOX 25970 CITY: RICHMOND STATE: VA ZIP: 23260 FORMER COMPANY: FORMER CONFORMED NAME: BANK OF VIRGINIA CO DATE OF NAME CHANGE: 19860717 FORMER COMPANY: FORMER CONFORMED NAME: VIRGINIA COMMONWEALTH BANKSHARES INC DATE OF NAME CHANGE: 19721020 FORMER COMPANY: FORMER CONFORMED NAME: VIRGINIA COMMONWEALTH CORP DATE OF NAME CHANGE: 19701113 10-K 1 SIGNET 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required). For the fiscal year ended December 31, 1994 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required). For the transition period from ____________ to ____________. Commission File No. 1-6505 SIGNET BANKING CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-6037910 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 7 North Eighth Street 23219 Richmond, Virginia (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (804) 747-2000 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $5 Par Value New York Stock Exchange Rights to Purchase Series A Junior Participating Preferred Stock, $20 par value New York Stock Exchange (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 28, 1995: * Common Stock, $5 Par Value - $2,019,314,875 The number of shares outstanding of each of the registrant's classes of common stock as of February 28, 1995: Common Stock, $5 Par Value - 58,594,838 * In determining this figure, the Registrant has assumed that the executive officers of the Registrant, the Registrant's directors, and persons known to the Registrant to be the beneficial owners of more than five percent of the Registrant's Common Stock, that directly or indirectly control the Registrant, are affiliates. Such assumption shall not be deemed to be conclusive for any other purpose. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the annual report to shareholders for the year ended December 31, 1994 are incorporated by reference into Parts I, II and IV. 2. Portions of the proxy statement for the annual shareholders' meeting to be held on April 25, 1995 are incorporated by reference into Part III. PART I ITEM 1. BUSINESS. General The Registrant is a registered bank holding company, incorporated in Virginia in 1962, and had consolidated assets of $12.9 billion as of December 31, 1994. On the basis of total assets and deposits at December 31, 1994, the Registrant is the second largest banking organization headquartered in Virginia. During 1994, the Registrant provided interstate financial services through four principal subsidiaries: Signet Bank/Virginia, headquartered in Richmond, Virginia; Signet Bank/Maryland, headquartered in Baltimore, Maryland; Signet Bank N.A., headquartered in Washington, D.C. and Capital One Financial Corporation ("Capital One"), headquartered in Falls Church, Virginia. On July 27, 1994, the Registrant announced 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 were transferred to Capital One Bank, a newly chartered limited purpose credit card bank. Capital One Bank became, in conjunction with the transfer, a wholly-owned subsidiary of Capital One, a wholly-owned subsidiary of Signet (the "Separation"). Accounts representing approximately $335 million, or 5%, of the managed credit card portfolio of the credit card business were retained by Signet. The Separation occurred November 22, 1994 at which time 7,125,000 shares of common stock of Capital One were sold in an initial public offering. Signet distributed all of the remaining Capital One common stock it held to Signet shareholders in a tax-free distribution on February 28, 1995. Capital One is listed on the New York Stock Exchange under the symbol COF. Signet's Board of Directors believes the distribution of Capital One shares will enhance shareholder value by creating two independent financial institutions, each possessing substantial financial and managerial strength and each pursuing separate and attractive long-term business strategies. The Registrant is engaged in general commercial and consumer banking businesses through its principal bank subsidiaries, which are members of the Federal Reserve System. Signet Bank/Virginia, Signet Bank/Maryland and Signet Bank N.A. provide financial services through banking offices located throughout Virginia, Maryland and Washington, D.C and a 24-hour full-service Telephone Banking Center. Capital One is a major issuer of credit cards nationwide, offering a broad spectrum of card products designed to meet the unique needs of differing market segments. Signet Bank/Virginia owns a commercial bank operating in the Bahamas. International banking operations are conducted through foreign branches of Signet Bank/Virginia and Signet Bank/Maryland. Service subsidiaries are engaged in writing insurance in connection with the lending activities of the banks and bank-related subsidiaries and owning real estate for banking premises. Other subsidiaries are engaged in trust operations, various kinds of lending and leasing activities, insurance agency activities, mortgage lending and broker and dealer activities relating to certain phases of the domestic securities business. As of December 31, 1994, the Registrant and its subsidiaries employed 6,028 full-time and 1,311 part-time employees. Capital One employed 2,305 full-time and 324 part-time employees, which are included in the total employees for the Registrant. Domestic Banking Operations Signet Bank/Virginia, incorporated under the laws of Virginia, had assets of $6.8 billion at December 31, 1994. Signet Bank/Maryland, incorporated under the laws of Maryland, had assets of $3.2 billion at December 31, 1994. Signet Bank N.A., incorporated under the laws of the United States, had assets of $619 million at December 31, 1994. Capital One Bank, incorporated under the laws of Virginia in 1994, had assets of $3.1 billion at December 31, 1994. Signet Bank/Virginia, Signet Bank/Maryland and Signet Bank N.A. provide all customary banking services to businesses and individuals. Capital One Bank is a limited purpose credit card bank. Domestic Trust Operations Trust operations are administered by Signet Trust Company, a subsidiary of the Registrant which presently operates four offices in Virginia, one office in Maryland and one office in Washington, D.C. International Banking Operations International banking operations are conducted through Signet Bank/ Maryland's and Signet Bank/Virginia's international divisions and through Signet Bank (Bahamas), Ltd., a subsidiary of Signet Bank/Virginia. Signet Bank/Virginia and Signet Bank/Maryland also conduct international banking operations through foreign branches located in the Bahamas and Cayman Islands, respectively. International banking is subject to special risks such as exchange controls and other regulatory or political policies of governments, both foreign and domestic. Currency devaluation is an additional risk of international banking; however, substantially all of the Registrant's international assets are repayable in U.S. dollars. Domestic Bank-Related Activities Signet Commercial Credit Corporation, a wholly-owned subsidiary of the Registrant, is engaged in bank-related activities in the United States. It makes loans that are often secured by inventory, accounts receivable or like security and are generally structured on a revolving basis. Signet Insurance Services, Inc. and Signet Insurance Services, Inc./ Maryland, wholly-owned subsidiaries of the Registrant, provide, as agents, a full line of life and property/casualty insurance coverage for both individuals and business enterprises. Signet Mortgage Corporation, a wholly-owned subsidiary of Signet Bank/ Virginia, engages in the business of originating, servicing, and selling mortgage loans. Signet Leasing and Financial Corporation, a wholly-owned subsidiary of Signet Bank/Maryland, engages in diversified equipment lease financing activities (excluding passenger automobiles) for commercial customers primarily in Maryland and the Mid-Atlantic region. Signet Financial Services, Inc., a wholly-owned subsidiary of the Registrant, acts as a broker and dealer in certain phases of the domestic securities business. Competition The Registrant is subject to substantial competition in all phases of its business. Its banks compete not only with other commercial banks but with other financial institutions, including brokerage firms, credit card banks, savings and loan associations and savings banks, credit unions, consumer loan companies, finance companies, insurance companies and certain governmental agencies, many of which are substantially larger than the Registrant. The Registrant's non-banking subsidiaries also operate in highly competitive fields and compete with organizations substantially larger than themselves. See "Regulation" below for a discussion of legislation which has increased competition in the markets served by the Registrant. Government Policy The earnings of the Registrant are affected not only by general economic conditions but also by the policies of various governmental regulatory authorities. In particular, the Federal Reserve System regulates money and credit conditions in order to influence general economic conditions, primarily through open market transactions in U.S. Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against member bank deposits. These policies have a significant influence on overall growth and distribution of bank loans, investments and deposits, and affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The Registrant cannot accurately predict the effect such policies may have in the future on its business and earnings. Capital Guidelines The Board of Governors of the Federal Reserve System (the "Federal Reserve Board") has adopted risk- based capital guidelines for bank holding companies. The minimum guidelines for the ratio of capital to risk-weighted assets (including certain off-balance-sheet activities, such as standby letters of credit) is 8 percent. At least half of the total capital must be composed of common equity, retained earnings and qualifying perpetual preferred stock less disallowed intangibles, including goodwill ("Tier I capital"). The remainder may consist of qualifying subordinated debt, other preferred stock and a limited amount of the loan loss allowance. At December 31, 1994, the Registrant's Tier I and total capital ratios were 12.59 percent and 15.59 percent, respectively. In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of Tier I capital to adjusted average quarterly assets equal to 3 percent for bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating. All other bank holding companies are generally required to maintain a leverage ratio of 3 percent plus an additional cushion of at least 100 to 200 basis points. The Registrant's leverage ratio at December 31, 1994 was 9.90 percent. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve Board has indicated that it will continue to consider a "tangible Tier I leverage ratio" (deducting all intangibles) in evaluating proposals for expansion or new activities. Each of the Registrant's subsidiary banks is subject to similar capital requirements adopted by the appropriate federal bank regulator. Following are the capital ratios for the Company's four principal bank subsidiaries at December 31, 1994: Ratio Signet Bank/Virginia Signet Bank/Maryland Signet Bank N.A. Capital One Tier I 7.39% 11.29% 27.14% 13.50% Total Capital 10.25 13.86 28.41 14.77 Leverage 5.69 7.02 9.83 11.71
Failure to meet capital guidelines could subject a national or state member bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC and a prohibition on the taking of brokered deposits. Bank regulators continue to indicate their desire to raise capital requirements applicable to banking organizations beyond current levels. However, management is unable to predict whether and when higher capital requirements would be imposed and, if so, at what levels and on what schedule. For further discussion, refer to the portions of Signet's 1994 Annual Report to Shareholders incorporated by reference herein (Exhibit 13.1). Supervision Signet Bank/Virginia, Signet Bank/Maryland and Capital One Bank are supervised and regularly examined by the Federal Reserve Board and by the Bureau of Financial Institutions of the Virginia State Corporation Commission or the Maryland Bank Commissioner. Signet Bank N.A. is subject to regulation, supervision and examination by the Office of the Comptroller of the Currency. Each of such banking subsidiaries is subject to regulation and examination by the Federal Deposit Insurance Corporation. The Registrant is also subject to examination by the Federal Reserve Board. The Registrant's non-banking subsidiaries are supervised by the Federal Reserve Board. In addition, Signet Insurance Services, Inc. and Signet Insurance Services, Inc./Maryland are subject to insurance laws and regulations of Virginia and Maryland, respectively, and the activities of Signet Financial Services, Inc. are regulated by the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and state securities laws. Regulation The Registrant is registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The BHC Act restricts the activities of the Registrant and requires prior approval of the Federal Reserve Board of any acquisition by the Registrant of more than 5% of the voting shares of any bank or bank holding company, any acquisition of all or substantially all of the assets of a bank and any merger or consolidation with another bank holding company. Under the BHC Act, the Registrant may not acquire any domestic bank located outside of Virginia unless such acquisition is specifically authorized by statute in the state where the bank is located. (See the discussion of interstate banking legislation below.) The BHC Act also prohibits the Registrant from engaging in any business in the United States other than that of managing or controlling banks or businesses closely related to banking, or of furnishing services to or performing services for subsidiaries and, with certain limited exceptions, from acquiring more than 5% of the voting shares of any company. The Federal Reserve Board generally follows a restrictive policy in permitting the entry of bank holding companies and other bank affiliates into domestic and foreign bank-related activities. Further, under Section 106 of the 1970 Amendments to the BHC Act and the Federal Reserve Board's regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of any property or service. Federal law imposes limitations on the ability of the Registrant and its subsidiaries to engage in certain phases of the domestic securities business. Capital One is not a bank holding company under the BHC Act as a result of its ownership of Capital One Bank because Capital One Bank is not a "bank" as defined under the BHC Act. Capital One Bank is not a "bank" under the BHC Act because it (i) engages only in credit card operations, (ii) does not accept demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties or others, (iii) does not accept any savings or time deposit of less than $100,000, (iv) maintains only one office that accepts deposits, and (v) does not engage in the business of making commercial loans. If Capital One Bank failed to meet the credit card bank exemption criteria described above, Capital One Bank's status as an insured depository institution would make Capital One subject to the provisions of the BHC Act. The Registrant is a bank holding company and is a legal entity separate and distinct from its banking and other subsidiaries. The principal sources of the Registrant's revenues are interest income derived from loans to and deposits in subsidiaries and dividends the Registrant receives from its subsidiaries. The right of the Registrant to participate as a shareholder in any distribution of assets of any subsidiary upon its liquidation or reorganization or otherwise is subject to the prior claims of creditors of any such subsidiary. Signet Bank/Virginia, Signet Bank/Maryland, Signet Bank N.A. and Capital One Bank are subject to claims by creditors for long-term and short-term debt obligations, including substantial obligations for federal funds purchased and securities sold under repurchase agreements, as well as deposit liabilities. There is also a number of federal and state legal limitations to the extent to which Signet Bank/Virginia, Signet Bank/Maryland, Signet Bank N.A. and Capital One Bank may pay dividends or otherwise supply funds to the Registrant or its affiliates (including Capital One). The prior approval of the appropriate federal bank regulator is required if the total of all dividends declared by a national bank or state member bank in any calendar year will exceed the sum of such bank's net profits, as defined by the regulators, for the year plus the preceding two calendar years. In addition, a dividend may not be paid in excess of a bank's undivided profits then on hand, after deducting losses and bad debts in excess of the allowance for loan and lease losses. The payment of dividends by the Registrant and its banking subsidiaries may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory minimums. In addition, the appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a national bank, a state member bank or a bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The payment of dividends that deplete a bank's capital base could be deemed to constitute such an unsafe or unsound practice. The Federal Reserve Board and the Office of the Comptroller of the Currency have each indicated that banking organizations should generally pay dividends only out of current operating earnings. Under applicable regulatory restrictions, all of the Registrant's banking subsidiaries were able to pay dividends as of January 1, 1995. Under federal law, Signet Bank/Virginia, Signet Bank/Maryland, Signet Bank N.A. and Capital One Bank may not, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, the Registrant or any non-bank subsidiary, or take their securities as collateral for loans to any borrower. In addition, federal law requires that certain transactions between Signet Bank/Virginia, Signet Bank/Maryland, Signet Bank N.A. and Capital One Bank and their affiliates, including sales of assets and furnishing of services, must be on terms that are at least as favorable to the banks as those prevailing in transactions with independent third parties. Signet Bank/Virginia, Signet Bank/Maryland, Signet Bank N.A. and Capital One Bank are subject to various statutes and regulations relating to required reserves, investments, loans, acquisitions of fixed assets, interest rates payable on deposits, requirements for meeting community credit needs, transactions among affiliates and the Registrant, mergers and consolidations, and other aspects of their operations. Virginia, Maryland and the District of Columbia have each adopted interstate banking statutes under which bank holding companies located in certain other states (primarily Southeastern states) may acquire banks or bank holding companies located in Virginia, Maryland or the District of Columbia, as applicable, provided the laws of the state in which the bank holding company making the acquisition has its principal place of business permit bank holding companies located in Virginia, Maryland or the District of Columbia, as applicable, to acquire banks and bank holding companies in that state. In addition, a number of other states have adopted interstate banking statutes that permit bank holding companies located in Virginia, Maryland or the District of Columbia to acquire out-of-state banks or bank holding companies, either on a reciprocal basis or without regard to reciprocity. Many of these statutes, and many of the interstate banking statutes referred to above, contain provisions which could restrict acquisitions by the Registrant of out-of-state banks or bank holding companies and, conversely, acquisitions of the Registrant by out-of-state banks or bank holding companies. On July 1, 1994, legislation became effective which amends Virginia's interstate banking statutes to allow Virginia bank holding companies to acquire banking institutions located in any state with reciprocal national banking laws and out-of-state bank holding companies to acquire Virginia banking institutions if the laws of the out-of-state bank holding company's home state permit acquisitions of banking institutions in that state by Virginia bank holding companies under the same conditions. On September 29, 1994, the federal Riegle-Neal Interstate Banking and Branching Efficiency Act (the "Riegle Act") became law. Under the Riegle Act, effective September 30, 1995, the Federal Reserve may approve bank holding company acquisition of banks in other states, subject to certain aging and deposit concentration limits. Commencing June 1, 1997 (or earlier if a particular state chooses), banks in one state may merge with banks in another state, unless the other state has chosen not to implement this section of the Riegle Act. These mergers are also subject to similar aging and deposit concentration limits. On February 23, 1995, the Virginia General Assembly passed legislation, effective July 1, 1995, which would permit Virginia banks to merge with out-of-state banks, and out-of-state banks resulting from such an interstate merger transaction to maintain and operate branches in Virginia of a merged Virginia bank, if the laws of the home state of such out-of-state bank permit interstate merger transactions. In addition, effective July 1, 1995, Virginia banks are permitted to establish de novo branches in other states, and out- of-state banks are permitted to establish de novo branches in Virginia, if the laws of the home state of such out-of-state bank permit Virginia banks to establish de novo branches in that state. Certain provisions of Maryland law affect the competitive posture of Maryland banks. Under Maryland law, an out-of-state bank holding company, regardless of location, may establish new banks in Maryland that may compete generally with Maryland banks, provided certain capital investment and employment requirements are met and, unless otherwise waived, the out-of-state bank holding company agrees to locate the headquarters of the new Maryland bank in a designated enterprise zone. Maryland law allows branching, subject to regulatory approval. Virginia law provides that a bank may establish new branches, subject to regulatory approval, anywhere in the state and, effective July 1, 1995, in other states with branching reciprocity. District of Columbia law allows branching by District of Columbia banks within the District, subject to regulatory approval. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), contains a number of provisions which directly or indirectly affect the activities of federally insured national and state-chartered commercial banks. FIRREA made a number of important changes in the deposit insurance system. FIRREA established separate insurance funds for banks (the Bank Insurance Fund ("BIF")) and savings associations (the Savings Association Insurance Fund) to be managed by the Federal Deposit Insurance Corporation (the "FDIC"). All national and state-chartered commercial banks that were insured by the FDIC at the time of the enactment of FIRREA were automatically insured by BIF. FIRREA allows the FDIC to recover from a depository institution for any loss or anticipated loss to the FDIC that results from the default of a commonly controlled insured depository institution or from assistance provided to such an institution. Signet Bank/Virginia, Signet Bank/Maryland and Signet Bank N.A. are commonly controlled by the Registrant, for purposes of this provision. As of March 1, 1995, when the distribution of Capital One shares to Signet shareholders was completed, Capital One Bank was not commonly controlled for such purposes. The FDIC's claim for loss reimbursement under the "cross-guaranty" provisions is superior to any claims of shareholders of the liable institution or any claims of affiliates of such institution (other than claims on secured debt that existed as of May 1, 1989). The FDIC's claim is subordinate to the claims of depositors, third party secured creditors, senior and general creditors and holders of subordinated debt other than affiliates. FIRREA gives the Federal Reserve Board specific authority to permit the acquisition of healthy, as well as failing, savings associations by a bank holding company under the BHC Act. FIRREA enhances the enforcement powers of the federal banking regulators, increases the penalties for violations of law and substantially revises and codifies the powers of receivers and conservators of depository institutions. The receivership and conservatorship provisions of FIRREA include a statutory claims procedure and provisions which confirm the powers of the FDIC to obtain a stay of pending litigation and to repudiate certain contracts or leases. The Crime Control Act of 1990, also contains a number of provisions which enhance the enforcement powers of the federal banking regulators and increase the penalties for violations of law. Under the National Bank Act, if the capital stock of a national bank, such as Signet Bank N.A., is impaired by losses or otherwise, the Office of the Comptroller of the Currency is authorized to require payment of the deficiency by assessment upon the bank's shareholders, prorata, and to the extent necessary, if any such assessment is not paid by any shareholder after three months notice, to sell the stock of such shareholder to make good the deficiency. Under Federal Reserve Board policy, the Registrant is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each of such subsidiaries. This support may be required at times when, absent such Federal Reserve Board policy, the Registrant may not find itself able to provide it. The Registrant's subsidiary banks are subject to FDIC deposit insurance assessments. FIRREA requires that the FDIC reach an insurance fund reserve for the BIF of $1.25 for every $100 of insured deposits. The FDIC has indicated that it expects the BIF to meet the required insurance fund reserve between May and June of 1995. If the reserve ratio of the BIF is less than the designated reserve ratio, the FDIC is required to set assessment rates sufficient to increase the ratio to the required ratio, and is authorized to impose special additional assessments. A significant increase in the assessment could have an adverse impact on the Registrant's results of operations. See discussion below under Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), for further information on the risk-based insurance assessment system adopted by the FDIC. In December 1991, FDICIA was enacted. FDICIA substantially revises the bank regulatory and funding provisions of the Federal Deposit Insurance Act and makes revisions to several other federal banking statutes. FDICIA requires the federal banking agencies to take "prompt corrective action" with depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized". A depository institution's capital tier depends upon where its capital levels are in relation to various relevant capital measures, which include a risk-based capital measure and a leverage ratio capital measure, and certain other factors. As of December 31, 1994, all four of the Registrant's banks met the "well capitalized" criteria. A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets each such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is significantly below any such measure and critically undercapitalized if it fails to meet any critical capital level set forth in the regulations. The critical capital level must be a level of tangible equity equal to not less than two percent of total assets and not more than 65 percent of the minimum leverage ratio to be prescribed by regulation (except to the extent that two percent would be higher than such 65 percent level). An institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. For a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5 percent of the depository institution's total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator. Under FDICIA, an institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. In addition, "pass through" insurance coverage may not be available for certain employee benefit accounts. FDICIA restated Section 22(h) of the Federal Reserve Act, a statutory provision which, among other things, restricts the amounts and terms of extensions of credit which may be made by a bank to its executive officers, directors, principal shareholders (collectively, "insiders"), and to their related interests. In addition to limitations previously in place, FDICIA requires a bank, when lending to insiders, to follow credit underwriting procedures that are not less stringent than those applicable to comparable transactions by the bank with persons outside the bank. Directors and their related interests are now subject to the same aggregate lending limits previously applicable to executive officers and their principal shareholders and their related interests; further, the amount a bank can lend in the aggregate to insiders, and to their related interests, is limited to an amount equal to the bank's unimpaired capital and surplus. Insiders are also prohibited from knowingly receiving, or knowingly permitting their related interests to receive, any extension of credit not authorized by Section 22(h) of the Federal Reserve Act. Under FDICIA, each insured depository institution will be required to submit annual financial statements to the FDIC, its primary federal regulatory, and any appropriate state banking supervisor and a report signed by the chief executive officer and chief accounting or financial officer which contains (i) a statement of management's responsibilities for preparing financial reports, establishing and maintaining an adequate internal control structure, and complying with laws and regulations relating to safety and soundness, and (ii) an assessment of the effectiveness of such structures and compliance effort. The institution's independent public accountant will then be required to attest to and report separately on the assertions of the institution's management. Under FDICIA, the appropriate federal banking agencies have issued regulations requiring insured depository institutions to have annual independent audits (which can be performed only by accounting firms which have, among other things, agreed to provide related working papers, policies and procedures to the FDIC, and the appropriate federal and state banking authorities, if so requested). In the case of institutions that are subsidiaries of holding companies, the audit requirement can be met by an audit of the holding company. The accountants must issue reports in compliance with generally accepted accounting principles and FDICIA. The scope of the audit must include a review of whether the financial statements of the institution are presented fairly in accordance with generally accepted accounting principles and whether they comply with such other disclosure requirements as the federal banking agencies may prescribe. Also, the accountants must apply procedures agreed upon by the FDIC to determine objectively if an institution is in compliance with laws and regulations. Institutions are required to provide their accountants copies of reports of condition, examination reports and information concerning any agency enforcement actions. Copies of the accounting firm reports are to be provided to the FDIC and the appropriate primary federal banking agency. Each insured depository institution will be required to have an independent audit committee made up entirely of outside directors who are independent of management of the institution and who satisfy any specific requirements the FDIC may establish. Their duties are to include review of the various new reports required under FDICIA. In the case of any insured depository institution which the FDIC determines to be a "large institution", the audit committee must include members with banking or related financial expertise. Also, in the case of such large institutions, the committee must have access to its own outside counsel, and may not include any large customers of the institution. There are certain exemptions for institutions that are part of a holding company structure, but the institution must have total assets of less than $9 billion, and an examination rating of 1 or 2. FDICIA amended the Federal Deposit Insurance Act by inserting a new provision concerning accounting objectives, standards, and requirements. Among other matters, the federal banking agencies are required to: (i) review the accounting principles used by depository institutions in preparing financial reports required to be filed with a federal banking agency and related matters with respect to such reports; (ii) modify or eliminate any accounting principles or reporting requirements which are inconsistent with FDICIA's objectives of effective supervision, prompt corrective action, and increased accuracy of financial statements; (iii) prescribe regulations which require that all assets and liabilities, including contingent assets and liabilities, of insured depository institutions be reported in, or otherwise taken into account of, in the preparation of any balance sheet, financial statement, report of condition, or other report required to be filed with the federal banking agency; and (iv) develop jointly with the other appropriate federal banking agencies, a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practical, in any such reports. All financial reports and statements are to be prepared in accordance with generally accepted accounting principles, except that each federal banking agency has the power to implement more stringent procedures in certain instances. FDICIA also imposes certain operational and managerial standards on financial institutions relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. FDICIA also imposes new restrictions on activities and investments of insured state banks, and prescribes limitations on risks posed by exposure of insured banks to other depository institutions, including adoption of policies to limit overnight credit exposures to correspondent banks. FDICIA requires the federal banking regulators to adopt rules prescribing certain safety and soundness standards for insured depository institutions and their holding companies. Proposed regulations implementing these standards to cover operations and management, asset quality and earnings, and employee compensation are pending adoption. The standards are intended to enable the regulatory agencies to address problems at depository institutions and holding companies before the problems cause significant deterioration in the financial condition of the institution. The proposal would establish the objectives of proper operations and management, but would leave specific methods for achieving those objectives to each institution. FDICIA sets forth a new Truth in Savings Act. The Federal Reserve Board has adopted regulations implementing the Truth in Savings Act. A variety of significant new disclosure requirements are imposed concerning interest rates and terms of deposit accounts. A requirement is also imposed that interest paid on interest-bearing accounts must be calculated on the full amount of principal, as opposed to on only non- reservable balances. Under FDICIA, the federal banking agencies adopted regulations providing standards for extensions of credit that are secured by liens on interests in real estate or made for the purpose of financing the construction of buildings or other improvements of real estate. In prescribing standards, the agencies are to consider the risk posed to the deposit insurance fund, the need for safe and sound operation of depository institutions, and the availability of credit. Under FDICIA, the FDIC adopted a risk-based insurance assessment system for implementation January 1, 1994 that evaluates an institution's potential for causing a loss to the insurance fund and to base deposit insurance premiums upon individual bank profiles. A transitional risk-based assessment system was in place during 1993. There were no significant changes between the transitional system and the final regulation. Under the risk-based assessment system, each institution pays FDIC insurance premiums within a range from 23 cents to 31 cents per $100 of deposits, depending on the institution's capital adequacy and a supervisory judgment of overall risk. As of December 31, 1994, all four of the registrant's banks paid the lowest FDIC insurance premium, 23 cents per $100 of deposits. The FDIC has announced that it expects to reduce deposit insurance premiums by the end of 1995. From time to time, various legislative proposals are submitted to and considered by Congress concerning the banking industry. Recent legislative initiatives have included, among other things, proposals to reform deposit insurance, limit the investments that a depository institution may make with insured funds, eliminate restrictions on interstate banking, expand the powers of banking organizations to enter into new financial service industries and revise the structure of the bank regulatory system. The Registrant cannot determine the ultimate effect that FDICIA and the implementing regulations adopted or to be adopted thereunder, or any potential legislation, if enacted, would have upon its financial condition or operations. Executive Officers of the Registrant The following table sets forth information with respect to the Registrant's executive officers: Names, Positions and Offices With Registrant During Last An Officer of the Five Years Age Registrant Since Robert M. Freeman 53 1978 Chairman and Chief Executive Officer. Prior to April, 1990, he was President and Chief Executive Officer. Malcolm S. McDonald 56 1982 President and Chief Operating Officer. Prior to April 1990, he was Vice Chairman. David L. Brantley 45 1988 Executive Vice President and Treasurer. Prior to February, 1995, he was Senior Vice President and Treasurer. Robert L. Bryant 44 1990 Senior Executive Vice President. Prior to July, 1994, he was Executive Vice President. Prior to February, 1990, he was Senior Vice President, Signet Bank/Virginia. W.H. Catlett, Jr. 46 1994 Executive Vice President and Controller (Principal Accounting Officer). Prior to August, 1994, he was a Senior Vice President. Names, Positions and Offices With Registrant During Last An Officer of the Five Years Registrant Since Philip H. Davidson 50 1977 Executive Vice President. T. Gaylon Layfield, III 43 1988 Senior Executive Vice President. Wallace B. Millner, III 55 1971 Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer). Kenneth H. Trout 46 1990 Senior Executive Vice President. Prior to May, 1991, he was an Executive Vice President. Prior to July, 1990, he was Executive Vice President, Signet Bank N.A. Sara R. Wilson 44 1980 Executive Vice President, General Counsel and Corporate Secretary. Prior to January, 1995, she was Executive Vice President and General Counsel. Prior to January, 1994, she was Senior Vice President and Senior Corporate Counsel.
There are no family relationships (as defined in the applicable regulations) among the above listed officers. The executive officers of the Registrant are elected to serve until the next organizational meeting of the board of directors of the Registrant following the next annual meeting of the stockholders of the Registrant and until their successors are elected. Statistical Information The statistical information required by Item 1 is in the Registrant's Annual Report to its shareholders for the year ended December 31, 1994, and is incorporated herein by reference, as follows: Page in the Registrant's Annual Report to its shareholders for Guide 3 Disclosure the year ended December 31, 1994 I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential A. Average Balance Sheet 30 & 31 B. Net Interest Earnings Analysis 30 & 31 C. Rate/Volume Analysis 23 II. Investment Portfolio A. Book Value of Investment Securities 61 B. Maturities of Investment Securities 34 C. Investment Securities Concentrations 34 & 35 III. Loan Portfolio A. Types of Loans 32 B. Maturities and Sensitivities of Loans to Changes in Interest Rates 33 C. Risk Elements 1. Nonaccrual, Past Due and Restructured Loans 37,38 & 39 2. Potential Problem Loans 39 3. Foreign Outstandings Not Applicable 4. Loan Concentrations 32 D. Other Interest Bearing Assets Not Applicable IV. Summary of Loan Loss Experience A. Analysis of Allowance for Loan Losses 25 B. Allocation of the Allowance for Loan Losses 26 V. Deposits A. Average Balances 30 & 31 B. Maturities of Large Denomination Certificates 40 C. Foreign Deposit Liability Disclosure 40 VI. Return on Equity and Assets A. Return on Assets 22 B. Return on Equity 22 C. Dividend Payout Ratio 41 D. Equity to Assets Ratio 22 VII. Short-Term Borrowings 63
ITEM 2. PROPERTIES. The executive offices of the Registrant and Signet Bank/Virginia are located at 7 N. Eighth Street, Richmond, Virginia, in a building owned by a subsidiary of the Registrant. The Registrant's main operations center and its bank card center are located in Henrico County, Virginia, in two office buildings owned by Capital One Bank. Signet Bank/Virginia leases a portion of these buildings. The principal offices of Signet Bank/Maryland are located at 7 St. Paul Street, Baltimore, Maryland. The principal offices of Signet Bank N.A. are located at 1130 Connecticut Avenue N.W., Washington, D.C. The principal offices of Capital One are located at 2980 Fairview Park Drive, Falls Church, Virginia. The principal offices of Signet Bank/Maryland, Signet Bank N.A. and Capital One are leased. Of the Registrant's 249 domestic branch banking locations, 138 are owned by subsidiaries of the Registrant, of which one is subject to mortgage indebtedness of approximately $361,000. The remaining 111 branch banking locations and offices of other subsidiaries are leased for various terms at an aggregate annual rent of approximately $22,581,000, of which approximately $4,821,000 is for Signet Bank/Maryland's principal offices. ITEM 3. LEGAL PROCEEDINGS. The Registrant and its subsidiaries are parties, plaintiff or defendant in numerous suits arising out of the collection of loans and the enforcement or defense of the priority of its security interests. Management believes that the pending actions against the Registrant or its subsidiaries, both individually and in the aggregate, will not have a material adverse effect on the financial condition or future operations of the Registrant. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The information required by Item 5 is included in the Registrant's Annual Report to its shareholders for the year ended December 31, 1994 on page 52 under the heading "Selected Quarterly Financial Data" and on page 69 in Note K, and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. The information required by Item 6 is included in the Registrant's Annual Report to its shareholders for the year ended December 31, 1994 on pages 22 and 41 under the headings "Selected Financial Data" and "Risk-Based and Other Capital Data", respectively, and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by Item 7 is included in the Registrant's Annual Report to its shareholders for the year ended December 31, 1994 on pages 21-52 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations", and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by Item 8 is included in the Registrant's Annual Report to its shareholders for the year ended December 31, 1994 on pages 53-82 under the heading "Signet Banking Corporation Consolidated Financial Statements" and on page 52 under the heading "Selected Quarterly Financial Data", and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by Item 10 as to the directors of the Registrant is included in the Registrant's 1995 Proxy Statement on pages 2-5 under the headings "Election of Directors" and "Other Directorships", and is incorporated herein by reference. The information required by Item 10 as to the executive officers of the Registrant is included in Item 1 under the heading "Executive Officers of the Registrant". ITEM 11. EXECUTIVE COMPENSATION. The information required by Item 11 is included in the Registrant's 1995 Proxy Statement on pages 8-13 under the headings "Compensation of the Board" and "Executive Compensation", and is incorporated herein by reference. Information under the headings "Organization and Compensation Committee Report on Executive Compensation" and "Performance Graph" in the Registrant's 1995 Proxy Statement is not incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by Item 12 is included in the Registrant's 1995 Proxy Statement on pages 1, 5 and 6 under the headings "Proxy Statement" and "Stock Ownership", and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by Item 13 is included in the Registrant's 1995 Proxy Statement on page 7 under the heading "Transactions", and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) The following consolidated financial statements of Signet Banking Corporation and Subsidiaries, included in the Registrant's Annual Report to its shareholders for the year ended December 31, 1994, are incorporated herein by reference in Item 8: Consolidated Balance Sheet - December 31, 1994 and 1993 Statement of Consolidated Income - Years ended December 31, 1994, 1993 and 1992 Statement of Consolidated Cash Flows - Years ended December 31, 1994, 1993 and 1992 Statement of Changes in Consolidated Stockholders' Equity - Years ended December 31, 1994, 1993 and 1992 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors (2) All schedules are omitted since the required information is either not applicable, not deemed material, or is shown in the respective financial statements or in notes thereto. (3) Exhibits: 2.1 Separation, Distribution and Indemnity Agreement dated as of February 22, 1994 among the Registrant, Signet Bank/Virginia and Capital One Financial Corporation (Filed herewith). 2.2 Retained Portfolio, Origination, Servicing and Management Agreement dated as of February 22, 1994 between Signet Bank/Virginia and Capital One Financial Corporation (Filed herewith). 3.1 Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Annual Report on Form 10 K for the fiscal year ended December 31, 1992). 3.2 Bylaws (Filed herewith). 4.1 Indenture dated as of May 1, 1972 Providing for Issuance of Unlimited Senior Debt Securities (Incorporated by reference to Exhibit 4-3 to Registration Statement No. 2-43731). 4.2 Indenture dated as of September 1, 1970 Providing for Issuance of Unlimited Capital Notes (Incorporated by reference to Exhibit 4-2 to Registration Statement No. 2-37919). 4.3 Indenture dated as of May 1, 1985 relating to $50,000,000 Floating Rate Subordinated Notes due 1997 (Incorporated by reference to Exhibit 4(a) to Registration Statement No. 2-97720). 4.4 Indenture dated as of April 1, 1986 Providing for Issuance of Unlimited Subordinated Debt Securities (Incorporated by reference to Exhibit 4(a) to Registration Statement No. 33-4491). 4.5 Officer's Certificate dated as of April 4, 1986 setting forth the form and terms of $100,000,000 of unsecured floating rate Subordinated Notes due in 1998 (Incorporated by reference to Exhibit 4.11 to Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 4.6 Officers' Certificate dated as of May 23, 1989 setting forth the form and terms of $100,000,000 of unsecured 9 5/8% Subordinated Notes due in 1999 (Incorporated by reference to Exhibit 4.12 to Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 4.7 Articles of Amendment, Rights Agreement, Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 1 to Current Report on Form 8-K dated May 23, 1989). 10.0 Management Contracts and Compensatory Plans Required to be filed as Exhibits. 10.1 Executive Employee Supplemental Retirement Plan (Incorporated by reference to Exhibit 10.4 to Annual Report on Form 10-K for the fiscal year ended December 31, 1988). 10.2 Form of Executive Employment Agreement between the Registrant and David L. Brantley, Robert L. Bryant, W.H. Catlett, Jr., Philip H. Davidson, Robert M. Freeman, T. Gaylon Layfield, III, Malcolm S. McDonald, Robert J. Merrick, Wallace B. Millner, III, Keith A. Reynolds, H. Nathaniel Taylor, Kenneth H. Trout, Sara R. Wilson and Randolph W. Wyckoff (Incorporated by reference to Exhibit 10.8 on Form 10-K for the fiscal year ended December 31, 1989). 10.3 1983 Stock Option Plan (Incorporated by reference to Exhibit A to Proxy Statement for 1983 Annual Meeting of Shareholders). 10.4 1985 Union Trust Bancorp Key Employee Stock Option Plan (Incorporated by reference to Exhibit 10.13 to Annual Report on Form 10-K for the fiscal year ended December 31, 1985). 10.5 1992 Stock Option Plan (Incorporated by reference to Exhibit II to Proxy Statement for 1992 Annual Meeting of Shareholders). 10.6 Executive Employee Excess Savings Plan (Incorporated by reference to Exhibit 10.14 to Annual Report on Form 10-K for the fiscal year ended December 31, 1987). 10.7 Split Dollar Life Insurance Plan and Agreement (Incorporated by reference to Exhibit 10.13 to Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 10.8 Executive Employee Deferred Compensation Plan (Incorporated by reference to Exhibit 10.15 to Annual Report on Form 10-K for the fiscal year ended December 31, 1988). 10.9 1988 Deferred Compensation Plan (Incorporated by reference to Exhibit 10.16 to Annual Report on Form 10-K for the fiscal year ended December 31, 1988). 10.10 Excess Benefit Retirement Plan (Incorporated by reference to Exhibit 10.17 to Annual Report on Form 10-K for the fiscal year ended December 31, 1988). 10.11 Annual Executive Incentive Compensation Plan (Incorporated by reference to Exhibit I to Proxy Statement for 1994 Annual Meeting of Shareholders). 10.12 Executive Long-Term Incentive Plan (Incorporated by reference to Exhibit II to Proxy Statement for 1994 Annual Meeting of Shareholders). 10.13 1994 Stock Incentive Plan (Incorporated by reference to Exhibit III to Proxy to Proxy Statement for 1994 Annual Meeting of Shareholders). 11.1 Computation of Earnings Per Share (Filed herewith). 13.1 1994 Annual Report to Shareholders (Filed herewith). 21.1 Subsidiaries of the Registrant (Filed herewith). 23.1 Consent of Ernst & Young LLP (Filed herewith). 27.1 Financial Data Schedule (Filed herewith). (b) Reports on Form 8-K The Registrant filed a Current Report on Form 8-K dated February 17, 1995, reporting that Signet Banking Corporation distributed certain materials to its shareholders in connection with the spin-off of Capital One Financial Corporation. The Registrant filed a Current Report on Form 8-K dated February 28, 1995, announcing that Signet Banking Corporation distributed all the common stock it held in Capital One Financial Corporation to Signet stockholders in a tax-fee distribution on February 28, 1995. The Registrant filed a Current Report on Form 8-K/A dated February 28, 1995, to include the Financial Data Schedule that was omitted from the Current Report on Form 8-K February 28, 1995. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNET BANKING CORPORATION Date: February 28, 1995 By /S/ W. H. Catlett, Jr. W. H. Catlett, Jr. Executive Vice President and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 28th day of February, 1995. SIGNATURES TITLE /S/ Robert M. Freeman Director, Chairman and Chief Executive Robert M. Freeman Officer (Principal Executive Officer) /S/ Malcolm S. McDonald Director, President and Chief Operating Malcolm S. McDonald Officer /S/ Wallace B. Millner, III Senior Executive Vice President and Wallace B. Millner, III Chief Financial Officer (Principal Financial Officer) /S/ W. H. Catlett, Jr. Executive Vice President and Controller W. H. Catlett, Jr. (Principal Accounting Officer) /S/ J. Henry Butta Director J. Henry Butta SIGNATURES TITLE /S/ Norwood H. Davis, Jr. Director Norwood H. Davis, Jr. /S/ William C. DeRusha Director William C. DeRusha /S/ Bruce C. Gottwald, Jr. Director Bruce C. Gottwald, Jr. Director William R. Harvey, Ph.D. /S/ Elizabeth G. Helm Director Elizabeth G. Helm /S/ Robert M. Heyssel, M.D. Director Robert M. Heyssel, M.D. Director Henry A. Rosenberg, Jr. /S/ Louis B. Thalheimer Director Louis B. Thalheimer EXHIBITS TO SIGNET BANKING CORPORATION ANNUAL REPORT ON FORM 10 K DATED DECEMBER 31, 1994 COMMISSION FILE NO. 1 6505 EXHIBIT INDEX Page Number or Exhibit Incorporation by Number Description Reference to 2.1 Separation, Distribution and Indemnity Page 23 Agreement 2.2 Retained Portfolio, Origination, Servicing Page 52 and Management Agreement 3.1 Articles of Incorporation Exhibit 3.1 to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 3.2 Bylaws Page 86 4.1 Instruments defining the rights of Exhibit 4 1, Registration No. 2 43731; security holders, including Indentures Exhibit 4 2, Registration No. 2 37919; Exhibit 4 3, Registration No. 2 97720; Exhibit 4 6, Registration No. 2 45986; Exhibit 4(a), Registration No. 2 97720; Exhibit 4(a), Registration Statement No. 33 4491; Exhibit 1 to Current Report on Form 8 K dated May 23, 1989; Exhibit 4.11 to Annual Report on Form 10 K for the fiscal year ended December 31, 1989 10.1 Executive Employee Supplemental Exhibit 10.4 to Annual Report on Form 10 K for Retirement Plan the fiscal year ended December 31, 1988 10.2 Form of Executive Employment Exhibit 10.8 to Annual Report on Form 10 K for Agreement between the Registrant the fiscal year ended December 31, 1989 and David L. Brantley, Robert L. Bryant, W.H. Catlett, Jr., Philip H. Davidson, Robert M. Freeman, T. Gaylon Layfield, III, Malcolm S. McDonald, Robert J. Merrick, Wallace B. Millner, III, Keith A. Reynolds, H. Nathaniel Taylor, Kenneth H. Trout, Sara R. Wilson and Randolph W. Wyckoff 10.3 1983 Stock Option Plan Exhibit A to Proxy Statement for 1983 Annual Meeting of Shareholders 10.4 1985 Union Trust Bancorp Key Exhibit 10.13 to Annual Report on Form 10 K for Employee Stock Option Plan the fiscal year ended December 31, 1985 10.5 1993 Stock Option Plan Exhibit II to Proxy Statement for 1993 Annual Meeting of Shareholders 10.6 Executive Employee Excess Exhibit 10.14 to Annual Report on Form 10 K for Savings Plan the fiscal year ended December 31, 1987 10.7 Split Dollar Life Insurance Plan Exhibit 10.13 to Annual Report on Form 10 K for and Agreement the fiscal year ended December 31, 1989 10.8 Executive Employee Deferred Exhibit 10.15 to Annual Report on Form 10 K for Compensation Plan the fiscal year ended December 31, 1988 10.9 1988 Deferred Compensation Plan Exhibit 10.16 to Annual Report on Form 10 K for the fiscal year ended December 31, 1988 10.10 Excess Benefit Retirement Plan Exhibit 10.17 to Annual Report on Form 10 K for the fiscal year ended December 31, 1988 10.11 Annual Executive Incentive Exhibit I to Proxy Statement for 1994 Annual Compensation Plan Meeting of Shareholders 10.12 Executive Long-Term Incentive Plan Exhibit II to Proxy Statement for 1994 Annual Meeting of Shareholders 10.13 1994 Stock Incentive Plan Exhibit III to Proxy Statement for 1994 Annual Meeting of Shareholders 11.1 Computation of Earnings per Share Page 96 13.1 1994 Annual Report to Shareholders Page 97 21.1 Subsidiaries of the Registrant Page 163 23.1 Consent of Ernst & Young LLP Page 165 27.1 Financial Data Schedule Page 166
EX-2 2 EXHIBIT 2.1 Exhibit 2.1 FORM OF SEPARATION, DISTRIBUTION AND INDEMNITY AGREEMENT BY AND AMONG SIGNET BANKING CORPORATION SIGNET BANK/VIRGINIA and CAPITAL ONE FINANCIAL CORPORATION SEPARATION, DISTRIBUTION AND INDEMNITY AGREEMENT TABLE OF CONTENTS ARTICLE I. DEFINITIONS 4 1. Section 1.01 General . . . . . . . . . . . . . . . . . . . . . 4 Section 1.02 Exhibits, etc.. . . . . . . . . . . . . . . . . . 8 Section 1.03 References to Time. . . . . . . . . . . . . . . . 8 ARTICLE II. CERTAIN TRANSACTIONS PRIOR TO AND IN CONNECTION WITH THE . . . SEPARATION AND THE IPO. . . . . . . . . . . . . . . . 8 2. Section 2.01 The Separation. . . . . . . . . . . . . . . . . 8 Section 2.02 The Capital One Bank Assets and Capital One Bank Liabilities. . . . . . . 9 Section 2.03 The IPO . . . . . . . . . . . . . . . . . . . . 12 Section 2.04 Proceeds of the IPO . . . . . . . . . . . . . . 12 Section 2.05 Regulatory Approvals and Consents . . . . . . . 13 Section 2.06 Certificate of Incorporation; By-Laws . . . . . . . . . . . . . . . . . . . 13 Section 2.07 Boards of Directors . . . . . . . . . . . . . . 13 Section 2.08 Execution and Delivery of Operative Agreements. . . . . . . . . . . . . 13 Section 2.09 Further Assurances. . . . . . . . . . . . . . . 13 Section 2.10 Interim Services Agreements . . . . . . . . . . 14 Section 2.11 Intercompany Servicing Agreements . . . . . . . 14 Section 2.12 Insurance . . . . . . . . . . . . . . . . . . . 14 Section 2.13 Miscellaneous Matters . . . . . . . . . . . . . 15 Section 2.14 Conditions Precedent to Consummation of the Separation and the IPO . . . . . . . . 16 ARTICLE III. THE DISTRIBUTION. . . . . . . . . . . . . . . . . . . 17 3. Section 3.01 The Distribution. . . . . . . . . . . . . . . . 17 Section 3.02 Cooperation Prior to the Distribution. . . . . . . . . . . . . . . . . 17 Section 3.03 Conditions to Distribution. . . . . . . . . . . 17 Section 3.04 Fractional Shares . . . . . . . . . . . . . . . 18 Section 3.05 The Capital One and Capital One Bank Boards . . . . . . . . . . . . . . . 18 ARTICLE IV. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . 18 4. Section 4.01 Indemnification by Signet . . . . . . . . . . . 18 Section 4.02 Indemnification by Capital One. . . . . . . . . 19 Section 4.03 Limitations on Indemnification Obligations . . . . . . . . . . . . . . . . . 19 Section 4.04 Procedures for Indemnification of Third Party Claims. . . . . . . . . . . . . . 20 Section 4.05 Remedies Cumulative . . . . . . . . . . . . . . 21 Section 4.06 Survival of Indemnities . . . . . . . . . . . . 21 ARTICLE V. ACCESS TO INFORMATION; SERVICES . . . . . . . . . . . 22 5. Section 5.01 Provision of Corporate Records. . . . . . . . . 22 Section 5.02 Access to Information . . . . . . . . . . . . . 22 Section 5.03 Production of Witnesses . . . . . . . . . . . . 22 Section 5.04 Retention of Records. . . . . . . . . . . . . . 22 Section 5.05 Confidentiality . . . . . . . . . . . . . . . . 22 Section 5.06 Provision of Services . . . . . . . . . . . . . 23 Section 5.07 Use of Name . . . . . . . . . . . . . . . . . . 23 Section 5.08 Covenant on Competition . . . . . . . . . . . . 23 ARTICLE VI. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . 24 6. Section 6.01 Complete Agreement; Construction. . . . . . . . 24 Section 6.02 Survival of Agreements. . . . . . . . . . . . . 24 Section 6.03 Expenses. . . . . . . . . . . . . . . . . . . . 24 Section 6.04 Dispute Resolution. . . . . . . . . . . . . . . 24 Section 6.05 Binding Arbitration . . . . . . . . . . . . . . 24 Section 6.06 Governing Law . . . . . . . . . . . . . . . . . 25 Section 6.07 Consent to Jurisdiction . . . . . . . . . . . . 25 Section 6.08 Notices . . . . . . . . . . . . . . . . . . . . 25 Section 6.09 Amendments. . . . . . . . . . . . . . . . . . . 26 Section 6.10 Successors and Assigns. . . . . . . . . . . . . 26 Section 6.11 Termination . . . . . . . . . . . . . . . . . . 26 Section 6.12 No Third Party Beneficiaries. . . . . . . . . . 26 Section 6.13 Titles and Headings . . . . . . . . . . . . . . 26 Section 6.14 Legal Enforceability. . . . . . . . . . . . . . 26 Section 6.15 No Waivers. . . . . . . . . . . . . . . . . . . 27 Section 6.16 Counterparts. . . . . . . . . . . . . . . . . . 27 Section 6.17 Performance . . . . . . . . . . . . . . . . . . 27 Annex A: Employee Benefits Agreement Annex B: Tax Sharing Agreement Annex C: Underwriting Agreement Annex D Capital One Certificate of Incorporation and By-Laws SCHEDULE 2.01(c) Form of Credit Agreement SCHEDULE 2.02(a) Capital One Bank Assets SCHEDULE 2.02(b) Excluded Assets SCHEDULE 2.02(d) Excluded Liabilities SCHEDULE 2.05(b) Material Consents SCHEDULE 2.07 Capital One Board of Directors at time of IPO SCHEDULE 2.10(b) Form of Signet/Virginia Interim Services Agreement SCHEDULE 2.10(c) Form of Capital One Interim Services Agreement SCHEDULE 2.11(i) Form of Retained Portfolio, Origination, Servicing and Management Agreement SCHEDULE 2.11(ii) Form of Secured Card Master Deposit Agreement SCHEDULE 2.11(iii) Form of Non-Card Products Agreement SCHEDULE 2.11(iv) Form of Lease Agreement SCHEDULE 2.11(v) Form of Cash Management Services Agreement SCHEDULE 2.11(vi) Form of Account Access Card and ATM Card Agreement SCHEDULE 5.07 Transition usage of SIGNET name and mark SEPARATION, DISTRIBUTION AND INDEMNITY AGREEMENT SEPARATION, DISTRIBUTION AND INDEMNITY AGREEMENT (this "Agree- ment"), dated as of November 15, 1994, by and among SIGNET BANKING CORPORATION, a Virginia corporation ("Signet"), Signet Bank/Virginia, a Virginia state member bank and a wholly owned subsidiary of Signet ("Signet/Virginia") and CAPITAL ONE FINANCIAL CORPORATION, a Delaware corporation and, as of the date hereof, a wholly owned subsidiary of Signet ("Capital One"). Capitalized terms used herein and not otherwise defined shall have the meaning ascribed thereto in Section 1.01. WHEREAS, the Signet Board and the Signet/Virginia Board have determined that it is appropriate and desirable to transfer to a separate limited purpose credit card banking subsidiary certain operations and assets of the credit card services businesses currently conducted by Signet/Virginia (the "Separation") and, in order to effect the transfer of the Capital One Bank Assets to, and the assumption of the Capital One Bank Liabilities by, Capital One Bank, Signet and Signet/Virginia have filed applications with the Bureau of Financial Institutions, the Federal Reserve Board and the FDIC to form Capital One Bank as a limited purpose credit card bank within the scope of 12 U.S.C. (Section Mark)1841(c)(2)(F) and to cause Capital One Bank to become a member of the Federal Reserve System and of the Bank Insurance Fund of the FDIC; and WHEREAS, the Signet Board and the Signet/Virginia Board have further determined that it is appropriate and desirable to cause Capital One Bank to become a wholly owned subsidiary of Capital One and, subject to certain conditions, to complete an initial public offering of up to 19.9% of the outstanding shares of Capital One Common Stock (the "IPO"); and WHEREAS, the Signet Board has further determined that it is appropriate and desirable to distribute, subject to certain conditions, to the stockholders of Signet on a pro rata basis all of Signet's interest in the Capital One Common Stock on the Distribution Date as specified herein (the "Distribution"); and WHEREAS, the Distribution is intended to qualify as a tax-free spin-off under Section 355 of the Internal Revenue Code of 1986, as amended; and WHEREAS, Signet, Signet/Virginia and Capital One have determined that it is appropriate and desirable to set forth the principal corporate transactions required to effect the Separation, the IPO, the Distribution and certain other agreements that will govern certain matters relating to the Separation, the IPO and the Distribution. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, the parties hereby agree as follows: ARTICLE I DEFINITIONS 1. Section 1.01 General. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): Action: any action, suit, arbitration, inquiry, proceeding or investigation by or before any court, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal. Affiliate: as defined in Rule 12b-2 under the Exchange Act, including with respect to Capital One, any Capital One Subsidiary and with respect to Signet, any Signet Subsidiary. Agent: the distribution agent for the Distribution selected by Signet, such selection to be reasonably acceptable to Capital One. Bridge Financing Facility: the Credit Agreement among Signet/Virginia, Capital One Bank, Morgan Guaranty Trust Company of New York, as Administrative Agent, and the banks listed therein, a form of which is attached hereto as Schedule 2.01(c). Bureau of Financial Institutions: the Bureau of Financial Institutions of the Virginia Corporation Commission. Capital One Bank Assets: as defined in Section 2.02(a). Capital One Bank Business: the credit card services business engaged in, prior to the Closing Date, by Signet/Virginia and as of the Closing Date and thereafter, by Capital One Bank through use of the Capital One Bank Assets but, in each case, excluding the Retained Portfolio. Capital One Bank Liabilities: as defined in Section 2.02(c). Capital One Common Stock: the common stock, par value $.01 per share, of Capital One. Capital One Interim Services Agreement: the Capital One Interim Services Agreement among Signet, Signet/Virginia, Capital One and Capital One Bank described in Section 2.10(c). Capital One Subsidiary: any Subsidiary of Signet or Capital One that will be a Subsidiary of Capital One immediately following the Closing Date, and any other Subsidiary of Capital One which thereafter may be organized or acquired. Closing Date: as defined in the Underwriting Agreement. Code: the Internal Revenue Code of 1986, as amended. Commission: the Securities and Exchange Commission. Consents: consents, waivers, amendments, permits or license transfers or other assignments of any kind. Distribution: as defined in the recitals of this Agreement. Distribution Date: the first business day 90 days, or as soon thereafter as practicable, after the Closing Date on which the Distribution shall be effected in accordance with, and subject to, the terms and conditions as specified herein. EDS Agreement: the data processing and related services agreement between Signet and its affiliates and Electronic Data Systems. Effective Date: the date on which the IPO Registration Statement is declared effective. Employee Benefit Plan: an employee welfare benefit plan or an employee pension benefit plan as defined in Sections 3(1) and 3(2) of ERISA or a plan which is both an employee welfare benefit plan and an employee pension benefit plan. Employee Benefits Allocation Agreement: the Employee Benefits Agreement between Signet and Capital One, the form of which is attached hereto as Annex A. ERISA: the Employee Retirement Income Security Act of 1974, as amended, or any successor legislation. Exchange Act: the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder. Excluded Assets: as defined in Section 2.02(b). Excluded Liabilities: as defined in Section 2.02(d). Excluded Securitization: as defined in Section 2.02(b)(i). FDIC: the Federal Deposit Insurance Corporation. Federal Reserve Board: the Board of Governors of the Federal Reserve System. Information Statement: the information statement to be sent to the holders of Signet Common Stock in connection with the Distribution. Insurance Proceeds: those monies (i) received by an insured from an insurance carrier or (ii) paid by an insurance carrier on behalf of the insured, in either case net of any applicable premium adjustments (including reserves) or retrospectively rated premium adjustments. Intercompany Servicing Agreements: the Intercompany Servicing Agreements described in Section 2.11. Interim Services Agreements: the Signet/Virginia Interim Services Agreement and the Capital One Interim Services Agreement. IPO: as defined in the recitals of this Agreement. IPO Registration Statement: the registration statement on Form S-1 filed by Capital One with the Commission to effect the registration of the Capital One Common Stock to be sold in the IPO pursuant to the Securities Act. IRS: the Internal Revenue Service. Liabilities: any and all debts, liabilities and obligations, including all contractual obligations, and all obligations as agent, servicer, lessor or lender, whether absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising (unless otherwise specified in this Agreement), including all costs and expenses relating thereto, and including, without limitation, those debts, liabilities and obligations arising under any law, rule, regulation, Action, threatened Action, order or consent decree of any governmental entity or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking including, without limitation, those arising under this Agreement. Losses: any and all losses, Liabilities, claims, damages, obligations, payments, costs and expenses, matured or unmatured, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, known or unknown (including, without limitation, the costs and expenses of any and all Actions, threatened Actions, demands, assessments, judgments, settlements and compromises relating thereto and attorneys' fees and any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any such Actions or threatened Actions). Mark: collectively, the following federally registered marks: Mark Registration No. SIGNET Stylized 1,411,650 SIGNET 1,411,651 MasterCard: MasterCard International, Incorporated, a Delaware corporation. Non-Card Products: as defined in Schedule 2.11(iii). NYSE: the New York Stock Exchange, Inc. Operative Agreements: the Employee Benefits Allocation Agreement, the Interim Services Agreements, the Intercompany Servicing Agreements, the Tax Sharing Agreement, the Bridge Financing Facility and the Underwriting Agreement. Proprietary Information: as defined in Section 2.02(a). Prospectus: the prospectus, whether preliminary or final, and as amended or supplemented, to be delivered to prospective purchasers of Capital One Common Stock in connection with the IPO. Record Date: the close of business on the date to be determined by the Signet Board as the record date for the Distribution. Retained Portfolio: the credit card accounts and receivables, and assets and liabilities related thereto, and the interests in the Securitizations to be retained by Signet and any Signet Subsidiary, as described on Schedule 2.02(b)(i). Securities Act: the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder. Securitizations: the trusts and related rights, interests and obligations created in connection with Signet/Virginia's on-going credit card securitization program. Separated Employee: any individual who, on or prior to the Distribution Date, was employed by Signet or any Signet Subsidiary or Capital One or any Capital One Subsidiary) and who, on or after the Distribution Date, or otherwise in connection with the Distribution, remains or, within 60 days after the Distribution Date, becomes, as the case may be, employed by Capital One or any Capital One Subsidiary, including any beneficiary or dependent of such individual, as applicable. Separation: as defined in the recitals of this Agreement. Signet Assets: subject to the provisions of the Operative Agreements, all of the assets of Signet, or any Signet Subsidiary, other than the Capital One Bank Assets. Signet Board: the Board of Directors of Signet. Signet Business: the businesses (formerly or currently) conducted or to be conducted by Signet and its Subsidiaries other than the Capital One Bank Business. Signet Common Stock: the common stock, par value $5.00 per share, of Signet. Signet Subsidiary: any Subsidiary of Signet, other than Capital One or any Capital One Subsidiary, including any Subsidiary of Signet following the Distribution Date and any other Subsidiary of Signet which thereafter may be organized or acquired. Signet/Virginia Board: the Board of Directors of Signet/Virginia. Signet/Virginia Interim Services Agreement: the Signet/Virginia Interim Services Agreement among Signet, Signet/Virginia, Capital One and Capital One Bank described in Section 2.10(b). Subsidiary: with respect to any specified person, any corporation or other legal entity of which such person or any Subsidiary controls or owns, directly or indirectly, more than 50% of the stock or other equity interest entitled to vote on the election of members to the board of directors or similar governing body. Tax: as defined in the Tax Sharing Agreement. Tax Sharing Agreement: the Tax Sharing Agreement between Signet and Capital One, the form of which is attached hereto as Annex B. Underwriters: the underwriters as set forth in the Underwriting Agreement. Underwriting Agreement: the Underwriting Agreement to be entered into on the Effective Date by the Underwriters, Signet and Capital One, a form of which is attached hereto as Annex C. Visa: Visa U.S.A., Inc., a Delaware corporation. Section 1.02 Exhibits, etc. References to an "Exhibit" or "Schedule" are, unless otherwise specified, to one of the Exhibits or Schedules attached to this Agreement, and references to "Section" or "Article" are, unless otherwise specified, to one of the Sections or Articles of this Agreement. Section 1.03 References to Time. All references in this Agreement to times of day shall be to Eastern time. ARTICLE II CERTAIN TRANSACTIONS PRIOR TO AND IN CONNECTION WITH THE SEPARATION AND THE IPO 2. Section 2.01 The Separation. Subject to the conditions specified in Section 2.14, Signet, Signet/Virginia and Capital One agree to take the following actions in connection with the Separation: (a) Prior to the Effective Date, Signet, Signet/Virginia and Capital One shall take all actions, including, without limitation, mutual agreement on the forms of the instruments referred to in Section 2.01(e), necessary to transfer to Capital One Bank, effective as of the Closing Date, all of the right, title and interest of Signet and its Subsidiaries in the Capital One Bank Assets and to have Capital One Bank assume and agree to pay, perform and discharge in due course all of the Capital One Bank Liabilities. (b) Prior to the Effective Date, Signet and Signet/Virginia shall, and Signet/Virginia shall cause Signet Properties Company, a wholly owned subsidiary of Signet/Virginia, to, take all actions necessary to transfer certain real property presently owned by Signet Properties Company as identi- fied on Schedule 2.02(b)(ii) and any liabilities related thereto to Signet/Virginia from Signet Properties Company. (c) Prior to the Effective Date, Signet/Virginia shall enter into the Bridge Financing Facility. The parties hereto agree to take all reasonable action as may be necessary to arrange the Bridge Financing Facility and to allow Signet/Virginia to draw down the required funding concurrently with the closing of the IPO. Signet and Capital One shall par- ticipate in the preparation of all materials and presentations as may be rea- sonably necessary to secure funding pursuant to the Bridge Financing Facility, including without limitation, rating agency presentations necessary to obtain the requisite ratings needed to secure the financing under the Bridge Financing Facility and to obtain permanent funding sources for Capital One Bank following the consummation of the IPO in order to permit Capital One Bank to repay the obligations which it shall assume under the Bridge Financ- ing Facility. (d) Prior to the transfer of all the outstanding capital stock of Capital One Bank to Capital One as contemplated in Section 2.01(e), and subsequent to the transfer of certain real property owned by Signet Properties Company as contemplated in Section 2.01(b), Signet, Signet/Virginia and Capital One shall, and Signet/Virginia shall cause Signet Properties Company to, take all actions necessary to merge Signet Properties Company with and into Capital One Bank. (e) On the Closing Date, Signet and Signet/Virginia shall execute and deliver to Capital One Bank instruments of transfer, conveyance and assignment evidencing the valid and effective transfer, conveyance and assignment of all of Signet's or Signet/Virginia's right, title and interest in and to the Capital One Bank Assets to Capital One Bank and Capital One Bank shall execute and deliver to Signet or Signet/Virginia, as the case may be, an instrument of assumption evidencing the valid and effective assumption of the Capital One Bank Liabilities, all said instruments to be in a form mutually satisfactory to the parties to this Agreement. On the Closing Date, and immediately following the Separation, Signet and Signet/Virginia shall transfer all Signet's and Signet/Virginia's right, title and interest in and to all of the outstanding capital stock of Capital One Bank to Capital One by means of a distribution of said capital stock by Signet/Virginia to Signet and a contribution of said capital stock by Signet to Capital One and the parties hereto shall execute such transfer instruments as they mutually deem appropriate to effectuate and evidence said transfer. Capital One and Signet shall also take all reasonable action as may be neces- sary to establish a liquidity portfolio for Capital One Bank as contemplated in the IPO Registration Statement. (f) Each of the parties hereto understands and agrees that no party hereto is, in this Agreement or in any other agreement or document contemplated by this Agreement or otherwise, representing or warranting in any way as to the value or freedom from encumbrance of, or any other matter concerning, any assets of such party, it being agreed and understood that all such assets are being transferred "as is"; provided, however, that the transfer instruments executed and delivered pursuant to Sections 2.01(d) and (e) shall provide that the transfer, conveyance and assignment of the Capital One Bank Assets and the outstanding capital stock of Capital One Bank shall be free and clear of any adverse claim, lien, mortgage, charge, security interest, pledge, option, encumbrance or other restriction or limitation held by Signet, Signet/Virginia or any Signet Affiliate (other than Capital One or a Capital One Subsidiary). Section 2.02 The Capital One Bank Assets and Capital One Bank Liabilities. (a) For purposes of this Agreement, "Capital One Bank Assets" shall mean (without duplication): (i) all credit accounts and the related contractual agreements (the "Accounts") (w) with any holder (each a "Cardholder") of a MasterCard or Visa credit card issued by Signet/Virginia prior to the Closing Date (each, a "Credit Card") whether or not such Account has been closed on or prior to the Closing Date, (x) entered into between Signet/Virginia and a Cardholder prior to the Closing Date, (y) subject to an agreement between a third party issuer of credit cards and a Card- holder which has been assigned by such issuer to Signet/Virginia prior to the Closing Date, or (z) arising from any Credit Card solicitations commenced prior to the Closing Date; (ii) any and all amounts owing by the Cardholders to Signet/Virginia in connection with the Accounts, including, without limitation, accrued interest, annual fees and other fees and other finance and service charges, in each case, whether or not billed, (the "Accounts Receivable"); (iii) any and all rights which Signet/Virginia has in and to all of the outstanding Credit Cards, together with any enhancements or other contract rights, including, without limitation, any security interests granted with respect to such Credit Cards (collectively, the "Contract Rights") provided in connection therewith; (iv) any and all books and records under Signet/Virginia's control, including, without limitation, all Account applications, Cardholder Lists, statements, books and records, correspondence, forms and other documents, in each case relating to the Capital One Bank Assets to be transferred to Capital One Bank, whether in paper, microfilm, micro- fiche, magnetic tape or other form ("Records"). "Cardholder List" shall mean all names, addresses, account numbers and all other information contained on Signet/Virginia's master file tape or otherwise relating to Cardholders whose Accounts are to be transferred to Capital One Bank; (v) all of Signet/Virginia's rights to interchange fees arising prior to, on or after the Closing Date under the bylaws of MasterCard and Visa which are earned with respect to the Accounts on and after the Closing Date; (vi) any Accounts Receivable arising prior to, on or after the Closing Date in connection with the Accounts on or after the Closing Date; (vii) any recoveries with respect to the Accounts, whether received prior to, on or after the Closing Date, including, without limitation, any amounts recovered pursuant to any credit life, credit disability or unemployment insurance policies covering any obligor under such Accounts; (viii) any owned, and the contractual rights with respect to any leased, personal property used primarily in, or necessary or useful for, the Capital One Bank Business, as generally described on Schedule 2.02(a)(viii); (ix) the real property and leasehold interests identified on Schedule 2.02(a)(ix); (x) the licenses or other permits used primarily in the Capital One Bank Business, as identified on Schedule 2.02(a)(x); (xi) the trademarks used primarily in the Capital One Bank Business, as identified on Schedule 2.02(a)(xi), provided, however, that the SIGNET name and trademark shall only be included among the Capital One Bank Assets to the extent provided in Section 5.07; (xii) any and all proprietary information, including all models, frameworks, operating practices, computer programs, trade secrets, test results, software and data files, relating to the solicitation, acquisition, servicing, collections, management and retention of Accounts and Cardholders, or otherwise used in the Capital One Bank Business (the "Proprietary Information"); (xiii) all rights with respect to the contracts identified on Schedule 2.02(a)(xiii); (xiv) all rights with respect to the Securitizations (other than the Excluded Securitizations) identified on Schedule 2.02(a)(xiv); (xv) the other assets related to the Capital One Bank Business described on Schedule 2.02(a)(xv); (xvi) the data and other assets relating to the Non-Card Products to be transferred to Capital One Bank as specified in the Non-Card Products Agreement attached hereto as Schedule 2.11(iii); (xvii) cash or high quality liquid securities reasonably acceptable to Capital One in an amount sufficient to make the net capital contribution associated with the contribution of the Capital One Bank Assets to, the assumption of the Capital One Bank Liabilities by, and the merger of Signet Properties Company into, Capital One Bank equal to $360 million; provided, however, that such amount will be reduced dollar for dollar to the extent that the net proceeds from the IPO (without taking into account any amount that may be received as a result of the exercise of the over-allotment option) exceed $100 million; (xviii) that certain interest rate swap entered into by Signet/Virginia in August 1994 with a third party for a notional amount of $500 million covering the period from September 1, 1994 through August 15, 1997 pursuant to which Signet/Virginia pays three month LIBOR and receives 6.74%; (xix) that certain interest rate swap entered into by Signet/Virginia in August 1994 with a third party for a notional amount of $39 million covering the period from September 1, 1994 through October 15, 1997 pursuant to which Signet/Virginia pays three month LIBOR and receives 6.78%; and (xx) that certain forward starting interest rate swap entered into by Signet/Virginia in September 1994 with a third party for a variable notional amount ranging from $4.8 to $0.6 billion covering the period from January 3, 1995 through April 13, 1995 pursuant to which Signet/Virginia pays 5.875% and receives three month LIBOR; provided, however, that the Capital One Bank Assets shall not include the Excluded Assets referred to in Section 2.02(b) below. (b) For the purposes of this Agreement, "Excluded Assets" shall mean: (i) the assets relating to the Retained Portfolio, including any assets referred to in clauses (i) - (vii) of Section 2.02(a) above which relate to the Accounts described in Schedule 2.02(b)(i) and including certain rights with respect to the Securitizations as set forth on Schedule 2.02(b)(i) (the "Excluded Securitizations"); (ii) certain of the real properties presently owned by Signet Properties Company as identified on Schedule 2.02(b)(ii); (iii) other than as set forth in Section 2.02(a), all rights with respect to any interest rate swaps or similar instruments used by Signet/Virginia in connection with funding, liquidity or interest rate risk management related to the Capital One Bank Business prior to the Closing Date; (iv) any assets the ownership of which has been retained by Signet or any Signet Subsidiary on an interim or permanent basis pursuant to the terms of any of the Operative Agreements; and (v) the selected other assets identified on Schedule 2.02(b)(v); (c) For the purposes of this Agreement, "Capital One Bank Liabilities" shall mean (without duplication): (i) all Liabilities of Signet or Signet/Virginia relating to or arising in connection with the Capital One Bank Assets or the Capital One Bank Business, whether arising before, on or after the Closing Date; (ii) all Liabilities which have been assumed by Capital One or Capital One Bank pursuant to the terms of any of the Operative Agreements; (iii) all Liabilities of Signet/Virginia under the Bridge Financing Facility; (iv) Liabilities of Signet/Virginia in an amount to be specified by Signet and Signet/Virginia as of the Closing Date not to exceed $500 million under existing federal funds lines between Signet/Virginia and Signet's other subsidiary banks; (v) all Liabilities related to the Signet Master Trust established pursuant to the Pooling and Servicing Agreement dated as of September 30, 1993 by and between Signet/Virginia and The Bank of New York, as trustee, including without limitation, all Liabilities under any related credit enhancement agreements and any related underwriting agreements; and (vi) all Liabilities arising out of or based upon any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to any preliminary or final registration statement or prospectus relating to any Securitization except with respect to such statements or omissions which relate to the Signet Assets, including, without limitation, Excluded Securitizations, or the Signet Business or to the transactions contemplated by this Agreement; provided, however, that the Capital One Bank Liabilities shall not include the Excluded Liabilities referred to in Section 2.02(d) below. (d) For the purposes of this Agreement, "Excluded Liabilities" shall mean: (i) all Liabilities of Signet or any Signet Affiliate relating to, or arising in connection with, the Signet Assets or the Signet Business, whether arising before, on or after the Closing Date; (ii) all Liabilities which have been retained or assumed by Signet or any Signet Affiliate pursuant to the terms of any of the Operative Agreements; (iii) all deposit Liabilities and other funding obligations of Signet/Virginia except for the assumed funding expressly set forth in Sections 2.02(c)(iii) and 2.02(c)(iv); (iv) all Liabilities relating to the EDS Agreement and the services provided thereunder, except as specifically set forth on Schedule 2.02(d)(iv); (v) all Liabilities relating to, or arising in connection with, the Excluded Assets, whether arising before, on or after the Closing Date; and (vi) any additional Liabilities of Signet/Virginia which are required to be reflected on the balance sheet of Signet/Virginia as of the Closing Date in accordance with generally accepted accounting principles and which are not included in the Capital One Bank Liabilities for the purposes of calculating the amount of assets to be contributed to Capital One Bank under Section 2.02(a)(xvii). Section 2.03 The IPO. Subject to the conditions specified in Section 2.14, Signet and Capital One shall use their best efforts to consummate the IPO. Such actions shall include, but not necessarily be limited to, those specified in this Section 2.03. (a) Capital One, in consultation with Signet, shall have filed the IPO Registration Statement, and such amendments or supplements thereto, as may be necessary in order to cause the same to become and remain effective, including, but not limited to, filing such amendments to the IPO Registration Statement as may be required by the Underwriting Agreement, the Commission or federal securities laws. Signet and Capital One shall also cooperate in pre- paring, filing with the Commission and causing to become effective any registration statements or amendments thereof which are required to reflect the establishment of, or amendments to, any employee benefit and other plans necessary or appropriate in connection with the IPO and the other transactions contemplated by the Employee Benefits Allocation Agreement and this Agreement. (b) Capital One and Signet shall enter into the Underwriting Agreement. (c) Signet and Capital One shall consult with each other and the Underwriters regarding the timing, pricing and other material matters with respect to the IPO. (d) Capital One shall use its reasonable best efforts to take all such action as may be necessary or appropriate under state securities and blue sky laws in connection with the IPO. (e) Capital One shall prepare, file and seek to make effective, an application for listing of the Capital One Common Stock on the NYSE, subject to official notice of issuance. (f) Signet and Capital One shall each participate in the preparation of materials and presentations as the Underwriters of the IPO shall deem necessary or desirable. (g) Capital One shall pay all expenses relating to the IPO (including the fees of the advisors and counsel to Signet and to Capital One), all of the reimbursable expenses of the Underwriters pursuant to the Underwriting Agreement, all of the costs of producing, printing, mailing and otherwise distributing the Prospectus, as well as the Underwriters' discount as provided in the Underwriting Agreement. Notwithstanding anything to the contrary that may be contained in the Underwriting Agreement, the provisions of this paragraph shall govern and control the allocation of IPO expenses as between Capital One and Signet. Section 2.04 Proceeds of the IPO. Signet and Capital One covenant and agree that the IPO will be a primary offering of Capital One Common Stock and that the net proceeds of the IPO will be retained by Capital One and Capital One Bank. Section 2.05 Regulatory Approvals and Consents. (a) Each of the parties hereto agrees that it will use its reasonable best efforts to cause the applications filed with the Bureau of Financial Institutions, the Federal Reserve Board and the FDIC in connection with the establishment of Capital One Bank as a wholly owned subsidiary of Signet/Virginia to be accepted and approved prior to the Effective Date. Prior to the Effective Date, the parties shall also seek appropriate confirmation from the FDIC, that following consummation of the Distribution Capital One Bank and the Signet subsidiary banks will not be "commonly controlled" within the meaning of the cross-guarantee provisions of 12 U.S.C. (Section Mark) 1815(e). To the extent the Separation, IPO and Distribution require additional regulatory approvals from any federal or state regulatory agency or other government body, the parties hereto shall likewise use their reasonable best efforts to cause such applications to be filed and approvals to be obtained as promptly as practicable prior to the Effective Date. (b) Each of the parties hereto agrees that it will use its reasonable best efforts to obtain (i) prior to the Effective Date, all material Consents necessary to effect the Separation and the IPO and (ii) prior to the Distribution Date, all material Consents necessary to effect the Distribution. Schedule 2.05(b) sets forth a listing of all material Consents which the parties hereto have determined as of the date of this Agreement to be required in connection with the consummation of the Separation, the IPO or the Distribution. Section 2.06 Certificate of Incorporation; By-Laws. As soon hereafter as practicable, Signet and Capital One shall take all action necessary so that, at the Effective Date, the Certificate of Incorporation and By-Laws of Capital One shall be substantially in the form attached hereto as Annex D. Section 2.07 Boards of Directors. (a) Capital One Bank. At the Closing Date, the Board of Directors of Capital One Bank shall consist of the individuals specified in the application of Signet to the Bureau of Financial Institutions to establish Capital One Bank. (b) Capital One. At the Closing Date, the Board of Directors of Capital One shall consist of the individuals listed on Schedule 2.07. Capital One agrees that promptly following the IPO, it shall undertake to appoint an additional director, which director shall not be affiliated with Capital One or any of its Subsidiaries nor Signet or any of its Subsidiaries. Section 2.08 Execution and Delivery of Operative Agreements. As promptly as practicable after the execution and delivery of this Agreement, but in no event later than the Effective Date, Signet, Signet/Virginia and Capital One and Capital One Bank shall each execute and deliver each of the Operative Agreements to which they are a party. Section 2.09 Further Assurances. (a) In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto shall use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under ap- plicable laws, regulations and agreements to consummate and make effective the transactions contemplated by this Agreement. In the event that prior to the Distribution Date it is determined by any party hereto that with respect to the Capital One Bank Assets (i) any item has been inadvertently omitted from Schedule 2.02(a) or Schedule 2.02(b), the parties hereto shall cooperate to amend such Schedule to include such item or (ii) any item has been inadvertently included on Schedule 2.02(a) or Schedule 2.02(b) the parties hereto shall cooperate to amend such Schedule to remove such item therefrom. Without limiting the foregoing, each party hereto shall cooperate with the other parties, and execute and deliver, or use its reasonable best efforts to cause to be executed and delivered, all instruments, including instruments of conveyance, assignment and transfer, and to make all filings with, and to obtain all consents, approvals or authorizations of, any governmental or regulatory authority or any other person under any permit, license, agreement, indenture or other instrument, and take all such other actions as such party may reasonably be requested to take by any other party hereto from time to time, consistent with the terms of this Agreement, in order to ef- fectuate the provisions and purposes of this Agreement and the transfers of assets and assumption of Liabilities and the other transactions contemplated hereby. If the transfer of any assets intended to be transferred hereunder is not consummated prior to or at the Closing Date, then the party hereto retaining such asset shall thereafter hold such asset in trust for the use and benefit of the party entitled thereto (at the expense of the party enti- tled thereto) and shall take such other action as may be reasonably requested by the party to whom such asset is to be transferred in order to place such party, insofar as reasonably possible, in the same position as if such asset had been transferred as contemplated hereby. If and when any such asset be- comes transferable, such transfer shall be effected forthwith. The parties hereto agree that, as of the Closing Date, each party hereto shall be deemed to have acquired complete and sole beneficial ownership of all of the assets, together with all rights, powers and privileges incident thereto, and shall be deemed to have assumed in accordance with the terms of this Agreement all of the Liabilities, and all duties, obligations and responsibilities incident thereto, that such party is entitled to acquire or required to assume pursuant to the terms of this Agreement. (b) Without limiting the generality of Section 2.09(a), Signet, as the sole stockholder of Capital One, and Signet/Virginia, as the sole stockholder of Capital One Bank, shall each ratify any actions which are reasonably necessary or desirable to be taken by Capital One or Capital One Bank, as the case may be, to effectuate the transactions contemplated by this Agreement. On or prior to the Closing Date, Signet shall take all actions as may be necessary to approve the Employee Benefit Plan of Capital One in order to satisfy the requirement of Rule 16b-3 under the Exchange Act. (c) Without limiting the generality of Sections 2.09(a) and 2.09(b), the parties hereto agree to take any reasonable actions determined by tax counsel to be necessary in order for the Distribution to qualify as a tax-free distribution within the meaning of Section 355 of the Code. Section 2.10 Interim Services Agreements. (a) Signet/Virginia has historically provided to Capital One Bank various assistance and support in connection with the Capital One Bank Business and the Capital One Bank Assets, including assistance and support related to accounting, tax, payroll, stockholders and public relations, funding, and other administrative services. Signet/Virginia will continue to provide such assistance and support as is necessary or desirable to maintain the Capital One Bank Business and the Capital One Bank Assets through 5:00 p.m. Eastern time on the Closing Date, and thereafter in accordance with the terms of the Signet/Virginia Interim Services Agreement. (b) Signet/Virginia shall assist Capital One Bank and Capital One in establishing their own policies, procedures and operations in connection with the activities generally described in Section 2.10(a) from and after 5:00 p.m. Eastern time on the Closing Date. The manner by which such services shall be provided and the fees and other terms relating thereto shall be set forth in the Signet/Virginia Interim Services Agreement as described more fully in the agreement attached as Schedule 2.10(b). (c) Certain data processing and budgetary systems historically used by Signet/Virginia will be transferred to Capital One Bank as part of the Capital One Bank Assets. Capital One Bank will continue to provide such assistance or support as is necessary or desirable in connection with such data processing and budgetary systems through 5:00 p.m. Eastern time on the Closing Date, and thereafter in accordance with the terms of the Capital One Interim Services Agreement as described more fully in the agreement attached as Schedule 2.10(c). Section 2.11 Intercompany Servicing Agreements. In connection with the Separation, Signet, Signet/Virginia, Capital One and Capital One Bank shall enter into the following Intercompany Servicing Agreements, forms of which are attached hereto as Schedule 2.11: (i) the Retained Portfolio, Origination, Servicing and Management Agreement; (ii) the Secured Card Master Deposit Agreement; (iii) the Non-Card Products Agreement; (iv) the Lease Agreement; (v) the Cash Management Services Agreements and (vi) the Account Access Card and ATM Card Agreement. Section 2.12 Insurance. (a) Signet has historically provided insurance coverage related to the Capital One Bank Business and the Capital One Bank Assets through various policies maintained by Signet for the benefit of itself and its Subsidiaries for workers' compensation, general liability, fire and other types of losses. Signet will use its reasonable best efforts to continue to provide such coverage in accordance with its past practice to Capital One and Capital One Bank, and with respect to the Capital One Bank Assets, from the date such coverage first commenced until 5:00 p.m. Eastern time on the Distribution Date or such later date as may be agreed to in writing by Signet and Capital One and accepted by the relevant insurers, and Capital One and Capital One Bank shall each make payments to Signet to reimburse Signet for its pro rata share of any premiums for any coverage for periods after 5:00 p.m. Eastern time on the Distribution Date in accordance with the past practice estab- lished by Signet in connection with the insurance of the assets and business relating to the Capital One Bank Business. To the extent that losses by Capital One Bank are not covered by such third-party insurers, Signet will not be required to reimburse Capital One Bank for such losses. (b) Signet shall use its reasonable best efforts to assist Capital One and Capital One Subsidiaries in obtaining initial insurance coverage for Capital One and Capital One Subsidiaries from and after the Distribution Date in such amounts as are agreed upon by the parties. Following the Distribution Date, each of the parties shall cooperate with and assist the other party in the prevention of conflicts or gaps in insurance coverage and/or collection of proceeds. (c) Signet and Capital One each agree that (i) Capital One and Capital One Bank shall each have the right to present claims to Signet or Signet's insurers under all policies of insurance placed by Signet on Capital One's or Capital One Bank's behalf, or which include Capital One or Capital One Bank as insureds, and (ii) Signet shall submit such claims to Signet's insurers on a timely basis or shall assist Capital One or Capital One Bank, as the case may be, in the submission of such claims to such insurers. The parties agree that certain policies are written on an "occurrence" basis and may provide coverage to Capital One or Capital One Bank, as the case may be, for incidents occurring prior to the Distribution Date even though the claim was first made after the Distribution Date and that other policies are writ- ten on a "claims made" basis and that such policies may not provide coverage to Capital One or Capital One Bank, as the case may be, for incidents oc- curring prior to the Distribution Date but which are first reported after the Distribution Date. (d) With respect to any insured Losses or retroactive premium adjustments relating to assets and/or operations of the Capital One Bank Business prior to the Distribution Date or such later date as may be agreed to pursuant to Section 2.12(a) hereof: Signet shall pay over to Capital One or Capital One Bank any Insurance Proceeds (or, in the case of workers' compensation insurance, Capital One Bank's pro rata share of such proceeds) it receives on account of such Losses, net of the amount of any applicable premium adjustments, retrospectively-rated premium adjustments or other costs which are paid or estimated by Signet to be paid by Signet in the ordinary course of business and any costs incurred by Signet in collecting such pro- ceeds. If Signet's estimate of such adjustments or other costs proves to be too small or too great, the difference between the estimate and the actual adjustments and other costs shall be paid back to Signet or over to Capital One or Capital One Bank, respectively, within one year after the initial pay- ment of insurance proceeds is made. Section 2.13 Miscellaneous Matters. (a) Prior to the Closing Date, Signet shall advise Capital One of any obligations, performance or surety bonds, comfort letters and other similar obligations of Signet and the Signet Subsidiaries relating to the Capital One Bank Assets. Capital One and Capital One Bank shall each use its reasonable best efforts from and after the Closing Date to obtain the release of Signet and the Signet Subsidiaries from all such obligations or liabil- ities. (b) Between the Closing Date and the Distribution Date, neither Signet nor Capital One shall issue, sell or transfer any shares of Capital One Common Stock, other than shares or options granted pursuant to the Company's stock option plans and any restricted stock issued in connection with the IPO, or enter into any binding obligation to do so or take any other actions which would prevent the Distribution from qualifying as a tax-free distribution within the meaning of Section 355 of the Code. (c) Capital One, Signet and Signet/Virginia agree, and Capital One shall cause Capital One Bank, to enter into any and all other appropriate arm's length agreements beyond those explicitly contemplated by this Article II as may be necessary or appropriate in order to satisfy any conditions imposed by the Underwriters or pursuant to the terms of the Bridge Financing Facility or otherwise necessary or appropriate to effectuate the transactions contemplated by this Agreement and to provide for the continued ordinary course operations of the Capital One Bank Business and the Signet Business as contemplated by the terms of this Agreement and the related Operating Agree- ments. Section 2.14 Conditions Precedent to Consummation of the Separation and the IPO. As soon as practicable after the date of this Agreement, the parties hereto shall use their reasonable best efforts to satisfy the following conditions to the consummation of the Separation and the IPO: (a) The regulatory approvals specified in Section 2.05, as well as any other federal and state regulatory approvals and waivers and all material Consents of any third parties necessary to consummate the Separation and the IPO as provided in Section 2.05, shall have been obtained. (b) The Bridge Financing Facility shall have been signed and all conditions to the draw down of funds thereunder shall be satisfied. (c) The IPO Registration Statement shall have been filed and de- clared effective by the Commission. (d) The actions and filings with regard to state securities and blue sky laws described in Section 2.03 shall have been taken and, where applicable, have become effective or been accepted. (e) The Capital One Common Stock shall have been accepted for listing on the NYSE. (f) Capital One and Signet shall have entered into the Underwriting Agreement and all conditions to the obligations of the Underwriters thereunder shall have been satisfied or waived. (g) The Operative Agreements shall have been duly executed by the parties thereto. (h) The actions specified in Section 2.06 in connection with the Capital One Certificate of Incorporation shall have been taken. (i) The actions specified in Section 2.01(b) with respect to Signet Properties Company shall have occurred. (j) The actions specified in Section 2.01(e) with respect to conveyance of the Capital One Bank Assets, assumption of the Capital One Bank Liabilities and the contribution of the capital stock of Capital One Bank shall have occurred. (k) Signet shall own at least 80.1% of the outstanding stock of Capital One following the IPO, after giving effect to the issuance of any shares of restricted stock to any employees of Capital One, and all other conditions to permit the Distribution to qualify as a tax free distribution to Signet stockholders shall, to the extent applicable as of the time of the IPO, be satisfied and there shall be no event or condition that is likely to cause any of such conditions not to be satisfied as of the time of the Dis- tribution or thereafter. (l) Capital One Bank shall have assumed Signet/Virginia's obligations under all agreements entered into in connection with the Securitizations except as otherwise specified in Schedules 2.02(a)(xiv) and 2.02(b)(i). (m) No order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Separation or the IPO or any of the other transactions contemplated by this Agreement shall be in effect. (n) Such other actions as the parties hereto may, based upon the advice of counsel, reasonably request to be taken prior to the Separation and the IPO in order to assure the successful completion of the Separation and the IPO and the other transactions contemplated by this Agreement shall have been taken. ARTICLE III THE DISTRIBUTION 3. Section 3.01 The Distribution. Subject to Section 3.03 hereof, on or prior to the Distribution Date, Signet will deliver to the Agent for the benefit of holders of record of Signet Common Stock on the Record Date, a single stock certificate, endorsed by Signet in blank, representing all of the then outstanding shares of Capital One Common Stock owned by Signet, and shall cause the transfer agent for the Signet Stock to instruct the Agent to distribute on the Distribution Date the appropriate number of such shares of Capital One Common Stock to each such holder or designated transferee or transferees of such holder. The Distribution shall be effective as of 5:00 p.m. Eastern time on the Distribution Date. Capital One and Signet, as the case may be, will provide to the Agent all share certificates and any infor- mation required in order to complete the Distribution on the basis of one share of Capital One Common Stock for each [ share(s)] of Signet Common Stock outstanding on the Record Date, subject to Section 3.04 hereof. Section 3.02 Cooperation Prior to the Distribution. (a) Signet and Capital One shall mail, prior to the Distribution Date, to the holders of Signet Common Stock, the Information Statement, which shall set forth appropriate disclosure concerning Capital One and Capital One Bank, the Distribution and other matters. Signet and Capital One will pre- pare, and Capital One will, to the extent required under applicable law, file with the Commission the Information Statement and any requisite no action letters which the parties determine are necessary or desirable to effectuate the Distribution and Signet and Capital One shall each use its reasonable best efforts to obtain all necessary clearances from the Commission as soon as practicable. (b) Signet and Capital One shall take all such action as may be necessary or appropriate under the securities or blue sky laws of states or other political subdivisions of the United States, in connection with the Distribution. (c) Signet and Capital One shall take all reasonable steps necessary and appropriate to cause the conditions set forth in Section 3.03 to be satisfied and to effect the Distribution on the Distribution Date. (d) Prior to the Distribution Date, Signet and Capital One shall, and shall cause each of their respective Subsidiaries to, conduct their busi- ness and operations in accordance with the requirements of the Bank Holding Company Act of 1956 and the regulations promulgated thereunder. (e) Signet and Capital One agree that except as otherwise contemplated herein and in the related Operative Agreements, during the period between the consummation of the IPO and the Distribution Date, Capital One shall conduct its operations and the operations of Capital One Bank in the ordinary course of business consistent with past practices and that Sig- net will not seek to effect any material changes in the business or operations of Capital One or Capital One Bank. Section 3.03 Conditions to Distribution. The Signet Board intends to establish the Record Date and the Distribution Date and all appropriate procedures in connection with the Distribution such that the Distribution shall occur on the first business day that is at least 90 days following the Closing Date, or as soon as practicable thereafter, that each of the following conditions to the Distribution shall have been satisfied or waived by the Signet Board in its discretion: (i) Signet shall have received an opinion, based on certain representations of Signet and Capital One, from Wachtell, Lipton, Rosen & Katz or such other counsel as shall be reasonably acceptable to Signet and Capital One, that the Distribution will qualify as a tax-free distribution for federal income tax purposes under Section 355 of the Code; (ii) the Signet Board shall have given final approval for the establishment of a record date for the Distribution; (iii) all requisite federal and state regulatory approvals and material consents which are required to effect the Distribution, shall have been received; (iv) an inde- pendent board of directors shall have been appointed for Capital One and Capital One Bank as provided for in Section 3.05; and (v) no order, injunc- tion or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Distribution shall be in effect. Section 3.04 Fractional Shares. The parties agree that the Agent shall be directed as soon as practicable after the Distribution Date to determine the number of whole shares and fractional shares of Capital One Common Stock allocable to each holder of record of Signet Common Stock as of the Record Date, to aggregate all such fractional shares and sell the whole shares obtained thereby at then prevailing prices and to cause to be distributed to each such holder to which a fractional share shall be alloca- ble such holder's ratable share of the proceeds of such sale, after making appropriate deductions of the amount required to be withheld for federal in- come tax purposes and after deducting an amount equal to all brokerage charges, commissions and transfer taxes attributed to such sale. Section 3.05 The Capital One and Capital One Bank Boards. Capital One and Signet shall each, and Capital One shall cause Capital One Bank to, take all actions which may be required, including the filing of any requisite notices or applications with the Federal Reserve Board and any other appropriate regulatory bodies, to elect or otherwise appoint as direc- tors of Capital One and Capital One Bank, on or prior to the Distribution Date, persons to be designated by a nominating committee of the Capital One's Board of Directors to constitute the Board of Directors of Capital One and the Board of Directors of Capital One Bank on the Distribution Date. Signet and Capital One shall take all steps necessary to ensure that neither Capital One nor Capital One Bank will have any common "management officials" with Signet and is Affiliates within the meaning of the Depository Institutions Management Interlocks Act, and the applicable regulations thereunder, as of the Distribution Date. ARTICLE IV INDEMNIFICATION 4. Section 4.01 Indemnification by Signet. Except with respect to employee benefits or other Liabilities to employees, which shall be governed by the Employee Benefits Allocation Agreement, and except with respect to claims for which Insurance Proceeds or other amounts are received, which shall be governed by Sections 2.12 and 4.03 hereof, Signet shall indemnify, defend and hold harmless Capital One, each Affiliate of Capital One and each of their respective directors, officers and employees and each of the heirs, executors, successors and assigns of any of the foregoing (the "Capital One Indemnitees") from and against any and all Losses of the Capital One Indemnitees arising out of or due to the failure of Signet or any of its Affiliates (other than a Capital One Indemnitee) to pay, perform or otherwise discharge any of the following items: (a) All Losses arising (whether before, on or after the Closing Date) in connection with the Signet Assets or the Signet Business, whether such Losses relate to events, occurrences or circumstances occurring or existing, or whether such Losses are asserted, before, on or after the Closing Date. (b) All Losses arising out of or based upon any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in any preliminary or final IPO Registration Statement, the Prospectus, or any amendment to the IPO Registration Statement; provided, however, that such indemnification shall not apply to any Losses to the extent such Losses arise out of or are based upon any statement or omission or alleged statement or omission made in any of the sections of the IPO Registration Statement that are listed in Section 4.02(b). (c) All Losses relating to any litigation initiated by persons acting in their capacity as a shareholder or creditor of Signet or a creditor of Signet/Virginia and arising out of the transactions contemplated by this Agreement, except for such Losses which have been expressly assumed by Capital One hereunder. (d) All Losses relating to the Excluded Liabilities. Anything in this Section 4.01 to the contrary notwithstanding, neither Signet nor any Signet Subsidiary shall have any liability whatsoever to either Capital One or any Capital One Subsidiary in respect of any Tax (as such term is defined in the Tax Sharing Agreement), except as otherwise provided in the Tax Sharing Agreement. Section 4.02 Indemnification by Capital One. Except with respect to employee benefits or other Liabilities to employees, which shall be governed by the Employee Benefits Allocation Agreement, and except with respect to claims for which Insurance Proceeds or other amounts are received, which shall be governed by Sections 2.12 and 4.03 hereof, Capital One shall indemnify, defend and hold harmless Signet, each Affiliate of Signet and each of their respective directors, officers and employees and each of the heirs, executors, successors and assigns of any of the foregoing (the "Signet Indem- nitees") from and against any and all Losses of the Signet Indemnitees aris- ing out of or due to the failure of Capital One or any of its Affiliates (other than a Signet Indemnitee) to pay, perform or otherwise discharge any of the following items: (a) All Losses arising (whether before, on or after the Closing Date) in connection with the Capital One Bank Assets or the Capital One Bank Business whether such Losses relate to events, occurrences or circumstances occurring or existing, or whether such Losses are asserted, before, on or af- ter the Closing Date. (b) All Losses arising out of or based upon any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, to the extent such Losses arise out of or are based upon the following sections of any preliminary or final IPO Registration Statement or the Prospectus, or any amendment to the IPO Registration Statement: "The Company", "Risk Factors", "Use of Proceeds", "Dividend Policy", "Management's Discussion and Analysis of Financial Condition and Results of Operations", and "Business". (c) All Losses related to any litigation initiated by persons acting in their capacity as a shareholder or creditor of Capital One or a creditor of Capital One Bank and arising out of the transactions contemplated by this Agreement, except for such Losses which have been expressly assumed by Signet hereunder. (d) All Losses related to the Capital One Bank Liabilities required to be assumed by Capital One Bank hereunder. Anything in this Section 4.02 to the contrary notwithstanding, neither Capital One nor any Capital One Subsidiary shall have any liability whatsoever to either Signet or any Signet Subsidiary in respect of any Tax, except as otherwise provided in the Tax Sharing Agreement. Section 4.03 Limitations on Indemnification Obligations. (a) The amount which any party (an "Indemnifying Party") is or may be required to pay to any other party (an "Indemnitee") pursuant to Section 4.01 or Section 4.02 shall be reduced (including, without limitation, retroactively) by any Insurance Proceeds or other amounts actually recovered by or on behalf of such Indemnitee, in reduction of the related Loss. If an Indemnitee shall have received payment (an "Indemnity Payment") required by this Agreement from an Indemnifying Party in respect of any Loss and shall subsequently actually receive Insurance Proceeds or other amounts in respect of such Loss, then such Indemnitee shall pay to such Indemnifying Party a sum equal to the amount of such Insurance Proceeds or other amounts actually received (up to but not in excess of the amount of any indemnity payment made hereunder). An insurer who would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto, or, solely by virtue of the indemnification provisions hereof, have any subrogation rights with respect thereto, it being expressly understood and agreed that no insurer or any other third party shall be entitled to a "windfall" (i.e., a benefit they would not be entitled to receive in the absence of the indemnification provi- sions) by virtue of the indemnification provisions hereof. (b) If an Indemnitee realizes a Tax benefit or detriment by reason of having incurred an Indemnifiable Loss for which such Indemnitee receives an Indemnity Payment from an Indemnifying Party or by reason of receiving an Indemnity Payment, then such Indemnitee shall pay to such Indemnifying Party an amount equal to the Tax benefit, or such Indemnifying Party shall pay to such Indemnitee an additional amount equal to the Tax detriment (taking into account any Tax detriment resulting from the receipt of such additional amounts), as the case may be. If, in the opinion of counsel to an Indem- nifying Party reasonably satisfactory in form and substance to the affected Indemnitee, there is a substantial likelihood that the Indemnitee will be entitled to a Tax benefit by reason of an indemnifiable Loss, the Indemnifying Party promptly shall notify the Indemnitee and the Indemnitee promptly shall take any steps (including the filing of such returns, amended returns or claims for refunds consistent with the claiming of such Tax benefit) that, in the reasonable judgment of the Indemnifying Party, are necessary and appropriate to obtain any such Tax benefit. If, in the opinion of counsel to an Indemnitee reasonably satisfactory in form and substance to the affected Indemnifying Party, there is a substantial likelihood that the Indemnitee will be subjected to a Tax detriment by reason of an Indemnifica- tion Payment, the Indemnitee promptly shall notify the Indemnifying Party and the Indemnitee promptly shall take any steps (including the filing of such returns or amended returns or the payment of Tax underpayments consistent with the settlement of any Liability for Taxes arising from such Tax detri- ment) that, in the reasonable judgment of the Indemnitee, are necessary and appropriate to settle any Liabilities for Taxes arising from such Tax detriment. If, following a payment by an Indemnitee or an Indemnifying Party pursuant to this Section 4.03(b) in respect of a Tax benefit or detriment, there is an adjustment to the amount of such Tax benefit or detriment, then each of Signet and Capital One shall make appropriate payments to the other, including the payment of interest thereon at the federal statutory rate then in effect, to reflect such adjustments. Section 4.04 Procedures for Indemnification of Third Party Claims. Procedures for Indemnification of Third Party Claims shall be as follows: (a) If an Indemnitee shall receive notice or otherwise learn of the assertion by a person (including, without limitation, any governmental entity) who is not a party to this Agreement (or any Affiliate of either party) or to the Tax Sharing Agreement of any claim or of the commencement by any such person of any Action (a "Third Party Claim") with respect to which an Indemnifying Party may be obligated to provide indemnification pursuant to Section 4.01, 4.02 or any other Section of this Agreement, such Indemnitee shall give such Indemnifying Party written notice thereof promptly after be- coming aware of such Third Party Claim; provided that the failure of any Indemnitee to give notice as provided in this Section 4.04(a) shall not relieve the related Indemnifying Party of its obligations under this Article IV, except to the extent that such Indemnifying Party is prejudiced by such failure to give notice. Such notice shall describe the Third Party Claim in reasonable detail. (b) An Indemnifying Party may elect to defend or to seek to settle or compromise, at such Indemnifying Party's own expense and by such Indemnifying Party's own counsel, any Third Party Claim. Within 30 days of the receipt of notice from an Indemnitee in accordance with Section 4.04(a) (or sooner, if the nature of such Third Party Claim so requires), the Indem- nifying Party shall notify the Indemnitee of its election whether the Indem- nifying Party will assume responsibility for defending such Third Party Claim, which election shall specify any reservations or exceptions. After notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third Party Claim, such Indemnifying Party shall not be liable to such Indemnitee under this Article IV for any legal or other ex- penses (except expenses approved in advance by the Indemnifying Party) subsequently incurred by such Indemnitee in connection with the defense thereof; provided that if the defendants with respect to any such Third Party Claim include both the Indemnifying Party and one or more Indemnitees and in any Indemnitee's reasonable judgment a conflict of interest between one or more of such Indemnitees and such Indemnifying Party exists in respect of such claim or if the Indemnifying Party shall have assumed responsibility for such claim with any reservations or exceptions, such Indemnitees shall have the right to employ separate counsel to represent such Indemnitees and in that event the reasonable fees and expenses of such separate counsel (but not more than one separate counsel reasonably satisfactory to the Indemnifying Party) shall be paid by such Indemnifying Party. If an Indemnifying Party elects not to assume responsibility for defending a Third Party Claim, or fails to notify an Indemnitee of its election as provided in this Section 4.04(b), such Indemnitee may defend or (subject to the remainder of this Section 4.04(b)) seek to compromise or settle such Third Party Claim. Notwithstanding the foregoing, neither an Indemnifying Party nor an Indemni- tee may settle or compromise any claim over the objection of the other; pro- vided, however, that consent to settlement or compromise shall not be unrea- sonably withheld. Neither an Indemnifying Party nor an Indemnitee shall consent to entry of any judgment or enter into any settlement of any Third Party Claim which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnitee, in the case of a consent or settlement by an Indemnifying Party, or to the Indemnifying Party, in the case of a consent or settlement by the Indemnitee, of a written release from all liability in respect to such Third Party Claim. (c) If an Indemnifying Party chooses to defend or to seek to compromise or settle any Third Party Claim, the related Indemnitee shall make available to such Indemnifying Party any personnel or any books, records or other documents within its control or which it otherwise has the ability to make available that are necessary or appropriate for such defense, settlement or compromise, and shall otherwise cooperate in the defense, settlement or compromise of such Third Party Claims, subject to the establishment of appropriate confidentiality arrangements which are reasonably satisfactory to Signet and Capital One. (d) Notwithstanding anything else in this Section 4.04 to the contrary, if an Indemnifying Party notifies the related Indemnitee in writing of such Indemnifying Party's desire to settle or compromise a Third Party Claim on the basis set forth in such notice (provided that such settlement or compromise includes as an unconditional term thereof the giving by the claimant or plaintiff of a written release of the Indemnitee from all liability in respect thereof) and the Indemnitee shall notify the Indemnifying Party in writing that such Indemnitee declines to accept any such settlement or compromise, such Indemnitee may continue to contest such Third Party Claim, free of any participation by such Indemnifying Party, at such Indemnitee's sole expense. In such event, the obligation of such Indemnifying Party to such Indemnitee with respect to such Third Party Claim shall be equal to (i) the costs and expenses of such Indemnitee prior to the date such Indemnifying Party notifies such Indemnitee of the offer to settle or compromise (to the extent such costs and expenses are otherwise indemnifi- able hereunder) plus (ii) the lesser of (A) the amount of any offer of set- tlement or compromise which such Indemnitee declined to accept and (B) the actual out-of-pocket amount such Indemnitee is obligated to pay subsequent to such date as a result of such Indemnitee's continuing to pursue such Third Party Claim. (e) Any claim on account of a Loss which does not result from a Third Party Claim shall be asserted by written notice given by the Indemnitee to the related Indemnifying Party. Such Indemnifying Party shall have a period of 30 days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such 30-day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such 30-day period or rejects such claim in whole or in part, such Indemnitee shall be free to pursue such remedies as may be available to such party under this Agreement or under applicable law. (f) In addition to any adjustments required pursuant to Section 4.03, if the amount of any Loss shall, at any time subsequent to the payment required by this Agreement, be reduced by recovery, settlement or otherwise, the amount of such reduction, less any expenses incurred in connection therewith, shall promptly be repaid by the Indemnitee to the Indemnifying Party. (g) In the event of payment by an Indemnifying Party to any Indemnitee in connection with any Third Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right or claim relating to such Third Party Claim against any claimant or plaintiff asserting such Third Party Claim or against any other person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecut- ing any subrogated right or claim. Section 4.05 Remedies Cumulative. The remedies provided in this Article IV shall be cumulative and shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party. Section 4.06 Survival of Indemnities. The obligations of each of Signet and Capital One under this Article IV shall survive the sale or other transfer by it of any assets or businesses or the assignment by it of any Li- abilities, with respect to any Loss of the other related to such assets, bus- inesses or Liabilities. ARTICLE V ACCESS TO INFORMATION; SERVICES 5. Section 5.01 Provision of Corporate Records. As soon as practicable after the Closing Date, Signet shall deliver to Capital One all Records relating to the Capital One Bank Assets and Capital One Bank Business. Such Records shall be the property of Capital One, but shall be retained in accordance with the provisions of Section 5.04. Section 5.02 Access to Information. From and after the Closing Date, Signet shall afford to Capital One and its authorized accountants, counsel and other designated representatives (collectively, "Representatives") reasonable access (including using reasonable efforts to give access to persons or firms possessing information) during normal busi- ness hours to all records, books, contracts, instruments, computer data and other data and information (collectively, "Information") within Signet's pos- session or in the possession of a Signet Affiliate, but excluding all Proprietary Information and customer lists and related information relating to the Signet Assets or the Signet Business, insofar as such access is rea- sonably required by Capital One or any Capital One Subsidiary in connection with the transactions contemplated by this Agreement and the Operative Agreements. Similarly, Capital One and Capital One Bank shall afford to Signet and its Representatives reasonable access (including using reasonable efforts to give access to persons or firms possessing information) during normal business hours to Information within Capital One's or Capital One Bank's possession but excluding all Proprietary Information and customer lists and related information, in each case, relating to the Capital One Assets or the Capital One Bank Business, insofar as such access is reasonably required by Signet or any Signet Subsidiary in connection with the transac- tions contemplated by this Agreement and the Operative Agreements. Informa- tion may be requested under this Article V for, without limitation, audit, accounting, claims, regulatory, litigation and tax purposes, as well as for purposes of fulfilling disclosure and reporting obligations and for performing this Agreement and the transactions contemplated hereby. Section 5.03 Production of Witnesses. After the Closing Date, each of Signet and Capital One and their respective Subsidiaries shall use reasonable efforts to make available to the other party and its Subsidiaries, upon written request, its directors, officers, employees and agents as wit- nesses to the extent that any such person may reasonably be required (giving consideration to business demands of such directors, officers, employees and agents) in connection with any legal, administrative or other proceedings in which the requesting party may from time to time be involved. Section 5.04 Retention of Records. Except as otherwise required by law or agreed to in writing, each of Signet and Capital One shall retain, and shall cause its Subsidiaries to retain following the Closing Date, for a period consistent with the document retention policies then in effect at Signet, Signet Subsidiaries, Capital One and Capital One Subsidiaries, respectively, all significant Information relating to the business of the other and the other's Subsidiaries. In addition, after the expiration of the applicable document retention periods, such Information shall not be de- stroyed or otherwise disposed of at any time, unless, prior to such destruction or disposal, (a) the party proposing to destroy or otherwise dis- pose of such Information shall provide no less than 30 days' prior written notice to the other, specifying in reasonable detail the Information proposed to be destroyed or disposed of and (b) if a recipient of such notice shall request in writing prior to the scheduled date for such destruction or disposal that any of the Information proposed to be destroyed or disposed of be delivered to such requesting party, the party proposing the destruction or disposal shall promptly arrange for the delivery of such of the Information as was requested at the expense of the party requesting such Information. Section 5.05 Confidentiality. Each of Signet and the Signet Subsidiaries on the one hand, and Capital One and the Capital One Subsidiaries on the other hand, shall hold, and shall cause its Representatives to hold, in strict confidence, all Information concerning the other in its possession or furnished by the other or the other's Representa- tives pursuant to either this Agreement or any of the Operative Agreements and shall not use any such Information except for such purposes as shall be expressly permitted hereunder (except in each case to the extent that such Information has been (a) in the public domain through no fault of such party or (b) later lawfully acquired from other sources by such party which sources are not themselves bound by a confidentiality obligation), and each party shall not release or disclose such Information to any other person, except its regulators, auditors, attorneys, financial advisors, bankers and other consultants and advisors, unless compelled to disclose by judicial or admin- istrative process or, as advised by its counsel, by other requirements of law. Section 5.06 Provision of Services. (a) Signet and Signet/Virginia shall make available to Capital One and Capital One Bank, during normal business hours and in a manner that will not unreasonably interfere with Signet's business, its tax, internal audit, accounting, legal and similar staff and services upon the terms and subject to the conditions set forth in the Interim Services Agreements and the Intercompany Servicing Agreements. (b) Capital One and Capital One Bank shall make available to Signet and Signet/Virginia, during normal business hours and in a manner that will not unreasonably interfere with Capital One's and Capital One Bank's business, its tax, internal audit, accounting, legal and similar staff and services (collectively "Capital One Services") whenever and to the extent that they may be reasonably required in connection with the preparation of tax returns, audits, claims or litigation, and otherwise to assist in effecting an orderly transition following the Distribution. Capital One or Capital One Bank, as the case may be, shall be entitled to receive from Signet, upon the presentation of invoices therefor, reimbursement for all fully allocated direct costs of providing the Capital One Services, but without any profit to Capital One or Capital One Bank. Section 5.07 Use of Name. (a) Use of SIGNET Name and Mark. Capital One acknowledges that Signet owns all rights in the SIGNET name and Mark and that after the Closing Date, Capital One and any Capital One Subsidiary will cease all use of the SIGNET name and Mark as part of any corporate name, trade name, and/or trade- mark or service mark, including, without limitation, on any credit cards issued in connection with the Capital One Bank Business, signs, letterhead, business cards, invoices and other business forms, telephone directory list- ings, and advertising and promotional materials, subject to a transition period in which Capital One may continue to use the SIGNET name or Mark pur- suant to the terms set forth in Schedule 5.07; provided, however, nothing herein prohibits Capital One or Capital One Bank from referring to its origin as a division of Signet Bank/Virginia in any regulatory filings, reports to shareholders, or any filings with state or federal courts or agencies. During this transition period after the Closing Date in which any use of the SIGNET name or Mark is used by Capital One, Signet will rely on Capital One to maintain the same standards of quality as previously exercised by Signet. Capital One agrees and acknowledges that Capital One's and Capital One Bank's respective use of the Mark shall inure to Signet's benefit. Capital One shall not, and shall not permit Capital One Bank to, commit or cause any third party to commit, any act challenging, contesting or in any way impairing Signet's right, title and interest in the Mark. (b) Use of CAPITAL ONE Name and Mark. Signet acknowledges that Capital One owns all rights in the CAPITAL ONE name and mark and agrees that Signet and any Signet Subsidiary will not use the CAPITAL ONE name and mark as part of any corporate name, trade name, and/or trademark or service mark, including, without limitation, on any credit cards issued by Signet, signs, letterhead, business cards, invoices and other business forms, telephone directory listings, and advertising and promotional materials, except to the extent reasonably necessary to advertise the Separation and Distribution. Section 5.08 Covenant on Competition. (a) Signet hereby agrees that for a period of two years following the consummation of the IPO, neither Signet nor any Affiliate of Signet (other than Capital One and any Capital One Subsidiary) shall engage in direct marketing solicitations in the general purpose bank credit card busi- ness outside of the region comprised of Virginia, Maryland and the District of Columbia; provided, however, that this restriction shall not apply to the credit card business of any banking entity that (i) is acquired by Signet or any such Signet Affiliate so long as subsequent to such acquisition Signet does not substantially increase the scope of such credit card business or (ii) acquires Signet or any such Signet Affiliate, if, in each case, the pri- mary purpose of any such acquisition is not to avoid the restrictions set forth herein. (b) Signet and Capital One agree that for a period of two years following the consummation of the Offerings, neither Signet nor any Signet Affiliate or Capital One or any Capital One Affiliate shall knowingly solicit for proposed employment any person who at the time is known by such party to be currently an employee of the other party or its Affiliates, without the consent of such other party. ARTICLE VI MISCELLANEOUS 6. Section 6.01 Complete Agreement; Construction. This Agreement, the Employee Benefits Allocation Agreement, the Tax Sharing Agreement, the Interim Services Agreements and the Intercompany Servicing Agreements, including any schedules and exhibits hereto or thereto, and other agreements and documents referred to herein, shall constitute the entire agreement be- tween the parties with respect to the subject matter hereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter. Notwithstanding any other provisions in this Agreement to the contrary, in the event and to the extent that there shall be a conflict between the provisions of this Agreement and the provisions of the Tax Sharing Agreement, the provisions of the Tax Sharing Agreement shall control. Section 6.02 Survival of Agreements. Except as otherwise contemplated by this Agreement, all covenants and agreements of the parties contained in this Agreement shall survive the Closing Date. Section 6.03 Expenses. (a) The expenses in connection with the IPO shall be paid as provided in Section 2.03(g). (b) Except as otherwise set forth in this Agreement, the Employee Benefits Allocation Agreement or the Tax Sharing Agreement, all costs and expenses arising on or prior to the Distribution Date (whether or not then payable) in connection with the Distribution (other than (i) costs incurred in connection with any financing arrangements entered into by Capital One or any of its Subsidiaries including all costs and fees relating to the Bridge Financing Facility, (ii) listing fees of any national securities exchange incurred with respect to listing the Capital One Common Stock, (iii) any fees charged by the rating agencies for rating Capital One securities, (iv) the fees and expenses of any outside consultant or counsel retained by Capital One, (v) costs incurred in engraving and printing the stock certificates of Capital One and (vi) costs (including attorneys' fees) of establishing any new employee benefit or compensation plans of Capital One and Capital One Bank, which shall be paid by Capital One) shall be paid by Signet to the extent that appropriate documentation concerning such costs and expenses shall be provided to Signet. Section 6.04 Dispute Resolution. Capital One and Capital One Bank, on the one hand, and Signet and Signet/Virginia, on the other hand, shall appoint two members from their managerial staffs to serve on a joint committee (the "Dispute Resolution Committee"). The Dispute Resolution Committee shall meet at either Capital One's or Signet's offices, whichever is more appropriate in light of the issue to be discussed, at such time as either party may demand in writing, for the purpose of resolving any dispute arising under this Agreement. No dispute under this Agreement shall be the subject of arbitration or other formal proceeding between the parties hereto before being considered by the Dispute Resolution Committee. If the Dispute Resolution Committee is unable to resolve any dispute submitted to it by any party hereto within 30 days after such submission, the Dispute Resolution Committee may refer the issue to the Chief Executive Officers of Capital One and Signet for resolution. If such officers are unable to resolve such dispute within 15 days after referral, or if the Dispute Resolution Committee determines to not refer any dispute to such officers, any member of the Dispute Resolution Committee may refer such dispute to binding arbitration as provided for in Section 6.05. Section 6.05 Binding Arbitration. (a) Any controversy, dispute or claim (whether lying in contract or tort) between or among the parties arising out of or related to this Agreement, or any agreements or instruments related hereto or delivered in connection herewith, shall, after the dispute resolution process set forth in Section 6.04 has been completed, at the request of any party be submitted to arbitration in accordance with this Section 6.05 by notifying the other parties of its election to arbitrate such controversy, dispute or claim. (b) Each controversy, dispute or claim submitted by a party to arbitration shall be heard by an arbitration panel composed of three arbitrators, in accordance with the following provisions. Signet and Signet/Virginia, on the one hand, and Capital One and Capital One Bank, on the other hand, shall each appoint one arbitrator within fifteen (15) days after the matter has been submitted to arbitration. If any party fails to appoint its arbitrator within such fifteen (15) day period, any party may apply to the American Arbitration Association (the "AAA") to appoint an arbitrator on behalf of the party that has failed to appoint its arbitrator. The two arbitrators appointed by or on behalf of (as the case may be) the parties shall jointly appoint a third arbitrator, who shall chair the arbitration panel (the "Chairman"). If the arbitrators appointed by or on behalf of the parties do not succeed in appointing a Chairman within fifteen (15) days after the latter of the two arbitrators appointed by or on behalf of the parties has been appointed, the Chairman shall, at the request of ei- ther party, be appointed by the AAA. If for any reason an arbitrator is un- able to perform his or her function, he or she shall be replaced and a substitute shall be appointed in the same manner as the arbitrator replaced. (c) Except as otherwise stated herein, arbitration proceedings shall be conducted in accordance with the Commercial Arbitration Rules of the AAA. In any arbitration proceeding hereunder: (i) proceedings shall, unless otherwise agreed by the parties, be held in Richmond, Virginia; (ii) the ar- bitration panel shall have no power to award punitive damages and shall be bound by all statutes of limitation which would otherwise be applicable in a judicial action brought by a party; and (iii) the decision of a majority of the arbitrators (or the Chairman if there is no such majority) shall be final and binding on the parties to this Agreement and shall be enforceable in any court of competent jurisdiction. The parties hereby waive any rights to appeal or to review of such decision by any court or tribunal and also waive any objections to such enforcement. THE PARTIES HEREBY AGREE TO WAIVE ALL RIGHTS TO TRIAL BY JURY WITH RESPECT TO ANY CONTROVERSY, DISPUTE OR CLAIM SUBMITTED TO ARBITRATION UNDER THIS AGREEMENT. (d) Notice preliminary to, in conjunction with, or incident to any arbitration proceeding may be sent to the parties by registered or certified mail (return receipt requested) at the address set forth in Section 6.08 and personal service is hereby waived. The arbitrators shall award recovery of all costs and fees incurred in connection with the arbitration and the proceeding, and obtaining any judgment related thereto, of each disputed matter (including reasonable attorney's fees and expenses and arbitrator's fees and expenses and court costs, in each case, with respect to such disputed matter) to the party that substantially prevails in the arbitration proceeding with respect to such disputed matter. (e) No provision of this Section 6.05 shall limit the right of any party to this Agreement to exercise self-help remedies such as set-off, or obtaining provisional, equitable or ancillary remedies from a court of competent jurisdiction before, after, or during the pendency of any arbitration or other proceeding. The exercise of a remedy does not waive the right of either party to resort to arbitration. Section 6.06 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without regard to the principles of conflicts of laws thereof. Section 6.07 Consent to Jurisdiction. Signet, Signet/Virginia and Capital One consent to and hereby submit to the exclusive jurisdiction of any state or federal court located in the Commonwealth of Virginia solely for the purpose of any enforcement with respect to any award rendered pursuant to the provisions of Section 6.05 or any equitable relief arising out of or relating to this Agreement or the transactions contemplated hereby. The exclusive venue for any enforcement with respect to any award rendered pursuant to the provisions of Section 6.05 or any equitable relief arising out of this Agree- ment or the transactions contemplated hereby shall be the state or federal courts located in the Commonwealth of Virginia and each of the parties hereto irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Section 6.08 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be delivered by hand, mailed by registered or certified mail (return receipt requested), or sent by cable, telegram, telex or telecopy (confirmed by regular, first-class mail), to the parties at the following addresses (or at such other addresses for a party as shall be specified by like notice) and shall be deemed given on the date on which such notice is received: if to Signet or Signet/Virginia: Signet Banking Corporation 7 North Eighth Street Richmond, Virginia 23219 Attention: Senior Executive Vice President in charge of Consumer Lending; with a copy to the General Counsel if to Capital One: Capital One Financial Corporation 11013 West Broad Street Road Glen Allen, Virginia 23060 Attention: Chief Administrative Officer; with a copy to the General Counsel at 8330 Boone Boulevard Vienna, Virginia 22182 Section 6.09 Amendments. This Agreement may only be modified or amended by an agreement in writing signed by the parties; provided that after the Effective Date and prior to the Distribution Date, any amendment, other than amendments to cure any ambiguity, correct or supplement any provision herein which may be inconsistent with any other provision herein or to make any other provision with respect to matters or questions arising hereunder which shall not be inconsistent with the provisions of this Agreement, must be approved by a majority of the directors of Capital One. Section 6.10 Successors and Assigns. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Section 6.11 Termination. This Agreement may be terminated and the Separation and IPO abandoned at any time prior to the Effective Date. At any time after the Effective Date, this Agreement may only be terminated with respect to the provisions hereof specifically relating to the Distribution and only in the event that the conditions specified in Section 3.03 have not been satisfied, other than conditions solely within the control of Signet, and will not, in the good faith judgment of the Signet Board, based upon advice of counsel, be satisfied within 360 days of the Closing Date unless such failure to satisfy the specified conditions does not, in the opinion of the Signet Board, materially impair the ability of Signet and Capital One to effect the Distribution and maintain the value of the Capital One Bank Assets and the Capital One Bank Business. In the event of termination, no party shall have any liability of any kind to any other party on account of such termination except that expenses incurred in connection with the transactions contemplated hereby shall be paid as provided in Section 6.03. Section 6.12 No Third Party Beneficiaries. Except for the provisions of Article IV relating to Indemnitees, this Agreement is solely for the benefit of the parties hereto and their respective Affiliates and should not be deemed to confer upon third parties (including any employee of Signet, Capital One, any Signet Subsidiary or any Capital One Subsidiary) any remedy, claim, reimbursement, cause of action or other right in excess of those existing without reference to this Agreement. Section 6.13 Titles and Headings. Titles and headings to sections herein are inserted for the convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. Section 6.14 Legal Enforceability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Without prejudice to any rights or remedies otherwise available to any party hereto, each party hereto acknowledges that damages would be an inadequate remedy for any breach of the provisions of this Agreement and agrees that the obligations of the parties hereunder shall be specifically enforceable. Section 6.15 No Waivers. No failure by any party hereto to take any action or assert any right hereunder shall be deemed to be a waiver of such right in the event of the continuation or repetition of the circumstances giving rise to such right, unless expressly waived in writing by the party against whom the existence of such waiver is asserted. Section 6.16 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 6.17 Performance. Each party hereto shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary or Affiliate of such party. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. SIGNET BANKING CORPORATION By: /S/ Wallace B. Millner, III SIGNET BANK/VIRGINIA By: /S/ Robert L. Bryant CAPITAL ONE FINANCIAL CORPORATION By:/S/ Nigel W. Morris SCHEDULE 2.01(c) [Bridge Financing Facility] SCHEDULE 2.02(a) [Capital One Bank Assets] (viii) [Schedule of personal property] [include description of computer and systems hardware] (ix) [Schedule of real property and leasehold interests] (x) [Schedule of licenses and permits] (xi) [Schedule of trademarks] (xiii) [Schedule of contracts] (xiv) [Schedule of securitizations (and spread accounts) to be transferred] (xv) [Schedule of other assets] SCHEDULE 2.02(b) [Excluded Assets] (i) [Retained Portfolio and Arrangements with respect to the 1990 Securitization] (ii) [Real properties owned by Signet Properties Company to be transferred to Signet/Virginia prior to the Separation] (v) [Miscellaneous other excluded assets] SCHEDULE 2.02(d) [Excluded Liabilities] (iv) [Liabilities related to the EDS Agreement not included with Excluded Liabilities] SCHEDULE 2.05(b) [List material consents from Section 2.05(b)] SCHEDULE 2.07 Capital One Board of Directors at time of IPO Robert M. Freeman, Chairman Richard D. Fairbank J. Henry Butta Norwood H. Davis, Jr. William C. DeRusha William R. Harvey Elizabeth G. Helm Robert M. Heyssel Malcolm S. McDonald Henry A. Rosenberg, Jr. Louis B. Thalheimer Stanley I. Westreich SCHEDULE 2.10(b) Form of Signet/Virginia Interim Services Agreement SCHEDULE 2.10(c) Form of Capital One Interim Services Agreement SCHEDULE 2.11(i) Form of Retained Portfolio, Origination Servicing and Management Agreement SCHEDULE 2.11(ii) Form of Secured Card Master Deposit Agreement SCHEDULE 2.11(iii) Form of Non-Card Products Agreement SCHEDULE 2.11(iv) Form of Lease Agreement SCHEDULE (v) Form of Cash Management Services Agreements SCHEDULE 2.11(vi) Form of Account Access Card and ATM Card Agreement SCHEDULE 5.07 EX-2 3 EXHIBIT 2.2 Exhibit 2.2 FORM OF RETAINED PORTFOLIO, ORIGINATION, SERVICING AND MANAGEMENT AGREEMENT BY AND AMONG SIGNET BANKING CORPORATION, SIGNET BANK/VIRGINIA, CAPITAL ONE FINANCIAL CORPORATION and CAPITAL ONE BANK TABLE OF CONTENTS Page ARTICLE I 1. DEFINITIONS Section 1.01 General. . . . . . . . . . . . . . . . . . . . . . 5 Section 1.02 Exhibits, etc. . . . . . . . . . . . . . . . . . . 14 Section 1.03 References to Time . . . . . . . . . . . . . . . . 14 ARTICLE II 2. Section 2.01 Agreements with Respect to the 1990 Trust. . . . . 14 RETAINED PORTFOLIO ARTICLE III 3. ORIGINATION OF ACCOUNTS AFTER THE CLOSING DATE Section 3.01 Solicitation of Accounts . . . . . . . . . . . . . 17 Section 3.02 Credit Approval of Signet Solicitations. . . . . . 17 Section 3.03 Review of Signet Solicitation Material . . . . . . 17 Section 3.04 Level of Signet Solicitations. . . . . . . . . . . 18 Section 3.05 Signet Solicitation Expenses . . . . . . . . . . . 18 Section 3.06 Signet Revenue Sharing . . . . . . . . . . . . . . 18 Section 3.07 Funding. . . . . . . . . . . . . . . . . . . . . . 18 Section 3.08 Concurrent Solicitations . . . . . . . . . . . . . 18 ARTICLE IV 4. MARKETING RESTRICTIONS IN BANK MARKET AREA Section 4.01 Marketing Restrictions . . . . . . . . . . . . . . 19 Section 4.02 Signet/Virginia Testing. . . . . . . . . . . . . . 19 Section 4.03 Early Termination of Signet Solicitations by Capital One Bank. . . . . . 19 ARTICLE V 5. IN-HOUSE SOLICITATIONS Section 5.01 Application Processing and Account Set Up. . . . . 19 Section 5.02 In-house Expenses. . . . . . . . . . . . . . . . . 20 ARTICLE VI 6. SERVICING AND MANAGEMENT OF THE SIGNET/VIRGINIA PORTFOLIO Section 6.01 Servicing of the Signet/Virginia Portfolio; Subservicing Securitized Accounts. . . . . . 20 Section 6.02 Capital One Servicing Fee; Other Charges. . . . . . . . . . . . . . . . . . . 20 Section 6.03 Ownership of the Signet/Virginia Portfolio; Identification of the Signet/Virginia Portfolio. . . . . . . . . . 21 Section 6.04 Signet/Virginia Information. . . . . . . . . . . . 21 ARTICLE VII 7. REPRESENTATIONS AND WARRANTIES Section 7.01 Representations and Warranties of Signet/Virginia. . . . . . . . . . . . . . . 21 Section 7.02 Representations and Warranties of Signet . . . . . . . . . . . . . . . . . . . 22 Section 7.03 Representations and Warranties of Capital One Bank . . . . . . . . . . . . . . 22 Section 7.04 Representations and Warranties of Capital One. . . . . . . . . . . . . . . . . 22 ARTICLE VIII 8. INDEMNIFICATION; LIMITATIONS ON LIABILITY Section 8.01 Indemnity of Capital One and Capital One Bank . . . . . . . . . . . . . . 22 Section 8.02 Indemnity of Signet and Signet/ Virginia . . . . . . . . . . . . . . . . . . 23 Section 8.03 Limitations on Indemnification Obligations. . . . . . . . . . . . . . . . . 23 Section 8.04 Procedures for Indemnification of Third Party Claims . . . . . . . . . . . . . 23 Section 8.05 Remedies Cumulative. . . . . . . . . . . . . . . . 25 Section 8.06 Survival of Indemnitees. . . . . . . . . . . . . . 25 Section 8.07 Reliance on Advice of Counsel Instructions, etc.25 Section 8.08 Liability for Nonperformance . . . . . . . . . . . 25 ARTICLE IX 9. COVENANTS Section 9.01 Maintenance of Capital One Bank's Existence . . . . . . . . . . . . . . 26 Section 9.02 Maintenance of Capital One's Existence26 Section 9.03 Standard of Care . . . . . . . . . . . . . . . . . 26 Section 9.04 Compliance with Laws and Regulations . . . . . . . 26 Section 9.05 Covenants of Signet/Virginia . . . . . . . . . . . 26 ARTICLE X 10. ACCESS TO INFORMATION; CONFIDENTIALITY; CUSTOMER NAMES Section 10.01 Access to Information. . . . . . . . . . . . . . . 27 Section 10.02 Production of Witnesses. . . . . . . . . . . . . . 27 Section 10.03 Confidentiality; Use of Information. . . . . . . . 27 Section 10.04 Customer Names . . . . . . . . . . . . . . . . . . 27 ARTICLE XI 11. MISCELLANEOUS Section 11.01 Complete Agreement; Construction . . . . . . . . . 28 Section 11.02 No Exclusive Commitment by Capital One and Capital One Bank . . . . . . 28 Section 11.03 Sale or Assignment of Origination Accounts . . . . . . . . . . . . 28 Section 11.04 Replacement of Capital One Bank. . . . . . . . . . 29 Section 11.05 Dispute Resolution . . . . . . . . . . . . . . . . 29 Section 11.06 Amendments . . . . . . . . . . . . . . . . . . . . 29 Section 11.07 No Waivers . . . . . . . . . . . . . . . . . . . . 29 Section 11.08 Successors and Assigns . . . . . . . . . . . . . . 29 Section 11.09 Termination; Conversion. . . . . . . . . . . . . . 29 Section 11.10 Governing Law. . . . . . . . . . . . . . . . . . . 30 Section 11.11 Binding Arbitration. . . . . . . . . . . . . . . . 30 Section 11.12 Consent to Jurisdiction. . . . . . . . . . . . . . 31 Section 11.13 Force Majeure. . . . . . . . . . . . . . . . . . . 31 Section 11.14 Further Assurances . . . . . . . . . . . . . . . . 31 Section 11.15 No Third Party Beneficiaries . . . . . . . . . . . 31 Section 11.16 Notices. . . . . . . . . . . . . . . . . . . . . . 31 Section 11.17 Survival . . . . . . . . . . . . . . . . . . . . . 32 Section 11.18 Titles and Headings. . . . . . . . . . . . . . . . 32 Section 11.19 Blanket Endorsement. . . . . . . . . . . . . . . . 32 Section 11.20 Legal Enforceability . . . . . . . . . . . . . . . 33 Section 11.21 Counterparts . . . . . . . . . . . . . . . . . . . 33 Annex A: Servicing Provisions Schedule 1.01(a) Account Management Criteria Schedule 1.01(b) Credit Information to be Reviewed by Solicitation Credit Committee Schedule 1.01(c) Matched Funding Rates RETAINED PORTFOLIO, ORIGINATION, SERVICING AND MANAGEMENT AGREEMENT RETAINED PORTFOLIO, ORIGINATION, SERVICING AND MANAGEMENT AGREEMENT (this "Agreement"), dated as of November __, 1994, by and among Signet Banking Corporation, a Virginia corporation ("Signet"), Signet Bank/Virginia, a Virginia state member bank and wholly-owned subsidiary of Signet ("Signet/Virginia"), Capital One Financial Corporation, a Delaware corporation ("Capital One"), and Capital One Bank, a Virginia state member bank and, as of the Closing Date (as herein defined), a wholly-owned subsidiary of Capital One ("Capital One Bank"). PRELIMINARY STATEMENTS WHEREAS, Signet, Signet/Virginia and Capital One have heretofore executed and delivered the Separation, Distribution and Indemnity Agreement, dated as of November 15, 1994 (the "Separation Agreement"); and WHEREAS, Signet/Virginia is a party to the 1990 Pooling and Servicing Agreement (as herein defined), pursuant to which Signet Credit Card Trust 1990-1 (the "1990 Trust") was created; and WHEREAS, as set forth, and subject to the terms and conditions, in the Separation Agreement, Signet and Signet/Virginia are to transfer designated credit card assets (the "Capital One Bank Assets") and the related credit card servicing business (the "Capital One Bank Business") to Capital One Bank; and WHEREAS, as set forth in the Separation Agreement, Signet/Virginia is to retain the Retained Portfolio (as herein defined); and WHEREAS, a portion of the Retained Portfolio is included in the 1990 Trust; and WHEREAS, in connection with the Separation, Signet/Virginia has agreed to convey to Capital One Bank a beneficial interest in the receivables in the 1990 Trust that are not receivables in the Retained Portfolio (the "Capital One Receivables"); and WHEREAS, Capital One Bank has agreed to generate credit card accounts after the Closing Date in the states of Maryland and Virginia and in the District of Columbia (collectively, the "Bank Market Area") for the account of, and for the sole benefit of, Signet/Virginia (the "Origination Portfolio") in order for the amount of Signet/Virginia's credit card receivables to be maintained at least the same level as in existence as of the Closing Date; and WHEREAS, Capital One Bank has agreed, as contemplated in the Separation Agreement, to provide, after the Closing Date, servicing (including assuming the obligations as the servicer of the 1990 Pooling and Servicing Agreement) and management with respect to the Signet/Virginia Portfolio (as herein defined). NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1. Section 1.01. General. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): 1990 Pooling and Servicing Agreement: the Pooling and Servicing Agreement, dated as of September 1, 1990, between Signet/Virginia, as transferor and servicer, and Chemical Trust Company of California, as trustee. 1990 Trust: as defined in the Preliminary Statements. 1990 Trust Letter: as defined on the 1990 Pooling and Servicing Agreement. Account: any credit account and related contractual agreements with any holder of a MasterCard or Visa credit card. Account Management Criteria: the criteria with respect to each of the categories set forth on Schedule 1.01(a) to be used in determining certain actions to be taken with respect to an Account. Account Management Services: services related to Account retention including, without limitation, changes in the amount of credit available, balance transfer promotions, retail telemarketing programs, convenience check mailings, statement inserts, gold upgrades and repricing. Account Set-Up Expenses: for any period, an amount equal to $2.00 per Account which amount is to compensate Capital One Bank for the expenses incurred by Capital One Bank in connection with booking each Account, including, without limitation, obtaining the plastics to be made in to credit cards, embossing credit cards, providing access checks and card carriers to the customer, compliance material to be sent to the customer, printing, postage and systems activation. Action: any action, suit, arbitration, inquiry, proceeding or investigation by or before any court, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal. Adjusted Capital One Names: as defined in Section 10.04(a). Adjusted Signet Names: as defined in Section 10.04(a). Adjustments: as defined in the 1990 Pooling and Servicing Agreement. Affiliate: as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder. Assessment Amount: for any period, with respect to the Credit Card Accounts (other than Credit Card Accounts in the Retained Portfolio) an amount equal to the product of the applicable Assessment Rate multiplied by the total dollar volume for such Accounts during such period. Assessment Rate: with respect to any Accounts, as set by MasterCard and Visa from time to time. Association Fees: the amount charged per transaction by MasterCard or Visa, from time to time, for reimbursement of settlement costs incurred by MasterCard or Visa, as the case may be. Average Balance: for any calendar quarter, with respect to the Origination Accounts owned by Signet/Virginia, an amount equal to the aggregate daily Origination Balances for each day during such quarter, including any such Accounts which have been securitized, divided by the number of days in such quarter. Average Test Account Balance: for any calendar quarter, with respect to the Test Accounts owned by Signet/Virginia, an amount equal to the aggregate daily Test Account Balances for each day during such quarter, including any such Accounts which have been securitized, divided by the number of days in such quarter. Average Funding Costs: as of any date, an amount equal to the sum of each of the Funding Costs with respect to each Signet Solicitation which has occurred prior to such date, divided by the number of such Solicitations. Average Hurdle Rate: as of any date, an amount, expressed as a percentage, equal to the sum of the products of each of the Hurdle Rates with respect to each Signet Solicitation which has occurred prior to such date times the Average Balance for the Accounts generated for each such Solicitation, divided by the sum of the Average Balances for the Accounts generated from each such Solicitation. Balance: the total amount outstanding with respect to any Account and/or Credit Line, as the case may be, including principal, accrued interest, annual fees and other fees and other finance and service charges, whether or not such amounts have been billed. BankCard Division: the division of Signet/Virginia which prior to the Closing Date housed the Capital One Bank Assets and operated the Capital One Bank Business. Bank Market Area: as defined in the Preliminary Statements. Base Profit: for any calendar quarter, an amount equal to the product of Equity multiplied by the Average Hurdle Rate as of the last date of such quarter. Batch Amount: with respect to customer statement forms, an amount equal to the sum of (i) the whole number (without rounding) determined by dividing 1000 into the number of such customer statement forms, plus, (ii) in the event that 1000 does not divide evenly into such number of such customer statement forms, 1; provided, however, that in the event that the total number of such customer statement forms is less than 1000 the batch amount shall be deemed to be 1. BINs: MasterCard and Visa identification numbers. Bundled Accounts: Accounts or Credit Lines which, as of Closing Date, are designated on the BankCard Division's production or MIS system as having a relationship with Signet/Virginia. Business Day: a day of the year, excluding Saturdays, on which banks are not required or authorized to close in the Commonwealth of Virginia. Capital One Account: as defined in the Non-Card Products Agreement. Capital One Bank Assets: as defined in the Preliminary Statements. Capital One Bank Business: as defined in the Preliminary Statements. Capital One Names: as of the Closing Date, with respect to the Bank Market Area, the names and addresses of (1) every credit card customer in the Capital One Bank Assets, including any securitized credit card accounts, and (ii) every Capital One Account customer. Capital One Receivables: as defined in the Preliminary Statements. Capital One Servicing Fee: for each calendar month, an amount equal to the product of $2.875 multiplied by the average number of Accounts in the Signet/Virginia Portfolio during such month. Charge-offs: for any calendar quarter, an amount equal to the charge-offs taken by Signet/Virginia with respect to the principal portion of the Balances of the Origination Accounts during such quarter. Charges: for any calendar quarter, an amount equal to the sum of the Capital One Servicing Fees related to the Origination Accounts, plus any Charge-offs, plus, the Average Funding Costs, plus, any Assessment Amount related to the Origination Accounts, plus, the Fraud Losses related to the Origination Accounts. Class A Additional Interest: as defined in the 1990 Pooling and Servicing Agreement. Class A Monthly Interest: as defined in the 1990 Pooling and Servicing Agreement. Class A Monthly Principal: as defined in the 1990 Pooling and Servicing Agreement. Class B Additional Interest: as defined in the 1990 Pooling and Servicing Agreement. Class B Monthly Interest: as defined in the 1990 Pooling and Servicing Agreement. Class B Monthly Principal: as defined in the 1990 Pooling and Servicing Agreement. Closing Date: as set forth in the Underwriting Agreement, a form of which is attached to the Separation Agreement as Annex C, the time and date of payment to Capital One for the shares of common stock being sold pursuant to the Underwriting Agreement. Collections: as defined in the 1990 Pooling and Servicing Agreement. Competitive Bid Sale: as defined in Section 11.03. Concurrent Solicitation: as defined in Section 3.08. Controlled Amortization Period: as defined in the 1990 Pooling and Servicing Agreement. Controlled Distribution Amount: as defined in the 1990 Pooling and Servicing Agreement. Core Strategy: targeting and identifying customers through analysis and modeling of risk parameters and credit information obtained from Credit Bureau Information. Credit Approval: as defined in Section 3.02. Credit Bureau Information: information obtained from credit bureaus with respect to the credit histories of potential customers. Credit Card Accounts: Accounts related to the Signet/Virginia Portfolio. Credit Card Guidelines: as defined in the 1990 Pooling and Servicing Agreement. Credit Information: the information specified on Schedule 1.01(b). Credit Line: unsecured, open-ended personal lines of credit without credit card access identified as open accounts on the BankCard Division's production and/or MIS system as of Closing Date, exclusive of Special Accounts. Dispute Resolution Committee: as defined in Section 11.05. Distribution Date: as defined in the Separation Agreement. Due Period: as defined in the 1990 Pooling and Servicing Agreement. Effective Date: as defined in the Separation Agreement. Equity: for any calendar quarter, an amount equal to the product of 6% multiplied times the Average Balance for such quarter. Excess Finance Charge Collections: as defined in the 1990 Pooling and Servicing Agreement. Excess Profits: for any calendar quarter in which Return on Equity exceeds the Average Hurdle Rate as of the last day of such quarter, an amount equal to the difference between Net Profit for such quarter, minus, Base Profit for such quarter; for any calendar quarter in which Return on Equity is less than or equal to the Average Hurdle Rate as of the last day of such quarter, Excess Profits shall be deemed to be zero (0). Federal Funds Rate: means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day for such transactions received by Signet/Virginia from three Federal funds brokers of recognized standing selected by it. Fee Revenue: for any calendar quarter, an amount equal to fees reflected on Signet/Virginia's records, in respect of the Origination Accounts for such calendar quarter, including, without limitation, annual fees, late fees, interchange fees, overlimit fees, and cash advance fees, less Reversals. Finance Charge Receivables: as defined in the 1990 Pooling and Servicing Agreement. Finance Revenue: for any calendar quarter, an amount, as reflected on Signet/Virginia's records, equal to the revenue in respect of the annual percentage rates charged with respect to each of the Origination Accounts for such calendar quarter, less Reversals. Fraud Losses: actual losses incurred with respect to the Signet/Virginia Portfolio due to fraud. Funding Costs: for any period, with respect to any Signet Solicitation, an amount determined by multiplying the Funding Rate for such Solicitation by the product of 94% multiplied times the Average Balance for the Accounts generated from such Solicitation. Funding Rate: with respect to each Signet Solicitation, the funding rate, based on Matched Funding, to be used in connection with determining the Charges in respect of the Origination Accounts, as agreed upon in writing by Signet/Virginia and Capital One Bank prior to the date of such Solicitation. Household Basis: the process of identifying those BankCard Division Accounts which are part of a household having a non-BankCard Division relationship with Signet/Virginia as of the Closing Date. The BankCard Division will use this information to identify Accounts and Credit Lines to be designated as Bundled. Hurdle Rate: with respect to each Signet Solicitation, the sum of, the rate for ten-year treasury notes as quoted in The Wall Street Journal on the first day of such Solicitation, or if such day is not a Business Day or there is no such quote in that day's edition, on the first preceding day which such quote appears in The Wall Street Journal, plus 7.3%. Indemnifying Party: as defined in Section 8.03. Indemnitees: as defined in Section 8.02. In-house Applications: credit card applications received by Signet/Virginia in connection with any In-house Solicitation. In-house Application Expenses: for any period, an amount equal to $15.00 per each application which was generated from an In-house Solicitation which amount is to compensate Capital One Bank for the expenses incurred by Capital One Bank in connection with processing each such application received, including, without limitation, back-end Credit Bureau Information, systems costs, personnel expenses and third party data entry costs. In-house Expenses: for any period, an amount equal to the sum of the In-house Application Expenses and Account Set-Up Expenses incurred by Capital One Bank in connection with Accounts generated through In-house Solicitations. In-house Portfolio: the portfolio of Accounts generated by Signet/Virginia on or after the Closing Date through In-house Solicitations. In-house Services: the services to be provided by Capital One Bank pursuant to Section 5.01. In-house Solicitations: solicitations of Accounts (i) by providing credit card applications in any branch or office or (ii) by mailing applications to, or otherwise soliciting, any then existing customer of Signet/Virginia or any Affiliate of Signet (other than Capital One or any subsidiary of Capital One). In-house Solicitation Information: as defined in Section 6.04. Insurance Proceeds: those monies (i) received by an insured from an insurance carrier or (ii) paid by an insurance carrier on behalf of the insured, in either case net of any applicable premium adjustments (including reserves) or retrospectively rated premium adjustments. Interchange: as defined in the 1990 Pooling and Servicing Agreement. Invested Amount: as defined in the 1990 Pooling and Servicing Agreement. Investor Certificateholders: as defined in the 1990 Pooling and Servicing Agreement. Letter of Credit: as defined in the 1990 Pooling and Servicing Agreement. Letter of Credit Issuer: as defined in the 1990 Pooling and Servicing Agreement. Liabilities: any and all debts, liabilities and obligations, including all contractual obligations, and all obligations as agent, servicer, lessor or lender, whether absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising (unless otherwise specified in this Agreement), in- cluding all costs and expenses relating thereto, and including, without limitation, those debts, liabilities and obligations arising under any law, rule, regulation, Action, threatened Action, order or consent decree of any governmental entity or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking including, without limitation, those arising under this Agreement. Losses: any and all losses, Liabilities, claims, damages, obligations, payments, costs and expenses, matured or unmatured, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, known or unknown (including, without limitation, the costs and expenses of any and all Actions, threatened Actions, demands, assessments, judgments, settlements and compromises relating thereto and attorneys' fees and any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any such Actions or threatened Actions). Market Area Accounts: Accounts or Credit Lines which, as of Closing Date, are designated on the BankCard Division's production or MIS system as having a primary billing address located in the Bank Market Area. Mass Reissuance: replacing all existing cards issued in connection with the Credit Card Accounts with new cards. MasterCard: MasterCard International, Incorporated, a Delaware corporation. Matched Funding: with respect to each Signet Solicitation, the funding rate as set forth on Schedule 1.01(c) which has the same type and duration of interest rate characteristics as that being offered in the related Signet Solicitation. MIS: Management information system. Miscellaneous Fees: all expenses incurred with respect to the on-going maintenance of the 1990 Trust, including without limitation, fees due to the Letter of Credit Issuer, Trustee's fees, account maintenance fees, rating agency fees, accountants' fees, legal fees and expenses and filing fees. Monthly Allocation Fraction: as defined in Section 2.01(e). Monthly Principal Beneficial Interest: as defined in Section 2.01(e). Name Processor: as defined in Section 10.04(a). Name Removal Process: as defined in Section 10.04(a). NIAT: for any calendar year, the net income after tax, excluding any extraordinary items. Net Profit: for any calendar quarter, an amount equal to the difference between Revenue for such quarter, minus, Charges for such quarter. Non-Card Products Agreement: the Non-Card Products Agreement, dated as of November 15, 1994, among Signet, Signet/Virginia, Capital One and Capital One Bank. Origination Accounts: Accounts related to the Origination Portfolio. Origination Balances: the outstanding Balance with respect to the Origination Portfolio. Origination Expenses: for any period, an amount equal to $.60 per piece mailed which amount is to compensate Capital One Bank for the expenses incurred by Capital One Bank in connection with selection of the persons to whom a Solicitation is to be made, the product to be offered and the market area to be offered, including, without limitation, purchasing lists of names, printing, postage, and obtaining Credit Bureau Information. Origination Portfolio: as defined in the Preliminary Statement. Overdraft Protection Accounts: Accounts or Credit Lines which, as of Closing Date, are designated on the BankCard Division's production or MIS system as providing overdraft protection to a non-BankCard Division deposit account. Performance Data: as defined in Section 6.04. Pooling Determination Date: as defined in the 1990 Pooling and Servicing Agreement as the Determination Date. Pooling Distribution Date: as defined in the 1990 Pooling and Servicing Agreement as the Distribution Date. Portfolio Services: as defined in Section 6.01(a). Potential Customer Names: as defined in Section 10.04. Pre-Approved Application Expenses: for any period, an amount equal to $6.00 per each application processed which was generated from a Signet Solicitation reflecting the expenses incurred by Capital One Bank in connection with processing each application for an Account received, including, without limitation, back-end Credit Bureau Information, systems costs, personnel expenses and third party data entry costs. Pre-Cut-Off Products: as defined in the Non-Card Products Agreement. Principal Receivables: as defined in the 1990 Pooling and Servicing Agreement. Rapid Amortization Period: as defined in the 1990 Pooling and Servicing Agreement. Receivables: as defined in the 1990 Pooling and Servicing Agreement. Reimbursement Agreement: as defined in the 1990 Pooling and Servicing Agreement. Reissuance Costs: an amount to be agreed to by Signet/Virginia and Capital One Bank prior to any Mass Reissuance by Capital One Bank on Signet/Virgnia's behalf. Remedies Exception: as defined in Section 7.01(b). Retained Accounts: in order of priority for inclusion in the Retained Portfolio; Special Accounts, Overdraft Protection Accounts, Bundled Accounts, Market Area Accounts, regardless of securitization status, pro rata across securitizations and on balance sheet as appropriate. Retained Portfolio: a portfolio of Accounts, Credit Lines, and Special Accounts chosen through the Selection Process, which prior to the Closing Date were housed in the BankCard Division and which will be retained by Signet/Virginia and will not be contributed to Capital One Bank as a part of the Capital One Bank Assets. Return on Equity: for any calendar quarter, an amount, expressed as a percentage, determined by dividing Equity for such quarter into an amount equal to 4 multiplied times the Net Profit for such quarter. Revenue: for any period, an amount equal to the sum of Finance Revenue, plus, Fee Revenue, each for such period. Reversals: with respect to any Account, an amount debited against the billed but unpaid portion of the Finance Revenue and/or Fee Revenue for such Account prior to taking any Charge-off against the principal amount of the Balance of such Account. Review Committee: the person or persons designated by Signet/Virginia to review the Review Information with respect to each Signet Solicitation as contemplated by Section 3.02. Review Information: the information designated by Signet/Virginia to be reviewed by its Review Committee. Review Process: as defined in Section 3.02(b). Revolving Period: as defined in the 1990 Pooling and Serving Agreement. Rolling Average Balance: as of any date after the Closing Date, an amount equal to the sum of the Average Balances for, up to, the four calendar quarters immediately preceding such date, provided that the first such quarter shall be the first full calendar quarter after the Closing Date, divided by the number of such calendar quarters. Rolling Average Test Balance: as of any date after the Closing Date, an amount equal to the sum of the Average Test Account Balances for, up to, the four calendar quarters immediately preceding such date, provided that the first such quarter shall be the first full calendar quarter after the Closing Date, divided by the number of such calendar quarters. Selection Process: the selection of Retained Accounts, using the criteria and methodology agreed upon by Signet and Capital One, as provided herein. Separation Agreement: as defined in the Preliminary Statements. Servicer: the servicer under the 1990 Pooling and Servicing Agreement. Services: collectively, the Portfolio Services, the Account Management Services and the In-house Services. Servicing Fee: as defined in the 1990 Pooling and Servicing Agreement. Signet Names: as of the Closing Date, with respect to Bank Market Area, the names and addresses of (i) every credit card customer in the Signet/Virginia Portfolio, including any securitized credit card accounts and (ii) every Signet Products customer and Pre-Cut-Off Products customer. Signet Products: as defined in the Non-Card Products Agreement. Signet Solicitation: as defined in Section 3.01. Signet Solicitation Expenses: for any period, with respect to each Signet Solicitation, an amount equal to the sum of the Origination Expenses, Pre-Approved Application Expenses, and Account Set-Up Expenses incurred by Capital One Bank in connection with such Signet Solicitation and the Accounts generated therefrom. Signet Solicitation Information: a defined in Section 3.03(a). Signet Test: as defined in Section 4.02. Signet/Virginia Balances: the outstanding Balance of the Accounts and Credit Lines in the Signet/Virginia Portfolio, including any Credit Card Accounts which have been securitized. Signet/Virginia Data: as defined in Section 10.03(b). Signet/Virginia Portfolio: collectively, the Retained Portfolio, the Origination Portfolio and the In-house Portfolio. Solicitation: as identified by a solicitation number assigned thereto by the BankCard Division or Capital One Bank, as the case may be, a mailing or telemarketing to a group of persons, which persons have been identified as potential customers with respect to MasterCard or Visa credit cards. Solicitation Committee: a committee consisting of up to 3 representatives from each of Signet/Virginia and Capital One Bank for the purpose of determining on at least a quarterly basis the level of Signet Solicitations to be made and to review other necessary information with respect to the Signet Solicitations. Solicitation Credit Committee: the committee designated by Signet/Virginia to review the Credit Information related to each Signet Solicitation. Special Accounts: Accounts on the BankCard Division's books that are selected to be retained by Signet/Virginia because of their particular characteristics, including Signet employee accounts, business card accounts, Signet corporate travel accounts, "private label" type accounts, and other on-balance sheet accounts identified on BankCard Division's production and/or MIS system as of Closing Date as part of the Retained Portfolio. Statement Fee: with respect to customer statement forms to be ordered by Capital One Bank on Signet/Virginia's behalf, an amount equal to the product of $2.70 multiplied by the Batch Amount with respect to such statement forms. Target Balance Level: the outstanding Balance of the Retained Portfolio as of the Closing Date; provided that in the event Signet/Virginia sells any Accounts in the Signet/Virginia Portfolio, whether through a Competitive Bid Sale or otherwise, to a party who is not an Affiliate of Signet (other than a securitization of such accounts) the Target Balance Level shall be reduced by an amount equal to the Balance of such Accounts at the time they are sold. Tax: as defined in the Tax Sharing Agreement between Signet and Capital One, a form of which is attached as Annex B to the Separation Agreement. Test Accounts: Accounts generated in connection with testing by Signet/Virginia pursuant to Section 4.02. Test Account Balances: the outstanding Balances of any Test Accounts. Tests: up to 50 mailings or telemarketing tests per year, each of which could generate up to approximately 500 Accounts per mailing or telemarketing. Third Party Claim: as defined in Section 8.04. Total Draw Amount: as defined in the 1990 Pooling and Servicing Agreement. Transferor: as defined in the 1990 Pooling and Servicing Agreement. Transferor's Interest: as defined in the 1990 Pooling and Servicing Agreement. Visa: Visa U.S.A., Inc., a Delaware corporation. Winning Bidder: as defined in Section 11.03. Section 1.02. Exhibits, etc. References to an "Exhibit" or "Schedule" are, unless otherwise specified, to one of the Exhibits or Schedules attached to this Agreement, and references to "Section" or "Article" are, unless otherwise specified, to one of the Sections or Articles of this Agreement. Section 1.03. References to Time. All references in this Agreement to times of day shall be to Eastern time. ARTICLE II RETAINED PORTFOLIO 2. Section 2.01. Agreements with Respect to the 1990 Trust. (a) After the Closing Date, Signet/Virginia will remain Transferor under the 1990 Pooling and Servicing Agreement and will comply with the terms thereof applicable to it as Transferor. (b) Between the Closing Date and the Distribution Date and as permitted by Section 8.06 of the 1990 Pooling and Servicing Agreement, Capital One Bank will act as subservicer of the 1990 Trust on the terms specified herein. In acting as subservicer of the 1990 Trust, Capital One Bank hereby agrees to conduct its duties in accordance with the Credit Card Guidelines and the 1990 Pooling and Servicing Agreement as if it were the Servicer thereunder. On each Pooling Distribution Date, Signet/Virginia will remit to Capital One Bank the Servicing Fee with respect to the preceding Due Period. (c) Effective upon the Distribution Date, Capital One Bank will acquire and assume all of Signet/Virginia's rights and obligations as Servicer under the 1990 Pooling and Servicing Agreement and will execute all instruments, documents or agreements necessary or appropriate for it to become Servicer thereunder. (d) By execution of this Agreement, Signet/Virginia does hereby transfer, assign, set over and otherwise convey to Capital One Bank, without recourse, a beneficial interest in, to and under the Capital One Receivables, whether now existing or hereafter created, all monies due or to become due thereon and all amounts received after the Closing Date with respect thereto and, all proceeds thereof, all as specified herein, and all rights, title and beneficial interest in, to and under the Interchange allocable to the Capital One Receivables as specified herein. (e) On each Pooling Distribution Date during the Controlled Amortization Period or the Rapid Amortization Period, as the case may be, (i) Capital One Bank shall pay to Signet/Virginia an amount (the "Monthly Principal Beneficial Interest") equal to the product of (x) in the case of the Controlled Amortization Period, the Controlled Distribution Amount with respect to such Pooling Distribution Date and, in the case of the Rapid Amor- tization Period, the Class A Monthly Principal and Class B Monthly Principal with respect to such Pooling Distribution Date, (y) a fraction (the "Monthly Allocation Fraction"), the numerator of which is the aggregate amount of Receivables in the 1990 Trust that are determined to be Capital One Receivables as of the end of the preceding Due Period and the denominator of which is the total amount of Receivables in the 1990 Trust as of the end of such Due Period and (z) a factor equal to a fraction the numerator of which is the aggregate amount of Receivables in the 1990 Trust that are determined to be Capital One Receivables as of the end of the preceding Due Period and the denominator of which is the total amount of Receivables in the 1990 Trust that are determined to be Capital One Receivables as of the end of the Revolving Period, and (ii) Signet/Virginia shall transfer, assign, and convey to Capital One Bank an undivided ownership interest in an amount of Receivables in the 1990 Trust equal to the Monthly Principal Beneficial Interest. (f) If at the termination of the 1990 Trust any Capital One Receivables have not been transferred to Capital One Bank by Signet/Virginia (the "Remaining Interest"), Capital One Bank shall pay to Signet/Virginia, on the tenth Business day following the end of the calendar month in which the 1990 Trust terminates, an amount equal to the outstanding balances of the Remaining Interest as of the date of the termination of the 1990 Trust and Signet/Virginia shall concurrently transfer, assign, and convey to Capital One Bank any Remaining Interest to Capital One Bank. (g) On each Pooling Determination Date during the Controlled Amortization Period or the Rapid Amortization Period, Signet/Virginia and Capital One Bank shall calculate the following amount (the "Monthly Income Amount"): (i) Collections of 1990 Trust Finance Charge Receivables (excluding Interchange and annual membership fees) allocated to Capital One Bank based on actual Collections of Finance Charge Receivables (excluding Interchange and annual membership fees) with respect to Capital One Receivables during the preceding Due Period; plus (ii) Collections of Interchange allocated to Capital One Bank with respect to the preceding Due Period based on the product of (x) a fraction the numerator of which is total purchases for the preceding Due Period with respect to Capital One Receivables and the denominator of which is total purchases with respect to all Receivables in the 1990 Trust during the preceding Due Period and (y) total Interchange with respect to all Receivables in the 1990 Trust with respect to the preceding Due Period; plus (iii) Collections of annual membership fees allocated to Capital One Bank with respect to the preceding Due Period based on the product of (x) the Monthly Allocation Fraction and (y) all amounts deemed to be Collections of annual membership fees with respect to the 1990 Trust with respect to the preceding Due Period; less (iv) Class A Monthly Interest and Class B Monthly Interest paid to Investor Certificateholders plus the amount of any Class A Monthly Interest and Class B Monthly Interest previously due but not distributed to Class A Certificateholders and Class B Certificateholders on a prior Distribution Date plus the amount of any Class A Additional Interest and Class B Additional Interest for such Pooling Distribution Date under the 1990 Pooling and Servicing Agreement allocated to Capital One Bank with respect to the preceding Due Period based on the product of (x) the Monthly Allocation Fraction and (y) all amounts deemed to be a Class A Monthly Interest and Class B Monthly Interest paid to Investor Certificateholders on such Pooling Distribution Date; less (v) The cost to fund on Signet/Virginia's balance sheet Capital One Bank's portion of the Transferor Interest of the 1990 Trust during the preceding Due Period determined by the product of (x) the Transferor's Interest (without giving effect to the transfer of any Monthly Principal Beneficial Interests therein to Capital One Bank) as of the end of the preceding Due Period and (y) the Monthly Allocation Fraction less the sum of all Monthly Principal Beneficial Interest amounts for all periods including the prior Due Period and (z) the average Federal Funds Rate plus 1.15% for the prior Due Period; less (vi) Charge-offs allocated to Capital One Bank based on actual charge-offs with respect to the preceding Due Period with respect to Capital One Receivables; less (vii) Miscellaneous Fees with respect to the preceding Due Period allocated based on the product of (i) the Monthly Allocation Fraction and (ii) all amounts determined to be Miscellaneous Fees with respect to such Due Period, less (viii) Fraud losses and other Adjustments with respect to the preceding Due Period allocated to Capital One Bank based on actual fraud losses and other Adjustments with respect to Capital One Receivables during the preceding Due Period, less (ix) The Servicing Fee paid to the Servicer with respect to the preceding Due Period, less (x) The amount of reimbursement of any Total Draw Amount on the Letter of Credit during the preceding Due Period with respect to the Capital One Receivables based on the product of (i) the Monthly Allocation Fraction and (ii) the Total Draw Amount on the Letter of Credit for such Due Period. If the Monthly Income Amount is a positive number, Signet/Virginia shall pay on the Pooling Distribution Date such amount to Capital One Bank. If the Monthly Income Amount is a negative number, Capital One Bank shall pay on the Pooling Distribution Date such amount to Signet/Virginia. (h) On the Pooling Distribution Date on which the Invested Amount and all amounts due to the Letter of Credit Issuer as provided in the Reimbursement Agreement are paid in full, (i) Capital One Bank shall pay to Signet/Virginia an amount equal to the outstanding principal amount of Capital One Receivables remaining in the 1990 Trust (after giving effect to all transfers of Capital One Receivables by Signet/Virginia on prior Pooling Distribution Dates) and (ii) Signet/Virginia shall assign, transfer and deliver to Capital One Bank all its remaining right, title and beneficial interest in such Capital One Receivables. On such date, Signet/Virginia shall take all actions necessary to assign, transfer and deliver to Capital One Bank all of Signet/Virginia's right, title and beneficial interest in all Accounts in the 1990 Trust then in existence that relate to Capital One Receivables. (i) It is the intent of the parties that the transactions contemplated by subsections (d), (e), (f) and (g) hereof (the Transactions") are to be treated as a true sale of the Capital One Receivables and the parties agree to account for the Transactions as such. (j) It is the intent of the parties that, for Federal, state and local income and franchise tax purposes with respect to the Transactions, the Investor Certificates will represent indebtedness of Signet/Virginia or Capital One Bank, as the case may be, secured by their respective allocations of Receivables in the 1990 Trust. In furtherance of the foregoing, the parties, by entering into this Agreement, agree to treat their respective allocations of such Receivables in which Investor Certificateholders have a beneficial interest as indebtedness for Federal, state or local income and franchise tax purposes. (k) Signet/Virginia agrees to solicit the necessary consents of the 1990 Trust's Investor Certificateholders, Letter of Credit Issuer and rating agencies to the transactions contemplated by this Section 2.01 as soon as practicable after the Closing Date. The parties hereto agree not to give effect to the transaction specified in subsection (e) of this Section 2.01 until such consents are obtained. On the first Pooling Distribution Date after obtaining such consents, the parties shall give effect to the Transactions and shall settle all such transactions that would have occurred on prior Pooling Distribution Dates if such transactions had been given effect on the November 1994 Pooling Distribution Date. (l) Signet/Virginia will retain ownership of the reimbursement account with respect to the Letter of Credit as of the Closing Date. At the termination of the 1990 Trust, Signet/Virginia will be entitled to retain all amounts remaining in the reimbursement account. (m) Signet/Virginia will be entitled to receive all interest earned on amounts in the Collection Account and the reimbursement account. (n) Solicitation expenses with regard to the solicitation of necessary consents from Investor Certificateholders, including without limitation any fee or other payment to Investor Certificateholders in connection with obtaining such consents, proxy solicitor fees, filing fees payable to the Securities and Exchange Commission or any state securities commission, legal fees and any other miscellaneous costs, will be allocated to Capital One Bank based on its Monthly Allocation Fraction determined as of the Closing Date. (o) Signet/Virginia and Capital One Bank agree to cooperate in good faith, maintain appropriate records and make available to each other such information as may be necessary to make all of the allocations and determinations contemplated in this Section 2.01. ARTICLE III ORIGINATION OF ACCOUNTS AFTER THE CLOSING DATE 3. Section 3.01. Solicitation of Accounts. Subject to Sections 3.02, 3.03, 10.04 and 11.09(b), after the Closing Date, Capital One Bank shall make Solicitations of Accounts in the Bank Market Area in the name of, and on behalf of, Signet/Virginia (each, a "Signet Solicitation"). The parties to be solicited and the product to be offered in connection with each Signet Solicitation shall be determined by Capital One Bank in accordance with Capital One Bank's Core Strategy. Capital One Bank shall use the same methodology and determining factors in selecting such parties as used by it for Solicitations of Accounts in the name of and on behalf of Capital One Bank. To the extent necessary to perform Signet Solicitations and so long as, and to the extent, permitted by applicable laws and regulations, Capital One Bank may request from any credit bureau, in Signet/Virginia's name, Credit Bureau Information with respect to any party who may be solicited in a Signet Solicitation. Section 3.02. Credit Approval of Signet Solicitations. (a) Prior to the commencement of each Signet Solicitation, Capital One Bank shall provide the Solicitation Credit Committee with Credit Information for such Signet Solicitation in order for the Solicitation Committee to approve (the "Credit Approval") or disapprove such Signet Solicitation. Within 10 Business Days of receipt of such information, Signet/Virginia shall notify Capital One Bank in writing whether the criteria for a Credit Approval has been met. Upon receipt of such notice Capital One Bank may commence the related Signet Solicitation. Capital One Bank shall not commence any Signet Solicitation for which it has not received a written notice from Signet/Virginia that such Solicitation meets the criteria for a Credit Approval. (b) With respect to each Signet Solicitation, within 90 days after such Solicitation is commenced, Capital One shall provide the Review Committee access to any Review Information necessary, with respect to a random sample of the Origination Accounts generated from such Solicitation, for the Review Committee to confirm that such Accounts conform to the Credit Information provided by Capital One to the Solicitation Credit Committee with respect of such Solicitation (the "Review Process"). (c) Signet/Virginia shall keep all Credit Information received with respect to any Credit Approval and any Review Information received in separate files and, except as provided for in Section 10.03, shall not disclose such information to any person or to any department or area within Signet/Virginia other than those involved in the Credit Approval or Review Process. Section 3.03. Review of Signet Solicitation Material. (a) At least 5 Business Days prior to each Signet Solicitation, Capital One Bank shall submit to Signet/Virginia all material to be included in the Solicitation; provided, however, that, except as may be required pursuant to Section 3.02, Signet/Virginia shall have no right to receive any modeling or proprietary information with respect to how the products to be offered in any Signet Solicitation, and the parties to whom such Solicitation will be sent, are determined, including without limitation, information with respect to name selection and product selection algorithms, applications, application information, decisioning models and credit limit assignment models ("Signet Solicitation Information"). Within 2 Business Days after receipt by Signet/Virginia of such material, if Signet/Virginia has not notified Capital One Bank, as set forth below, of any disapproval of such material, Capital One Bank may mail such Solicitation material and Signet/Virginia shall have no further rights to modify such material. If Signet/Virginia disapproves any material provided to it which is to be included in any Signet Solicitation, Signet/Virginia shall notify Capital One Bank of its disapproval of such material and indicate any such material, including without limitation, any wording or marks in such material, which Signet/Virginia does not approve, and such material shall be corrected or changed as directed by Signet/Virginia prior to being included in such Solicitation; provided, however, that no changes shall be made to the legal, regulatory, or other material provisions so long as such provisions are in compliance with applicable laws and regulations. (b) In the event there is a dispute between Signet/Virginia and Capital One Bank with respect to any Solicitation material, the Signet Solicitation material shall not be mailed; provided, however, nothing in this Section 3.03 shall prevent Capital One Bank from mailing a Concurrent Solicitation which includes material which Signet/Virginia disapproved; and provided further that in the event of such a dispute Capital One Bank may make a solicitation in Capital One Bank's name to the parties that were to be solicited on Signet/Virginia's behalf. Section 3.04. Level of Signet Solicitations. Capital One Bank shall use its best efforts to generate new Origination Accounts and related Origination Balances in order to maintain the Rolling Average Balance of the Signet/Virginia Portfolio plus the Rolling Average Test Account Balances at a level at least equal to the Target Balance Level. Within 10 days after the beginning of each calendar quarter, beginning with the first full calendar quarter after the Closing Date, the Solicitation Committee shall meet and determine the timing and level of the Signet Solicitations to be commenced during the last two months of such calendar quarter and the first month of the next calendar quarter in order to so maintain the Rolling Average Balance of the Signet/Virginia Portfolio plus the Rolling Average Test Account Balances. Section 3.05. Signet Solicitation Expenses. Capital One Bank shall deliver to Signet/Virginia within 30 days after the end of each calendar quarter an invoice setting forth an itemized list of Signet Solicitation Expenses incurred by Capital One Bank during such calendar quarter, whether such expenses were incurred in respect of a Signet Solicitation commenced during such quarter or a prior quarter. Signet/Virginia shall, within 30 days after receipt of any such invoice, pay to Capital One Bank an amount equal to one-half of the Signet Solicitation Expenses set forth therein. Section 3.06. Signet Revenue Sharing. So long as any Origination Accounts are owned by Signet/Virginia, Capital One Bank shall deliver to Signet/Virginia, within 30 days after the end of each calendar quarter, an invoice setting forth the amount, and calculation, using the Funding Costs provided by Signet/Virginia, of Excess Profits for the preceding calendar quarter with respect to the Origination Accounts so owned. Signet/Virginia shall, within 30 days after receipt of any such invoice, pay to Capital One Bank an amount equal to 50% of the Excess Profits set forth therein. Section 3.07. Funding. Signet/Virginia may provide funding with respect to the Signet/Virginia Portfolio in any manner it so determines without consultation with Capital One Bank; provided, however, that for the purposes of calculating Net Profit with respect to the Origination Portfolio, the amount used in respect of funding shall be the Funding Costs as agreed to by Signet/Virginia and Capital One Bank with respect to each Signet Solicitation. Section 3.08. Concurrent Solicitations. Subject to Section 10.04, Capital One Bank may make Solicitations in the name of and on behalf of Capital One Bank at the same time or during the same period as Capital One Bank is making a Signet Solicitation and may develop any such Solicitation from the same Credit Bureau Information as used for a Signet Solicitation (a "Concurrent Solicitation"). With respect to any Concurrent Solicitation, Capital One Bank shall, in determining which parties are to be solicited in the name of and on behalf of Signet/Virginia and which parties are to be solicited in the name of and on behalf of Capital One Bank, use random selection to ensure that Signet/Virginia receives a representative sample of such parties. ARTICLE IV MARKETING RESTRICTIONS IN BANK MARKET AREA 4. Section 4.01. Marketing Restrictions. Prior to September 30, 1996, Signet/Virginia shall not, and Signet shall not permit its other Affiliates (other than Capital One or any subsidiary of Capital One) to, commence Solicitations for Accounts in the Bank Market Area; provided, however, that nothing in this Section 4.01 shall prohibit Signet/Virginia or any of its Affiliates from making In-house Solicitations, and; provided further that if Signet/Virginia, as provided for in Section 11.09(b), or Capital One Bank, as provided in Section 4.03, terminates the provisions of Article III, the restrictions set forth in the first part of this sentence shall terminate and shall be of no further force or effect. Section 4.02. Signet/Virginia Testing. Notwithstanding anything to the contrary in this Agreement, Signet/Virginia, or any Signet Affiliate, may perform Tests with respect to solicitation of credit cards at any time in the Bank Market Area (each, a "Signet Test"); provided, however, that any such Tests shall be performed solely by Signet/Virginia or such Affiliate without any reliance on, or assistance from, Capital One or Capital One Bank; provided further that in the event any Accounts are generated from any Signet Test and Signet/Virginia requests Capital One Bank to provide Services with respect to such Accounts pursuant to this Agreement, Capital One Bank shall provide such Services so long as the terms and criteria for servicing such Accounts are reasonably compatible with Capital One Bank's then existing systems. Section 4.03. Early Termination of Signet Solicitations by Capital One Bank. So long as the restrictions set forth in Section 4.01 are in effect, notwithstanding anything to the contrary in this Agreement, if Capital One Bank in its good faith judgment determines that Signet/Virginia is in violation of the provisions of Section 4.01, Capital One Bank shall so notify Signet/Virginia in writing of such determination. If Signet/Virginia disputes such determination, Signet/Virginia shall promptly notify Capital One Bank of such dispute and refer such dispute to the Dispute Resolution Committee. If Signet/Virginia does not notify Capital One Bank that it disputes Capital One Bank's determination that Signet/Virginia is in violation of the provisions of Section 4.01, Capital One Bank's obligation to conduct Signet Solicitations pursuant to Article III shall automatically terminate; provided, however, any such termination shall not relieve Capital One or Capital One Bank of their respective obligations under the other provisions of this Agreement. ARTICLE V IN-HOUSE SOLICITATIONS 5. Section 5.01. Application Processing and Account Set- Up. (a) Subject to 5.01(c), Capital One Bank shall process each In-house Application delivered by Signet/Virginia to Capital One Bank to determine whether the party submitting such application to Signet/Virginia qualifies to be issued a credit card. Capital One Bank shall perform such processing in the same manner and using the same criteria and care as used by Capital One Bank in determining whether a credit card should be issued to any party submitting an application to Capital One Bank. Capital One Bank shall deliver the results of any such processing to Signet/Virginia in a timely manner in order for Signet/Virginia to comply with any applicable Federal or state laws and regulations with respect to responding to any applicant for credit. To the extent necessary to perform In-house Solicitation and so long as, and to the extent, permitted by applicable laws and regulations, Capital One Bank may request from any credit bureau, in Signet/Virginia's name, Credit Bureau Information with respect to any party who has been solicited in a In-house Solicitation. (b) Subject to 5.01(c), if so requested by Signet/Virginia, Capital One Bank shall process and set-up any account generated through an In-house Solicitation which Signet/Virginia has determined to establish as an Account. Capital One Bank shall perform such processing in the same manner and using the same criteria and care as used by Capital One Bank in processing and setting-up credit card accounts for customers of Capital One Bank. (c) If the layout or terms of any In-house Application or Account to be processed pursuant to Section 5.01(a) or 5.01(b) are not reasonably compatible with Capital One Bank's then existing systems and processing capabilities, Capital One Bank shall have no obligation to provide the services called for in Section 5.01(a) or 5.01(b), as the case may be. Section 5.02. In-house Expenses. Capital One Bank shall deliver to Signet/Virginia within 30 days after the end of each calendar quarter an invoice setting forth an itemized list of the In-house Expenses incurred by Capital One Bank during such quarter, Signet/Virginia shall, within 30 days after receipt of any such invoice, pay to Capital One Bank the amount of the In-house Expenses set forth therein. ARTICLE VI SERVICING AND MANAGEMENT OF THE SIGNET/VIRGINIA PORTFOLIO 6. Section 6.01. Servicing of the Signet/Virginia Portfolio; Subservicing Securitized Accounts. (a) Capital One Bank shall provide services with respect to the Signet/Virginia Portfolio, including the Credit Card Accounts securitized pursuant to the 1990 Pooling and Servicing Agreement, which services shall include, without limitation, customer service support, collections, statement rendering, routine card reissuance, payment processing and systems, operations and accounting support (the "Portfolio Services"), and Account Management Services, each as set forth in Annex A of this Agreement. Capital One Bank shall provide Account Management Services with respect to the Signet/Virginia Portfolio to the same extent that such services are being provided with respect to Capital One Bank's credit card portfolio; provided, however, that any actions taken in respect of the Signet/Virginia Portfolio with respect to the credit characteristics of any Credit Card Accounts or Credit Lines, including without limitation, changing the interest rate charged, increasing the amount of available credit, reducing or eliminating the fees charged or renewing the term of any Account or Credit Line, shall only be taken in compliance with Signet/Virginia's Account Management Criteria, in effect at such time and previously provided to Capital One Bank by Signet/Virginia. To the extent necessary to provide the Services and so long as, and to the extent, permitted by applicable laws and regulations, Capital One Bank may request from and report to any credit bureau, in Signet/Virginia's name, information with respect to the Signet/Virginia Portfolio. (b) In the event Signet/Virginia determines to securitize additional Credit Card Accounts, Capital One Bank shall act, if so requested by Signet/Virginia, as the servicer or a subservicer and, in accordance with the terms of this Agreement, assume the obligations of the servicer under the related pooling and servicing agreement, with respect to any such Accounts. Section 6.02. Capital One Servicing Fee; Other Charges. (a) Capital One Bank shall deliver to Signet/Virginia within 30 days after the end of each calendar quarter an invoice setting forth the amount of the Capital One Servicing Fee for each month during such quarter, the calculation of such amount for each such month, and the aggregate of such Capital One Servicing Fees for such quarter. Signet/Virginia shall, within 30 days after receipt of any such invoice, pay to Capital One Bank the aggregate amount of Capital One Servicing Fees set forth therein. (b) Within 30 days after the end of each calendar quarter Capital One Bank shall deliver to Signet/Virginia an invoice setting forth the Assessment Amount paid by Capital One Bank to MasterCard and Visa respectively, during such quarter. Signet/Virginia shall, within 30 days after receipt of any such invoice, pay to Capital One Bank the Assessment Amount set forth therein. (c) In the event that Signet/Virginia requests Capital One Bank to make a Mass Reissuance of credit cards on Signet/Virginia's behalf, Capital One Bank shall deliver to Signet/Virginia within 30 days after the end of the calendar quarter in which such Mass Reissuance has been completed an invoice setting forth a detailed list of the Reissuance Costs incurred by Capital One Bank during such quarter. Signet/Virginia shall, within 30 days after receipt of any such invoice, pay to Capital One Bank the amount of the Reissuance Costs set forth therein. (d) Capital One Bank shall from time to time deliver to Signet/Virginia an invoice setting forth the Association Fees charged by MasterCard and Visa with respect to the Signet/Virginia Portfolio. Signet/Virginia shall, within 30 days after receipt of any such invoice, pay to Capital One Bank the Association Fees set forth therein. (e) Capital One Bank shall, upon ordering statement forms to be used in connection with Services provided with respect to the Signet/Virginia Portfolio, deliver to Signet/Virginia an invoice setting forth the Statement Fee related to such order. Signet/Virginia shall, within 30 days after receipt of any such invoice, pay to Capital One Bank the Statement Fee set forth therein. Section 6.03. Ownership of the Signet/Virginia Portfolio; Identification of the Signet/Virginia Portfolio. All Accounts and Credit Lines related to the Signet/Virginia Portfolio and all related Balances shall be owned solely by, or if any such Accounts have been securitized, for the benefit of, Signet/Virginia. Capital One Bank shall mark all of its files, whether computer or otherwise, related to the Signet/Virginia Portfolio to indicate that such Accounts, Credit Lines and Balances are owned by Signet/Virginia. 6.04. Signet/Virginia Information. Signet/Virginia shall own all Account performance data with respect to the Signet/Virginia Portfolio, including, without limitation, information with respect to the name and address of the customer, customer credit information, payments received, pricing, purchase and cash advance behavior, delinquency, charge-offs and outstandings ("Performance Data") and Capital One Bank shall provide Signet/Virginia such data, within 15 days after the end of each month, on a computer tape, in a format reasonably compatible with Signet/Virginia's systems. With respect to any In-house Solicitations, in addition to the Performance Data, Signet/Virginia shall own all information developed by Signet/Virginia on or after the Closing Date with respect to how the products to be offered in any In-house Solicitation, and the parties to whom such Solicitation are to be made, are determined, including without limitation, information with respect to name selection and product selection algorithms, applications, application information, decisioning models and credit limit assignment models ("In-house Solicitation Information"). ARTICLE VII REPRESENTATIONS AND WARRANTIES 7. Section 7.01. Representations and Warranties of Signet/Virginia. Signet/Virginia represents and warrants to Capital One and Capital One Bank as follows: (a) Signet/Virginia has been duly organized, and is validly existing as a bank and in good standing under the laws of Virginia, and has all requisite corporate power and authority to own, lease or otherwise hold its assets and carry on its business as it is now being conducted. (b) Signet/Virginia has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement has been duly authorized by all requisite corporate action of Signet/Virginia. This Agreement has been duly executed and delivered by Signet/Virginia and, assuming due execution and delivery by Capital One and Capital One Bank, constitutes the legal, valid and binding obligation of Signet/Virginia, enforceable against Signet/Virginia in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith, and fair dealing, regardless of whether enforcement is sought in a proceeding in equity or at law (the foregoing "subject to" clause is hereinafter referred to as the "Remedies Exception"). Section 7.02. Representations and Warranties of Signet. Signet represents and warrants to Capital One and Capital One Bank as follows: (a) Signet has been duly organized, and is validly existing and in good standing under the laws of Virginia, and has all requisite corporate power and authority to own, lease or otherwise hold its assets and carry on its business as it is now being conducted. (b) Signet has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement has been duly authorized by all requisite corporate action of Signet. This Agreement has been duly executed and delivered by Signet and, assuming due execution and delivery by Capital One and Capital One Bank, constitutes the legal, valid and binding obligation of Signet, enforceable against Signet in accordance with its terms, subject to the Remedies Exception. Section 7.03. Representations and Warranties of Capital One Bank. Capital One Bank hereby represents and warrants to Signet and Signet/Virginia as follows: (a) Capital One Bank has been duly organized, and is validly existing as a bank and in good standing under the laws of Virginia, and has all requisite corporate power and authority to own, lease or otherwise hold its assets and carry on its business as it is now being conducted. (b) Capital One Bank has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement has been duly authorized by all requisite corporate action of Capital One Bank. This Agreement has been duly executed and delivered by Capital One Bank and, assuming due execution and delivery by Signet and Signet/Virginia, constitutes the legal, valid and binding obligation of Capital One Bank, enforceable against Capital One Bank in accordance with its terms, subject to the Remedies Exception. Section 7.04. Representations and Warranties of Capital One. Capital One hereby represents and warrants to Signet and Signet/Virginia as follows: (a) Capital One has been duly organized, and is validly existing and in good standing under the laws of Delaware, and has all requisite corporate power and authority to own, lease or otherwise hold its assets and carry on its business as it is now being conducted. (b) Capital One has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement has been duly authorized by all requisite corporate action of Capital One. This Agreement has been duly executed and delivered by Capital One and, assuming due execution and delivery by Signet and Signet/Virginia, constitutes the legal, valid and binding obligation of Capital One, enforceable against Capital One in accordance with its terms, subject to the Remedies Exception. ARTICLE VIII INDEMNIFICATION; LIMITATIONS ON LIABILITY 8. Section 8.01. Indemnity of Capital One and Capital One Bank. Signet and Signet/Virginia shall indemnify, defend and hold harmless Capital One and Capital One Bank, each Affiliate thereof and each of their respective directors, officers and employees and each of their heirs, executors, successors and assigns of any of the foregoing (the "Capital One Indemnitees") from and against any and all costs and expenses, Losses, damages, claims and Liabilities (including reasonable attorneys' fees, disbursements and expenses of litigation), incurred by or asserted against an Capital One Indemnitee (other than in connection with any action brought by Signet or Signet/Virginia or any Signet Affiliate against an Capital One Indemnitee) in connection with (i) the performance of Services under this Agreement or otherwise in its capacity as agent of Signet or Signet/Virginia hereunder, unless caused by the willful misconduct or negligence or bad faith of Capital One or Capital One Bank, as the case may be, or (ii) subject to Section 8.08, any act or omission by Signet or Signet/Virginia in connection with this Agreement which is not within the scope of authority conferred by this Agreement or is in violation of any provision of this Agreement or any applicable laws and regulations. Section 8.02. Indemnity of Signet and Signet/Virginia. Capital One and Capital One Bank shall indemnify, defend and hold harmless Signet and Signet/Virginia, each Affiliate thereof and each of their respective directors, officers and employees and each of their heirs, executors, successors and assigns of any of the foregoing (the "Signet Indemnitees", and together with the Capital One Indemnitees, the "Indemnitees") from and against any and all costs and expenses, losses, damages, claims and Liabilities (including reasonable attorneys' fees, disbursements and expenses of litigation), incurred by or asserted against a Signet Indemnitee (other than in connection with any action brought by Capital One or Capital One Bank or any Capital One Affiliate against a Signet Indemnitee) in connection with, subject to Section 8.08, any act or omission by Capital One or Capital One Bank in connection with this Agreement which is not within the scope of authority conferred by this Agreement or is in violation of any provision of this Agreement or any applicable laws and regulations. Section 8.03. Limitations on Indemnification Obligations. (a) The amount which any party (an "Indemnifying Party") is or may be required to pay to an Indemnitee pursuant to Section 8.01 or Section 8.02 shall be reduced (including, without limitation, retroactively) by any Insurance Proceeds or other amounts actually recovered by or on behalf of such Indemnitee, in reduction of the related Loss. If an Indemnitee shall have received payment (an "Indemnity Payment") required by this Agreement from an Indemnifying Party in respect of any Loss and shall subsequently actually receive Insurance Proceeds or other amounts in respect of such Loss, then such Indemnitee shall pay to such Indemnifying Party a sum equal to the amount of such Insurance Proceeds or other amounts actually received (up to but not in excess of the amount of any indemnity payment made hereunder). An insurer who would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto, or, solely by virtue of the indemnification provisions hereof, have any subrogation rights with respect thereto, it being expressly understood and agreed that no insurer or any other third party shall be entitled to a "windfall" (i.e., a benefit they would not be entitled to receive in the absence of the indemnification provisions) by virtue of the indemnification provisions hereof. (b) If an Indemnitee realizes a Tax benefit or detriment by reason of having incurred an Indemnifiable Loss for which such Indemnitee receives an Indemnity Payment from an Indemnifying Party or by reason of receiving an Indemnity Payment, then such Indemnitee shall pay to such Indemnifying Party an amount equal to the Tax benefit, or such Indemnifying Party shall pay to such Indemnitee an additional amount equal to the Tax detriment (taking into account any Tax detriment resulting from the receipt of such additional amounts), as the case may be. If, in the opinion of counsel to an Indemnifying Party reasonably satisfactory in form and substance to the affected Indemnitee, there is a substantial likelihood that the Indemnitee will be entitled to a Tax benefit by reason of an indemnifiable Loss, such Indemnifying Party promptly shall notify the Indemnitee and the Indemnitee promptly shall take any steps (including the filing of such returns, amended returns or claims for refunds consistent with the claiming of such Tax benefit) that, in the reasonable judgment of such Indemnifying Party, are necessary and appropriate to obtain any such Tax benefit. If, in the opinion of counsel to an Indemnitee reasonably satisfactory in form and substance to the affected Indemnifying Party, there is a substantial likelihood that the Indemnitee will be subjected to a Tax detriment by reason of an Indemnification Payment, the Indemnitee promptly shall notify such Indemnifying Party and the Indemnitee promptly shall take any steps (including the filing of such returns or amended returns or the payment of Tax underpayments consistent with the settlement of any Liability for Taxes arising from such Tax detriment) that, in the reasonable judgment of the Indemnitee, are necessary and appropriate to settle any Liabilities for Taxes arising from such Tax detriment. If, following a payment by an Indemnitee or an Indemnifying Party pursuant to this Section 8.03(b) in respect of a Tax benefit or detriment, there is an adjustment to the amount of such Tax benefit or detriment, then each of Signet or Signet/Virginia, on the one hand, and Capital One or Capital One Bank, on the other hand, shall make appropriate payments to the other, including the payment of interest thereon at the federal statutory rate then in effect, to reflect such adjustments. Section 8.04. Procedures for Indemnification of Third Party Claims. (a) If an Indemnitee shall receive notice or otherwise learn of the assertion by a person (including, without limitation, any governmental entity) who is not a party to this Agreement (or any Affiliate of either party) of any claim or of the commencement by any such person of any Action (a "Third Party Claim") with respect to which an Indemnifying Party may be obligated to provide indemnification pursuant to Section 8.01 or 8.02 such Indemnitee shall give such Indemnifying Party written notice thereof promptly after becoming aware of such Third Party Claim; provided that the failure of any Indemnitee to give notice as provided in this Section 8.04(a) shall not relieve the related Indemnifying Party of its obligations under this Article VIII, except to the extent that such Indemnifying Party is prejudiced by such failure to give notice. Such notice shall describe the Third Party Claim in reasonable detail. (b) An Indemnifying Party may elect to defend or to seek to settle or compromise, at such Indemnifying Party's own expense and by such Indemnifying Party's own counsel, any Third Party Claim. Within 30 days of the receipt of notice from an Indemnitee in accordance with Section 8.04(a) (or sooner, if the nature of such Third Party Claim so requires), the Indemnifying Party shall notify the Indemnitee of its election whether the Indemnifying Party will assume responsibility for defending such Third Party Claim, which election shall specify any reservations or exceptions. After notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third Party Claim, such Indemnifying Party shall not be liable to such Indemnitee under this Article VIII for any legal or other expenses (except expenses approved in advance by the Indemnifying Party) subsequently incurred by such Indemnitee in connection with the defense thereof; provided that if the defendants with respect to any such Third Party Claim include both an Indemnifying Party and one or more Indemnitees and in any Indemnitee's reasonable judgment a conflict of interest between one or more of such Indemnitees and such Indemnifying Party exists in respect of such claim or if an Indemnifying Party shall have assumed responsibility for such claim with any reservations or exceptions, such Indemnitees shall have the right to employ separate counsel to represent such Indemnitees and in that event the reasonable fees and expenses of such separate counsel (but not more than one separate counsel reasonably satisfactory to the Indemnifying Party) shall be paid by such Indemnifying Party. If an Indemnifying Party elects not to assume responsibility for defending a Third Party Claim, or fails to notify an Indemnitee of its election as provided in this Section 8.04(b), such Indemnitee may defend or (subject to the remainder of this Section 8.04(b)) seek to compromise or settle such Third Party Claim. Notwithstanding the foregoing, neither an Indemnifying Party nor an Indemnitee may settle or compromise any claim over the objection of the other; provided, however, that consent to settlement or compromise shall not be unreasonably withheld. Neither an Indemnifying Party nor an Indemnitee shall consent to entry of any judgment or enter into any settlement of any Third Party Claim which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnitee, in the case of a consent or settlement by an Indemnifying Party, or to the Indemnifying Party, in the case of a consent or settlement by the Indemnitee, of a written release from all liability in respect to such Third Party Claim. (c) If the Indemnifying Party chooses to defend or to seek to compromise or settle any Third Party Claim, the related Indemnitee shall make available to such Indemnifying Party any personnel or any books, records or other documents within its control or which it otherwise has the ability to make available that are necessary or appropriate for such defense, settlement or compromise, and shall otherwise cooperate in the defense, settlement or compromise of such Third Party Claims, subject to the establishment of appropriate confidentiality arrangements which are reasonably satisfactory to Signet and Signet/Virginia, on the one hand, and Capital One and Capital One Bank, on the other hand. (d) Notwithstanding anything else in this Article VIII to the contrary, if the Indemnifying Party notifies the related Indemnitee in writing of such Indemnifying Party's desire to settle or compromise a Third Party Claim on the basis set forth in such notice (provided that such settlement or compromise includes as an unconditional term thereof the giving by the claimant or plaintiff of a written release of the Indemnitee from all liability in respect thereof) and the Indemnitee shall notify the Indemnifying Party in writing that such Indemnitee declines to accept any such settlement or compromise, such Indemnitee may continue to contest such Third Party Claim, free of any participation by such Indemnifying Party, at such Indemnitee's sole expense. In such event, the obligation of such Indemnifying Party to such Indemnitee with respect to such Third Party Claim shall be equal to (i) the costs and expenses of such Indemnitee prior to the date such Indemnifying Party notifies such Indemnitee of the offer to settle or compromise (to the extent such costs and expenses are otherwise indemnifiable hereunder) plus (ii) the lesser of (A) the amount of any offer of settlement or compromise which such Indemnitee declined to accept and (B) the actual out-of-pocket amount such Indemnitee is obligated to pay subsequent to such date as a result of such Indemnitee's continuing to pursue such Third Party Claim. (e) Any claim on account of a Loss which does not result from a Third Party Claim shall be asserted by written notice given by the Indemnitee to the Indemnifying Party. The Indemnifying Party shall have a period of 30 days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such 30-day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such 30-day period or rejects such claim in whole or in part, the Indemnitee shall be free to pursue such remedies as may be available to such party under this Agreement or under applicable law. (f) In addition to any adjustments required pursuant to Section 8.03, if the amount of any Loss shall, at any time subsequent to the payment required by this Agreement, be reduced by recovery, settlement or otherwise, the amount of such reduction, less any expenses incurred in connection therewith, shall promptly be repaid by the Indemnitee to the Indemnifying Party. (g) In the event of payment by an Indemnifying Party to any Indemnitee in connection with any Third Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right or claim relating to such Third Party Claim against any claimant or plaintiff asserting such Third Party Claim or against any other person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right or claim. Section 8.05. Remedies Cumulative. The remedies provided in this Article VIII shall be cumulative and shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party. Section 8.06. Survival of Indemnitees. The obligations of each of Signet and Signet/Virginia, on the one hand, and Capital One and Capital One Bank, on the other hand, to the parties to this Agreement or any Indemnitee under this Article VIII shall survive the sale or other transfer by it of any assets or businesses or the assignment by it of any Liabilities, with respect to any Loss of the other related to such assets, businesses or Liabilities. Section 8.07. Reliance on Advice of Counsel, Instructions, etc. (a) Notwithstanding any provision of this Agreement to the contrary, neither Capital One nor Capital One Bank shall be liable for any action it takes or omits to take in good faith (i) in reliance on advice of legal counsel to Signet or Signet/Virginia, (ii) upon and in conformity with the instructions of Signet or Signet/Virginia or (iii) in accordance with the instructions, rulings or orders of any state or any other governmental authority. (b) Notwithstanding any provision of this Agreement to the contrary, neither Signet nor Signet/Virginia shall be liable for any action it takes or omits to take in good faith (i) in reliance on advice of legal counsel to Capital One or Capital One Bank, (ii) upon and in conformity with the instructions of Capital One or Capital One Bank or (iii) in accordance with the instructions, rulings or orders of any state or any governmental authority. Section 8.08. Liability for Nonperformance. (a) Capital One and Capital One Bank shall not have any liability to Signet or Signet/Virginia for any act or omission within the scope of authority conferred by this Agreement which is based on a good-faith belief that such act or omission is consistent with Capital One's or Capital One Bank's, as the case may be, obligation hereunder or for failure to perform its obligations hereunder unless such failure arises out of, directly or indirectly, the willful misconduct or negligence or bad faith on the part of Capital One or Capital One Bank, as the case may be. Neither Capital One nor Capital One Bank shall be required to perform any Services (or any part of any Services) to the extent that performance of such Services (or such part of such Services) would violate any law, rule or regulation. (b) Signet and Signet/Virginia shall not have any liability to Capital One or Capital One Bank for any act or omission within the scope of authority conferred by this Agreement which is based on a good-faith belief that such act or omission is consistent with Signet or Signet/Virginia's, as the case may be, obligation hereunder or for failure to perform its obligations hereunder unless such failure arises out of, directly or indirectly, the willful misconduct or negligence or bad faith on the part of Signet or Signet/Virginia, as the case may be. Neither Signet nor Signet/Virginia shall be required to perform any Services (or any part of any Services) to the extent that performance of such Services (or such part of such Services) would violate any law, rule or regulation. ARTICLE IX COVENANTS 9. Section 9.01. Maintenance of Capital One Bank's Existence. Capital One Bank shall keep in full effect its existence, rights and franchises as a corporation under the laws of the jurisdiction of its incorporation, and will obtain and preserve its qualification to do business, or employ agents qualified to do business, in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Agreement and to perform its respective duties under this Agreement. Capital One Bank shall continue to employ persons having sufficient skill and experience, and shall maintain a sufficient scale and scope of operations generally, as are necessary to perform its obligations under this Agreement. Any person into which Capital One Bank may be merged or consolidated, or any corporation resulting from any merger or consolidation to which Capital One Bank shall be a party, or any person succeeding to the business of Capital One Bank, shall be the successor of Capital One Bank hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. Section 9.02. Maintenance of Capital One's Existence. Capital One shall keep in full effect its existence, rights and franchises as a corporation under the laws of the jurisdiction of its incorporation, and will obtain and preserve its qualification to do business, or employ agents qualified to do business, in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Agreement and to perform its respective duties under this Agreement. Capital One shall continue to employ persons having sufficient skill and experience, and shall maintain a sufficient scale and scope of operations generally, as are necessary to perform its obligations under this Agreement. Any person into which Capital One may be merged or consolidated, or any corporation resulting from any merger or consolidation to which Capital One shall be a party, or any person succeeding to the business of Capital One, shall be the successor of Capital One hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. Section 9.03. Standard of Care. Capital One Bank shall perform its obligations and provide Services hereunder in accordance with (i) the past written policies and procedures of the BankCard Division, except to the extent that a more exacting standard is used or observed by Capital One Bank with respect to its own credit card portfolio, in which case such standard will be used with respect to Capital One Bank's obligations and Services to be provided hereunder and (ii) the rules and regulations of MasterCard or Visa, as the case may be. Section 9.04. Compliance with Laws and Regulations. Capital One Bank shall perform its obligations and provide Services hereunder in accordance with the requirements of safe and sound banking practices and shall comply in all material respects with all applicable law and regulations. Section 9.05. Covenants of Signet/Virginia. Signet/Virginia covenants and agrees to send all notices and other communications received with regard to the Signet/Virginia Portfolio to Capital One Bank. This covenant shall terminate and shall have no further effect in the event that Capital One Bank is replaced as servicing agent hereunder. ARTICLE X ACCESS TO INFORMATION; CONFIDENTIALITY; CUSTOMER NAMES 10. Section 10.01. Access to Information. From and after the date hereof, each party hereto shall afford to any other party and its authorized accountants, counsel and other designated representatives reasonable access (including using reasonable efforts to give access to persons or firms possessing information) during normal business hours to all records, books, contracts, instruments, computer data and other data and information within its possession, but excluding all proprietary information and customer lists and related information, insofar as such access is reasonably required in connection with the transactions contemplated by this Agreement. Information may be requested under this Section 10.01 for, without limitation, audit, accounting, claims, regulatory, litigation and tax purposes, as well as for purposes of fulfilling disclosure and reporting obligations and for performing this Agreement and the transactions contemplated hereby. Section 10.02. Production of Witnesses. Each of parties hereto and their respective Affiliates shall use reasonable efforts to make available to any other party and its Affiliates, upon written request, its directors, officers, employees and agents as witnesses to the extent that any such person may reasonably be required (giving consideration to business demands of such directors, officers, employees, and agents) in connection with any legal, administrative or other proceedings in which the requesting party may from time to time be involved. Section 10.03. Confidentiality; Use of Information. (a) From and after the execution of this Agreement, the parties hereto shall keep confidential, and shall use reasonable efforts to cause their respective officers, directors, employees and agents to keep confidential, any and all information obtained from the other party concerning the assets, properties and business of the other party, and shall not use such information for any purpose other than those contemplated by this Agreement; provided, however, that neither party shall be subject to the obligations set forth in the preceding clause with respect to any such information provided to it by the other party which either is (i) in the public domain through no fault of such party or (ii) lawfully acquired from other sources by such party which sources are not themselves bound by a confidentiality obligation; and each party shall not release or disclose such information to any other person, except its regulators, auditors, attorneys, financial advisors, bankers and other consultants and advisors, unless compelled to disclose by judicial or administrative process or, as advised by its counsel, by other requirements of law. The terms of this Section 10.03 shall survive the termination of this Agreement. (b) Capital One Bank shall own and have sole use of any Signet Solicitation Information. Signet/Virginia shall own and have sole use of all Performance Data and In-house Solicitation Information (collectively, the "Signet/Virginia Data"). No party hereto nor any of their respective Affiliates shall use for their own purposes any information or data related to any Account which is not owned by them. Section 10.04. Customer Names. (a) Within 10 days after the Closing Date, Signet/Virginia shall provide the Signet Names and Capital One Bank shall supply the Capital One Names to an independent third-party data processor mutually agreed upon by Signet and Capital One (the "Name Processor") with whom Signet/Virginia and Capital One Bank shall have entered into an agreement pursuant to which the Name Processor will (i) promptly compare each of the Capital One Names and the Signet Names and eliminate from each the names which appear in both the Capital One Names and the Signet Names (the "Common Names") and produce (A) a list of Capital One Names minus the Common Names (the "Adjusted Capital One Names") and (B) a list of Signet Names minus the Common Names (the "Adjusted Signet Names") and (ii) as requested, process potential customer names ("Potential Customer Names") of each of Signet/Virginia and Capital One Bank and, remove the Adjusted Signet Names, in the case of Capital One Potential Customer Names, or Adjusted Capital One Names, in the case of Signet/Virginia Potential Customer Names, from any such list of Potential Customer Names (the "Name Removal Process"). (b) From the Closing Date to and including September 30, 1996, prior to commencement of any Signet Test and, in the event Capital One Bank's obligation to perform Signet Solicitations is terminated, any Solicitation by Signet/Virginia for credit card customers, Signet/Virginia shall (i) deliver to the Name Processor a tape containing all the Signet/Virginia Potential Customer Names to be solicited in such Signet Test or Solicitation in order for the Name Removal Process to be performed on such Potential Customer Names and (ii) only include in any Signet Test or such Solicitation the Potential Customer Names remaining after the Name Removal Process has been completed. Signet/Virginia shall pay all expenses associated with any Name Removal Process performed pursuant to this Section 10.04(b). (c) From the Closing Date to and including September 30, 1996, prior to the commencement of any Concurrent Solicitation or other credit card Solicitation by Capital One Bank on Capital One Bank's behalf, Capital One Bank shall (i) deliver to the Name Processor a tape containing all Capital One Potential Customer Names to be Solicited in such Concurrent or other Solicitation in order for the Name Removal Process to be performed on such Potential Customer Names and (ii) only include in any Concurrent or other Solicitation the Potential Customer Names remaining after the Name Removal Process has been completed. Capital One Bank shall pay all expenses associated with any Name Removal Process performed pursuant to this Section 10.04(c). (d) From the Closing Date to and including September 30, 1996, prior to the commencement of any Signet Solicitation, Capital One Bank shall (i) deliver to the Name Processor a tape containing all Signet/Virginia Potential Customer Names to be solicited in such Signet Solicitation in order for the Name Removal Process to be performed on such Potential Customer Names and (ii) only include in any Signet Solicitation the Potential Customer Names remaining after the Name Removal Process has been completed. Signet/Virgnia shall pay all expenses associated with any Name Removal Process performed pursuant to this Section 10.04(d). ARTICLE XI MISCELLANEOUS 11. Section 11.01. Complete Agreement; Construction. This Agreement, including any annexes, schedules and exhibits hereto, and other agreements and documents referred to herein, shall constitute the entire agreement between the parties with respect to the subject matter hereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter. Section 11.02. No Exclusive Commitment by Capital One and Capital One Bank. Capital One and Capital One Bank shall have no obligation to perform any services as the agent of Signet or Signet/Virginia other than those Services provided for in this Agreement unless mutually agreed by the parties hereto. Capital One, Capital One Bank and any Capital One Affiliate may engage in any other business activities as it may in its sole discretion determine during the term of this Agreement, notwithstanding that such activities may be similar to and competitive with the activities of Signet, Signet/Virginia and Signet's Affiliates, provided that no such activity causes a breach of Capital One's or Capital One Bank's obligations under this Agreement or the Separation Agreement. Section 11.03. Sale or Assignment of Origination Accounts. (a) Signet/Virginia may only sell the Origination Accounts (in whole or in part) through a competitive bidding process in which Capital One Bank is permitted to be a bidder ("Competitive Bid Sale"); provided, however, that any such sale shall be conditioned on the Winning Bidder, if other than Capital One Bank, (the "Winning Bidder") providing a servicing arrangement with respect to such Origination Accounts to replace the arrangement set forth herein and; provided further that nothing in this Section 11.03 shall prevent Signet/Virginia from securitizing Credit Card Accounts. (b) In the event that Capital One Bank is not the Winning Bidder in any Competitive Bid Sale, upon receipt of payment from the Winning Bidder, Signet/Virginia shall promptly pay to Capital One Bank 50% of the amount received in payment for such Competitive Bid Sale in excess over an amount equal to the sum of the aggregate Balance as of the date of sale of the Origination Accounts so sold plus any reasonable costs incurred by Signet/Virginia in connection with such Competitive Bid Sale. (c) In connection with any Competitive Bid Sale, Capital One Bank shall promptly provide information to any party which is bidding in such Competitive Bid Sale which is reasonably necessary to permit such party to evaluate the Origination Accounts being sold; provided, however, that Capital One Bank shall not be required to provide any proprietary information in connection with any Competitive Bid Sale. Section 11.04. Replacement of Capital One Bank. (a) In the event of a material breach of Capital One Bank's servicing obligations hereunder which is not cured within 90 days of Capital One Bank's receipt of written notice specifying such breach, Signet/Virginia shall have the right to replace Capital One Bank as its servicing agent. (b) Replacement of Capital One Bank as servicer pursuant to this Section 11.04 shall be effective only upon written notice by Signet/Virginia to Capital One Bank. (c) Replacement of Capital One Bank as servicer pursuant to this Section 11.04 with respect to the Services to be provided pursuant to this Agreement shall not relieve Capital One Bank with respect to any of its other obligations hereunder, including, without limitation, its obligation to conduct Signet Solicitations. (d) Replacement of Capital One Bank a servicer pursuant to this Section 11.04 with respect to the Services to be provided pursuant to this Agreement shall not relieve Signet/Virginia with respect to any of its obligations hereunder, including without limitation, its obligations under Sections 3.06 and 11.03 with respect to revenue sharing and the sale of Origination Accounts. (e) All other rights of Signet, Signet/Virginia, Capital One and Capital One Bank under law shall be preserved notwithstanding any substitution of services pursuant to paragraph 11.04(a) above. Section 11.05. Dispute Resolution. Capital One and Capital One Bank, on the one hand, and Signet and Signet/Virginia, on the other hand, shall each appoint two members of their managerial staff to serve on a joint management committee (the "Dispute Resolution Committee"). The Dispute Resolution Committee shall meet at either Capital One Bank's or Signet/Virginia's offices, whichever is more appropriate in light of the issue to be discussed, at such time as either party may demand in writing, for the purpose of resolving any dispute arising under this Agreement. No dispute under this Agreement shall be the subject of arbitration or other formal proceeding between the parties hereto before being considered by the Dispute Resolution Committee. If the Dispute Resolution Committee is unable to resolve any dispute submitted to it by any party hereto within 30 days after such submission, the Dispute Resolution Committee may refer the issue to the Chief Executive Officers of Capital One and Signet for resolution. If such officers are unable to resolve such dispute within 15 days after referral, or if the Dispute Resolution Committee determines to not refer any dispute to such officers, any member of the Dispute Resolution Committee may refer such dispute to binding arbitration as provided for in Section 11.11. Section 11.06. Amendments. This Agreement may only be modified or amended by an agreement in writing signed by the parties hereto. Section 11.07. No Waivers. No failure by any party hereto to take any action or assert any right hereunder shall be deemed to be a waiver of such right in the event of the continuation or repetition of the circumstances giving rise to such right, unless expressly waived in writing by the party against whom the existence of such waiver is asserted. Section 11.08. Successors and Assigns. Neither Capital One nor Capital One Bank shall assign its rights or obligations hereunder without the prior written consent of Signet and Signet/Virginia, which approval shall not be unreasonably withheld. Neither Signet nor Signet/Virginia shall assign its rights or obligations hereunder without the prior written consent of Capital One and Capital One Bank, which approval shall not be unreasonably withheld. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Section 11.09. Termination; Conversion. (a) This Agreement shall terminate and shall be, except as provided in Section 11.17, of no further force and effect after September 30, 1996. (b) Notwithstanding anything to the contrary in this Agreement, Signet and Signet/Virginia may terminate the provisions of Article III of this Agreement at any time upon 30 days' written notice to Capital One and Capital One Bank; provided that such termination shall not relieve Signet/Virginia of its obligations under Section 3.06; and provided further that such termination shall not relieve Capital One or Capital One Bank, on the one hand, or Signet or Signet/Virginia on the other hand, of any of their other respective obligations hereunder. (c) Notwithstanding anything to the contrary in this Agreement, Signet and Signet/Virginia may terminate the provision of Article V of this Agreement at anytime upon 30 days' written notice. Such termination shall not relieve Capital One or Capital One Bank, on the one hand, and Signet or Signet/Virginia, on the other hand, with respect to any of their other respective obligations hereunder. (d) Commencing on April 1, 1996, or, if earlier, (i) the termination of Capital One Bank's obligation to provide any Services hereunder whether pursuant to Section 11.04, by mutual agreement or otherwise or (ii) the sale of any Origination Accounts pursuant to Section 11.03, Capital One Bank shall provide such assistance as is reasonably necessary to Signet/Virginia or any Winning Bidder to convert the relevant Services to Signet/Virginia's or the Winning Bidder's or a Signet/Virginia or Winning Bidder designated third party's MasterCard and Visa credit card processing systems; provided, however, that no conversions shall be made or related assistance provided during the period between October 15th of one year and January 15th of the immediately succeeding year. To effect any such conversion, Capital One Bank shall (i) provide Signet/Virginia or any Winning Bidder with such systems and programming services as are reasonably necessary to analyze Capital One Bank's records relating to the Services and shall convert them to a form that is compatible with Signet/Virginia's or the Winning Bidder's or such third party's data processing systems, (ii) at Signet/Virginia's request, in the customer billing statements, or separately, mail all communications by Signet/Virginia to customers relating to the conversion of the Signet/Virginia Portfolio (e.g., change in terms notices), and (iii) provide any Signet/Virginia Data, as directed by Signet/Virginia, to Signet/Virginia or any Winning Bidder or such designated third party. Signet/Virginia shall pay Capital One Bank an amount equal to the sum of all reasonable costs incurred by Capital One Bank in connection with any such conversion, plus 15% of such costs. Section 11.10. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without regard to the principles of conflicts of laws thereof. Section 11.11. Binding Arbitration. (a) Any controversy, dispute or claim (whether lying in contract or tort) between or among the parties arising out of or related to this Agreement, or any agreements or instruments related hereto or delivered in connection herewith, shall, after the dispute resolution process set forth in Section 11.05 has been completed, at the request of any party be submitted to arbitration in accordance with this Section 11.11 by notifying the other parties of its election to arbitrate such controversy, dispute or claim. (b) Each controversy, dispute or claim submitted by a party to arbitration shall be heard by an arbitration panel composed of three arbitrators, in accordance with the following provisions. Signet and Signet/Virginia, on the one hand, and Capital One and Capital One Bank, on the other hand, shall each appoint one arbitrator within fifteen (15) days after the matter has been submitted to arbitration. If any party fails to appoint its arbitrator within such fifteen (15) day period, any party may apply to the American Arbitration Association (the "AAA") to appoint an arbitrator on behalf of the party that has failed to appoint its arbitrator. The two arbitrators appointed by or on behalf of (as the case may be) the parties shall jointly appoint a third arbitrator, who shall chair the arbitration panel (the "Chairman"). If the arbitrators appointed by or on behalf of the parties do not succeed in appointing a Chairman within fifteen (15) days after the latter of the two arbitrators appointed by or on behalf of the parties has been appointed, the Chairman shall, at the request of either party, be appointed by the AAA. If for any reason an arbitrator is unable to perform his or her function, he or she shall be replaced and a substitute shall be appointed in the same manner as the arbitrator replaced. (c) Except as otherwise stated herein, arbitration proceedings shall be conducted in accordance with the Commercial Arbitration Rules of the AAA. In any arbitration proceeding hereunder: (i) proceedings shall, unless otherwise agreed by the parties, be held in Richmond, Virginia; (ii) the arbitration panel shall have no power to award punitive damages and shall be bound by all statutes of limitation which would otherwise be applicable in a judicial action brought by a party; and (iii) the decision of a majority of the arbitrators (or the Chairman if there is no such majority) shall be final and binding on the parties to this Agreement and shall be enforceable in any court of competent jurisdiction. The parties hereby waive any rights to appeal or to review of such decision by any court or tribunal and also waive any objections to such enforcement. THE PARTIES HEREBY AGREE TO WAIVE ALL RIGHTS TO TRIAL BY JURY WITH RESPECT TO ANY CONTROVERSY, DISPUTE OR CLAIM SUBMITTED TO ARBITRATION UNDER THIS AGREEMENT. (d) Notice preliminary to, in conjunction with, or incident to any arbitration proceeding may be sent to the parties by registered or certified mail (return receipt requested) at the address set forth in Section 11.16 and personal service is hereby waived. The arbitrators shall award recovery of all costs and fees incurred in connection with the arbitration and the proceeding, and obtaining any judgment related thereto, of each disputed matter (including reasonable attorney's fees and expenses and arbitrator's fees and expenses and court costs, in each case, with respect to such disputed matter) to the party that substantially prevails in the arbitration proceeding with respect to such disputed matter. (e) No provision of this Section 11.11 shall limit the right of any party to this Agreement to exercise self-help remedies such as setoff, or obtaining provisional, equitable or ancillary remedies from a court of competent jurisdiction before, after, or during the pendency of any arbitration or other proceeding. The exercise of a remedy does not waive the right of either party to resort to arbitration. Section 11.12. Consent to Jurisdiction. The parties hereto consent to and hereby submit to the exclusive jurisdiction of any state or federal court located in the Commonwealth of Virginia for the purpose of any enforcement with respect to any award rendered pursuant to the provisions of Section 11.11 or any equitable relief arising out of or relating to this Agreement or the transactions contemplated hereby. The exclusive venue for any enforcement with respect to any award rendered pursuant to the provisions of Section 11.11 or any equitable relief arising out of this Agreement or the transactions contemplated hereby shall be the state or federal courts located in the Commonwealth of Virginia and each of the parties hereto irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Section 11.13. Force Majeure. If Capital One or Capital One Bank is unable to perform any of its duties or fulfill any of its covenants or obligations under this Agreement as a result of causes beyond its control and without its fault or negligence, including but not limited to acts of God or government, fire, flood, war, and governmental controls, then Capital One or Capital One Bank, as the case may be, shall not be deemed to be in default of this Agreement during the continuance of such events which rendered it unable to perform; and Capital One or Capital One Bank, as case may be, shall have such additional time thereafter as is reasonably necessary to enable it to resume performance of its duties and obligations under this Agreement; and Signet or Signet/Virginia, as the case may be, shall not be required to pay Capital One or Capital One Bank, as the case may be, for any service to the extent that such party is unable to perform. Notwithstanding the foregoing, if the suspension of Capital One's or Capital One Bank's obligation to perform under this Agreement is of such a nature or duration as to substantially frustrate the purpose of this Agreement, then Signet and Signet/Virginia shall have the right to terminate this Agreement by giving Capital One and Capital One Bank 15 days' prior written notice of termination, in which case termination shall be effective upon the expiration of such 15 day period unless Capital One or Capital One Bank, as the case may be, resumes performance prior to such expiration. Section 11.14. Further Assurances. Each of the parties hereto shall execute such documents and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby. Section 11.15. No Third Party Beneficiaries. Except for the provisions of Article VIII relating to Indemnitees, this Agreement is solely for the benefit of the parties hereto and should not be deemed to confer upon third parties any remedy, claim, reimbursement, cause of action or other right in excess of those existing without reference to this Agreement. Section 11.16. Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be delivered by hand, mailed by registered or certified mail (return receipt requested), or sent by facsimile, cable, telegram, telex or telecopy (confirmed by regular, first-class mail), to the parties at the following addresses (or at such other addresses for a party as shall be specified by like notice) and shall be deemed given on the date on which such notice is received: if to Signet: Signet Banking Corporation 7 North Eighth Street Richmond, Virginia 23219 Attention: Senior Executive Vice President in charge of Consumer Lending; with a copy to the General Counsel if to Signet/Virginia: Signet Bank/Virginia 7 North Eighth Street Richmond, Virginia 23219 Attention: Senior Executive Vice President in charge of Consumer Lending; with a copy to the General Counsel if to Capital One: Capital One Financial Corporation 11013 West Broad Street Road Glen Allen, Virginia 23060 Attention: Chief Administrative Officer; with a copy to the General Counsel at 8330 Boone Boulevard Vienna, Virginia 22182 if to Capital One Bank: Capital One Bank 11013 West Broad Street Road Glen Allen, Virginia 23060 Attention: Chief Administrative Officer; with a copy to the General Counsel at 8330 Boone Boulevard Vienna, Virginia 22182 Section 11.17. Survival. Sections 3.06 and 11.03 and Articles VII, VIII and X as well as any accrued right of Capital One, Capital One Bank, Signet or Signet/Virginia to payment hereunder shall survive termination of this Agreement. The termination of this Agreement shall not release any party from any liability that at the time of termination had already accrued or that may subsequently accrue in respect of any act or omission taken or made before such termination. Section 11.18. Titles and Headings. Titles and headings to sections herein are inserted for the convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. Section 11.19. Blanket Endorsement. (a) Signet/Virginia appoints Capital One Bank as its agent and attorney-in-fact and, during the term of this Agreement, grants authority to Capital One Bank to endorse checks, notes and drafts which are made payable to Signet/Virginia on Accounts in the Signet/Virginia Portfolio ("Signet Checks") in either the name of Signet/Virginia or in Capital One Bank's own name as agent for Signet/Virginia (with no obligation to disclose the agency relationship in the form of endorsement). Signet/Virginia grants Capital One Bank the authority to handle Signet Checks in the same manner as Capital One Bank would do if the Signet Checks were made payable to Capital One Bank, so long as the amount of the Signet Checks is properly credited to the appropriate Accounts in the Signet/Virginia Portfolio. (b) Signet/Virginia assigns to Capital One Bank any rights or claims that Signet/Virginia may have with respect to any checks, notes or drafts which are intended by the drawer of the check to be paid on an Account in the Capital One Bank Assets, which are received by either Signet/Virginia or Capital One Bank after the Closing Date ("Capital One Checks"). Signet/Virginia will forward any Capital One Checks to Capital One Bank received by Signet/Virginia after the Closing Date. Signet/Virginia grants Capital One Bank the right to use Signet/Virginia's name to endorse Capital One Checks if such checks are made payable to Signet/Virginia. Section 11.20. Legal Enforceability. The illegality, invalidity or unenforceability of any provision of this Agreement as determined by a court of competent jurisdiction in no way shall affect the validity of any other provision hereof. If any provision of this Agreement is found by a court or regulatory agency of competent jurisdiction to be illegal, invalid or unenforceable or in violation of present or future applicable laws and regulations, such provision shall be fully severable. In lieu of such illegal, invalid or unenforceable provision there shall be added automatically as a part hereof a provision as similar in terms and economic effect to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. Section 11.21. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. SIGNET BANKING CORPORATION By: /S/ Wallace B. Millner Name: Wallace B. Millner Title: Senior Executive Vice President and Chief Operating Officer SIGNET BANK/VIRGINIA By: /S/ T. Gaylon Layfield, III Name: T. Gaylon Layfield, III Title: Senior Executive Vice President CAPITAL ONE FINANCIAL CORPORATION By: /S/ Nigel W. Morris Name: Nigel W. Morris Title: President and Chief Operating Officer CAPITAL ONE BANK By: /S/ Nigel W. Morris Name: Nigel W. Morris Title: President and Chief Operating Officer EX-3 4 EXHIBIT 3.2 Exhibit 3.2 As adopted December 21, 1966 by the Board of Directors and amended through October 28, 1994 BYLAWS OF SIGNET BANKING CORPORATION ARTICLE I CORPORATE SEAL The seal of the Corporation shall consist of a circular impression stamped upon paper, with or without a wafer, with the name of the Corporation and the word "Virginia" inscribed along its circumference and the word "seal" inscribed in its center, in the design and form now here impressed upon the margin of this page. It may be affixed and attested by any officer. ARTICLE II STOCK CERTIFICATES Each holder of the shares of stock of the Corporation shall be entitled to a stock certificate evidencing his ownership of the shares of the Corporation. Stock certificates shall be in such form as may be required by and approved by the Board of Directors. The signatures of the officers upon any stock certificate may be facsimiles if such certificate is countersigned by a transfer agent designated by the Board of Directors, other than the Corporation itself or an employee of the Corporation, and the signature of the transfer agent may be by facsimile if the certificate is registered by the manual signature of a registrar designated by the Board of Directors other than the Corporation itself or an employee of the Corporation. (Amended November 18, 1970) ARTICLE III MEETING OF STOCKHOLDERS Section 1. Place of Meeting. All meetings of the stockholders of the Corporation shall be held in the City of Richmond, Virginia, at the registered office of the Corporation or at such other place within or without the State of Virginia, as may be fixed in the notice of the meeting or in the waiver thereof. -1- (Amended February 16, 1983). Section 2. Annual Meeting. The annual meeting of the stockholders of the Corporation shall be held on such date in March, April, May or June as the Board of Directors may designate. (Amended February 16, 1983) Section 3. Special Meetings. Special meetings of the stockholders may be called by the Chairman of the Board, the President or the Board of Directors. (Amended December 18, 1985) Section 4. Notice of Meetings. Unless waived in the manner prescribed by law, written notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called shall be given not less than ten or more than fifty days before the date of the meeting (except as a different time is specified by law), either personally or by mail, at the direction of the Chairman of the Board, the President, the Secretary, or the persons calling the meeting, to each stockholder of record entitled to vote at such meeting. Section 5. Quorum and Voting. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at all meetings of the stockholders, regular or special. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, unless the vote of a greater number or voting by class is required by law, and except that in elections of directors those receiving the greatest number of votes shall be deemed elected even though not receiving a majority. Each stockholder shall be entitled to one vote in person or by proxy for each share of stock entitled to vote standing in his name on the books of the Corporation. The vote on all questions shall be taken in such a manner as the Chairman prescribes, provided, however, that on demand of the holders of not less than one-tenth of the stock represented at the meeting and entitled to vote any such vote shall be by ballot. Section 6. Procedure. Stockholders' meetings shall be presided over by the Chairman of the Board, or, in his absence, the President, or, in his absence, the Vice Chairman of the Board, if any, or, in the absence of all of them, a chairman to be elected at the meeting. The Secretary of the Corporation or, in his absence, an Assistant Secretary or a secretary elected at the meeting for the purpose, shall act as secretary of each meeting and record the minutes. At each meeting of the stockholders, a committee may be appointed by the Chairman, and shall be appointed by the Chairman on the demand of the stockholders of not less than one-tenth of the stock represented at the meeting and entitled to vote, to determine the number of shares represented at the meeting by stockholders in person or by proxy. Any meeting may be adjourned from day to day, or from time to time, and such adjournment -2- may be directed without a quorum, but no business except adjournment shall be transacted in the absence of a quorum. (Amended November 21, 1973) ARTICLE IV DIRECTORS AND THEIR MEETINGS Section 1. Number, Election and Qualifying Shares. The general management of the property, business and affairs of the Corporation shall be vested in a Board of Directors of twelve (12) Directors including the Chairman of the Board and President. The Directors shall be elected at the annual meeting of the stockholders or as soon thereafter as practicable, and shall hold office until the next annual meeting of stockholders and until their successors shall have been elected. Vacancies in the board shall be filled as provided by law. On and after July 1, 1963, each Director of the Corporation shall be the owner in his own name and have in his possession or control shares of the common stock of the Corporation having an aggregate par value of not less than one thousand dollars ($1,000.00). Such stock must be unpledged and unencumbered at the time such Director becomes a Director and during the whole of his term as such. (Amended October 28, 1994) -3- Section 2. Meetings. Regular meetings of the Board of Directors shall be held on the fourth Tuesday in each month except the month of August or as provided below for the transaction of such business as may properly come before such meeting. The meeting held during the month of the stockholders meeting shall be held after the stockholders meeting, shall be the annual organizational meeting and shall be held for the purpose of the election of officers and designation of committees for the ensuing year and for the transaction of such other business as may properly come before the meeting. No notice of the regular organizational meeting of the Board shall be necessary. Special meetings of the Board of Directors shall be held on call of the Chairman of the Board or the President. Unless waived in the manner prescribed by law, notice of a special meeting shall be telephoned, mailed or telegraphed to each Director at least 24 hours prior to the time of the meeting. Neither the business to be transacted at, nor the purpose of any special meeting, need be specified in the notice of the meeting. Meetings of the Board of Directors may be held at any time without notice if all the Directors are present, or if those not present waive notice either before or after the meeting. Meetings of the Board of Directors may be conducted by means of conference telephones or similar communications equipment and a written record shall be made of the action taken at such meetings. (Amended July 16, 1985) Section 3. Quorum. A majority of the Directors shall constitute a quorum at any meeting, regular or special, and a majority of the Directors present at any meeting at which a quorum is present shall be sufficient for the transaction of any and all business for which a different quorum or vote is not otherwise specifically and expressly required by law or the bylaws. (Amended January 17, 1973) Section 4. Executive Committee. The Board of Directors may, by a resolution passed by a majority of the whole Board, designate as an Executive Committee five Directors, one of whom shall be the Chairman of the Board, who may be the Chairman of the Executive Committee if so designated, and one of whom shall be the President. The Committee, during the interim between Board meetings, shall have, and may exercise all of the authority of the Board of Directors, except to approve an amendment to the Articles of Incorporation or a Plan of Merger or Consolidation. The Executive Committee shall meet at such time and place as established by a resolution of the Committee, and, in the alternative, on the call of the Chairman or the President. Notice of meetings of the Executive Committee shall be given in the same manner as notices are required to be given for special meetings of the Board of Directors. In the event that any outside Director designated as a member of the Executive Committee shall be unable to attend a meeting of the Committee, any outside Director not so designated may be requested to attend by the Chairman of the Board or the President as a substitute for the absent member, and, when so in attendance, shall be deemed for all purposes a duly elected member of the Executive Committee. -4- Meetings of the Executive Committee may be conducted by means of conference telephones or similar communications equipment and a written record shall be made of the action taken at such meetings. (Amended February 27, 1990) Section 5. Audit Committee. The Audit Committee shall be composed of outside Directors. It shall meet at least quarterly in order to perform the following functions and duties and to recommend to the Board of Directors such action as is appropriate to the performance thereof. 1. Review the engagement of the independent accountants, including the scope and general extent of their review, the audit procedures which will be utilized, and the compensation to be paid; and, 2. Review with the independent accountants, and with the Corporation's chief financial officer (as well as with other appropriate personnel), the general policies and procedures utilized by the Corporation with respect to internal auditing, accounting, and financial controls. The members of the Committee shall have at least a general familiarity with the accounting and reporting principles and practices applied by the Corporation in preparing its financial statements; and, 3. Review with the independent accountants, upon completion of their audit (a) any report or opinion proposed to be rendered in connection herewith; (b) the independent accountants' perceptions of the Corporation's financial and accounting personnel; (c) the cooperation which the independent accountants received during the course of their review; (d) the extent to which the resources of the Corporation were and should be utilized to minimize the time spent by the outside auditors; (e) any significant transactions which are not a normal part of the Corporation's business; (f) improper payments; (g) any change in accounting principles; (h) all significant adjustments proposed by the auditor; (i) any recommendations which the independent accountants may have with respect to improving internal financial controls; choice of accounting principles or management reporting systems; and 4. Inquire of the appropriate personnel and the independent auditors as to any instances of deviations from established codes of conduct of the Corporation and periodically review such policies; and 5. Meet with the Corporation's financial staff at least twice a year to review and discuss with them the scope of internal accounting and auditing procedures then in effect; and the extent to which recommendations made by the internal staff or by the independent accountants have been implemented; and, 6. Meet with the Corporation's independent accountants in the absence of management to discuss the general operations of the Corporation. -5- 7. Prepare and present to the Board of Directors a report summarizing its recommendation with respect to the retention (or discharge) of the independent accountants for the ensuing year; and 8. Direct and supervise an investigation into any matter brought to its attention within the scope of its duties (including the power to retain outside counsel or independent public accountants in connection with any such investigation). 9. The Committee shall review all significant difficulties encountered or important discoveries made by the independent accountants or the internal auditors for report to the Board; and 10. Review in advance the employment of the independent accountants to perform any function other than auditing the accounts of the Corporation and the review of its income tax return. 11. The Committee shall keep under review the question of Director conflict of interest or the appearance thereof and report such to the Board as appropriate; and, 12. The Committee and/or its Chairman shall from time to time, with the Secretary of the Committee, meet with the Chief Executive Officer of the Corporation in order to communicate to management, significant concerns of the Committee developed in the performance of its responsibilities as set forth herein. (Amended December 20, 1978) Section 6. Organization and Compensation Committee. The Organization and Compensation Committee shall be charged with the review and/or approval of the Corporation's officer title, salary, bonus, incentive and other employee benefit programs for the employees of the Corporation and its subsidiaries. It shall also be charged with at least annually, reviewing senior management's plans and recommendations with regard to management succession. Section 7. Other Committees. The Board of Directors by resolution adopted by a majority of the Directors present at a meeting at which a quorum is present, may designate other committees to consist of Directors, officers, or employees of the Corporation, or others, who shall advise with the officers on matters relating to the specific fields for which they are appointed and shall otherwise have the duties specified in the resolution of appointment. Section 8. Quorum Rules. A majority of a Committee shall be necessary for a quorum. A Committee shall have authority to elect a secretary (unless otherwise herein provided), and to fix its own rules as to notice and procedure; in the absence of such rules, the provisions as to notice of special meeting of the Board of Directors shall govern as to notice of a Committee meeting. -6- ARTICLE V OFFICERS AND THEIR DUTIES Section 1. Officers, Election and Removal. The officers of the Corporation shall be a Chairman of the Board, a President, a Secretary, a Treasurer and such additional officers as the Board of Directors may from time to time prescribe, all of whom shall be elected annually at the meeting of the Board of Directors following the annual meeting of the stockholders, to serve until the next such meeting of the Board and until their successors are elected, unless sooner removed, but may be removed at any time at the pleasure of the Board, and vacancies may be filled at any meeting of the Board. Any two or more offices may be held by the same person, except the offices of President and Secretary. Section 2. Chairman of the Board. The Chairman of the Board shall have general authority to conduct the business of the Corporation and shall preside at all meetings of the stockholders and the Board of Directors. He may be the Chief Executive Officer of the Corporation if so designated. Also, the Chairman of the Board shall have the authority to appoint officers of the Corporation up to but not including the titles of members of the Management Committee and to delegate that authority up to and including the position of Senior Vice President. (Amended February 27, 1990) Section 2A. Chairman Emeritus. The Chairman Emeritus, if there be one, shall preside as Chairman of the Executive Committee unless another Chairman of the Executive Committee is designated by the Board of Directors. (Amended February 27, 1990) Section 3. President. The President shall perform the duties of the Chairman of the Board in the absence or upon the disability of the Chairman of the Board. He may be the Chief Executive Officer or the Chief Operating Officer of the Corporation if so designated. In the absence of the Chairman of the Board, the President shall preside at meetings of the stockholders, Board of Directors, and the Executive Committee. Also, the President shall have the authority to appoint officers of the Corporation up to but not including the titles of members of the Management Committee and to delegate that authority up to and including the position of Senior Vice President. (Amended April 27, 1989) Section 4. Vice Chairman of the Board. The Vice Chairman of the Board, if any, shall perform such duties as may be assigned from time to time to him or the President, and may be the chief administrative officer of the Corporation if so designated. In the absence or disability of the President, he shall exercise his duties and exercise his authority and, if the Chairman of the Board and the President are one and the same person, then, in his absence, the Vice Chairman of the Board shall preside at meetings of the -7- stockholders, Board of Directors and the Executive Committee. In the absence or disability of the Chairman of the Board and the President he shall act as Chief Executive Officer. (Amended November 17, 1976) Section 5. Executive Vice President. The Executive Vice President, if any, shall assist the President in the performance of his duties and shall perform such other duties as may be assigned to him from time to time by the Board of Directors, the Executive Committee, the Chairman of the Board, the President or the Vice Chairman of the Board. (Amended November 21, 1973) Section 6. Secretary. The Secretary shall perform the usual duties of the office of Secretary and shall have such special authority as may from time to time be conferred upon him by the bylaws or the Board of Directors. (Amended November 21, 1973) Section 7. Treasurer. The Treasurer shall perform the usual duties of the office of Treasurer. Section 8. Duties. In addition to the duties herein assigned to certain officers, they and other officers prescribed by the Board of Directors shall perform such duties and have such special authority as may from time to time be conferred upon them by the Board of Directors, the Executive Committee, or officers senior in rank to them. ARTICLE VI VOTING OF STOCK OWNED Unless otherwise provided by a vote of the Board of Directors, the Chairman of the Board, the President, the Vice Chairman of the Board, any Vice President, the Secretary or the Treasurer may appoint attorneys to vote any stock in any other corporation owned by the Corporation or may attend any meeting of the holders of stock of such corporation and vote such shares in person. (Amended November 21, 1973) -8- ARTICLE VII Bylaws for the Corporation may be made, altered, amended or repealed by the Board of Directors, but bylaws made by the Board of Directors may be repealed or changed, and new bylaws made, by the stockholders. I, Andrew T. Moore, Jr., hereby certify that I am the Senior Vice President and Corporate Secretary of Signet Banking Corporation (the Corporation), and that the above Bylaws consisting of pages 1 through 7, each of which is identified by my initials, are the Bylaws of the Corporation and are in effect through October 28, 1994. WITNESS my hand and the seal of the Corporation this 6th day of December, 1994. /S/ Andrew T. Moore Senior Vice President and Corporate Secretary -9- EX-11 5 EXHIBIT 11.1 EXHIBIT 11.1 SIGNET BANKING CORPORATION AND SUBSIDIARIES FORM 10-K COMPUTATION OF EARNINGS PER SHARE (dollars in thousands - except per share) 1994 1993 1992 Common and common equivalent: Average shares outstanding 57,355,021 56,291,808 55,147,928 Dilutive stock options based on the treasury stock method using average market price 500,034 574,866 507,222 Shares used 57,855,055 56,866,674 55,655,150 Net income applicable to Common Stock $ 149,834 $ 174,414 $ 109,200 Per share amount $ 2.59 $ 3.07 $ 1.96 Assuming full dilution: Average shares outstanding 57,355,021 56,291,808 55,147,928 Dilutive stock options based on the treasury stock method using the period end market price, if higher than average market price 507,906 628,282 575,582 Assuming conversion of Subordinated Convertible Debentures 3,848 Shares used 57,862,927 56,920,090 55,727,358 Net income $ 149,834 $ 174,414 $ 109,200 Add: Interest on Subordinated Convertible Debentures, net of income tax effect 2 Net income applicable to Common Stock assuming conversion $ 149,834 $ 174,414 $ 109,202 Per share amount $ 2.59 $ 3.06 $ 1.96
The calculations of common and common equivalent earnings per share and fully diluted earnings per share are submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although both calculations are not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because there is dilution of less than 3%. The Registrant has elected to show fully diluted earnings per share in its financial statements. EX-13 6 EXHIBIT 13.1 SIGNET BANKING CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-1994 COMPARED TO 1993 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 New York Stock Exchange under the symbol SBK. At December 31, 1994, Signet had assets of $12.9 billion and provided interstate financial services through four principal subsidiaries: Signet Bank/Virginia, headquartered in Richmond, Virginia; Signet Bank/Maryland, headquartered in Baltimore, Maryland; Signet Bank N.A., headquartered in Washington, D.C.; and Capital One Financial Corporation ("Capital One"), headquartered in Falls Church, Virginia. Signet is engaged in general commercial and consumer banking businesses, and provides a full range of financial services to individuals, businesses and organizations through 249 banking offices, 253 automated teller machines and a 24-hour full-service Telephone Banking Center. Signet offers investment services including municipal bond, government, federal agency and money market sales and trading, foreign exchange trading and discount brokerage. In addition, an international operation concentrating on trade finance and specialized services for trust, leasing, asset based lending, cash management, real estate, insurance and consumer financing are offered. Signet's primary market area extends from Baltimore to Washington, south to Richmond, and on to Hampton Roads/Tidewater Virginia. Capital One is a major issuer of credit cards nationwide, offering a broad spectrum of card products designed to meet the unique needs of different market segments. On October 25, 1994, Signet filed an amended registration statement with the Securities and Exchange Commission ("SEC") which described plans to spin off Capital One. Under such plans, designated assets and liabilities of Signet Bank/ Virginia's credit card division were transferred to Capital One Bank, a newly chartered limited purpose credit card bank. Capital One Bank became, in conjunction with the transfer, a wholly-owned subsidiary of Capital One, a wholly-owned subsidiary of Signet (the "Separation"). Accounts representing approximately $335 million, or 5%, of the managed credit card portfolio were retained by Signet. The Separation occurred November 22, 1994 at which time 7,125,000 shares of common stock of Capital One were sold in an initial public offering. Signet distributed all of the remaining common stock it held in Capital One to Signet stockholders in a tax-free distribution on February 28, 1995. Capital One is listed on the New York Stock Exchange under the symbol COF. Signet's Board of Directors believes the spin-off will enhance shareholder value by creating two independent financial institutions, each possessing substantial financial and managerial strength and each pursuing separate and attractive long-term business strategies. For a detailed analysis of the effects of the spin-off, see the discussion of the Credit Card Business elsewhere in this Report. In 1994, Signet also announced a comprehensive program to improve the performance of its core banking businesses through initiatives to reduce costs and enhance revenues. In connection with the spin-off and the cost reduction measures, Signet recorded special pre-tax charges of $92.2 million for restructuring ($43.2 million), and for terminating certain data processing contracts ($49.0 million). During the third quarter of 1994, the Company acquired Pioneer Financial Corporation ("Pioneer"), the parent company of Pioneer Federal Savings Bank, a $400 million financial institution located in Chester, Virginia. The transaction involved a tax-free exchange of stock and was accounted for as a purchase acquisition. Pioneer's shareholders received .6232 shares of Signet common stock for each Pioneer share held. This resulted in Signet issuing approximately 1.5 million shares of common stock. The transaction had an immaterial dilutive effect on Signet's earnings per share. During 1994, Signet was ranked number one in capital strength among the nation's 65 largest banks by a leading independent investment firm. On February 15, 1995, Signet announced it had reached a definitive agreement to acquire the assets of Sheffield Management Company and Sheffield Investments, Inc., managers and distributors of the Blanchard group of mutual funds. These funds are marketed nationally through direct mail and comprise eleven fixed income and equity funds totaling approximately $1 billion. This transaction is expected to close in the second quarter of 1995. In 1995, Signet began construction on a new operations center located close to Richmond, Virginia. The estimated total cost of this project is $45 million. A detailed discussion of the 1994 operating results and financial condition at December 31, 1994 follows and is intended to help readers analyze the accompanying Consolidated Financial Statements and related Notes. A Glossary of Financial Terms has also been included in this Report. SUMMARY OF PERFORMANCE Signet reported consolidated net income for 1994 of $149.8 million, or $2.59 per share, compared with $174.4 million, or $3.06 per share, in 1993. The 1994 net income reflects special pre-tax charges of $92.2 million for restructuring and for terminating certain data processing contracts. Included in the restructuring charges are costs related to an early retirement plan, employee severance and facilities consolidation. The 1994 performance reflected substantial growth in non-interest sources of revenues, primarily resulting from the strong growth in the Company's credit card business and significant improvement in asset quality. Profitability measures reflected the record level of earnings, excluding special one-time charges, in 1994 of $209.8 million, resulting in a return on assets ("ROA") of 1.83% and a return on common stockholders' equity ("ROE") of 19.74%. These impressive ratios are indicative of Signet's improved performance and compare favorably with the 1.50% ROA and 19.62% ROE achieved in 1993. TABLE 1 SELECTED FINANCIAL DATA
Five-Year Compound 1994 1993 1992 1991 1990 1989 Growth Rate SUMMARY OF OPERATIONS (dollars in thousands-except per share) Net interest income-taxable equivalent $ 523,717 $ 545,093 $ 454,912 $ 420,026 $ 469,807 $ 462,185 2.53% Less: taxable equivalent adjustment 13,706 15,753 19,302 22,056 25,879 27,325 (12.89) Net interest income 510,011 529,340 435,610 397,970 443,928 434,860 3.24 Provision for loan losses(1) 14,498 47,286 67,794 287,484 182,724 58,530 (24.35) Net interest income after provision for loan losses 495,513 482,054 367,816 110,486 261,204 376,330 5.66 Non-interest operating income 564,624 361,118 280,988 248,537 188,571 175,810 26.28 Securities available for sale gains 3,413 3,913 10,504 94,666 Investment securities gains (losses) 46 405 (17,951) (1,445) 12,971 9,438 (65.52) Total non-interest income 568,083 365,436 273,541 341,758 201,542 185,248 25.12 Non-interest expense(2) 846,423 598,316 499,239 508,925 414,535 395,061 16.46 Income (loss) before income taxes (benefit) 217,173 249,174 142,118 (56,681) 48,211 166,517 5.46 Applicable income taxes (benefit)(3) 67,339 74,760 32,918 (30,934) 6,833 43,197 9.29 Net income (loss) $ 149,834 $ 174,414 $ 109,200 $ (25,747) $ 41,378 $ 123,320 3.97 Per common share: Net income (loss) $ 2.59 $ 3.06 $ 1.96 $ (.48) $ .78 $ 2.27 2.67 Cash dividends declared(4) 1.00 .80 .45 .30 .78 .76 5.64 Book value at year-end 18.96 17.04 14.77 13.17 13.83 14.07 6.15 Average common shares outstanding 57,862,927 56,920,090 55,727,358 53,994,340 53,026,764 53,372,898 1.63 SELECTED AVERAGE BALANCES (dollars in millions) Assets $ 11,469 $ 11,617 $ 11,168 $ 11,534 $ 12,349 $ 11,467 0.00 Earning assets 10,152 10,553 10,181 10,538 11,374 10,518 (0.71) Loans (net of unearned income) 6,408 6,206 5,618 6,071 7,218 6,916 (1.51) Deposits 7,747 7,733 7,886 8,362 7,900 7,341 1.08 Long-term borrowings 255 287 298 318 353 320 (4.44) Interest bearing liabilities 8,606 9,121 9,000 9,506 10,291 9,344 (1.63) Common stockholders' equity 1,046 889 768 750 755 709 8.09 Managed credit card portfolio 6,470 3,530 1,709 1,606 1,474 1,241 39.13 SELECTED YEAR-END BALANCES (dollars in millions) Assets $ 12,931 $ 11,849 $ 12,093 $ 11,239 $ 11,405 $ 12,476 Earning assets 11,479 10,745 11,010 9,443 10,291 11,417 Loans (net of unearned income) 7,924 6,310 5,809 5,884 6,445 7,215 Deposits 7,822 7,821 7,823 8,481 8,344 7,595 Long-term borrowings 254 266 298 299 350 361 Interest bearing liabilities 8,529 9,167 9,684 9,031 9,272 10,145 Common stockholders' equity 1,111 965 827 712 736 751 Managed credit card portfolio 7,676 5,098 2,244 1,700 1,580 1,418 OPERATING RATIOS Net income to: Average common stockholders' equity 14.33% 19.62% 14.22% N/M 5.48% 17.12% Average total stockholders' equity 14.33 19.62 14.22 N/M 5.48 16.81 Average assets 1.31 1.50 .98 N/M .34 1.08 Total stockholders' equity to assets (average) 9.12 7.65 6.88 6.50% 6.11 6.40 Loans to deposits (average) 80.85 80.26 71.24 72.92 91.36 94.20 Net loan losses to average loans 0.71 .91 2.34 2.03 1.51 .74 Net interest spread(5) 4.63 4.76 4.05 3.40 3.41 3.49 Net yield margin(5) 5.16 5.17 4.47 3.98 4.13 4.39 At year-end: Allowance for loan losses to loans 2.78 4.01 4.57 5.60 2.54 1.30 Allowance for loan losses to non-performing loans 846.32 342.63 228.25 156.84 117.15 116.53
(1) 1991 included a special provision of $146.6 million to accelerate the reduction of real estate assets. (2) 1993, 1992 and 1991 included provisions of $7.4 million, $15.5 million and $71.9 million, respectively, to the reserve for foreclosed properties, which had December 31, 1993, 1992 and 1991 balances of $5.7 million, $10.6 million and $41.6 million, respectively. 1994, 1993, 1992, 1991, 1990 and 1989 included $100.9 million, $55.8 million, $23.1 million, $14.6 million, $21.4 million and $14.5 million, respectively, of credit card solicitation expenses. 1994 included a $49.0 million contract termination fee and $43.2 million of restructuring charges. (3) Income taxes (benefit) applicable to net securities available for sale gains and investment securities gains (losses) were as follows: 1994-$1.2 million; 1993-$1.5 million; 1992-($2.5) million; 1991-$32.9 million; 1990-$4.6 million; and 1989-$3.3 million. Additionally, 1992 included $6.3 million of recaptured alternative minimum tax and 1990 included $6.3 million of alternative minimum tax. (4) In March, 1991, Signet announced that, thereafter, its dividend declaration would be made in the month following the end of each quarter instead of in the last month of each quarter. As a result, 1991 included only three dividend declarations; however, four dividend payments were made. (5) Net interest spread and net yield margin were calculated on a taxable equivalent basis, using a tax rate of 35% for 1994 and 1993 and 34% for 1992, 1991, 1990, and 1989. Taxable equivalent net interest income of $523.7 million was a principal component of earnings and reflected a slight decline of $21.4 million from the 1993 level. The net yield margin for 1994 was 5.16%, a one basis point decline from the prior year. This decrease in the net yield margin was primarily due to higher funding costs associated with interim funding for Capital One. The provision for loan losses of $14.5 million represented a significant decrease from the 1993 level of $47.3 million as credit quality continued to improve. Non-interest operating income totaled $564.6 million for 1994, a 56% increase over the prior year. The growth resulted from increases in nearly all major categories of non-interest income, with the largest dollar increase being in the credit card servicing income category. During 1994, Signet recognized net securities gains of $3.5 million compared with net gains of $4.3 million in 1993. Non-interest expense increased $248.1 million from the previous year due in large part to the restructuring and data processing contract termination charges of $92.2 million and an increase of $45.1 million in expenses related to the credit card account solicitation program. Sizable increases in staff- related expenses arose mainly from increasing the number of employees to support the growth in the managed credit card portfolio. Travel and communications, supplies and equipment and external data processing services also rose due to the rapid growth in the credit card area. Table 1 shows selected financial data for the past six years and five-year compound growth rates. INCOME STATEMENT ANALYSIS NET INTEREST INCOME Taxable equivalent net interest income, a primary contributor to earnings, was $523.7 million for 1994, a decline of $21.4 million, or 4%, over 1993. The decline in net interest income reflected the impact of a lower level of on-balance sheet average earning assets and a higher cost of funds, offset in part by higher yields on most earning assets categories resulting from rising interest rates. The discussion of net interest income should be read in conjunction with Table 2-Net Interest Income Analysis and Table 8-Average Balance Sheet. TABLE 2 NET INTEREST INCOME ANALYSIS taxable equivalent basis(1) Year Ended 1994 vs. 1993 Year Ended 1993 vs. 1992 December 31 Increase Change due to(3) December 31 Increase Change due to(3) (in thousands) 1994 1993 (Decrease) Volume Rates 1992 (Decrease) Volume Rates INTEREST INCOME: Loans, including fees:(2) Commercial $165,372 $158,587 6,785 $ 3,570 $ 3,215 $181,600 $ (23,013) $(10,529) $(12,484) Credit card 212,157 215,607 (3,450) 9,057 (12,507) 110,864 104,743 133,532 (28,789) Other consumer 130,513 95,273 35,240 24,103 11,137 103,948 (8,675) 656 (9,331) Real estate-construction 21,007 31,590 (10,583) (14,041) 3,458 53,812 (22,222) (23,056) 834 Real estate-commercial mortgage 50,254 47,757 2,497 (3,697) 6,194 50,147 (2,390) 305 (2,695) Real estate-residential mortgage 8,399 7,634 765 2,072 (1,307) 9,801 (2,167) (1,678) (489) Total loans 587,702 556,448 31,254 18,041 13,213 510,172 46,276 52,791 (6,515) Interest bearing deposits with other banks 11,512 12,031 (519) (533) 14 24,103 (12,072) (14,273) 2,201 Federal funds and resale agreements 44,294 23,196 21,098 6,713 14,385 29,984 (6,788) (2,775) (4,013) Trading account securities 21,487 31,297 (9,810) (12,741) 2,931 21,783 9,514 12,384 (2,870) Credit card loans held for securitization 41,015 36,263 4,752 3,568 1,184 0 36,263 0 36,263 Loans held for sale 13,010 17,007 (3,997) (3,342) (655) 14,125 2,882 3,762 (880) Securities available for sale 73,409 17,064 56,345 59,316 (2,971) 38,504 (21,440) (16,675) (4,765) Investment securities-taxable 4,395 93,806 (89,411) (89,957) 546 112,087 (18,281) (10,704) (7,577) Investment securities-nontaxable 23,895 32,366 (8,471) (9,150) 679 35,806 (3,440) (3,630) 190 Total interest income 820,719 819,478 1,241 (31,101) 32,342 786,564 32,914 28,826 4,088 INTEREST EXPENSE: Money market and interest checking 23,123 22,544 579 1,420 (841) 27,638 (5,094) 2,485 (7,579) Money market savings 44,571 45,463 (892) (3,133) 2,241 64,500 (19,037) (5,504) (13,533) Savings accounts 33,461 24,079 9,382 7,698 1,684 21,189 2,890 6,914 (4,024) Savings certificates 61,377 58,514 2,863 (9,466) 12,329 102,519 (44,005) (18,376) (25,629) Large denomination certificates 14,527 10,970 3,557 1,849 1,708 13,936 (2,966) 207 (3,173) Foreign 10,071 6,627 3,444 1,201 2,243 994 5,633 5,750 (117) Total interest on deposits 187,130 168,197 18,933 (3,003) 21,936 230,776 (62,579) (10,309) (52,270) Federal funds and repurchase agreements 65,894 63,986 1,908 (11,441) 13,349 65,561 (1,575) 8,553 (10,128) Other short-term borrowings 27,293 25,521 1,772 (264) 2,036 15,899 9,622 10,081 (459) Long-term borrowings 16,685 16,681 4 (1,855) 1,859 19,416 (2,735) (728) (2,007) Total interest expense 297,002 274,385 22,617 (15,488) 38,105 331,652 (57,267) 4,382 (61,649) Net Interest Income $523,717 $545,093 $(21,376) $ 43,516 $ (64,892) $454,912 $ 90,181 $ 16,860 $ 73,321
(1) Total income from earning assets includes the effects of taxable equivalent adjustments, using a tax rate of 35% for 1994 and 1993 and 34% for 1992 in adjusting interest on the tax-exempt loans and securities to taxable equivalent basis. (2) Includes fees on loans of approximately $30,497, $24,440, and $19,305 for 1994, 1993, and 1992, respectively. (3) The change in interest due to both volume and rates has been allocated in proportion to the relationship of the absolute dollar amounts of the change in each. The changes in income and expense are calculated independently for each line in the schedule. The totals for the volume and rate columns are not the sum of the individual lines. Average earning assets totaled $10.2 billion for 1994, a decrease of 4% from the previous year. Credit card securitizations reduced earning assets by transferring assets off the balance sheet. Adding average securitized credit card loans to both years' average earning assets would result in a 20% increase in earning assets year-over-year. The commercial, credit card, real estate mortgage-residential and other consumer loan categories experienced increases in average balances in 1994. Decreases occurred in the real estate-construction and real estate-commercial mortgage categories of the loan portfolio, reflecting the continued successful efforts of the Company to reduce its commercial real estate exposure. Investment securities declined by $1.6 billion on average over 1993 as the Company implemented Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in 1994 and as securities were called or matured. Securities available for sale grew $1.0 billion over 1993 primarily due to the implementation of SFAS No. 115. Credit card loans held for securitization averaged $432.6 million for 1994, up from $393.8 million in 1993. See a more detailed discussion of Earning Assets elsewhere in this Report. Average interest bearing liabilities fell 6% to $8.6 billion for 1994. Declines in savings certificates, money market savings, Federal funds and repurchase agreements and long-term borrowings were partially offset by growth in savings accounts, money market and interest-checking and purchased deposit categories. In 1994, average core deposits of $7.2 billion declined only slightly from the prior year and represented 71% of average earning assets and 112% of average loans. The mix in core deposits changed as depositors responded to volatile interest rates by shortening maturities and transferring from savings certificates into money market and demand products. Non-interest bearing demand deposits increased 9%, on average, during 1994. See a more comprehensive discussion of Funding elsewhere in this Report. The net interest spread of 4.63% for 1994 declined from the 4.76% reported for the previous year. The net decline was due to the rise in funding rates exceeding the increase in yields on earning assets. The bridge financing facility utilized by Capital One as a funding source subsequent to November 22, 1994 (the "Separation" date) carried a high rate of interest which contributed to the narrowing of the net interest spread. The overall yield on earning assets was 8.08%, up 31 basis points from 1993, while the increase in rates paid for interest bearing liabilities amounted to 3.45%, up 44 basis points from the previous year. TABLE 3 NET YIELD COMPARISON-1994 VERSUS 1993 Causes for a one basis point drop in the Net Yield Margin from 1993 to 1994: Net Yield Margin for the year ended December 31, 1993 5.17% Higher funding costs excluding bridge financing facility (0.33) Decline in average/higher yield on Trading Account Securities-net 0.09 Higher average/decline in yield on Credit Card-net (0.09) Higher yield and average on Other Consumer Loans 0.08 Bridge financing facility (0.04) Improved yield on other earning assets and other factors 0.28 Net Yield Margin for the year ended December 31, 1994 5.16% The net yield margin fell by one basis point in 1994 to 5.16% from 5.17% for 1993. The decline in the net yield margin was the net result of several factors, as analyzed in Table 3. An approximate basis point impact was calculated for each item noted. Higher yields and growth in consumer loans other than credit card was more than offset by a decline in the yield of the on-balance sheet portfolio of credit card loans (including those held for securitization) and significantly higher funding rates. The lower yield on the credit card portfolio was due to rapid growth in low introductory rate credit card products. In most of its recent marketing programs, the Company has offered accounts with low introductory rates which generally increase to a higher rate after the introductory period expires. For selected introductory rate accounts, all or part of the rate increase following the introductory period may be waived, leading to continued downward pressure on yields. Signet uses various off-balance sheet interest rate derivatives as an integral part of its asset and liability management and trading activities. For Signet's core business, variable assets generally exceed variable liabilities. To hedge against the resulting interest rate risk, Signet enters into derivative transactions. Derivative contracts, used for hedging purposes, increased interest on earning assets by $13.4 million and $14.3 million and decreased borrowing costs by $39.0 million and $82.4 million for 1994 and 1993, respectively. The overall increase in the net yield margin as a result of these instruments amounted to 52 and 92 basis points for 1994 and 1993, respectively. For a more detailed description and discussion of derivative income and expense impact on net income, refer to the Interest Rate Sensitivity section elsewhere in this Report. Credit card securitizations also have an effect on net interest income and the net yield margin. For a detailed analysis of this effect, see discussion of the Credit Card Business elsewhere in this Report. TABLE 4 STATEMENT OF CHANGES IN ALLOWANCE FOR LOAN LOSSES Year Ended December 31 (dollars in thousands) 1994 1993 1992 1991 1990 Balance at beginning of year $253,313 $265,536 $329,371 $163,669 $ 93,572 Provision for loan losses(1) 14,498 47,286 67,794 287,484 182,724 Transfer (to) from loans held for securitization (4,869) (2,902) 1,503 (3,926) Addition arising from acquisition 3,327 Loans charged-off: Commercial 9,827 17,832 33,238 55,312 29,365 Credit card 32,141 38,582 43,309 44,902 58,910 Other consumer 2,459 2,893 4,876 4,362 5,297 Real estate-construction 9,746 26,890 58,406 32,514 24,396 Real estate-mortgage(2) 20,360 5,720 15,140 2,990 3,858 Total loans charged-off 74,533 91,917 154,969 140,080 121,826 Recoveries of loans previously charged-off: Commercial 5,997 13,138 6,992 3,263 2,395 Credit card 11,012 15,937 14,043 10,691 8,909 Other consumer 1,179 1,421 1,445 1,362 1,648 Real estate-construction 6,037 4,259 523 1,479 2 Real estate-mortgage(2) 4,558 555 337 171 Total recoveries 28,783 35,310 23,340 16,795 13,125 Net loans charged-off 45,750 56,607 131,629 123,285 108,701 Balance at end of year $220,519 $253,313 $265,536 $329,371 $163,669 Net charge-offs to average loans: Commercial .18% .22% 1.17% 2.22% 1.06% Other consumer .08 .12 .29 .23 .27 Real estate 2.15 2.45 4.93 1.88 1.40 Sub-total .54 .76 2.09 1.64 1.00 Credit card 1.15 1.28 4.13 5.44 3.76 Total .71 .91 2.34 2.03 1.51 Allowance for loan losses to net loans at year-end 2.78% 4.01% 4.57% 5.60% 2.54%
(1) Included $146,600 special provision to accelerate the reduction of real estate loans in 1991. (2) Real estate-mortgage includes real estate-commercial mortgage and real estate-residential mortgage. Real estate-residential mortgage charge-offs and recoveries were not significant for the periods presented. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses is the periodic expense of maintaining an adequate allowance to absorb possible future losses, net of recoveries, inherent in the existing loan portfolio. In evaluating the adequacy of the provision and the allowance for loan losses, management takes into consideration several factors including national and local economic trends and conditions; weighted average historical losses; trends in delinquencies, bankruptcies and non-performing loans; trends in watch list growth/reduction; off-balance sheet credit risk; known deterioration and concentrations of credit; effects of any changes in lending policies and procedures; credit evaluations; experience and ability of lending management and staff; and the liquidity and volatility of the markets in which Signet does business. Signet is refining its process through the use of a tool called migration analysis to better estimate losses in the commercial and real estate portfolios. This method traces loan risk ratings and losses over time. Additionally, particular emphasis is placed on adversely rated loans. Signet's charge-off policy is closely integrated with the loan review process. Commercial and real estate loan charge-offs are recorded when any loan or portions of loans are determined to be uncollectible. Credit card loans typically are charged off when they are six months past due and a minimum payment has not been received for 60 days, while other consumer loans are typically charged off when they are six months past due. Once a loan has been charged off, it is Signet's policy to continue to pursue the collection of principal and interest. Table 4 provides a five-year comparison of the activity in the allowance for loan losses along with the details of the charge-offs and recoveries by loan category. The provision for loan losses totaled $14.5 million for 1994, a decrease of $32.8 million from the 1993 total of $47.3 million. This decrease was the result of lower charge-offs due to Signet's improved credit quality. Credit card securitizations have an effect on the level of on-balance sheet charge-offs and provisioning. For a detailed analysis of this effect, see discussion of the Credit Card Business elsewhere in this Report. Net charge-offs decreased 19% to $45.8 million for 1994, compared with $56.6 million for the prior year. Decreases were noted in all loan categories except real estate-mortgage. Of the $30.1 million in real estate charge-offs, approximately $21 million were the result of the sale of $102 million of real estate related loans in the third quarter of 1994. Commercial loan net charge- offs experienced an improvement when comparing 1994 with 1993 due to improved credit quality. Commercial net charge-offs for the Company, as a whole, totaled only $3.8 million, a decrease of $0.9 million from the previous year as the decline in charge-offs exceeded the decline in recoveries. One large commercial credit accounted for approximately $3.3 million of the commercial loan charge-offs as it was sold early in 1994, well within the loan's allocated allowance. Many of the commercial charge-offs for the last several years were real estate related. The secondary collateral for many commercial loans is real estate, and unsecured working capital/operating lines to real estate developers are classified as commercial loans. Other consumer net charge-offs declined to $1.3 million, or .08% of average other consumer loans. Credit card net charge- offs amounted to $21.1 million in 1994, or 1.15% of average credit card loans. Improvement in the credit quality and substantial growth of the credit card portfolio caused the percentage of net credit card losses to average credit card loans on the balance sheet to decline from 1993 to 1994. Net losses for 1994 on the total managed credit card portfolio, which included securitized receivables, were 1.61% of total average managed credit card loans, compared with 2.34% reported for 1993. The low level of credit card losses in 1993 and 1994 is a reflection of management's attention to the diversification of the portfolio as well as the quality of the Company'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 significant charge-offs. The allowance for loan losses at December 31, 1994 was $220.5 million, or 2.78% of year-end loans, compared with the 1993 year-end allowance of $253.3 million, or 4.01% of loans. The 1994 allowance for loan losses equated to 8.5 times year-end non-performing loans and 4.5 times year-end non-performing assets, indicating significantly improved coverage over 1993 when the December 31, 1993 allowance for loan losses amounted to 3.4 times non-performing loans and 2.2 times non-performing assets. The decline in the level of the allowance primarily reflected charge-offs taken on real estate related loans, the majority of which resulted from the real estate loan sale mentioned previously. Signet's allocated allowance for loan losses for all loan categories is detailed in Table 5. On a monthly basis, commercial and real estate loans (excluding residential mortgage) warranting management's attention are identified and examined, and factors such as the creditworthiness of the borrower, the adequacy of underlying collateral and the impact of business and economic conditions upon the borrower are evaluated. Based on this information and action plans provided by the lending units, Signet's Credit Risk Management Division determines the aggregate level of 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, trends in delinquencies, projected charge-offs by specific loan solicitation, bankruptcies and loan volume. The remaining loan portfolio (unclassified commercial, real estate and consumer loans) receives a general allocation deemed to be reasonably necessary to provide for losses within the categories of loans set forth in the table and based on risk ratings and the factors previously listed. As noted previously, Signet is refining its allocation process by using migration analysis to evaluate allowance needs for commercial and real estate loans. Also, loan types experiencing significant growth receive special attention in determining allowance adequacy. The overall allocation 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 is continuously refining this process and believes that the allowance for loan losses is adequate to cover anticipated losses in the loan portfolio under current economic conditions. NON-INTEREST INCOME A significant portion of Signet's revenue is derived from non-interest related sources including servicing income, service charges, trust fees and other income. The 1994 results reflected Signet's continued emphasis on non-interest operating income. TABLE 5 ALLOWANCE FOR LOAN LOSSES ALLOCATION
DECEMBER 31, 1994 December 31, 1993 December 31, 1992 December 31, 1991 December 31, 1990 PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS IN EACH IN EACH IN EACH IN EACH IN EACH CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY TO TO TO TO TO ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL (dollars in thousands) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS Commercial $ 34,041 30.86% $ 33,618 35.87% $ 33,930 36.87% $ 50,795 39.08% $ 57,792 39.21% Commercial-special(1) .24 1,064 .34 6,376 .52 Credit card 78,500 31.94 63,500 28.40 55,974 21.21 31,522 11.79 20,400 10.46 Other consumer 15,593 25.62 3,530 20.37 3,527 20.11 4,845 20.77 4,275 20.30 Real estate(2) 60,532 11.58 25,684 11.31 19,056 14.30 20,466 16.40 54,725 30.03 Real estate-special(1) 57,631 3.81 98,924 7.17 173,162 11.44 Unallocated 31,853 69,350 53,061 42,205 26,477 Total $220,519 100.00% $253,313 100.00% $265,536 100.00% $329,371 100.00% $163,669 100.00%
(1) Allowance allocated to an accelerated real estate asset reduction program which was established in 1991 and successfully terminated at the beginning of 1994. (2) Real estate loans include real estate-construction, real estate-commercial mortgage and real estate-residential mortgage loans. Real estate-residential has an insignificant amount of allowance allocation because of the minimal credit risk associated with that type of loan. TABLE 6 NON-INTEREST INCOME Percent Change Year Ended Increase Year Ended (dollars in thousands) December 31 (Decrease) December 31 1994 1993 1994/1993 1992 1991 1990 Credit card servicing income $337,284 $153,018 120% $101,185 $ 62,664 $ 12,435 Credit card service charges 73,321 63,222 16 31,553 42,276 59,574 Service charges on deposit accounts 66,141 64,471 3 66,971 62,924 57,799 Trust income 19,442 17,599 10 15,949 16,019 15,006 Mortgage servicing and origination 18,661 24,210 (23) 16,529 8,726 6,463 Other service charges and fees 15,112 16,260 (7) 17,540 12,815 12,120 Gain on sale of bank card merchant business 8,946 Gain on sale of mortgage servicing 6,000 N/M Trading profits (losses) (268) (1,396) N/M 11,193 14,867 6,981 Other 28,931 23,734 22 20,068 19,300 18,193 Non-Interest Operating Income 564,624 361,118 56 280,988 248,537 188,571 Securities available for sale gains 3,413 3,913 (13) 10,504 94,666 Investment securities gains (losses) 46 405 (89) (17,951) (1,445) 12,971 Total Non-Interest Income $568,083 $365,436 55% $273,541 $341,758 $201,542
Table 6 details the various components of non-interest income for the past five years. Non-interest income for 1994 was $568.1 million, up 55% from $365.4 million for 1993 and included $3.5 million ($2.2 million after-tax) and $4.3 million ($2.8 million after-tax), for 1994 and 1993, respectively, of primarily securities available for sale gains. Signet recognized nominal gains on investment securities during 1994 and 1993 as certain securities were called. Non-interest operating income amounted to $564.6 million for 1994, an increase of $203.5 million, or 56% over 1993. The primary sources of growth were increases in credit card servicing income and credit card service charges along with a $6.0 million gain on the sale of mortgage servicing rights. Credit card servicing income totaled $337.3 million for 1994, an increase of $184.3 million over last year. This category is primarily made up of the income received for servicing the $5.1 billion of securitized credit card receivables. The increase in credit card servicing income is offset by a corresponding reduction of net interest income and credit card service charges because securitization has the effect of transferring revenue from net interest income and credit card service charges to credit card servicing income. Improvement in charge-off experience had a favorable impact on credit card servicing income. Credit card service charges, which include membership fees and other credit card processing fees, totaled $73.3 million for 1994, an increase of $10.1 million, or 16%, from 1993 due to an increase in volume resulting from the success of the solicitation program. For further discussion of the impact of credit card securitizations on the income statement, see the Credit Card Business section elsewhere in this Report. Service charges on deposit accounts rose $1.7 million, or 3%, over 1993 to $66.1 million. Trust income, which totaled $19.4 million, was up 10% from last year primarily due to growth in the number of customers served by Signet and revised trust fee schedules. Mortgage servicing and origination income totaled $18.7 million for 1994 compared with $24.2 million in 1993, a decrease of 23%, as a result of a significant decline in the volume of mortgage loans originated due to higher interest rates. During 1994, mortgage production totaled $865 million, which was 50% lower than the 1993 level. Since the majority of these loans are sold in the secondary market with servicing retained by Signet, the Company's servicing portfolio grew to $4.8 billion at December 31, 1994. Other service charges and fees, which consisted primarily of fees related to commercial and standby letters of credit ($4.4 million), discount brokerage ($3.7 million) and checkbooks ($3.4 million) totaled $15.1 million, a reduction of $1.1 million, or 7%. Trading losses, which totaled $268 thousand in 1994, down from $1.4 million in 1993, were derived from services performed as a dealer bank for customers and from profits and losses earned on securities trading and arbitrage positions. The remaining categories of non-interest operating income, which included credit card application fees, credit card insert fees, gains and losses on sales of mortgage loans, safe deposit box rentals, income from various insurance products, venture capital income and miscellaneous income from other sources, amounted to $28.9 million for 1994, an increase of $5.2 million, or 22% over the prior year. NON-INTEREST EXPENSE Non-interest expense for 1994 totaled $846.4 million, an increase of $248.1 million, or 41% from 1993. Excluding the contract termination fee and restructuring charges in 1994 and credit card solicitation and foreclosed property expenses for both years, non-interest expense rose 24% from the prior year primarily due to growth in the credit card business. Table 7 details the various categories of non-interest expense for the past five years. Signet's efficiency ratio (the ratio of non-interest expense to taxable equivalent operating income) was 77.53% for 1994, compared with 66.02% for 1993. Excluding the contract termination fee, restructuring charges, other one-time spin-off related expenses and foreclosed property expense from non-interest expense lowers the ratio to 69.12% and 64.53% for the respective years. 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 64.55% for 1994 and 60.67% for 1993. With the anticipated Capital One spin-off, Signet began a major refocus on its core banking businesses. In the third quarter of 1994, Signet's Board of Directors approved a comprehensive core bank improvement plan aimed at reducing Signet's efficiency ratio through cost reductions and revenue initiatives in order to enhance its competitive position. In conjunction with the plan, which was implemented in the third quarter, Signet recorded a restructuring charge of $43.2 million ($28.1 million after-tax, or $0.48 per share). Included in the charge was approximately $15.6 million primarily for increased retiree medical and pension benefits related to an early retirement program in which 225 employees participated, approximately $13.0 million of accelerated retiree medical and pension obligations and anticipated severance benefits for approximately 750 employees and approximately $14.6 million related to the writedown of bank-owned properties and lease termination costs due to the expected abandonment of facilities resulting from the reduction in employees. All cash outflows related to the restructuring charge will be funded by cash provided by operations. As of December 31, 1994, Signet had reduced the restructuring liability by approximately $2.4 million for severance and early retirement benefits and approximately $5.9 million for lease termination and other facilities related costs. As a result of implementing the cost reduction measures, the number of full-time equivalent employees excluding Capital One fell 13% during the year ended December 31, 1994. The plan is expected to be fully implemented by the end of 1995. Savings are then expected to be approximately $40 million per year, primarily related to reduced salary and benefits expense. Staff expense (salaries and employee benefits), the largest component of non-interest expense, totaled $323.5 million, a 16% increase over 1993. Salaries rose 21% year-over-year primarily due to the increased staffing to support the significant growth in the credit card business. The number of full-time equivalent employees in the credit card business rose 53% from year-end 1993. Benefits expense for 1994 was relatively level with 1993 even though the total number of full time employees grew by 5% because the $6.0 million cost of implementing SFAS No. 112, "Employers' Accounting for Postemployment Benefits," was recorded in 1993. Both 1994 and 1993 included expenses related to the credit card account solicitation program initiated during early 1989. These costs totaled $100.9 million ($65.6 million after-tax, or $1.13 per share) for 1994 and $55.8 million ($36.3 million after-tax, or $0.64 per share) for 1993. These programs were implemented to increase the growth of accounts and outstandings and have required significant out-of-pocket expenses to launch large scale but carefully planned solicitations to a national marketplace. The Company's solicitation strategy, which uses extensive testing, is designed to improve the efficiency of the solicitation process, thereby improving opportunities to create value by controlling credit exposure and creating higher probabilities for success. The success of this strategy has been outstanding as the total managed credit card portfolio grew 51% from $5.1 billion at December 31, 1993 to $7.7 billion at December 31, 1994 and 441% from December 31, 1989. TABLE 7 NON-INTEREST EXPENSE Percent Change Year Ended Increase Year Ended (dollars in thousands) December 31 (Decrease) December 31 1994 1993 1994/1993 1992 1991 1990 Salaries $257,297 $212,665 21% $186,600 $177,626 $174,517 Employee benefits 66,188 65,249 1 49,388 31,366 33,615 Total staff expense 323,485 277,914 16 235,988 208,992 208,132 Credit card solicitation 100,886 55,815 81 23,133 14,648 21,382 Travel and communications 57,543 35,416 62 25,662 24,688 23,027 Supplies and equipment 54,862 40,550 35 32,536 36,660 45,061 External data processing services 50,026 36,578 37 31,138 18,846 902 Occupancy 47,059 40,192 17 38,899 39,231 37,388 Contract Termination 49,000 N/M Restructuring Charge 43,212 N/M Professional services 26,108 16,159 62 14,278 11,793 11,778 FDIC assessment 16,754 18,253 (8) 18,769 17,476 8,894 Public relations, sales and advertising 16,662 17,213 (3) 7,868 9,204 12,661 Credit and collection 11,646 10,619 10 9,231 7,969 5,584 Foreclosed property (699) 13,575 (105) 26,741 78,085 4,069 Other 49,879 36,032 38 34,996 41,333 35,657 Total Non-Interest Expense $846,423 $598,316 41% $499,239 $508,925 $414,535
The other non-interest expense categories reflected the costs associated with increased business volume. Travel and communications expense rose $22.1 million, or 62%, year-over-year, primarily due to higher postage and telephone charges related to managing a larger credit card portfolio. Approximately 90% of the $14.3 million increase in supplies and equipment expense was attributable to servicing the expanded credit card base. Occupancy expense increased $6.9 million, or 17%, from year-to-year, of which $5.9 million was due to a need for more office space for the credit card business. External data processing services rose $13.4 million, the majority (85%) of which occurred in the credit card area. Of the $9.9 million increase in professional services, $7.1 million was attributed to the credit card volume increase. The deposit insurance assessment from the Federal Deposit Insurance Corporation ("FDIC") totaled $16.8 million, a slight decline from 1993. The four Signet banks are "well capitalized" and, as a result, pay the lowest FDIC insurance premium rate. The $14.3 million decline in foreclosed property expense was primarily due to the elimination in 1994 of provisions recorded to maintain the reserve for foreclosed properties and lower costs to maintain and operate these properties. During 1993, foreclosed property reserve provisions of $7.4 million were recorded. The reserve was eliminated at year-end 1994 as management deemed foreclosed property to be fairly valued on the balance sheet. See Table 18 in the Risk Elements section for an analysis of this reserve. Costs of maintaining and operating foreclosed properties are expensed as incurred. Expenditures to complete or improve foreclosed properties are capitalized only if expected to be recovered; otherwise they are expensed. In 1991, Signet entered into a ten-year contract with Electronic Data Systems ("EDS") under which EDS manages Signet's information services, including the data center, telecommunications and systems and programming. During 1992, EDS and Signet converted most existing application systems to an integrated system, with a broader range of capabilities to support product delivery and services throughout the Company. Expense categories favorably affected by the outsourcing decision were primarily staff expense and supplies and equipment, offset, in part, by external data processing services (includes expenses for services of several outsourcing vendors, principally EDS). In late 1992, the credit card business began to reduce its reliance on EDS services and in September 1994 agreed to terminate substantially all EDS services over a transition period ending June 30, 1995. The cost of the contract termination, $49.0 million ($31.9 million after-tax, or $0.55 per share), was included as a one-time charge in the credit card business' financial results. This amount was paid in 1994. Signet will continue to use EDS subsequent to the spin-off, while Capital One will utilize certain transitional services from EDS through June 30, 1995. INCOME TAXES Income tax expense reported for 1994 was $67.3 million as compared with $74.8 million for 1993. This represented an effective tax rate of 31.0% for 1994 and 30.0% for 1993. Note L to the Consolidated Financial Statements reconciles reported income tax expense to the amount computed by applying the Federal statutory rate to income before income taxes. An increase in the Federal tax rate from 34% to 35% in 1993 had minimal impact on the income tax expense. Adoption of SFAS No. 109, "Accounting for Income Taxes," in 1993 did not have a material impact on the Company's financial position or results of operations. BALANCE SHEET REVIEW EARNING ASSETS Average earning assets totaled $10.2 billion for 1994, (as shown in Table 8-Average Balance Sheet), a decrease of 4% from the 1993 level. The portfolios experiencing the largest declines were investment securities ($1.6 billion) and trading account securities ($197 million), while the securities available for sale and the loan portfolios increased by $1.0 billion and $201 million, respectively. A more detailed discussion of the various earning asset categories follows. LOANS Loans (net of unearned income) for 1994, averaged $6.4 billion, an increase of $201 million, or 3%, from the 1993 level. Average balances increased in the commercial, credit card, other consumer and real estate-residential mortgage loan categories, while the real estate-construction and real estate-commercial mortgage loan average balances declined. The composition of the loan portfolio has been significantly altered over the past two years by strong growth in credit card and other consumer loans reflecting positive response to Signet's innovative product offerings. In addition, Signet reduced its overall average commercial real estate loan exposure by $247 million during 1994. At year-end 1994, Signet had no commercial loans outstanding to borrowers in the same or related industries which, in total, exceeded ten percent of total loans. Approximately half of the loan portfolio is secured, including all real estate related loans, leases, and a portion of the consumer and commercial loan portfolios. The unsecured portion includes mostly credit card loans and student loans. Borrowers were concentrated in a market area which extended from the Baltimore-Washington corridor through Richmond east to the Hampton Roads area of Virginia. It is the policy of the Company to review each prospective credit in order to determine an adequate level of security or collateral prior to making the loan. The type of collateral will vary and ranges from liquid assets to real estate. The Company's access to collateral, in the event of borrower default, is assured through adherence to lending laws and the Company's sound lending standards and credit monitoring procedures. The various loan categories for the past five year-ends are detailed in Table 9. TABLE 8 AVERAGE BALANCE SHEET 1994 1993 1992 AVERAGE INCOME/ YIELD/ Average Income/ Yield/ Average Income/ Yield/ (dollars in thousands) BALANCE EXPENSE RATE Balance Expense Rate Balance Expense Rate ASSETS Earning assets (taxable equivalent basis):(1) Interest bearing deposits with other banks $ 251,266 $ 11,512 4.58% $ 262,910 $ 12,031 4.58% $ 578,464 $ 24,103 4.17% Federal funds and resale agreements 970,300 44,294 4.56 752,510 23,196 3.08 835,398 29,984 3.59 Trading account securities 287,192 21,487 7.48 484,384 31,297 6.46 308,815 21,783 7.05 Credit card loans held for securitization 432,581 41,015 9.48 393,835 36,263 9.21 Loans held for sale 200,712 13,010 6.48 249,797 17,007 6.81 197,263 14,125 7.16 Securities available for sale 1,338,449 73,409 5.48 299,023 17,064 5.71 527,440 38,504 7.30 Investment securities-taxable 66,829 4,395 6.58 1,628,855 93,806 5.76 1,809,648 112,087 6.19 Investment securities-nontaxable 197,231 23,895 12.12 274,967 32,366 11.77 305,814 35,806 11.71 Loans (net of unearned income):(2) Commercial 2,148,726 165,372 7.70 2,101,423 158,587 7.55 2,235,382 181,600 8.12 Credit card 1,838,392 212,157 11.54 1,764,277 215,607 12.22 709,266 110,864 15.63 Other consumer 1,512,767 130,513 8.63 1,207,323 95,273 7.89 1,199,711 103,948 8.66 Real estate-construction 249,353 21,007 8.42 448,859 31,590 7.04 776,447 53,812 6.93 Real estate-commercial mortgage 560,542 50,254 8.97 607,573 47,757 7.86 603,934 50,147 8.30 Real estate-residential mortgage 97,855 8,399 8.58 76,962 7,634 9.92 93,672 9,801 10.46 Total loans 6,407,635 587,702 9.17 6,206,417 556,448 8.97 5,618,412 510,172 9.08 Total earning assets 10,152,195 $820,719 8.08 10,552,698 $819,478 7.77 10,181,254 $786,564 7.73 Non-rate related assets: Cash and due from banks 501,821 461,249 446,084 Allowance for loan losses (241,633) (263,593) (307,558) Premises and equipment (net) 242,933 201,792 207,186 Other assets 813,312 665,305 640,920 Total assets $11,468,628 $11,617,451 $11,167,886 LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Deposits: Money market and interest checking $ 1,020,838 $ 23,123 2.27% $ 960,342 $ 22,544 2.35% $ 875,654 $ 27,638 3.16% Money market savings 1,618,550 44,571 2.75 1,738,336 45,463 2.62 1,912,875 64,500 3.37 Savings accounts 1,019,068 33,461 3.28 772,194 24,079 3.12 563,932 21,189 3.76 Savings certificates 1,981,823 61,377 3.10 2,364,320 58,514 2.47 2,967,714 102,519 3.45 Large denomination certificates 318,659 14,527 4.56 272,693 10,970 4.02 268,713 13,936 5.19 Foreign 236,765 10,071 4.25 200,440 6,627 3.31 26,919 994 3.69 Total interest bearing deposits 6,195,703 187,130 3.02 6,308,325 168,197 2.67 6,615,807 230,776 3.49 Federal funds and repurchase agreements 1,677,884 65,894 3.93 2,043,207 63,986 3.13 1,793,836 65,561 3.65 Other short-term borrowings 477,424 27,293 5.72 482,405 25,521 5.29 292,210 15,899 5.44 Long-term borrowings 254,917 16,685 6.55 286,809 16,681 5.82 298,475 19,416 6.51 Total interest bearing liabilities 8,605,928 297,002 3.45 9,120,746 274,385 3.01 9,000,328 331,652 3.68 Non-interest bearing liabilities: Demand deposits 1,550,902 1,424,260 1,270,364 Other liabilities 265,899 183,284 129,231 Preferred stock Common stockholders' equity 1,045,899 889,161 767,963 Total liabilities and stockholders' equity $11,468,628 $11,617,451 $11,167,886 Net interest income/spread $523,717 4.63% $545,093 4.76% $454,912 4.05% Interest income to average earning assets 8.08% 7.77% 7.73% Interest expense to average earning assets 2.92 2.60 3.26 Net yield margin 5.16% 5.17% 4.47%
(1) Includes the effects of taxable equivalent adjustments, using a tax rate of 35% for 1994 and 1993 and 34% for 1992, 1991, 1990, and 1989. (2) For the purpose of these computations, nonaccrual loans are included in the daily average loan amounts. Also, interest income includes fees on loans of approximately $30,497, $24,440, $19,305, $18,916, $21,803 and $21,057 for the years 1994 through 1989, respectively. Growth Rate 1991 1990 1989 Average Balances Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ One-Year Five-Year Balance Expense Rate Balance Expense Rate Balance Expense Rate 1994-1993 Compounded $ 671,770 $ 42,183 6.28% $ 235,430 $ 19,650 8.35% $ 136,869 $ 12,705 9.28% (4.43)% 12.92% 678,826 39,397 5.80 529,737 43,706 8.25 361,551 34,354 9.50 28.94 21.83 160,664 13,505 8.41 65,415 5,594 8.55 116,259 9,785 8.42 (40.71) 19.83 92,055 15,780 17.14 1,096 183 16.70 9.84 133,157 9,689 7.28 77,888 6,572 8.44 25,262 1,604 6.35 (19.65) 51.36 1,855,272 165,440 8.92 79,137 7,322 9.25 85,540 8,551 10.00 347.61 73.34 557,092 40,642 7.30 2,801,688 265,697 9.48 2,497,587 238,938 9.57 (95.90) (51.53) 317,781 36,734 11.56 366,148 41,607 11.36 379,038 42,956 11.33 (28.27) (12.25) 2,339,531 220,910 9.44 2,535,436 271,820 10.72 2,455,966 287,447 11.70 2.25 (2.64) 628,531 104,204 16.58 1,331,523 220,944 16.59 1,241,347 195,915 15.78 4.20 8.17 1,291,047 131,417 10.18 1,340,139 150,220 11.21 1,402,238 161,905 11.55 25.30 1.53 1,082,342 94,942 8.77 1,245,071 137,009 11.00 1,135,575 142,655 12.56 (44.45) (26.16) 606,610 57,769 9.52 593,976 67,319 11.33 554,111 65,499 11.82 (7.74) 0.23 123,006 13,030 10.59 171,502 17,848 10.41 126,320 11,931 9.45 27.15 (4.98) 6,071,067 622,272 10.25 7,217,647 865,160 11.99 6,915,557 865,352 12.51 3.24 (1.51) $10,537,684 985,642 9.35 11,374,186 $ 1,255,491 11.04 10,517,663 $1,214,245 11.54 (3.80) (0.70) 429,020 454,276 464,933 (191,856) (118,240) (88,211) 217,386 210,462 198,383 541,489 428,395 374,247 $11,533,723 $12,349,079 $11,467,015 $ 709,136 $ 33,473 4.72% $ 613,871 $ 30,236 4.93% $ 571,538 $ 29,812 5.22% 6.30% 12.30% 1,692,870 92,383 5.46 1,524,107 100,965 6.62 1,487,758 102,493 6.89 (6.89) 1.70 434,484 21,115 4.86 417,276 20,326 4.87 433,559 21,203 4.89 31.97 18.64 3,597,228 227,644 6.33 2,909,487 240,991 8.28 2,482,965 210,076 8.46 (16.18) (4.41) 727,160 46,022 6.33 1,125,161 92,288 8.20 967,397 86,689 8.96 16.86 (19.92) 38,271 2,573 6.72 179,058 14,946 8.35 191,961 17,755 9.25 18.12 4.28 7,199,149 423,210 5.88 6,768,960 499,752 7.38 6,135,178 468,028 7.63 (1.79) 0.20 1,755,343 104,067 5.93 2,764,929 223,455 8.08 2,332,701 204,114 8.75 (17.88) (6.38) 233,945 14,289 6.11 404,033 31,590 7.82 555,905 50,337 9.05 (1.03) (3.00) 317,799 24,050 7.57 353,452 30,887 8.74 320,302 29,581 9.24 (11.12) (4.46) 9,506,236 565,616 5.95 10,291,374 785,684 7.63 9,344,086 752,060 8.05 (5.64) (1.63) 1,162,973 1,131,186 1,206,302 114,607 171,749 182,855 24,657 749,907 754,770 709,115 $11,533,723 $12,349,079 $11,467,015 $420,026 3.40% $ 469,807 3.41% $ 462,185 3.49% 9.35% 11.04% 11.54% 5.37 6.91 7.15 3.98% 4.13% 4.39%
TABLE 9 SUMMARY OF TOTAL LOANS December 31 (in thousands) 1994 1993 1992 1991 1990 Loans: Commercial $2,472,620 $2,299,973 $2,181,218 $2,351,990 $2,549,462 Credit card 2,559,172 1,808,515 1,243,873 700,488 679,854 Other consumer 2,053,461 1,297,309 1,179,303 1,233,310 1,319,432 Real estate-construction 209,183 309,842 549,001 952,687 1,199,599 Real estate-commercial mortgage 526,956 581,529 632,072 587,644 617,621 Real estate-residential mortgage 191,508 71,411 77,844 113,466 135,227 Total $8,012,900 $6,368,579 $5,863,311 $5,939,585 $6,501,195
Commercial loans, which represented 34% of the total average loan portfolio, averaged $2.1 billion for 1994, a slight increase from last year. However, commercial loans rose more than 7% from year-end 1993 to year-end 1994 reflecting strong loan growth towards the end of 1994. Signet's commercial loan portfolio is strongly oriented toward a diverse group of middle market borrowers. These loans are predominately in the manufacturing, wholesaling, services and real estate industries. The credit risk associated with middle market borrowers is principally influenced by general economic conditions and the resulting impact on the borrower's operations. In addition, a risk faced by the Company includes the risk of diminishing collateral values. Collateralization for commercial loans primarily consists of liquid assets, trading assets and capital assets, and is determined on a case-by-case basis. Credit card receivables on the balance sheet averaged $1.8 billion for 1994, an increase of 4% from 1993, and represented 29% of the total average loan portfolio. Credit card outstandings increased despite $2.4 billion of securitizations ($1.2 billion in June, $600 million in September and $550 million in November, 1994). The primary purpose of securitization is to fund the growth in credit card receivables. As noted earlier, net income is not significantly affected by the securitizations. The solicitation program added approximately 1,900,000 and 1,400,000 net accounts for 1994 and 1993, respectively. At year-end, on-balance sheet credit card loans totaled $2.6 billion, an increase of 42% over 1993, as the Company's solicitation program yielded substantial results. The growth was achieved through a variety of attractive products offered to carefully targeted customer segments with a low risk profile. The total managed credit card portfolio, which grew $2.6 billion during the year, totaled $7.7 billion at December 31, 1994. The managed portfolio includes both loans on the balance sheet and securitized assets. See the Credit Card Business section for a more detailed discussion. Other consumer loans averaged $1.5 billion for 1994, a 25% increase from 1993, and represented 24% of the total loan portfolio. This category consists of student loans, home equity loans and installment and other consumer type loans. The increase in other consumer loans was concentrated in student loans and loans generated by implementing Signet's information-based strategy. Table 10 illustrates the effectiveness of Signet's ability to implement growth strategies in the consumer and student loan markets in 1994. Risks faced by the Company include (i) the possibility of future economic downturns causing an increase in credit losses and (ii) the risk that an increasing number of consumers will default on the payment of their outstanding balances or seek protection under bankruptcy laws, resulting in accounts being charged off as uncollectible. TABLE 10 OTHER CONSUMER LOAN PORTFOLIO December 31 (in thousands) 1994 1993 YEAR-END BALANCES: Student loans $ 848,099 $ 526,730 Home equity loans 511,947 434,101 Installment and other loans 693,415 336,478 Total consumer loan portfolio (year-end) $2,053,461 $1,297,309 AVERAGE BALANCES: Student loans $ 649,519 $ 409,371 Home equity loans 462,315 452,789 Installment and other loans 400,933 345,163 Total consumer loan portfolio (average) $1,512,767 $1,207,323 Real estate-construction loans totaled $249 million, a decrease of 44%, or $200 million, from the 1993 average. This category represented only 4% of the average loan portfolio for 1994, down from 7% in 1993. During 1994, the Company sold a $102 million portfolio of real estate related loans at a discount for which there were sufficient allocated reserves. The sale of these loans accounted for approximately $21 million of the 1994 net charge-offs. The real estate loan sale impacted the real estate-construction loan ($73 million) and real estate-commercial mortgage loan ($29 million) categories. The credit risk associated with real estate lending is principally influenced by real property markets and the resulting impact on the borrower's operations. A primary risk associated with the real estate business involves the possibility of future economic downturns in the real property market causing an increase in credit losses. It is the Company's policy to maintain loan-to-value maximums of 80% for construction and commercial mortgage loans. The maximum loan-to-value collateral limits have been established to meet the goals of the Company in targeting percentages based on diversification strategy, market conditions and economic conditions. Real estate-commercial mortgage loans represented 9% of the average loan portfolio in 1994. This category averaged $561 million, a decrease of 8%, from 1993. The portfolio consisted of $276 million of commercial mortgage loans and $285 million of mini-permanent (interim) mortgage loans compared with $319 million and $289 million for the respective loan types in 1993. Construction loans typically are converted to mini-permanent mortgage loans when the related project is cash flowing to cover debt service, and permanent financing, for various reasons, is not desired or obtainable at the present time. Real estate- commercial mortgage loans decreased partially as a result of the sale of approximately $29 million of real estate-commercial mortgage loans for which there were sufficient allocated reserves. Real estate-residential mortgage loans increased $21 million, or 27%, from 1993 to average $98 million primarily the result of acquiring Pioneer. This category consisted of conventional home mortgages which experienced record levels of refinancings during 1993. Refinancing activity declined substantially in 1994 as interest rates increased. It is the Company's policy to maintain average loan-to-value maximums of 85% for real estate-residential mortgages. Loans above 80% have mortgage insurance. As noted previously, a primary risk associated with the real estate business involves the possibility of future economic downturns in the real property market causing an increase in credit losses. Table 11 shows the maturities of selected loan categories at year-end 1994. Loans, as a result of maturities, monthly payments, sales and securitizations provide an important source of liquidity. See discussion on Liquidity elsewhere in this Report. Unused loan commitments related primarily to commercial loans and excluding credit card loans were approximately $2.9 billion at year-end 1994 and $2.7 billion at year-end 1993. TABLE 11 MATURITIES OF SELECTED LOANS December 31, 1994 Maturing After One Year But Within Within Five After (in thousands) One Year Years Five Years Total Commercial $1,221,784 $1,115,430 $135,406 $2,472,620 Real estate-construction 97,449 98,785 12,949 209,183 Real estate-commercial mortgage 171,362 262,999 92,595 526,956 Total $1,490,595 $1,477,214 $240,950 $3,208,759
For interest sensitivity purposes, $403,242 of the amounts due after one year are fixed rate loans and $1,314,922 are variable rate loans. SECURITIES The securities portfolio consists of trading account securities, securities available for sale and investment securities. If the Company has the positive intent and ability to hold securities until maturity, they are classified as investment securities and carried at amortized historical cost. Otherwise, securities are classified either as available for sale, which are carried at market with unrealized gains and losses recorded through adjustments to stockholders' equity, or as trading account securities and carried at market with unrealized gains and losses recorded through earnings, depending on management's asset/liability strategy, liquidity needs or objectives. The accounting policy for investment securities is included in Note A to Consolidated Financial Statements. As noted earlier, the Company implemented SFAS No. 115 in 1994. At December 31, 1994, trading account securities consisted of $212 million of government securities, $139 million of asset-backed securities and $2 million of other securities. Trading account securities averaged $287 million in 1994, down 41% from the $484 million level in 1993. TABLE 12 SECURITIES AVAILABLE FOR SALE December 31, 1994 Maturities Within 1 Year 1-5 Years 6-10 Years After 10 Years Total (dollars in thousands) Fair Fair Fair Fair Fair Value Yield Value Yield Value Yield Value Yield Value Yield U.S. Government and agency obligations- Mortgage-backed securities $270,290 6.62% $336,713 7.71% $607,003 7.22% Other $383,893 5.25% 73,984 7.01 457,877 5.53 States and political subdivisions 67 7.94 49 15.51 116 11.14 Other 24,939 7.04 46,889 6.61 $104,872 6.20% 176,700 6.43 Total $383,893 5.25% $369,280 6.73% $383,651 7.57% $104,872 6.20% $1,241,696 6.49%
The yields shown are actual weighted average interest rates at year-end on a taxable equivalent basis using a tax rate of 35%. Securities available for sale are used as part of management's asset/liability strategy and may be sold in response to changes in interest rates, resultant prepayment risk and other factors dictated by the strategy. These securities consist principally of U.S. Treasury and mortgage-backed securities. All of the mortgage-backed securities in the securities available for sale portfolio as well as in the investment securities portfolio are subject to prepayment risk since the mortgages related to these securities can prepay at any time without penalty. This risk occurs when interest rates decline, causing the securities to lose value since the term and, therefore, the interest stream of the securities has shortened due to prepayments. The fixed rate mortgage-backed and treasury securities are subject to interest rate risk. Therefore, when interest rates rise, these fixed rate securities lose value. At December 31, 1994, the net unrealized losses, net of tax, related to securities available for sale, totaled $21.8 million primarily from a reduction in the value of mortgage-backed securities and U.S. Treasury obligations due to rising interest rates. Securities available for sale for 1994 averaged $1.3 billion, an increase of $1.0 billion over the 1993 level, since approximately $1.5 billion of securities were reclassified from investment securities to securities available for sale when SFAS No. 115 was adopted. The U.S. Treasury securities portfolio totaled $265 million at year-end 1994, up from $21.8 million at the end of 1993. At December 31, 1994, the securities available for sale portfolio (excluding securities having no maturity) had a remaining average maturity of less than four years and unrealized gains of $1.6 million and unrealized losses of $39.2 million. Table 12 shows the maturities of the securities available for sale portfolio and the weighted average yields to maturity of such securities. Signet's investment securities portfolio of $399 million at December 31, 1994 consisted of obligations of the U.S. Treasury and government sponsored agencies (includes mortgage-backed securities and CMOs), obligations of states, municipalities and other political subdivisions, as well as bonds and notes of corporations. Investment securities are primarily fixed rate instruments with maturities ranging from less than one year to ten or more years. Table 13 shows the maturities of the investment securities portfolio and the weighted average yields to maturity of such securities (non-taxable securities are on a taxable equivalent basis). These assets are used as security for public and trust deposits, as collateral for repurchase transactions and to provide interest income. The fixed rate mortgage-backed and treasury securities are subject to interest rate risk and all of the mortgage-backed securities are subject to prepayment risk for the reasons noted above in the discussion of securities available for sale. Investment securities for 1994 averaged $264 million, a decrease of $1.6 billion over the 1993 level, as approximately $1.5 billion were reclassified from investment securities to securities available for sale when SFAS No. 115 was adopted. At year-end 1994, the investment securities portfolio had a remaining average maturity of less than four years and unrealized gains of $5.9 million and unrealized losses of $5.0 million. Investment securities portfolio yields increased to 10.71% from the 1993 level of 6.63% as the majority of securities reclassified to available for sale were lower yielding securities. TABLE 13 INVESTMENT SECURITIES December 31, 1994 Maturities Within 1 Year 1-5 Years 6-10 Years After 10 Years Total (dollars in thousands) Fair Fair Fair Fair Fair Value Yield Value Yield Value Yield Value Yield Value Yield U.S. Government and agency obligations - Mortgage-backed securities $ 50,050 6.80% $ 25,124 8.15% $ 75,174 7.25% Other 74,550 7.13 74,550 7.13 States and political subdivisions $29,532 11.03% 103,588 11.94 26,807 12.99 $13,644 10.88% 173,571 11.86 Other 26,221 6.80 49,222 6.74 45 6.00 75,488 6.76 Total $29,532 11.03% $254,409 8.99% $101,153 8.75% $13,689 10.86% $398,783 9.14% The yields shown are actual weighted average interest rates at year end on a taxable equivalent basis using a tax rate of 35%.
At December 31, 1994, all CMOs and mortgage-backed pass-through securities held by Signet were issued or backed by federal agencies. At the end of the past two years, Signet did not have any investments with a single issuer (except for U.S. Government and agency obligations which are separately disclosed in this Report) which aggregated greater than ten percent of stockholders' equity. OTHER EARNING ASSETS Other earning assets are comprised of interest bearing deposits with other banks, federal funds sold and securities purchased under agreements to resell, credit card loans held for securitization and loans held for sale. Other earning assets averaged $1.9 billion in 1994, up 12% from $1.7 billion in 1993. These earning assets reflect the normal process of balancing the subsidiary banks' reserve position; dealer activities, in which money market instruments are bought and then sold to customers; and, for a short period of time, holding loans and/or securities to be sold in the secondary market. These investments are generally short-term, high quality and very liquid (see Liquidity discussion), and consequently, have yields generally lower than loans or investment securities. The level of these investments can vary from year-to- year as they are used to manage interest rate risk, to take advantage of short- term interest rate opportunities and provide liquidity. CREDIT CARD BUSINESS As previously noted, on October 25, 1994, Signet filed an amended registration statement with the SEC which described 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 were transferred to Capital One Bank, a newly chartered limited purpose credit card bank. Capital One Bank, in conjunction with the transfer, became a wholly-owned subsidiary of Capital One, a wholly-owned subsidiary of Signet (the "Separation"). Accounts representing approximately $335 million, or 5%, of the managed credit card portfolio were retained by Signet. These retained accounts are in Signet's core bank market area and/or are tied to other banking relationships. Capital One will continue to service and manage these accounts according to a servicing agreement which provides for arm's length fees and which can continue through September 1996. Separation occurred on November 22, 1994 at which time 7,125,000 shares of common stock of Capital One were sold in an initial public offering. Signet distributed all of the remaining common stock it held in Capital One to Signet stockholders in a tax-free distribution on February 28, 1995. The following discussion includes Signet's credit card business prior to and subsequent to the Separation (including the retained portfolio). Signet is one of the oldest continually operating bank card issuers in the U.S., having commenced credit card operations in 1953, the same year as the formation of what is now MasterCard International. It is among the 15 largest issuers of Visa and Master Card credit cards in the United States based on managed loans outstanding. During the six years ended December 31, 1994, the Company's managed credit card portfolio (which includes securitized receivables) grew at a 36% compound annual rate from $1.2 billion at year-end 1988 to $7.7 billion. This growth has been largely due to general industry dynamics that have existed over the past several years and the success of the information-based strategy ("IBS") adopted by the Company in 1988. IBS is designed to allow the Company to differentiate among customers based on credit risk and usage characteristics and to capture profitable opportunities by effectively matching client characteristics with attractive product offerings. Through IBS, the Company is able to design and target customized solicitations at various customer segments, thereby enhancing customer response levels and the returns on solicitation expenditures within given underwriting parameters. The Company has applied IBS to other areas of its credit card business, including account management, credit line management, pricing strategies, usage stimulation, collections, recoveries and retention. 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 responded by being an innovator of strategies designed to attract customers, such as offering credit cards with low introductory rates and a balance transfer option and secured card products. These strategies, combined with the segmenting and targeting capabilities of IBS, have contributed to the growth in recent periods of the Company's account originations and account balances. The Company's profitability in the credit card business is affected by interest spread, cardholder usage patterns, credit quality, the level of solicitation (marketing) expenses and operating efficiencies. The Company's credit card revenues consist primarily of interest income on its revolving credit card loans and non-interest income consisting of credit card servicing income and credit card fees, which include annual membership fees, interchange income and other credit card fee income. The Company's primary cash expenses are the costs of funding credit card loans, credit losses, salaries and employee benefits, solicitation (marketing) expenses, processing expenses and income taxes. Significant marketing expenses to implement the Company's new credit card product strategies (e.g., printing, credit bureau costs and postage) are incurred prior to the acquisition of new accounts while the resulting revenues are recognized over the life of the acquired accounts. Revenues recognized are a function of the response rate of the initial marketing program, card usage patterns, credit quality of accounts, product pricing, effectiveness of account management programs, attrition rates and operating costs. TABLE 14 MANAGED CREDIT CARD PORTFOLIO December 31 (in thousands) 1994 1993 1992 1991 1990 YEAR-END BALANCES: On-balance sheet loans held for securitization $ 400,000 On-balance sheet loans $2,559,172 $1,808,515 $1,243,873 $ 700,488 679,854 Securitized loans 5,116,791 3,289,656 1,000,000 1,000,000 500,000 Total managed portfolio (year-end) $7,675,963 $5,098,171 $2,243,873 $1,700,488 $1,579,854 AVERAGE BALANCES: On-balance sheet loans held for securitization $ 432,581 $ 393,835 $ 92,055 $ 1,096 On-balance sheet loans 1,838,392 1,764,277 $ 709,266 628,531 1,331,523 Securitized loans 4,198,588 1,372,187 1,000,000 884,931 141,097 Total managed portfolio (average) $6,469,561 $3,530,299 $1,709,266 $1,605,517 $1,473,716
The Company'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. The Company had a total of $5.1 billion of securitized credit card receivables as of December 31, 1994. See Table 14 for a five year summary of the Company's managed credit card portfolio. Securitization is the transformation of a pool of credit card receivables into marketable securities. Table 15 indicates the impact of the securitizations on the statement of consolidated operations, average assets, return on assets and net yield margin for the past four years. Credit card receivables are generally 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 net interest income and provision for loan losses and increase non-interest income, but the net effect on the Company's earnings is minimal, while increasing the return on assets. The Company services the related credit card accounts after the receivables are securitized. Because securitization changes the Company's involvement from that of a lender to that of a loan servicer, there is a change in how the revenue is reported in 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, the Company's credit card servicing income over the term of these transactions may vary depending upon the credit performance of the securitized receivables. However, the Company's exposure to credit losses on the securitized receivables is contractually limited to these cash flows. TABLE 15 IMPACT OF THE CREDIT CARD SECURITIZATIONS Year Ended December 31 (dollars in thousands) 1994 1993 1992 1991 STATEMENT OF CONSOLIDATED OPERATIONS (AS REPORTED) Net interest income $ 510,011 $ 529,340 $ 435,610 $ 397,970 Provision for loan losses 14,498 47,286 67,794 287,484 Non-interest income 568,083 365,436 273,541 341,758 Non-interest expense 846,423 598,316 499,239 508,925 Income (loss) before income taxes (benefit) $ 217,173 $ 249,174 $ 142,118 $ (56,681) ADJUSTMENTS FOR SECURITIZATIONS Net interest income $ 314,389 $ 167,662 $ 131,424 $ 85,958 Provision for loan losses 77,170 57,633 63,599 51,026 Non-interest income (237,219) (110,029) (67,825) (34,932) Non-interest expense - - - - Income before income taxes $ - $ - $ - $ - MANAGED STATEMENT OF OPERATIONS (ADJUSTED) Net interest income $ 824,400 $ 697,002 $ 567,034 $ 483,928 Provision for loan losses 91,668 104,919 131,393 338,510 Non-interest income 330,864 255,407 205,716 306,826 Non-interest expense 846,423 598,316 499,239 508,925 Income (loss) before income taxes (benefit) $ 217,173 $ 249,174 $ 142,118 $ (56,681) As reported: Average earning assets $10,152,195 $10,552,698 $10,181,254 $10,537,684 Return on assets 1.31% 1.50% .98% N/M Net yield margin 5.15 5.17 4.47 3.98% Including securitized credit cards: Average earning assets $14,350,783 $11,924,885 $11,181,254 $11,422,615 Return on assets 0.96% 1.34% .90% N/M Net yield margin 5.84 5.97 5.24 4.43% Yield on managed credit card portfolio 12.08% 13.76% 17.51% 16.39%
In addition to the significant increase in outstandings, the absolute dollars of net loan losses, on a managed portfolio basis, rose from $83.9 million in 1993 to $104.1 million for 1994. However, the ratio of charge-offs to average managed loans fell from 2.34% for 1993 to 1.61% for 1994, as the 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. The Company also believes that the improved charge-off ratio is evidence of the high credit quality of the accounts obtained through the solicitation program and the improved credit quality of the more seasoned accounts in the portfolio. The high quality of the credit card portfolio is also reflected in loan delinquency data. The total managed credit card loans sixty days or more past due ratio increased to 1.74% of related loans at year-end 1994 from 1.53% for year-end 1993, as the dollar amount rose to approximately $134 million compared with $79 million at the same respective dates. These delinquency rates remain well below industry averages. Refer to Table 16 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. 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 the Company's recent marketing programs, the Company 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. The Company may in its discretion waive all or part of the rate increase for selected accounts. Much of the growth in the Company's account origination and its managed loan portfolio in recent periods has been attributable to customers who, attracted by the Company's low introductory rates, transferred balances from competing card issuers. The Company has very successfully implemented its IBS 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, home equity loans and consumer loans. During 1994, consumer loans other than credit card grew by $756 million, as installment loans increased $357 million, student loans rose $321 million and home equity loans were up $78 million. While initial results are promising, it is too early to determine how successful IBS will be in these other areas of Signet. TABLE 16 DELINQUENCIES OF THE CREDIT CARD PORTFOLIO* December 31 (dollars in thousands) 1994 1993 1992 1991 Number of Days DELINQUENT Delinquent Delinquent Delinquent Delinquent AMOUNT PERCENT Amount Percent Amount Percent Amount Percent 30-59 days $ 97,058 1.26% $ 52,099 1.01% $ 46,500 2.05% $ 53,106 3.04% 60-89 days 48,070 0.63 28,236 0.55 25,443 1.12 29,955 1.72 90+ days 85,478 1.11 50,359 0.98 49,579 2.18 57,070 3.27 Total $230,606 3.00% $130,694 2.54% $121,522 5.35% $140,131 8.03%
*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. RISK ELEMENTS NON-PERFORMING ASSETS Non-performing assets include non-accrual loans, restructured loans and foreclosed properties. Non-accrual loans are loans on which interest accruals have been suspended. It is Signet's policy to discontinue interest accruals on commercial and real estate loans when they become contractually past due 90 days as to principal or interest payments or when other internal or external factors indicate that collection of principal or interest is doubtful. Occasionally, exceptions are made to this policy if supporting collateral is adequate and the loan is in the process of collection. Credit card loans typically are charged off when they are six months past due and a minimum payment has not been received for 60 days, while other consumer loans typically are charged off when the loan is six months past due; therefore, these loans are not usually placed in non-accruing status. Restructured loans are loans on which a concession, such as a reduction in interest rate below the current market rate for new debt with similar risks, is granted to a borrower. Foreclosed properties are classified as either in substance foreclosures or legal foreclosures. In substance foreclosures occur when the borrower has little equity in the project based on the fair market value of the collateral, the repayment of the loan can be made only through operations or the sale of the collateral, and the debtor has abandoned control of the collateral or has retained control but it is doubtful that in the foreseeable future the debtor will be able to rebuild sufficient equity or repay the loan. Legal foreclosures occur when Signet legally takes title to the collateral. TABLE 17 NON-PERFORMING ASSETS AND PAST DUE LOANS December 31 (dollars in thousands) 1994 1993 1992 1991 1990 Non-accrual loans: Commercial $10,548 $ 42,303 $ 25,470 $ 57,824 $ 67,945 Consumer 1,708 2,191 808 989 658 Real estate-construction 5,490 17,837 52,051 107,778 66,557 Real estate-mortgage* 7,310 6,523 7,341 40,494 1,159 Total non-accrual loans 25,056 68,854 85,670 207,085 136,319 Restructured loans: Commercial 1,609 8,099 2,923 3,392 Real estate-construction 1,000 3,470 22,568 Total restructured loans 1,000 5,079 30,667 2,923 3,392 Total non-performing loans 26,056 73,933 116,337 210,008 139,711 Legally foreclosed properties 21,593 37,938 64,279 124,006 67,945 In substance foreclosed properties 887 10,357 11,124 40,008 63,248 Less foreclosed property reserve (5,742) (10,625) (41,632) Total foreclosed properties 22,480 42,553 64,778 122,382 131,193 Total non-performing assets $48,536 $116,486 $181,115 $332,390 $270,904 Percentage to loans (net of unearned) and foreclosed properties 0.61% 1.83% 3.08% 5.53% 4.12% Allowance for loan losses to: Non-performing loans 846.32% 342.63% 228.25% 156.84% 117.15% Non-performing assets 454.34 217.46 146.61 99.09 60.42 Accruing loans past due 90 days or more $65,333 $ 58,891 $ 64,835 $ 91,971 $ 93,676
* 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. Non-performing assets at year-end 1994 totaled $48.5 million, or 0.61% of loans and foreclosed properties. This compares very favorably with $116.5 million (net of the $5.7 million foreclosed property reserve), or 1.83%, respectively, at the end of 1993. Overall non-performing real estate assets declined $34.1 million, or 48%, including $20.1 million of foreclosed properties (net of reserves). One large commercial credit ($24.7 million) was placed on non-accrual status at the end of 1993. In early 1994, the Company sold this loan well within the loan's allocated allowance. Table 17 provides details on the various components of non-performing assets and past due loans for the last five years. Foreclosed properties totaled $22.5 million at the end of 1994, and were equal to 46% of total non-performing assets and 62% of non-performing real estate assets. Signet sold $27.5 million of foreclosed properties during 1994. Signet provided financing on only $388,000 of the foreclosed properties sold in 1994. The reserve for foreclosed properties was eliminated at December 31, 1994, as shown in Table 18, since management deemed foreclosed properties to be fairly valued on the balance sheet. TABLE 18 Year Ended December 31 (in thousands) 1994 1993 1992 1991 Balance at beginning of year $ 5,742 $ 10,625 $ 41,632 $ - Additions (reductions) to reserve charged (credited) to expense (1,764) 7,405 15,503 71,878 Writedowns (3,978) (12,288) (46,510) (30,246) Balance at end of year $ - $ 5,742 $ 10,625 $ 41,632
The largest geographic exposure of Signet's non-performing real estate assets (construction loans, mortgage loans and foreclosed properties) at December 31, 1994 was in the Metro-Washington area, at 43%. Commercial development represented the largest type of project at 34% of the total. Accruing loans past due 90 days or more as to principal or interest payments totaled $65.3 million and $58.9 million at the end of 1994 and 1993, respectively. The details of these past due loans are displayed in Table 19. The past due commercial and real estate loans were in the process of collection and were adequately collateralized. Also, of the 1994 past due other consumer loans, $20.3 million, or 85%, were student loan delinquencies, which are indirectly government guaranteed and do not represent material loss exposure to Signet. The sharp rise in credit card outstandings during 1994 is the primary reason for the $11.6 million increase in past due credit card loans. However, during 1994, the ratio of credit card loans past due 90 days or more as a percentage of credit card loans outstanding on-balance sheet rose only 19 basis points from 0.91% to 1.10% as the portfolio matured. TABLE 19 ACCRUING LOANS PAST DUE 90 DAYS OR MORE December 31 (in thousands) 1994 1993 Commercial $ 5,433 $ 2,641 Credit card 28,050 16,491 Other consumer 24,023 22,637 Real estate-construction 2,363 11,133 Real estate-commercial mortgage 1,582 4,333 Real estate-residential mortgage 3,882 1,656 Total $65,333 $58,891 At year-end 1994, management was monitoring $43.2 million of loans for which the ability of the borrower to comply with present repayment terms was uncertain. These loans were not included in the above disclosure. They are followed closely, and management at present believes that the allowance for loan losses is adequate to cover anticipated losses that may be attributable to these loans. Interest recorded as income on year-end non-accrual and restructured loans was $0.5 million, $2.5 million and $5.4 million for 1994, 1993 and 1992, respectively, compared with interest income of $3.4 million, $7.5 million and $13.4 million for the same respective periods which would have been recorded had these loans performed in accordance with their original terms. The pre-tax costs of carrying (funding) an average of $34.1 million of foreclosed properties in 1994, $61.6 million in 1993 and $114.7 million in 1992 were approximately $1.2 million, $1.9 million and $4.2 million, respectively, when calculated by applying an average annual cost of funds to the outstanding balance. These amounts have been calculated using historical rates, and may not necessarily reflect improved earnings on a prospective basis, as these funds may be reemployed at different rates. SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which is effective for financial statements issued for fiscal years beginning after December 15, 1994, requires impaired loans to be measured at the present value of expected future cash flows by discounting those cash flows generally at the loan's effective interest rate, or at the loan's market price or the fair value of the collateral if the loan is collateral dependent. SFAS No. 114 also requires troubled debt restructurings involving a modification of terms to be remeasured on a discounted basis. The Company is currently evaluating the impact that SFAS No. 114 will have on the Company; however, management does not expect that this statement will have a materially adverse impact on its future results of operations or financial position. REAL ESTATE LENDING This section of the Report discusses and details Signet's real estate loan exposure. By the end of 1993, Signet had successfully completed its Accelerated Real Estate Asset Reduction Program (the "Program"), as detailed in a separate section in Management's Discussion and Analysis of Financial Condition and Results of Operations - 1993 Compared to 1992. As a result, Signet terminated the Program effective January 1, 1994, and all remaining assets were assigned to work-out units. Signet's real estate-construction loan exposure at December 31, 1994, totaled $209 million, a decline of 32%, or $101 million, from the 1993 year-end level. Approximately 46% of these loans were located in the Metro-Washington area, while only 6% were located outside Signet's market area. The largest type of construction financing was residential, followed by office buildings. Of the construction loan portfolio, $5.5 million were on non-accruing status and $1.0 million were classified as restructured troubled debt at year-end (see discussion on Non-Performing Assets). The remaining unfunded commitments on Signet's construction loans at year-end 1994 totaled approximately $195.4 million. The other category of real estate lending is mortgage loans, which includes two categories; commercial mortgage and residential mortgage. Commercial mortgage loans totaled $527 million at December 31, 1994 and included $248 million of mini-permanent (interim) mortgage loans. Construction loans typically are converted to mini-permanent mortgage loans when the related project is cash flowing to cover debt service and permanent financing, for various reasons, is not desired or obtainable at the present time. Residential mortgages consist of conventional home mortgage loans and have experienced very few losses. This loan category totaled $192 million at the end of 1994. FUNDING DEPOSITS The Company offers a diverse range of products to its customers, including interest bearing and non-interest bearing demand, savings and certificates of deposits, both domestic and foreign. Signet competes for deposits with other commercial banks, savings banks, savings and loan associations, the bond and stock market and other providers of non-bank financial services, including money market funds, credit unions, mutual funds and other deposit gathering institutions. Average deposits totaled $7.7 billion for 1994, essentially level with 1993. Core deposits averaged $7.2 billion for 1994, virtually unchanged from 1993. These deposits represent Signet's largest and most important funding source due to their relatively low cost and reasonably stable nature. This source of funding also enhances the overall liquidity position of the Company. The core deposits category that experienced the greatest decline was savings certificates which fell $382 million, or 16%, from 1993 as depositors responded to volatile interest rates by shortening the maturities of their investments and transferring their funds into money market and demand products. Savings accounts and demand deposits were up $247 million and $127 million, respectively, nearly offsetting the decline in savings certificates. Signet increased its deposit and customer base during the year through the acquisition of Pioneer, new products, innovative marketing techniques and quality customer service; however, the competition among financial institutions for these deposits and increased awareness on the part of consumers have effectively increased the relative cost of and reduced the overall benefits received from these deposits. Purchased deposits (large denomination certificates and foreign deposits), averaged $555 million for 1994, an increase of $82 million, or 17%, from the prior year. Large denomination certificates are principally sold to existing corporate customers. The demand for such funds depends upon the Company's varying financing needs and also reflects the previously mentioned customers' shifting of deposits to shorter, more liquid products. As a result, the interest rates are based upon market competition for these funds. Table 20 shows the maturity composition of large denomination certificates at year-end 1994. TABLE 20 MATURITIES OF DOMESTIC LARGE DENOMINATION CERTIFICATES $100,000 OR MORE December 31, 1994 (in thousands) Balance Percent 3 months or less $262,671 41% Over 3 through 6 months 84,520 13 Over 6 through 12 months 234,689 36 Over 12 months 61,174 10 Total $643,054 100% The majority of foreign deposits are in denominations of $100,000 or more. SHORT-TERM AND LONG-TERM BORROWINGS Short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements, commercial paper, Treasury tax and loan deposits, Federal Reserve borrowings, the Capital One Bridge Financing Facility and short-term borrowings from other banks. This category of borrowings is an accessible source of generally moderately priced funds (except for the Bridge Financing Facility) and has become an important financing vehicle for Signet's balance sheet management. Signet supplements its funding sources in the short-term money market and through securitizations. Short-term borrowings have an original maturity of less than one year. This category declined $370 million, or 15%, from 1993 to average $2.2 billion. In connection with the Separation, Capital One Bank obtained a syndicated bank loan facility (the "Bridge Financing Facility") of $1.75 billion on a non-revolving basis (another $500 million remains available on a revolving basis over the 364-day term of the facility) to meet its interim funding and liquidity needs. The initial amount of borrowing under the Bridge Financing Facility was approximately $1.7 billion at 60 basis points over the London Inter Bank Offering Rate ("LIBOR") before financing costs. In December 1994, Capital One reduced the Bridge Financing Facility by $400 million through new funding sources, primarily large denomination certificates. In early 1995, the Bridge Financing Facility was further reduced by bank notes with longer maturities. It is Capital One management's intent to replace this funding source during the first half of 1995. See Note G to Consolidated Financial Statements for further details on this source of funds. Long-term borrowings represent a very stable, although relatively expensive, source of funds and have been used to provide Tier II capital to Signet's subsidiaries, for acquisitions and for general corporate purposes. This category averaged $255 million for 1994, a decline of 11%, or $32 million, from 1993. This decline resulted primarily from regularly scheduled amortization of principal and on February 1, 1994, Signet called for redemption at par the remaining $11.9 million of 7 3/4% Senior Debentures due in 1997. No long-term debt was issued during the year. Note H to Consolidated Financial Statements provides a detailed analysis of long-term borrowings at December 31, 1994 and 1993. STOCKHOLDERS' EQUITY Stockholders' equity provides a source of permanent funding, allows for future growth and assists the Company in withstanding unforeseen adverse developments. At December 31, 1994, stockholders' equity totaled $1.1 billion, an increase of $147 million, or 15%, from the previous year-end level of $965 million. The increase reflects net retained income for 1994 of $93 million, the issuance of common stock in connection with the acquisition of Pioneer of $59 million and the issuance of common stock through investor and employee stock purchase plans, as well as the stock option plan, which, in total, added an additional $17 million in net proceeds to equity. During the third quarter of 1994, Signet completed the acquisition of Pioneer, a $400 million financial institution located in Chester, Virginia. The transaction was a tax-free exchange of stock and was accounted for as a purchase. Pioneer's shareholders received .6232 shares of Signet common stock for each Pioneer share held. This resulted in Signet issuing approximately 1.5 million shares of common stock. The transaction had an immaterial dilutive effect on Signet's earnings per share. At spin-off, Signet's stockholders' equity will be reduced by the amount of Capital One's stockholders' equity less minority interest (see Note T to the Consolidated Financial Statements). This will generally reduce Signet's capital ratios; however, the ratios will remain strong and all of Signet's banks are within "well-capitalized" regulatory guidelines (see discussion on Capital Analysis). Effective January 1, 1994, Signet adopted SFAS No. 115, which requires that securities classified as available for sale be reported at fair value with unrealized gains and losses reported as a component of retained earnings, net of tax. At December 31, 1994, the net unrealized losses, net of tax, related to securities available for sale, totaled $21.8 million, primarily from a reduction in the value of mortgage-backed securities and U.S. Treasury obligations. Signet has no plans at present to sell these securities and recognize a loss. The dividends declared during 1994 of $57.2 million represented an annual rate of $1.00 per share. The principal source of dividends to be paid by the Company to its shareholders is normally dividends and interest from the Company's subsidiary banks. Various state and federal laws and policies limit the ability of the Company to pay dividends to shareholders and the ability of Signet's subsidiary banks to pay dividends to the Company. Under applicable regulatory restrictions, all of the Company's banking subsidiaries were able to pay dividends to the Company in 1994. The 1995 first quarter dividend was $.25 per share. After the spin-off of Capital One, Signet's quarterly dividend is expected to be $.17 per share. CAPITAL ANALYSIS A primary objective of management is and has been to sustain its strong capital position to merit the confidence of customers, the investing public, banking regulators and stockholders. A strong capital position has helped the Company withstand unforeseen adverse developments and take advantage of profitable investment opportunities. It also allowed Signet to incur the contract termination fee and restructuring charge in 1994. Table 21 details certain risk-based and other capital data. Capital adequacy is defined as the amount of capital needed to maintain future asset growth and to absorb losses. Regulators consider a range of factors when determining capital adequacy, such as the organization's size, quality and stability of earnings, risk diversification, management expertise, asset quality, liquidity and internal controls. Management reviews the various capital measures monthly and takes appropriate action to ensure that they are within established internal and external guidelines. Management believes that Signet's current capital and liquidity positions are strong and that its capital position is adequate to support its various business areas. TABLE 21 RISK-BASED AND OTHER CAPITAL DATA December 31 1994 1993 (dollars in thousands-except per share) BALANCE PERCENT Balance Percent Qualifying common stockholders' equity $1,237,453 $ 964,662 Less goodwill and other disallowed intangibles (44,581) (23,404) Total Tier I capital 1,192,872 12.58% 941,258 11.12% Qualifying debt 165,800 222,607 Qualifying allowance for loan losses 119,812 107,646 Total Tier II capital 285,612 3.01 330,253 3.90 Total risk-based capital $1,478,484 15.59 $1,271,511 15.02 Total risk-adjusted assets $9,484,219 $8,466,048 Leverage ratio 9.90 8.13 Tangible Tier I leverage ratio 9.57 7.88
December 31 1994 1993 1992 1991 1990 Ratios: Common equity to assets 8.60% 8.14% 6.84% 6.33% 6.46% Internal equity capital generation rate 8.79 13.21 10.99 (5.58) .01 Common dividend payout ratio 38.61 26.14 22.96 N/M% 100.00 Book value per share $18.96 $17.04 $14.77 $13.17 $ 13.83
The Federal Reserve Board has issued capital guidelines which are sensitive to credit risk factors (including off-balance sheet exposure). Emphasis is placed on common stockholders' equity in relationship to total assets adjusted for risk. The focus is principally on credit risk, but does include certain interest rate and market risks when assigning risk categories. The risk-based capital guidelines define capital as either core capital (Tier I) or supplementary capital (Tier II). These guidelines required banking organizations to meet a minimum total capital ratio of 8%, with at least 4% Tier I Capital. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires the federal banking agencies to take prompt corrective action in respect to depository institutions that do not meet minimum capital requirements. FDICIA established five capital tiers: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A depository institution's capital tier depends upon where its capital levels are in relation to various relevant capital measures, which include a risk-based capital measure and a leverage ratio capital measure, and certain other factors. As of December 31, 1994, all four of Signet's banking subsidiaries met the well-capitalized criteria. As detailed in Table 21, the Company's consolidated risk-based capital ratios at December 31, 1994 were 15.59% and 12.58% for Total Capital and Tier I Capital, respectively. The Federal Reserve Board also requires a minimum leverage ratio of 3%. For most corporations, including Signet, the minimum leverage ratio is 3% plus an additional cushion of at least 100 to 200 basis points depending upon risk profiles and other factors. The leverage ratio is calculated by dividing Tier I Capital by the current quarter's total average assets less goodwill and other disallowed intangibles. Signet's leverage ratio at December 31, 1994 was 9.90%. For informational purposes, Table 22 details the components of Signet's intangible assets for the past five years and the estimated amortization for the next five years. TABLE 22 INTANGIBLE ASSETS December 31 (in thousands) 1994 1993 1992 1991 1990 Goodwill $37,247 $22,883 $26,067 $29,250 $32,433 Credit card premium 6,448 7,271 8,094 8,917 9,740 Core deposit premiums 16,019 11,730 14,130 16,523 Mortgage servicing rights 29,431 12,847 3,473 2,946 1,523 Total $89,145 $54,731 $51,764 $57,636 $43,696 The amortization of intangibles is expected to be approximately $8,536 annually over the next five years. DERIVATIVES AND OTHER OFF-BALANCE SHEET RISK Signet has been party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers, to reduce its own exposure to fluctuations in interest rates and to participate in trading activities. These financial instruments include commitments to extend credit, standby and commercial letters of credit, mortgages sold with recourse and interest rate contracts, including forwards, futures, options and interest rate swaps, caps and floors. These instruments involve, to varying degrees, elements of credit or interest rate risk in excess of the amount recognized in the balance sheet. Signet uses the same credit policies for off-balance sheet items as it does for on-balance sheet instruments. Extensive discussion of these off-balance sheet activities is included in Note O to Consolidated Financial Statements and the Interest Rate Sensitivity discussion. Discussion of the impact of derivative income on operations is included in Note A to Consolidated Financial Statements and the Interest Rate Sensitivity discussion. Refer to Table 24 for a roll forward schedule of interest rate swap activity. Fair value information related to derivative activity is included in Note R to Consolidated Financial Statements. The impact of derivative activity on liquidity is discussed in the Liquidity discussion. INTEREST RATE SENSITIVITY Signet's interest rate sensitivity position is managed by the Asset and Liability Committee ("ALCO") and monitored through the use of simulations on rate sensitive pre-tax income. Interest rate sensitivity is the relationship between changes in market interest rates and changes in rate sensitive income due to the repricing characteristics of assets and liabilities. For example, in periods of rising rates, the core banking businesses will experience wider spreads as consumer deposit costs lag increases in market interest rates. Improved spreads due to the lag in pricing on consumer deposits will be partially offset to the extent that the funding cost on the investment portfolio increases. ALCO routinely uses derivatives such as interest rate swaps to insulate the Company against the possibility of sudden changes in interest rates. ALCO, in managing interest rate sensitivity, also uses simulations to better measure the impact that market changes and alternative strategies might have on net interest income. Both current period maturity and repricing information and projected balance sheet strategies are used to simulate rate sensitivity. The lag effect of consumer deposit rates, determined through historical analysis and forecasting techniques, is also modeled. Given the timing of the spin-off, interest rate sensitivity for the Company was evaluated excluding those assets transferred to Capital One. These simulations show that an immediate and sustained 100 basis point change in interest rates would have less than a 2% impact on rate sensitive income over the next twelve months, reflecting Signet's conservative balance sheet strategy. ALCO operates under a policy designed to limit the impact of a sudden 100 basis point change in interest rates to no more than a 5% change in net income over a twelve month period. Over the course of 1994, Signet moved toward a more neutral interest rate sensitivity position as evidenced by Table 23 (completed for the consolidated entity as of December 31, 1994). Although the table shows a basic 180-day net asset position of $1.9 billion, the Company has taken steps to offset this position through the use of derivative products. Including the impact of these derivatives and credit card securitizations resulted in a 180-day net asset position of $131 million, or 1% of total assets. At December 31, 1994, the notional values of the Company's derivative products for the purpose of managing interest rate risk were $3.9 billion of interest rate swaps, $650 million of interest rate floors, $100 million of interest rate caps and $330 million of futures contracts. This includes $539 million of interest rate swaps used to hedge the interest streams associated with credit card securitizations which are recorded in non-interest income. In addition, the Company has entered into a forward starting interest rate swap for a variable notional amount ranging from $0.6 billion to $4.8 billion whereby the Company pays a fixed rate of 5.875% and receives one month LIBOR, from January 3, 1995 through April 13, 1995. This interest rate swap was transferred to Capital One. Interest rate swaps, where the Company, in all material respects, makes variable rate payments and receives fixed rate payments, were entered into to manage the interest rate sensitivity in the Company's existing balance sheet mix. During 1994, the Company's interest rate swaps increased income on earning assets by $10.4 million and reduced borrowing costs by $42.2 million. The majority of the existing interest rate swaps have either a 3- or 5-year life and will mature by 1999. Interest rate floors, with average strike prices of approximately 5% tied to the three-month LIBOR increased income on earning assets by $2.6 million in 1994. Interest rate floors were purchased to hedge variable rate assets against decreases in interest rates. Maturity dates on the interest rate floors range from 1997-2003. Interest rate caps, with average strike prices of approximately 5.5% tied to the three-month LIBOR, increased borrowing costs by $4.0 million in 1994. Interest rate caps were purchased to hedge variable rate liabilities against increases in interest rates. All existing interest rate caps will mature by mid-1995. Futures contracts were purchased to hedge interest rate changes on interest bearing deposits with other banks, securities available for sale and savings certificates. During 1994, gains of $1.2 million on closed contracts increased income on interest bearing deposits with other banks and securities available for sale and decreased expense on savings certificates. At December 31, 1994, the Company had deferred gains on open futures contracts used for hedging purposes of $153 thousand, which will be amortized into income when closed over a period not to exceed six years. As the derivative contracts mature, management will determine the necessity to enter into additional contracts at that time. See Note O to Consolidated Financial Statements for further details of off-balance sheet risk. See Table 24 for a roll forward schedule of interest rate swaps. TABLE 23 INTEREST RATE SENSITIVITY December 31, 1994 1-30 31-60 61-90 91-180 Within 180 Days- >1 Year- Over (dollars in millions) Days Days Days Days 180 Days 1 Year 5 Years 5 Years Earning assets: Securities $ 479 $ 49 $ 112 $ 57 $ 697 $ 111 $ 317 $ 515 Loans 2,972 43 2,239 452 5,706 319 1,532 367 Other earnings assets 1,809 67 5 13 1,894 20 Total earning assets 5,260 159 2,356 522 8,297 450 1,849 882 Interest bearing liabilities: Deposits: Savings(1) 409 1,309 47 1,765 518 134 1,258 Other time 293 144 144 511 1,092 619 855 38 Short-term borrowings 2,896 68 227 104 3,295 17 1 Long-term borrowings 50 50 100 200 50 4 Total interest bearing liabilities 3,598 262 1,730 762 6,352 1,154 1,040 1,300 Non-rate related assets and liabilities, net 1,332 298 INTEREST SENSITIVITY GAP 1,662 (103) 626 (240) 1,945 (704) (523) (716) Impact of interest rate swaps, futures, floors and caps (555) (1,450) (500) (545) (3,050) 45 3,005 Impact of credit card securitizations and repricing(2) (2,392) (36) 3,808 (144) 1,236 (26) (1,212) Interest sensitivity gap adjusted for impact of securitization interest rate swaps, futures, floors and caps(2) $ (1,285) $ (1,589) $3,934 $ (929) $ 131 $ (685) $ 1,270 $ (716) Adjusted interest sensitivity gap as a percentage of total assets (9.94)% (12.29)% 30.42% (7.18)% (1.01)% (5.30)% 9.82% (5.54)% CUMULATIVE INTEREST SENSITIVITY GAP $ (1,285) $ (2,874) $1,060 $ 131 $ 131 $ (554) $ 716 Adjusted cumulative interest sensitivity gap as a percentage of total assets (9.94)% (22.23)% 8.20% 1.01% 1.01% (4.28)% 5.54%
(1) Historical rate sensitivity analysis shows that interest checking and statement savings, while technically subject to immediate withdrawal, actually have shown repricings and run-off characteristics that generally fall within 1-5 years. A similar analysis has been done with money market savings and money market checking and these products have been adjusted accordingly. (2) Some of the coupons on securitizations are tied to commercial paper and LIBOR rates and, therefore, are shown in the earliest period for repricing. While the income from securitizations is booked in non-interest income, it is shown in this chart as it is impacted by rate movements. TABLE 24 INTEREST RATE SWAPS Synthetic Trading/ (notional in millions Alteration (a) Dealer (b) Total Balance at December 31, 1992 $2,557 $261 $2,818 Additions 1,241 237 1,478 Expirations 1,240 170 1,410 Balance at December 31, 1993 2,558 328 2,886 ADDITIONS (c) 953 30 983 EXPIRATIONS 187 81 268 BALANCE AT DECEMBER 31, 1994 $3,324 $277 $3,601 (a) Impacts interest rate sensitivity. Synthetic alteration is a risk manage- ment tool used to change the nature of an interest earning asset or interest bearing liability from fixed rate to variable rate or vice versa. (b) Impacts trading income. (c) In 1994, the Company purchased $539 million of interest rate swaps that hedge credit card securitizations. Income from these swaps is recorded in non-interest income. These swaps are not included in this roll forward schedule. LIQUIDITY Liquidity is the ability to meet present and future financial obligations either through the sale or maturity of existing assets or by the acquisition of additional funds through liability management. Therefore, both the coordination of asset and liability maturities and effective liability management are important to the maintenance of liquidity. Stable core deposits and other interest-bearing funds, accessibility to local, regional and national funding sources and readily marketable assets are all important determinants of liquidity. Table 25 reflects certain liquidity ratios for the past five year- ends. The 1994 ratios remained strong. Asset liquidity is generally provided by interest bearing deposits with other banks, federal funds sold and securities purchased under agreements to resell, securities available for sale, loans held for sale and trading account securities. Table 12 shows 31% of the securities available for sale portfolio maturing within one year. As indicated in Table 13, $29.5 million of investment securities mature within one year. Liability liquidity is measured by the Company's ability to obtain deposits and purchased funds at favorable rates and in adequate amounts and by the length of maturities. Since core deposits are the most stable source of liquidity a bank can have because they are government insured, the high level of average core deposits during 1994 maintained the Company's strong liquidity position. Signet's 1994 average loan balances were entirely funded with core deposits. Signet's equity base, as noted earlier, also provides a stable source of funding. The parent company does not rely on the capital markets for funding on a regular basis. The parent company issues a modest amount of commercial paper in its local market, which is reinvested in repurchase agreements with its subsidiary banks (included in Advances to Bank Subsidiaries on the parent company's balance sheet). Additionally, the parent company does not have any significant long-term debt issues maturing until 1997; however, as noted earlier, on February 1, 1994, Signet called for redemption at par the remaining $11.9 million of 7 3/4% Senior Debentures due in 1997. For 1994, cash and cash equivalents declined a modest $56 million. Cash provided by operations was $652 million for this time period resulting mainly from proceeds from securitization of credit card loans. Cash used by investing activities amounted to $1.4 billion principally due to purchases of securities available for sale and an increase in loans. Cash provided by financing activities amounted to $695 million due primarily to an increase in short-term borrowings related to the Bridge Financing Facility. The Company's future liquidity may be affected by derivative activities. Potential losses are limited to counter-party risk in situations where Signet is owed money; that is, when Signet holds contracts with a positive fair value. The Company's net unrealized gain as of December 31, 1994 was $25.1 million. The Company does not expect any counterparty to fail to meet its obligation. Also, at December 31, 1994, the Company had unrealized losses on derivative transactions totaling $168.6 million, which if terminated would require a cash outlay. Signet presently has no intention to terminate these contracts. There are no credit concerns related to the Company's obligations and it expects to meet those obligations without default. TABLE 25 LIQUIDITY RATIOS December 31 1994 1993 1992 1991 1990 Ratio of liquid assets to: Purchased funds 90.4% 121.6% 130.5% 134.3% 121.0% Loans 48.1 66.5 82.0 54.1 58.8 Assets 29.5 35.4 39.4 28.3 33.2 INFLATION Since interest rates and inflation rates do not always move in concert, the effect of inflation on banks may not necessarily be the same as on other businesses. A bank's asset and liability structure differs significantly from that of manufacturing and other concerns in that virtually all assets and liabilities are of a monetary nature. Inflation affects a bank's lending activities. Since inflation tends to drive the costs of goods and services higher, the level of customers' financing needs usually rises to keep pace. As loan demand increases, competition for variable funds may raise the base rate charged for these funds. Banks are then faced with increased credit risk as borrowers experience greater exposure to financial risk from the higher rates. In such cases, banks place more emphasis on the adequacy of the allowance for loan losses. As a result, continued inflation increases the overall cost of doing business, both directly and indirectly. FAIR VALUE The FASB has issued SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," and Note R to Consolidated Financial Statements includes the requirements of this statement. Since interest rates, credit risks and other dimensions of fair value of the Company's assets, liabilities and off-balance sheet instruments change rapidly and, additionally, since this disclosure excludes some aspects of the Company's overall fair value, Note R should not be viewed as an indication of the Company's overall market value. Furthermore, certain valuation techniques used in developing Note R require assumptions and forecasts of cash flows. While Note R complies with SFAS No. 107, these assumptions and other subjective determinations should be considered when interpreting the data. SIGNET BANKING CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-1993 COMPARED TO 1992 SUMMARY OF PERFORMANCE Signet reported consolidated net income of $174.4 million, or $3.06 per share for 1993, compared with $109.2 million, or $1.96 per share, in 1992. The 1993 performance reflected improved net interest margins and substantial growth in non-interest sources of revenues, primarily resulting from the strong growth in the Company's credit card business and significant improvement in asset quality, which was due primarily to the success of the Program. The Program was established at the end of 1991 to enable the Company to reduce problem real estate assets and minimize their impact on future earnings. Since the commencement of the Program, the Company reduced assets in the Program by 65%, within the discounts originally provided, thereby accomplishing the Program objective. As a result, the Company terminated the Program effective January 1, 1994. The remaining assets were assigned to work out units. During 1993, the Company reduced its overall risk real estate exposure (construction loans, commercial mortgage loans and foreclosed properties) by $311.9 million and non- performing assets declined by $64.6 million to total $116.5 million at December 31, 1993. Profitability measures reflected the high level of earnings in 1993 as ROA was 1.50% and ROE was 19.62%. These impressive ratios were indicative of Signet's improved performance and compare very favorably with the .98% ROA and 14.22% ROE achieved in 1992. INCOME STATEMENT ANALYSIS NET INTEREST INCOME Taxable equivalent net interest income was $545.1 million for 1993, an increase of $90.2 million, or 20%, over 1992. The overall improvement in net interest income reflected the impact of strong growth in the credit card portfolio and the significantly lower cost of funds, offset in part by lower yields on all earning asset categories resulting from declining market interest rates. The net yield margin rose in 1993 to 5.17% from 4.47% for 1992, an increase of 70 basis points. The increase in the net yield margin was primarily the net result of several factors: a change in the mix of earning assets due to the impact of growth in the credit card portfolio (23 basis points); a net decrease in average interest bearing deposits with other banks, federal funds sold and securities purchased under agreements to resell, securities available for sale and trading account securities (12 basis points); a favorable change in the mix of funding sources and, due to the lower rate environment, lower costs associated with these funding sources (60 basis points); lower levels and related effects of non-performing loans (2 basis points); and higher levels of demand deposits (5 basis points). These favorable factors were partially offset by lower yields on and changes in the mix of earning assets due to the lower rate environment experienced during 1993 (32 basis points). Derivative contracts, used for hedging purposes, increased interest on earning assets by $14.3 million and $13.6 million and decreased borrowing costs by $82.4 million and $103.8 million for 1993 and 1992, respectively. The overall increase in the net yield margin as a result of these instruments amounted to 92 basis points and 115 basis points for 1993 and 1992, respectively. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses totaled $47.3 million for 1993, a decrease of $20.5 million from the 1992 total of $67.8 million. This decrease was the result of lower charge-offs due to Signet's improved credit quality. Net charge-offs decreased 57% to $56.6 million for 1993, compared with $131.6 million for the prior year. Decreases were noted in all loan categories. Commercial loan net charge-offs experienced a sharp improvement when comparing 1993 with 1992 due to lower gross charge-offs and a strong increase in commercial loan recoveries. Real estate-construction and real estate-mortgage loans also experienced significant declines in net losses for 1993 due to a higher level of Program charge-offs in 1992. Of the $27.8 million in real estate net charge-offs during 1993, $26.5 million were in Program loans. The primary objective of the Program was to accelerate the reduction of real estate exposure, which in turn resulted in higher levels of charge-offs of Program assets. In spite of $9.1 million of Program commercial net charge-offs in 1993, commercial net charge-offs for the Company, as a whole, totaled only $4.7 million, a decrease of $21.6 million from 1992. This resulted from a significant increase in commercial loan recoveries. Other consumer net charge-offs declined to $1.5 million, or .12% of average other consumer loans. Credit card net charge-offs amounted to $22.6 million in 1993, or 1.28% of average on-balance sheet credit card loans. Net losses for 1993 on the total managed credit card portfolio, which included securitized receivables, were 2.34% of total average managed credit card loans, compared with 5.31% reported for 1992. The allowance for loan losses at December 31, 1993, was $253.3 million, or 4.01% of year-end loans, compared with the 1992 year-end allowance of $265.5 million, or 4.57% of loans, and included $57.6 million designated for the Program. The 1992 year-end allowance included $100.0 million designated for the Program. The 1993 allowance for loan losses was 343% of year-end non-performing loans and 217% of year-end non-performing assets indicating significantly improved coverage over 1992, when the December 31, 1992 allowance for loan losses was 228% of non-performing loans and 147% of non-performing assets. NON-INTEREST INCOME Non-interest operating income amounted to $361.1 million for 1993, an increase of $80.1 million, or 29% over 1992. The primary sources of growth were increases in credit card servicing income, credit card service charges and mortgage servicing and origination fees. These increases were partially offset by a sharp decline in trading profits. Credit card servicing income totaled $153.0 million for 1993, an increase of $51.8 million over 1992. The increase in credit card servicing income was offset by a corresponding reduction of credit card service charges and net interest income because securitization had the effect of transferring revenue from net interest income and credit card service charges to credit card servicing income. Improvement in charge-off experience and declining interest rates had a favorable impact on credit card servicing income because the March 1991 and portions of the September and December 1993 securitizations pay a coupon based on a variable rate and the declining rates created an increase in the spread earned by the Company. Service charges on deposit accounts declined $2.5 million, or 4%, over 1992 to $64.5 million. This reduction was caused by certain retail promotions in late 1992 and early 1993 whereby customers were offered one year of waived maintenance fees. Credit card service charges, which include membership fees and other credit card processing fees, totaled $63.2 million for 1993, an increase of $31.7 million from 1992 due to an increase in volume resulting from the success of the solicitation program. Trust income, which totaled $17.6 million, was up 10% from 1992 primarily due to revised personal trust fee schedules. Mortgage servicing and origination income totaled $24.2 million for 1993 compared with $16.5 million in 1992, an increase of 46%, as a result of a significant increase in the volume of mortgage refinancings. During 1993, mortgage production totaled $1.7 billion, which was 57% higher than the 1992 level. Since the majority of these loans were sold in the secondary market with servicing retained by Signet, the Company's servicing portfolio grew to $3.2 billion at December 31, 1993. Other service charges and fees, which consisted primarily of fees related to: commercial and standby letters of credit ($4.4 million); discount brokerage ($4.0 million) and checkbooks ($3.5 million) totaled $16.3 million, a reduction of 7%. The decline in this category was attributable to lower brokerage fees as Signet converted its proprietary mutual funds to a no-load basis. Trading losses, which totaled $1.4 million in 1993, a sharp contrast to trading profits of $11.2 million in 1992, were derived from services performed as a dealer bank for customers and from profits and losses earned on securities trading and arbitrage positions. The remaining recurring categories of non-interest operating income, which included increases in Company-owned life insurance cash surrender value, credit card application fees, gains and losses on sales of mortgage loans, safe deposit box rentals, income from various insurance products and miscellaneous income from other sources, amounted to $23.7 million for 1993, an increase of $3.7 million, or 18% over 1992. During 1993, Signet recognized gains of $3.9 million on transactions in the securities available for sale portfolio and nominal gains on investment securities as certain securities were called. In 1992, Signet recognized net losses of $7.4 million on investment securities and securities available for sale transactions primarily the result of $17.0 million of write-downs on collateralized mortgage obligation residuals and excess mortgage servicing held in the investment securities portfolio. No such writedowns were necessary in 1993. These securities, of which only $3.8 million remained at the end of 1993, were sensitive to the increases in mortgage prepayments caused by the lower interest rates and high volume of refinancings. During 1992, gains of $10.5 million were recognized on transactions in the securities available for sale portfolio, primarily on sales of 30-year mortgage-backed securities. NON-INTEREST EXPENSE Non-interest expense for 1993 totaled $598.3 million, an increase of $99.1 million, or 20% from 1992. Excluding credit card solicitation and foreclosed property expenses for both years, non-interest operating expense rose 18% from 1992. Signet's efficiency ratio (the ratio of non-interest expense to taxable equivalent operating income) was 66.02% for 1993, an improvement from 67.84% for 1992. Reducing non-interest expense by the amount of foreclosed property expense drops the ratio down to 64.53% and 64.21% for the respective years. 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 60.67% for 1993 and 59.10% for 1992. Staff expense (salaries and employee benefits), the largest component of non-interest expense, totaled $277.9 million, an 18% increase over 1992. Salaries rose 14% year-over-year primarily due to the increased staffing to support the significant growth in the credit card business. The number of full- time equivalent employees rose 22% from year-end 1992. The incentive compensation amounts increased as a direct result of the record earnings performance of the Company. For 1993, profit sharing awards of $18.8 million were recorded in the employee benefits category due to higher corporate earnings. This compares with $13.0 million of profit sharing expense in 1992. The cost of implementing SFAS No. 112 (see below), which totaled $6.0 million, and the rising cost of medical insurance and other benefits also contributed to the overall increase in employee benefits. Both 1993 and 1992 included expenses related to the credit card account solicitation program initiated during early 1989. These costs totaled $55.8 million ($36.3 million after-tax, or $.64 per share) for 1993 and $23.1 million ($15.3 million after-tax, or $.27 per share) for 1992. The other non-interest expense categories reflected the costs associated with increased business volume. Approximately half of the $8.0 million increase in supplies and equipment expense was attributable to servicing the expanded credit card base. Travel and communications expense rose $9.8 million, or 38%, from year-to-year, also due primarily to the credit card growth. Public relations, sales and advertising expense during 1993 rose $9.3 million from the 1992 level due to bank-wide retail promotional campaigns. The deposit insurance assessment from the FDIC totaled $18.3 million, a slight decline from 1992. The decrease of $13.2 million in foreclosed property expense was primarily due to a decline in provisions recorded to maintain the reserve for foreclosed properties. During 1993, provisions of $7.4 million were expensed compared with $15.5 million during 1992. This reserve balance was $5.7 million at year-end 1993. In December, 1990, FASB issued SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." The Company applied the new rule starting in the first quarter of 1993 on a prospective basis. The charge against income was $6.6 million for 1993. Postretirement benefit cost for prior years, which was recorded on a cash basis, has not been restated. The Company made an investment from which the income offset this 1993 expense. In November, 1992, SFAS No. 112, "Employers' Accounting for Postemployment Benefits," was issued establishing accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. Signet's decision to adopt SFAS No. 112 in 1993 increased benefits expense by approximately $6.0 million ($3.9 million after-tax, or $.07 per share). INCOME TAXES Income tax expense reported for 1993 was $74.8 million as compared with $32.9 million for 1992. This represented an effective tax rate of 30.0% for 1993 and 23.2% for 1992. The 1992 income tax expense included an alternative minimum tax credit of $6.3 million resulting in lower effective tax rates. The 1993 effective tax rate was influenced by a lower relative proportion of tax-exempt income to total taxable income when compared with 1992. An increase in the Federal tax rate from 34% to 35% in 1993 had minimal impact on income tax expense. BALANCE SHEET REVIEW EARNING ASSETS Average earning assets totaled $10.6 billion for 1993, an increase of 3.6% from the 1992 level. A discussion of the various earning asset categories follows. Loans (net of unearned income) for 1993 averaged $6.2 billion, an increase of $588 million, or 10%, from the 1992 level. Average balances increased in the credit card, other consumer and real estate-commercial mortgage loan categories, while the commercial, real estate-construction and real estate-residential mortgage loan average balances declined. The composition of the loan portfolio was significantly altered in 1992 and 1993 by the credit card national solicitations and securitizations and weak commercial loan demand caused by a sluggish economy. In addition, Signet reduced its overall risk real estate exposure by $312 million during 1993. Commercial loans, which represented 34% of the total average loan portfolio, averaged $2.1 billion for 1993, a slight decline from 1992. Signet's commercial loan portfolio was strongly oriented toward diversified middle market borrowers. Credit card receivables on the balance sheet averaged $1.8 billion for 1993, an increase of 145% from 1992, and represented 28% of the total average loan portfolio. Credit card outstandings increased significantly in spite of $2.3 billion of securitizations ($1.2 billion in September 1993 and $1.1 billion in December 1993). The solicitation program added approximately 1,400,000 and 400,000 net new accounts for 1993 and 1992, respectively. At year-end 1993, on-balance sheet credit card loans totaled $1.8 billion, an increase of 45% over 1992, as Signet's solicitation program yielded substantial results. The total managed credit card portfolio grew $2.9 billion during 1993 and totaled $5.1 billion at the end of the year. Other consumer loans averaged $1.2 billion for 1993, a slight increase from 1992, and represented 19% of the total loan portfolio. This category consisted of home equity loans ($453 million-1993, $491 million-1992), student loans ($409 million-1993, $293 million-1992), second mortgage loans ($67 million-1993, $98 million-1992), direct and indirect automobile installment loans ($57 million- 1993, $73 million-1992), and other consumer-type loans ($221 million-1993, $244 million-1992). The slight increase in other consumer loans in 1993 was concentrated in student loans. Consumer real estate loans declined due to the high volume of mortgage loan refinancings in 1993. Real estate-construction loans totaled $449 million, a decrease of 42%, or $328 million, from the 1992 average. This category represented 7% of the average loan portfolio for 1993, down from 14% in 1992. Real estate-commercial mortgage loans represented 10% of the 1993 average loan portfolio. This category averaged $608 million, an increase of less than 1%, from 1992. The portfolio consisted of $319 million of commercial mortgage loans and $289 million of mini-permanent (interim) mortgage loans compared with $412 million and $192 million for the respective loan types in 1992. Real estate-residential mortgage loans declined $17 million, or 18%, from 1992 to average $77 million in 1993. The average balance of the securities portfolio, which consists of trading account securities, securities available for sale and investment securities, was down $264 million from 1992 to 1993. Securities available for sale and trading account securities decreased from 1992 in recognition of Signet's liquidity position, the lower level of deposits, the sluggish economy and the redeployment of these assets into higher yielding credit card loans. In addition, $57.8 million of mortgage-backed securities available for sale were sold during 1993 resulting in net gains of $3.9 million. This was done in reaction to the rapid repayments being experienced on the underlying mortgage loans as consumers continued to refinance mortgage loans at extremely high levels during 1993. Investment securities for 1993 averaged $1.9 billion, a decrease of $212 million over the 1992 level as securities were called or matured. The Company increased its holdings of U.S. Treasury securities during late 1991 and 1992 in response to reduced loan demand and to generate sustainable sources of interest income. Additionally in 1992, increased prepayments on the assets underlying the Company's portfolio of collateralized mortgage obligation residuals and excess mortgage servicing resulted in $17 million of writedowns. No such writedowns were necessary in 1993. This portfolio totaled $3.8 million at year-end 1993 down from $8.8 million at the prior year-end. At year-end 1993, the investment securities portfolio (excluding securities having no maturity) had a remaining average maturity of 5 years and unrealized gains of $64.6 million and unrealized losses of $5.0 million. Investment securities portfolio yields declined to 6.63% from the 1992 level of 6.99% as higher yielding securities were called or matured. Other earning assets, which include interest-bearing deposits with other banks, federal funds sold and securities purchased under agreements to resell, loans held for sale and credit card loans held for securitization, averaged $1.7 billion, a slight increase from 1992. Credit card loans held for securitization averaged $394 million with a yield of 9.21% for 1993. There were no credit card loans held for securitization in 1992. CREDIT CARD BUSINESS The managed credit card portfolio (which includes securitized receivables) increased in 1993, by $2.9 billion, or 127%, from December 31, 1992. In spite of this increase, absolute dollars of net loan losses, on a managed portfolio basis, declined from $94.2 million in 1992 to $83.9 million for 1993 as the more seasoned accounts in the portfolio continued to show improved credit quality. The high quality of the credit card portfolio was also reflected in loan delinquency data. The ratio of managed credit card loans sixty days or more past due dropped to 1.53% of related loans at year-end 1993 from 3.30% for year-end 1992, while the dollar amount remained relatively stable at approximately $79 million compared with $75 million at the same respective dates. Signet had securitized a total of $3.3 billion of credit card receivables as of December 31, 1993 ($500 million in September 1990, $500 million in March 1991, $1.2 billion in September 1993 and $1.1 billion in December 1993). RISK ELEMENTS NON-PERFORMING ASSETS Non-performing assets at year-end 1993 totaled $116.5 million (net of the $5.7 million foreclosed property reserve), or 1.83% of loans and foreclosed properties, compared with $181.1 million, or 3.08%, respectively, at the end of 1992. The decline in non-performing assets can be attributed to the Program. Overall non-performing real estate assets declined $76.4 million, or 52%, including $22.2 million of foreclosed properties (net of reserves). One large commercial credit ($24.7 million) was placed on non-accrual status at the end of 1993. In early 1994, the Company sold this loan well within the loan's allocated allowance at year-end. Foreclosed properties totaled $42.6 million (net of reserve) at the end of 1993, and were equal to 37% of total non-performing assets and 60% of non-performing real estate assets. The reserve for foreclosed properties was 12% of the foreclosed property balance before the reserve. The gross foreclosed properties balance reflected an aggregate discount of 48% from prior charge-offs and writedowns. There were $7.4 million of additions to the reserve charged to expense during 1993. These additions principally represented transfers from the allowance allocated to Program loans as these loans migrated to foreclosed properties. Signet sold $39.8 million of foreclosed properties during 1993. The average discount from the loan balance prior to any charge-offs and writedowns was approximately 40%. This percentage was comprised of 18% taken as charge-offs prior to foreclosure and 22% taken in writedowns and other expenses at sale. Signet did not provide financing on any of the foreclosed properties sold in 1993. Accruing loans past due 90 days or more as to principal or interest payments totaled $58.9 million and $64.8 million at the end of 1993 and 1992, respectively. At year-end 1993, management was monitoring $113.2 million of loans for which the ability of the borrower to comply with present repayment terms was uncertain. These loans were not included in the above disclosure. REAL ESTATE LENDING Signet's real estate-construction loan exposure at December 31, 1993, totaled $310 million, a decline of 44%, or $239 million, from the 1992 year-end level. Approximately 61% of these loans were located in the Metro-Washington area, while only 3% were located outside Signet's market area. The largest type of construction financing was residential, followed closely by office buildings. Of the construction loan portfolio, $17.8 million were on non-accruing status and $3.5 million were classified as restructured troubled debt at year-end 1993. Commercial mortgage loans totaled $582 million at December 31, 1993 and included $290 million of mini-permanent (interim) mortgage loans. Residential mortgages totaled $71 million at the 1993 year-end. ACCELERATED REAL ESTATE ASSET REDUCTION PROGRAM ("THE PROGRAM") As previously noted, the Company initiated a program in December 1991, to accelerate the reduction of real estate assets. The Program's objective was to significantly reduce the Company's overall exposure to risk real estate assets through the use of discounts without adversely impacting future earnings. The Program was very successful and substantially accomplished its objective as evidenced in the following discussion. As a result, Signet terminated the Program as a separate reporting unit effective January 1, 1994. The remaining assets were assigned to work out units or, in some cases, were allowed to mature in accordance with their terms. Since inception of the Program, its assets (before reserves) were reduced by 65%, or $567.1 million. The Program started with $645.8 million of assets (net of the allowance for loan losses of $179.5 million and the reserve for foreclosed properties of $41.6 million) and ended 1993 with $236.5 million of assets (net of the allowance for loan losses of $57.6 million and the reserve for foreclosed properties of $5.7 million). During 1992 and 1993, the two years of the Program's operation, the largest reductions of assets were in real estate-construction performing loans ($351.3 million), real estate-construction non-accrual loans ($95.9 million) and in legal foreclosed properties ($81.6 million). Total loans declined by 64%, or $452.9 million, and foreclosed properties declined by 73%, or $114.2 million. Of the remaining assets in the Program at December 31, 1993, $238.9 million, or 80%, were performing loans and $70.1 million, or 23%, were residential development projects. In 1992 and 1993, Signet sold $145.2 million of Program foreclosed properties at a 23% discount from the December 31, 1991 balance, which was approximately equal to the 21% discount established on these properties. Loans removed from the Program on financings, payoffs, etc., were $350.5 million. Discounts taken on these loans were 22% compared with the 26% discount originally established. Since the commencement of the Program, the total discounts taken for all asset sales or removals were 23% compared with the 24% discount originally established. The remaining discounts in the Program at year-end 1993 of $63.4 million represented 21% of the assets in the Program as compared with 26% at the inception of the Program. The lower level of remaining overall discount was a reflection of reducing certain assets during 1992 and 1993 with high discounts and aggressively writing down certain properties to anticipated sale prices. Previous write-downs and charge-offs, coupled with the allowance/reserve provided coverage of 23% on performing loans, 58% on non-performing loans, 56% on foreclosed properties and 34% in the aggregate. There were $15 million of unfunded commitments at December 31, 1993 compared with $47 million and $118 million at December 31, 1992 and 1991, respectively. At December 31, 1993, remaining balances on assets which Signet financed totaled $47 million (which were retained in the Program) under normal business terms and with normal underwriting standards, except for $5 million of which were considered restructured troubled debt and were included in the Program's non- performing assets. FUNDING DEPOSITS Average deposits totaled $7.7 billion for 1993, a decrease of 2%, or $154 million, from 1992. The overall decrease and the change in the mix of deposits was principally the result of declining rates and the consumers' decision to shorten maturities, increase liquidity and to move funds into non-financial institution products. Signet's own mutual fund family, Virtus (formerly The Medalist Funds), attracted $199 million in 1993, a portion of which was generated from deposit customers of the Company. In addition, Signet's sales of non-proprietary mutual fund and annuity products totaled $86 million in 1993. Core deposits averaged $7.3 billion for 1993, a decrease of 4% from 1992. The category of core deposits which experienced the greatest decline was savings certificates which fell $603 million, or 20%, from 1992 as depositors responded to lower interest rates by shortening the maturities of their investments and transferring their funds into money market and demand products. Purchased deposits (large denomination certificates and foreign deposits), averaged $473 million for 1993, an increase of $178 million, or 60%, from 1992. SHORT-TERM AND LONG-TERM BORROWINGS In 1993, short-term borrowings increased $440 million, or 21%, over 1992 to average $2.5 billion. The increase in purchased funds was to temporarily fund the growth in credit card receivables before securitization. Long-term borrowings averaged $287 million in 1993, a decline of 4%, or $12 million, from 1992. STOCKHOLDERS' EQUITY At December 31, 1993, stockholders' equity totaled $965 million, an increase of $138 million, or 17%, from the 1992 year-end level of $827 million. The increase reflects net retained income for 1993 of $129.4 million and the issuance of common stock through investor and employee stock purchase plans, as well as the stock option plan, which added an additional $9.2 million in net proceeds to equity. The Board of Directors approved a 25% quarterly dividend increase from $.20 to $.25 per share effective with the dividend payable November 24, 1993. This increase followed a 33% increase declared on April 28, 1993. The result of the two dividend increases in 1993 was to increase the annual rate to $1.00 from $.60 per share, or a 67% increase. The Company's consolidated risk-based capital ratios at December 31, 1993, were 15.02% and 11.12% for Total Capital and Tier I Capital, respectively. Signet's leverage ratio at December 31, 1993, was 8.13%. INTEREST RATE SENSITIVITY, LIQUIDITY AND INFLATION At December 31, 1993, the Company had a basic 180-day net asset position of $988 million. Execution of off-balance sheet interest rate and hedging instruments resulted in a 180-day net liability position of $1.4 billion, or 12% of total assets. At December 31, 1993, the notional values of the Company's derivative products for the purpose of hedging interest rate risk were $2.4 billion of interest rate swaps, $700 million of interest rate floors, $400 million of interest rate caps, and $200 million of futures contracts. During 1993, the Company's interest rate swaps increased income on earning assets by $2.7 million and reduced borrowing costs by $90.3 million. Interest rate floors, with average strike prices of approximately 5% tied to the three- month LIBOR, increased income on earning assets $11.4 million in 1993. Interest rate floors were purchased to hedge variable rate assets against decreases in interest rates. Interest rate caps, with average strike prices of approximately 5.5% tied to the three-month LIBOR, increased borrowing costs by $7.9 million in 1993. Interest rate caps were purchased to hedge variable rate liabilities against increases in interest rates. Futures contracts were purchased to hedge interest rate changes in Euro dollar time deposits. During 1993, gains of $200 thousand on closed contracts increased income on Euro dollar time deposits. The high level of average core deposits during 1993 maintained the Company's strong liquidity position. Signet's 1993 year-end and average loan balances were entirely funded with core deposits. A bank's asset and liability structure differs significantly from that of a manufacturing and other concerns in that virtually all assets and liabilities are of a monetary nature. Continued inflation has increased the overall cost of doing business, both directly and indirectly. SIGNET BANKING CORPORATION AND SUBSIDIARIES 1994 FOURTH QUARTER ANALYSIS Table 26, on the following page, contains selected quarterly financial data for the years ended December 31, 1994 and 1993. Consolidated net income for the fourth quarter of 1994 was $42.9 million, or $.73 per share, which included Signet's pre-tax restructuring charges of $9.6 million. Adjusting for the special charges, Signet's earnings declined less than 2% to $49.1 million, or $.84 per share, from $49.9 million, or $.87 per share, earned in the same period in 1993. Higher solicitation and other credit card expenses were primarily responsible for the decrease. Key profitability ratios reflected the special pre-tax charges as ROA was 1.41% and ROE was 15.55% for the fourth quarter of 1994. Considering Signet's "normalized" performance excluding the special charges, ROA was 1.61% and ROE was 16.93%. This compares with ROA of 1.71% and ROE of 21.09% for the fourth quarter of 1993. Taxable equivalent net interest income declined $1.9 million, or just 1%, from the fourth quarter of 1993 to the fourth quarter of 1994. The net yield on earning assets for the same periods declined 14 basis points from 5.07% to 4.93%. The declines reflected the increase in funding costs associated with rising interest rates and interim funding (Bridge Financing Facility) for Capital One. Reflecting an improvement in credit quality, Signet's provision for loan losses fell from $10.3 million in the fourth quarter of 1993 to $3.0 million in the fourth quarter of 1994. Annualized net charge-offs to average loans declined from 77 basis points to 44 basis points as net charge-offs declined from $11.7 million to $7.7 million in the same periods. Real estate net loan losses showed the greatest improvement, dropping to $.4 million in net recoveries from $6.0 million in net charge-offs, or 2.23% of related loans, in the 1993 fourth quarter. Loan growth exceeded $1.4 billion from September 30, 1994 to the end of 1994. The largest increase was in credit card loans ($817 million ) followed by other consumer loans ($386 million). The significant growth in each of these portfolios was the result of Signet's use of IBS and innovative product offerings. Non-interest income rose from $122.2 million in the fourth quarter of 1993 to $148.4 million in the same quarter of 1994. This represented an increase of 22%, or $26.3 million. Credit card servicing income increased $29.0 million, or 46%, due to a significant increase in securitized loans. Credit card service charges increased $6.1 million, or 37%, as volume rose. Partially offsetting these increases was a $3.8 million, or 47%, decline in mortgage servicing and origination income as the volume of loans processed declined due to rising rates. Gains on sale of securities available for sale decreased $2.0 million, or 90%, and investment securities recorded nominal gains as securities were called. Non-interest expense in the fourth quarter of 1994 was higher by $40.9 million, or 24%, from a year ago. Credit card solicitation expense increased $15.5 million or almost double the fourth quarter 1993 expense. A restructuring charge of $9.6 million, related to the writedown of bank-owned properties and lease termination costs due to the abandonment of facilities, was recorded in the fourth quarter of 1994. Other increases included salaries of $5.9 million, or 10%, travel and communications of $5.9 million, or 58%, and supplies and equipment of $5.4 million, or 50%. These increases were primarily the result of growth in the Company's credit card business. Partially offsetting the increases in these categories was a decline of $8.1 million, or 39%, in employee benefits expense. This decrease resulted primarily from a $6.0 million accrual in the fourth quarter of 1993 for postemployment benefits. TABLE 26 SELECTED QUARTERLY FINANCIAL DATA 1994 1993 FOURTH THIRD SECOND FIRST Fourth Third Second First (unaudited) QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter SUMMARY OF OPERATIONS (in thousands) Interest income $222,931 $198,222 $196,225 $189,635 $195,853 $212,536 $201,466 $193,870 Interest expense 94,768 68,500 71,315 62,419 66,097 72,614 71,684 63,990 Net interest income 128,163 129,722 124,910 127,216 129,756 139,922 129,782 129,880 Provision for loan losses 3,000 3,000 2,999 5,499 10,276 12,501 9,011 15,498 Net interest income after provision for loan losses 125,163 126,722 121,911 121,717 119,480 127,421 120,771 114,382 Non-interest operating income(1) 148,166 151,658 136,157 128,643 119,654 85,515 81,183 74,766 Securities available for sale gains (losses) 220 140 3,265 (212) 2,248 1,665 Investment securities gains (losses) 47 22 45 (68) 254 2 46 103 Non-interest expense (2) 210,875 276,814 186,625 172,109 169,934 147,516 146,809 134,057 Income before income taxes (benefit) 62,721 1,728 74,753 77,971 71,702 65,422 55,191 56,859 Applicable income taxes (benefit) 19,847 (1,734) 24,368 24,858 21,758 19,659 14,751 18,592 Net income $ 42,874 $ 3,462 $ 50,385 $ 53,113 $ 49,944 $ 45,763 $ 40,440 $ 38,267 AVERAGE BALANCE SHEET DATA (in millions) Loans (net of unearned income) $ 6,966 $ 6,080 $ 6,344 $ 6,235 $ 6,074 $ 6,210 $ 6,512 $ 6,029 Investment securities 374 208 226 247 1,790 1,840 1,953 2,037 Other earning assets 3,258 3,345 3,697 3,630 2,583 2,920 2,179 2,076 Total earning assets 10,598 9,633 10,267 10,112 10,447 10,970 10,644 10,142 Cash and due from banks 517 501 500 489 500 460 454 431 Other non-rate related assets 973 837 734 709 654 605 584 570 Total average assets $ 12,088 $ 10,971 $ 11,501 $ 11,310 $ 11,601 $ 12,035 $ 11,682 $ 11,143 Interest bearing deposits $ 6,227 $ 6,092 $ 6,206 $ 6,259 $ 6,273 $ 6,388 $ 6,366 $ 6,205 Short-term borrowings 2,610 1,775 2,239 1,994 2,405 2,842 2,573 2,278 Long-term borrowings 254 254 254 258 266 286 297 298 Non-interest bearing liabilities 1,903 1,786 1,785 1,792 1,718 1,612 1,578 1,521 Common stockholders' equity 1,094 1,064 1,017 1,007 939 907 868 841 Total average liabilities and stockholders' equity $ 12,088 $ 10,971 $ 11,501 $ 11,310 $ 11,601 $ 12,035 $ 11,682 $ 11,143 PER COMMON SHARE Net income $ 0.73 $ 0.05 $ 0.88 $ 0.93 $ .87 $ .80 $ .71 $ .68 Cash dividends declared 0.25 0.25 0.25 0.25 .25 .20 .20 .15 Market prices: High 35 41 43 7/8 39 7/8 36 7/8 35 30 5/8 28 13/16 Low 27 1/4 34 1/2 40 3/8 35 30 5/8 26 3/4 24 3/4 21 1/2 AVERAGE COMMON SHARES AND COMMON STOCK EQUIVALENTS (in thousands) 58,927 57,898 57,358 57,247 57,087 57,010 56,871 56,705
(1) Third quarter of 1994 included a $6.0 million gain on sale of mortgage servicing. (2) First, second, third, and fourth quarters of 1993 included credit card solicitation expenses of $9.3 million, $17.2 million, $13.7million, and $15.6 million, respectively. First, second, third, and fourth quarters of 1994 included credit card solicitation expenses of $21.4 million, $24.2 million, $24.2 million and $31.1 million, respectively. The third quarter of 1994 included a $49.0 million contract termintation fee and $33.6 million of restructuring charges. The fourth quarter of 1994 included $9.6 million of restructuring charges. The above schedule is a tabulation of the Company's unaudited quarterly results of operations for the years ended December 31, 1994 and 1993. The Company's common shares are traded on the New York Stock Exchange under the symbol SBK. In addition, shares may be traded in the over-the-counter stock market. There were 15,503 common stockholders of record at December 31, 1994. SIGNET BANKING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31 (dollars in thousands-except per share) 1994 1993 ASSETS Cash and due from banks $ 531,747 $ 463,358 Interest bearing deposits with other banks 355,795 540,312 Federal funds sold and securities purchased under resale agreements 1,135,821 1,075,754 Trading account securities 353,040 379,638 Loans held for sale 69,506 421,361 Securities available for sale 1,241,696 248,163 Investment securities (market value: 1994-$399,666, 1993-$ 1,829,231) 398,783 1,769,615 Loans: Commercial 2,472,620 2,299,973 Credit card 2,559,172 1,808,515 Other consumer 2,053,461 1,297,309 Real estate-construction 209,183 309,842 Real estate-commercial mortgage 526,956 581,529 Real estate-residential mortgage 191,508 71,411 Gross loans 8,012,900 6,368,579 Less: Unearned income (88,723) (58,267) Allowance for loan losses (220,519) (253,313) Net loans 7,703,658 6,056,999 Premises and equipment (net) 258,715 216,524 Interest receivable 98,557 84,118 Other assets 783,911 593,380 Total assets (Capital One Financial Corporation amounted to $3,072,546 and $1,991,207, respectively) $12,931,229 $11,849,222 LIABILITIES Non-interest bearing deposits $ 1,542,349 $ 1,544,852 Interest bearing deposits: Money market and interest checking 1,050,176 1,039,215 Money market savings 1,453,629 1,745,066 Savings accounts 1,170,990 880,072 Savings certificates 1,952,090 2,051,300 Large denomination certificates 643,054 347,820 Foreign 9,225 212,288 Total interest bearing deposits 6,279,164 6,275,761 Total deposits 7,821,513 7,820,613 Securities sold under repurchase agreements 875,458 1,281,645 Federal funds purchased 881,693 942,969 Commercial paper 108,664 168,488 Bridge financing facility 1,300,000 Other short-term borrowings 146,955 232,024 Long-term borrowings 253,641 266,152 Interest payable 31,078 28,205 Minority interest in Capital One Financial Corporation 106,900 Other liabilities 293,848 144,464 Total liabilities 11,819,750 10,884,560 STOCKHOLDERS' EQUITY Common Stock, par value $5 per share; Authorized 100,000,000 shares, issued and outstanding 58,636,759 (1994) and 56,608,578 (1993) 293,184 283,043 Capital surplus 198,869 133,038 Retained earnings 619,426 548,581 Total stockholders' equity 1,111,479 964,662 Total liabilities and stockholders' equity $12,931,229 $11,849,222
See notes to consolidated financial statements. SIGNET BANKING CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME Year Ended December 31 (in thousands-except per share) 1994 1993 1992 Interest income: Loans, including fees: Commercial $163,195 $157,157 $178,465 Credit card 212,157 215,607 110,864 Other consumer 130,513 95,273 103,948 Real estate-construction 20,977 31,570 53,754 Real estate-commercial mortgage 47,520 44,830 46,570 Real estate-residential mortgage 8,399 7,634 9,801 Total loans, including fees 582,761 552,071 503,402 Interest bearing deposits with other banks 11,512 12,031 24,103 Federal funds sold and resale agreements 44,294 23,196 29,984 Trading account securities 21,487 31,297 21,783 Credit card loans held for securitization 41,015 36,263 Loans held for sale 13,010 16,875 14,125 Securities available for sale 72,696 17,064 38,233 Investment securities-taxable 4,395 93,538 111,550 Investment securities-nontaxable 15,843 21,390 24,082 Total interest income 807,013 803,725 767,262 Interest expense: Money market and interest checking 23,123 22,544 27,638 Money market savings 44,571 45,463 64,500 Savings accounts 33,461 24,079 21,189 Savings certificates 61,377 58,514 102,519 Large denomination certificates 14,527 10,970 13,936 Foreign 10,071 6,627 994 Total interest on deposits 187,130 168,197 230,776 Securities sold under repurchase agreements 37,712 42,193 53,586 Federal funds purchased 28,182 21,793 11,975 Other short-term borrowings 27,293 25,521 15,899 Long-term borrowings 16,685 16,681 19,416 Total interest expense 297,002 274,385 331,652 Net interest income 510,011 529,340 435,610 Provision for loan losses 14,498 47,286 67,794 Net interest income after provision for loan losses 495,513 482,054 367,816 Non-interest income: Credit card servicing income 337,284 153,018 101,185 Credit card service charges 73,321 63,222 31,553 Service charges on deposit accounts 66,141 64,471 66,971 Trust income 19,442 17,599 15,949 Other 68,436 62,808 65,330 Non-interest operating income 564,624 361,118 280,988 Securities available for sale gains 3,413 3,913 10,504 Investment securities gains (losses) 46 405 (17,951) Total non-interest income 568,083 365,436 273,541 Non-interest expense: Salaries 257,297 212,665 186,600 Employee benefits 66,188 65,249 49,388 Credit card solicitation 100,886 55,815 23,133 Travel and communications 57,543 35,416 25,662 Supplies and equipment 54,862 40,550 32,536 External data processing services 50,026 36,578 31,138 Occupancy 47,059 40,192 38,899 Contract termination 49,000 Restructuring charges 43,212 Other 120,350 111,851 111,883 Total non-interest expense 846,423 598,316 499,239 Income before income taxes (Capital One Financial Corporation amounted to $146,827, $170,854 and $48,864, respectively) 217,173 249,174 142,118 Applicable income taxes 67,339 74,760 32,918 Net income $149,834 $174,414 $109,200 Earnings per common share $ 2.59 $ 3.06 $ 1.96 Cash dividends declared per share 1.00 .80 .45 Average common shares outstanding 57,863 56,920 55,727
See notes to consolidated financial statements. SIGNET BANKING CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS Year Ended December 31 (in thousands) 1994 1993 1992 Operating Activities Net Income $ 149,834 $ 174,414 $ 109,200 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 14,498 47,286 67,794 Provision and writedowns on foreclosed property 1,536 7,852 17,170 Depreciation and amortization 44,055 37,073 35,178 Investment securities (gains) losses (46) (405) 17,951 Securities available for sale gains (3,413) (3,913) (10,504) (Increase) decrease in interest receivable (14,439) 16,734 (4,355) Increase in other assets (198,905) (63,663) (58,226) Increase (decrease) in interest payable 2,873 595 (12,597) Increase in other liabilities 268,010 23,075 6,363 Proceeds from securitization of credit card loans 2,393,936 2,283,329 Proceeds from sales of loans held for sale 24,555,822 11,518,162 21,628,906 Purchases and originations of loans held for sale (26,597,903) (14,007,768) (21,709,180) Proceeds from sales of trading account securities 15,691,014 13,184,093 10,706,397 Purchases of trading account securities (15,654,476) (12,895,420) (11,186,538) Decrease in receivable from security sales 773,595 Net cash provided by operating activities 652,396 321,444 381,154 Investing Activities Proceeds from sales of investment securities 13,225 Proceeds from sales of securities available for sale 1,380,809 62,354 262,949 Proceeds from maturities of investment securities 64,542 519,509 380,335 Proceeds from maturities of securities available for sale 2,289,363 46,239 397,115 Purchases of securities available for sale (3,188,560) (6,000) (400,330) Purchases of investment securities (213,057) (218,197) (591,832) Net increase in loans (1,689,940) (596,509) (79,929) Recoveries of loans previously charged-off 28,783 35,310 23,340 Purchases of premises and equipment (75,210) (44,526) (8,234) Net cash used by investing activities (1,403,270) (201,820) (3,361) Financing Activities Net increase (decrease) in deposits 900 (2,701) (657,224) Net decrease (increase) in short-term borrowings 687,644 (370,714) 1,403,383 Repayment of long-term debt (12,511) (31,810) (1,059) Proceeds from issuance of common stock 75,972 9,203 26,625 Payment of cash dividends (57,192) (45,058) (24,768) Net cash provided (used) by financing activities 694,813 (441,080) 746,957 (Decrease) increase in cash and cash equivalents (56,061) (321,456) 1,124,750 Cash and cash equivalents at beginning of year 2,079,424 2,400,880 1,276,130 Cash and cash equivalents at end of year $ 2,023,363 $ 2,079,424 $ 2,400,880 Supplemental disclosure Interest paid $ 294,130 $ 273,790 $ 344,249 Income taxes paid 47,091 48,520 29,857
See notes to consolidated financial statements. SIGNET BANKING CORPORATION AND SUBSIDIARIES STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY Common Stock Capital Retained (dollars in thousands-except per share) Shares Amount Surplus Earnings Balance December 31, 1991 27,017,550 $135,088 $104,473 $ 471,990 Net income 109,200 Issuance of Common Stock 963,274 4,816 21,809 Cash dividends - Common Stock-$ .45 a share (24,768) Change in valuation allowance-marketable equity securities 4,024 Balance December 31, 1992 27,980,824 139,904 126,282 560,446 Net income 174,414 Issuance of Common Stock 489,283 2,447 6,756 Cash dividends - Common Stock-$ .80 a share (45,058) Change in valuation allowance-marketable equity securities (529) Two-for-one common stock split 28,138,471 140,692 (140,692) Balance December 31, 1993 56,608,578 283,043 133,038 548,581 ADJUSTMENT TO BEGINNING BALANCE FOR CHANGE IN ACCOUNTING METHOD FOR NET UNREALIZED GAINS ON SECURITIES AVAILABLE FOR SALE, NET OF TAX OF $16,147 29,987 NET INCOME 149,834 ISSUANCE OF COMMON STOCK: RELATED TO ACQUISITION 1,514,286 7,571 51,708 OTHER 513,895 2,570 14,123 CASH DIVIDENDS - COMMON STOCK-$1.00 A SHARE (57,192) CHANGE IN NET UNREALIZED LOSSES ON SECURITIES AVAILABLE FOR SALE, NET OF TAX BENEFIT OF $27,880 (51,784) BALANCE DECEMBER 31, 1994 58,636,759 $293,184 $198,869 $ 619,426
See notes to consolidated financial statements. SIGNET BANKING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS-EXCEPT PER SHARE) A SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of Signet Banking Corporation and subsidiaries ("Signet" or the "Company") are prepared in conformity with generally accepted accounting principles and prevailing practices of the banking industry. The following is a summary of the significant accounting and reporting policies used in preparing the financial statements. CONSOLIDATION AND RECLASSIFICATIONS: The consolidated financial statements include the accounts of Signet, including Signet Bank/Virginia, Signet Bank/Maryland, Capital One Financial Corporation and Signet Bank N.A., its principal subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain prior years' amounts have been reclassified to conform to the 1994 presentation. STATEMENT OF CONSOLIDATED CASH FLOWS: Cash and cash equivalents, as presented in the statement of cash flows, includes cash and due from banks, interest bearing deposits with other banks and federal funds sold and securities purchased under resale agreements. During 1994 and 1993, $10,112 and $26,238, respectively, was transferred from loans to foreclosed property. During 1994, $388of loans were originated to facilitate the sale of foreclosed properties. During 1993, no loans were originated to facilitate the sale of foreclosed properties. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in 1994. At adoption, securities totaling $1,509,328 were reclassified from investment securities to securities available for sale. An after-tax gain of $29,987 is carried as a component of retained earnings, representing the unrealized gain in securities available for sale at adoption. TRADING INSTRUMENTS: Financial instruments (including trading account securities and derivatives) used for trading purposes are recorded in the consolidated balance sheet at fair value at the reporting date. Realized and unrealized changes in fair values are recognized in other non-interest income (trading profits (losses)) in the period in which the changes occur. Trading instruments included in the consolidated balance sheet are comprised primarily of government securities and asset-backed securities. Interest revenue arising from these trading instruments is included in the statement of consolidated operations as part of total interest income. The net loss on all trading activities recorded in trading profits in 1994 was $268. Net unrealized income on all trading activities decreased $4,988 from an unrealized gain of $3,309 at December 31, 1993 to an unrealized loss of $1,679 at December 31, 1994. SECURITIES AVAILABLE FOR SALE: Securities available for sale represent those securities not classified as either investment securities or trading account securities. Securities available for sale includes securities for which the primary objective is to realize a holding gain and/or securities held for indefinite periods of time and not intended to be held until maturity. Securities held for indefinite periods of time include securities that may be sold in response to changes in interest rates and/or significant prepayment risk. Securities available for sale are carried at market value, with unrealized gains and losses recorded in retained earnings. When securities are sold, the adjusted cost of the specific certificate sold is used to compute gains or losses on the sale. The Company adopted SFAS No. 115 in 1994. At adoption, securities totaling $1,509,328 were reclassified from investment securities to securities available for sale. An after-tax gain of $29,987 was carried as a component of retained earnings, representing the unrealized gain in securities available for sale at adoption. During 1994, the fair value of these securities declined $51,784 to an after-tax unrealized loss of $21,787 at December 31, 1994. LOANS HELD FOR SALE: Loans held for sale are carried at the lower of aggregate cost or market value. INVESTMENT SECURITIES: When securities are purchased and at each balance sheet date, they are classified as investment securities if it is management's positive intent and ability to hold them until maturity. These securities are carried at cost, adjusted for amortization of premiums and accretion of discounts, both computed by the effective yield method. The Company adopted SFAS No. 115 in 1994 as noted in the Securities Available For Sale discussion above. LOANS: Interest on loans is computed by methods which generally result in level rates of return on principal amounts outstanding. It is management's practice to cease accruing interest on commercial and real estate loans when payments are 90 days delinquent. However, management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest, and the loan is in the process of collection. Credit card loans typically are charged off when the loan is six months past due and a minimum payment has not been received for 60 days, while other consumer loans typically are charged off when the loan is six months past due. Loan origination and commitment fees and certain direct loan origination costs are deferred and generally amortized as an adjustment of the related loans' yield over the contractual life of the related loans except for certain loans (e.g., home equity line) which consider anticipated prepayments in establishing an economic life. Credit card loan annual membership fees and direct origination costs are deferred and amortized over one year on a straight-line basis. Deferred fees (net of deferred costs) were $33,690 and $15,449 at December 31,1994 and 1993, respectively. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained to absorb possible future losses, net of recoveries, inherent in the existing loan portfolio. The provision for loan losses is the periodic cost of maintaining an adequate allowance. In evaluating the adequacy of the allowance for loan losses, management, on a monthly basis, takes into consideration the following factors: the condition of industries and geographic areas experiencing or expected to experience particular economic adversities; historical charge-off and recovery activity (noting any particular trend changes over recent periods); trends in delinquencies, bankruptcies and non-performing loans; trends in loan volume and size of credit risks; any irrevocable commitments to extend funds; the degree of risk inherent in the composition of the loan portfolio; current and anticipated economic conditions; credit evaluations; underwriting policies; and the liquidity and volatility of the markets in which Signet does business. The Company will adopt SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," in 1995. This statement sets forth the appropriate method of computing the allowance for loan losses for impaired loans, but does not give guidance on the overall allowance adequacy. Impaired loans will be measured at the present value of their expected future cash flows by discounting those cash flows at the loan's effective interest rate, or at the loan's market price or the fair value of the collateral if the loan is collateral dependent. The difference between the value of the loan and the loan balance is recorded as an allowance for loan losses. The new statement also requires that troubled debt restructurings involving a modification of terms be remeasured on a discounted basis. The Company is currently evaluating the impact that SFAS No. 114 will have on the Company. However, management does not expect that this statement will have a materially adverse impact on the Company's future results of operations and financial position. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less allowances for depreciation and amortization ($208,476 at December 31, 1994; $188,845 at December 31, 1993). Depreciation and amortization expense are computed generally by the straight-line method. Interest costs relating to the construction of major operating facilities are capitalized using a weighted average rate. FORECLOSED PROPERTY: Real estate acquired in satisfaction of a loan and in- substance foreclosures are included in other assets, and stated at the lower of (1) fair value minus estimated costs to sell; or (2) cost, defined as the fair value of the asset on the date of foreclosure or classification into in substance foreclosure. A foreclosed property reserve was maintained for subsequent valuation adjustments on a specific property basis as part of the Accelerated Real Estate Reduction Program. The reserve was eliminated at the end of 1994. In substance foreclosures are properties in which the borrower has little or no equity in the collateral, where repayment of the loan is expected only from the operation or sale of the collateral, and the borrower either effectively abandons control of the property or the borrower has retained control of the property but the ability to rebuild equity based on current financial conditions is considered doubtful. INTANGIBLE ASSETS: Goodwill, representing the excess of purchase price over the fair value of net assets acquired, is amortized on a straight-line basis over periods not exceeding fifteen years. Other acquired intangible assets such as deposit base intangibles and purchased credit card relationships are amortized on a straight-line basis over the expected periods of benefit. PREFERRED STOCK: The Company is authorized to issue, in series, up to 5,000,000 shares of Preferred Stock with a par value of $20 per share. RISK MANAGEMENT INSTRUMENTS: The Company enters into a variety of interest rate contracts-including futures contracts and interest rate swaps, caps and floors to manage its interest rate exposure. These instruments are not marked to market. Related income or expense including amortization of purchase premiums or settlement gains or losses are recorded as an adjustment to the yield of the related interest earning asset or interest bearing liability over the periods covered by the contracts. If an instrument is terminated, any gain or loss is deferred and amortized as an adjustment to the yield of the designated assets or liabilities over the remaining periods originally covered by the contract. The Company also uses interest rate swaps to manage the interest rate risk associated with securitizations. Income or expense from these swaps is recorded on an accrual basis along with securitization income in non-interest income. SALES AND SERVICING OF LOANS: Signet periodically securitizes and sells loans, primarily credit card receivables and residential mortgage loans. Signet's credit card securitizations are recorded as sales in accordance with SFAS No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse." Gains on the sale of credit card receivables are limited to the amounts related to loans existing at the time of sale and do not include amounts related to future loans expected to be sold during the reinvestment period. Due to the relatively short average life of credit card loans, no gain or loss is recorded at the time of sale. Rather, loan servicing fees, which represent credit card interest and fees in excess of interest paid to certificate holders, credit losses and other trust expenses, are recorded over the life of the transaction as earned. Transaction expenses are deferred and amortized over the reinvestment period of the transaction as a reduction of loan servicing fees. The majority of Signet's mortgage loan sales are in the secondary market with servicing retained. These sales are recorded in accordance with SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." The gain or loss on the sale is determined based on the difference between the carrying value of the mortgages and the sales price. When mortgage loans are sold with servicing retained and the servicing fee rate differs from a current normal servicing fee rate, the sales price is adjusted for determining the gain or loss on sale to provide for the recognition of a normal servicing fee in subsequent years. INCOME TAXES: Prepaid and deferred income taxes are provided for timing differences between income and expense for financial reporting purposes and for income tax purposes. The adoption of SFAS No. 109, "Accounting for Income Taxes," in 1993 did not have a material impact on the Company's financial position or results of operations. As permitted by SFAS No. 109, the Company elected not to restate the financial statements of any prior years. EARNINGS PER SHARE: Earnings per share were based on the average number of shares outstanding and applicable equivalents (stock options). B CASH AND DUE FROM BANKS The domestic bank subsidiaries are required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those reserve balances were approximately $103,141 and $99,318 for the years ended December 31, 1994 and 1993, respectively. C SECURITIES AVAILABLE FOR SALE Securities available for sale are summarized as follows: Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value December 31, 1994 U.S. Government and agency obligations- Mortgage-backed securities $ 633,338 $ (26,335) $ 607,003 Other 461,140 $ 11 (3,274) 457,877 Obligations of states and political subdivisions 110 6 116 Other 184,703 1,603 (9,606) 176,700 $1,279,291 $1,620 $ (39,215) $1,241,696 December 31, 1993 U.S.Government and agency obligations- Mortgage-backed securities $ 47,672 $3,123 $ 50,795 Other 199,641 1,484 201,125 Other 850 850 $248,163 $4,607 $ 252,770 December 31, 1992 U.S. Government and agency obligations- Mortgage-backed securities $146,880 $8,889 $ 155,769 Other 199,208 292 199,500 Other 755 755 $346,843 $9,181 $ 356,024
The book and market values of securities available for sale by contractual maturity, except mortgage-backed securities for which an average life is used, at December 31, 1994 are shown below: Fair Cost Value Due in one year or less $ 384,798 $ 383,893 Due after one year through five years 386,338 369,280 Due after five years through ten years 394,971 383,651 Due after ten years 113,184 104,872 $1,279,291 $1,241,696 Securities available for sale with aggregate book values of approximately $623,743, $198,619, and $341,050 at December 31, 1994, 1993 and 1992, respectively, were pledged to secure public deposits, repurchase agreements and other banking transactions. Proceeds from sales of securities available for sale during 1994, 1993 and 1992 were $1,380,809, $62,354, and $262,949, respectively. Gross gains of $6,152, $3,913 and $10,984, and gross losses of $2,739, $-0- and $480 were realized on those sales for 1994, 1993 and 1992, respectively. D INVESTMENT SECURITIES Investment securities are summarized as follows: Gross Gross Unrealized Unrealized Fair DECEMBER 31, 1994 Cost Gains Losses Value U.S. Government and agency obligations- Mortgage-backed securities $ 75,174 $ (1,867) $ 73,307 Other 74,550 (1,894) 72,656 Obligations of states and political subdivisions 173,571 $ 5,920 (24) 179,467 Other 75,488 (1,252) 74,236 $ 398,783 $ 5,920 $ (5,037) $ 399,666 December 31, 1993 U.S. Government and agency obligations- Mortgage-backed securities $ 461,345 $ 4,843 $ (37) $ 466,151 Other 925,225 39,263 (6) 964,482 Obligations of states and political subdivisions 258,815 18,690 (49) 277,456 Other 124,230 1,797 (4,885) 121,142 $1,769,615 $64,593 $ (4,977) $1,829,231 December 31, 1992 U.S. Government and agency obligations- Mortgage-backed securities $ 755,506 $ 9,673 $ (31) $ 765,148 Other 868,272 14,666 (5) 882,933 Obligations of states and political subdivisions 291,727 24,553 (435) 315,845 Other 157,957 2,205 (15,313) 144,849 $2,073,462 $51,097 $ (15,784) $2,108,775
The book and market values of investment securities by contractual maturity, except mortgage-backed securities for which an average life is used, at December 31, 1994 are shown below: Fair Cost Value Due in one year or less $ 29,532 $ 29,935 Due after one year through five years 254,409 253,713 Due after five years through ten years 101,153 101,575 Due after ten years 13,689 14,443 $398,783 $399,666 Investment securities with aggregate book values of approximately $264,775, $1,460,790 and $1,529,001 at December 31, 1994, 1993 and 1992, respectively, were pledged to secure public deposits, repurchase agreements and other banking transactions. Proceeds from sales of investment securities during 1994, 1993 and 1992 were $-0-, $-0- and $13,225, respectively. Gross gains of $113, $534 and $3,132 and gross losses of $67, $129 and $4,083 were realized on those sales and called securities for 1994, 1993 and 1992, respectively. E ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR FORECLOSED PROPERTY The following is a summary of changes in the allowance for loan losses: Year Ended December 31 1994 1993 1992 Balance at beginning of year $253,313 $265,536 $329,371 Provision for loan losses 14,498 47,286 67,794 Net deduction arising in purchase/sale transactions (1,542) (2,902) Losses 74,533 91,917 154,969 Recoveries 28,783 35,310 23,340 Net loan losses 45,750 56,607 131,629 Balance at end of year $220,519 $253,313 $265,536 Following is a summary of changes in the reserve for foreclosed property: Year Ended December 31 1994 1993 1992 Balance at beginning of year $ 5,742 $ 10,625 $ 41,632 Additions (reductions) to reserve charged (credited) to expense (1,764) 7,405 15,503 Writedowns of foreclosed property (3,978) (12,288) (46,510) Balance at end of year $ 0 $ 5,742 $ 10,625 F NON-PERFORMING ASSETS Following is a summary of non-performing assets at December 31, 1994 and 1993 along with the interest recorded as income in 1994 and 1993 on the year-end non-accrual and restructured loans, as well as the interest income for the same respective periods which would have been recorded had the loans performed in accordance with their original terms: Non-Accrual Restructured Foreclosed Loans Loans Properties Total 1994 Aggregate recorded investment $25,056 $1,000 $22,480 $ 48,536 Interest at contracted rates 3,301 82 3,383 Interest recorded as income 424 82 506 1993 Aggregate recorded investment $68,854 $5,079 $42,553 $116,486 Interest at contracted rates 5,761 1,738 7,499 Interest recorded as income 2,152 352 2,504
Foreclosed properties were net of a $5,742 reserve at December 31, 1993 and included $887 and $10,357 of in substance foreclosed properties at December 31, 1994 and 1993, respectively. G SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM BORROWINGS Following is a summary of short-term borrowings for the years ended December 31, 1994, 1993 and 1992: Maximum Average Outstanding Weighted Interest at Any Outstanding Average Average Rate at Month End at Year End Outstanding Interest Rate Year End 1994 Repurchase agreements $1,218,035 $ 875,458 $1,015,595 3.7% 4.5% Federal funds 1,273,862 881,693 662,289 4.3 4.6 Commercial paper 147,372 108,664 126,903 3.6 5.3 Bridge Financing Facility 1,700,000 1,300,000 175,342 7.1 6.6 Other short-term borrowings 342,054 146,955 175,178 5.8 5.4 Total $3,312,770 $2,155,307 4.3% 5.8% 1993 Repurchase agreements $1,674,044 $1,281,645 $1,337,553 3.2% 2.5% Federal funds 1,043,546 942,969 705,654 3.1 3.1 Commercial paper 174,552 168,488 144,129 2.5 3.0 Other short-term borrowings 459,346 232,024 338,276 6.5 6.2 Total $2,625,126 $2,525,612 3.5% 3.2% 1992 Repurchase agreements $2,236,469 $2,236,469 $1,450,036 3.7% 2.9% Federal funds 465,972 465,972 343,799 3.5 2.6 Commercial paper 140,681 125,126 128,134 2.9 2.3 Other short-term borrowings 343,088 168,273 163,904 7.5 7.2 Total $2,995,840 $2,085,873 3.9% 3.4%
The weighted average interest rate is calculated by dividing annual interest expense by the daily average outstanding principal balance. In connection with the Separation (described in Note T), Capital One Bank obtained a syndicated bank loan facility (the "Bridge Financing Facility") of $1.75 billion on a non-revolving basis (another $500 million remains available on a revolving basis over the 364-day term of the facility) to meet its interim funding and liquidity needs. The initial amount of borrowing under the Bridge Financing Facility was approximately $1.7 billion at 60 basis points over LIBOR before financing costs. In December 1994, Capital One reduced the Bridge Financing Facility by $400 million through new funding sources, primarily large denomination certificates. In early 1995, the Bridge Financing Facility was further reduced by bank notes with longer maturities. It is Capital One management's intent to replace this funding source during the first half of 1995. Below is data concerning reverse repurchase agreements under which the amount at risk with the listed counterparties exceeded 10% of the Company's stockholders' equity at December 31, 1994: Weighted Type Name of Counterparty Amount at Risk Average Maturity Reverse Repurchase Chemical Bank $115,469 February 7, 1995 Agreement
H LONG-TERM BORROWINGS Long-term borrowings consisted of the following: December 31 1994 1993 7 3/4% Senior Debentures $ 11,900 Notes and mortgages (5-11 3/5%) $ 3,641 4,252 Subordinated notes: 9 5/8% due 1999 100,000 100,000 Floating Rate due 1998 100,000 100,000 Floating Rate due 1997 50,000 50,000 250,000 250,000 $253,641 $ 266,152 The Senior Debentures were redeemable at the option of the Company, at par. On February 1, 1994, Signet called for redemption the remaining $11,900 of Senior Debentures. The Company has $100,000 principal amount of unsecured 9 5/8% Subordinated Notes due in 1999. Interest on the Notes is payable semiannually on June 1 and December 1 of each year. The Notes will mature on June 1, 1999. The Notes are not redeemable prior to maturity. The Company has $100,000 principal amount of Floating Rate Subordinated Notes due in 1998. The Notes are redeemable at the option of the Company at their principal amount plus accrued interest. The interest rate is determined quarterly based on the London interbank offered quotations for three-month U.S. dollar deposits. The Company has $50,000 principal amount of Floating Rate Subordinated Notes due in 1997. The Notes are redeemable at the option of the Company at their principal amount plus accrued interest. The interest rate is determined quarterly based on the London interbank offered quotations for three-month U.S. dollar deposits. Premises stated at approximately $4,504 at December 31, 1994 are subject to liens relating to notes and mortgages. Maturities of long-term borrowings in the aggregate for the next five years are as follows: 1995 $616 1997 $ 50,290 1999 $100,313 1996 273 1998 100,297 I COMMON STOCK At December 31, 1994, the Company had reserved 4,105,573 shares of its Common Stock for issuance in connection with stock option, employee and investor stock purchase plans. The following is a summary of the number of shares of common stock issued: Year Ended December 31 1994 1993 1992 Acquisition of Pioneer Financial Corporation 1,514,286 Two-for-one stock split 28,138,471 Stock issuance 626,372 Investor stock purchase plan 263,180 166,224 123,508 Employee stock purchase plan 114,057 76,344 63,760 Stock option plan 136,658 246,715 147,433 Other 2,201 Total 2,028,181 28,627,754 963,274 Under the Investor Stock Purchase Plan, 935,923 shares of Common Stock were reserved at December 31, 1994. The plan provides that the price of the Common Stock will be 95% of market value at the time of purchase through dividend reinvestment and 100% of market value at the time of purchase through optional cash contributions. In May 1989, the Company's Board of Directors declared a dividend of one Preferred Share Purchase Right for each outstanding share of the Company's Common Stock. Each right will entitle stockholders to buy one two-hundredth of a share of a new Series of Preferred Stock at an exercise price of $70. Each two-hundredth of a share of the new Preferred Stock has terms designed to approximate the economic equivalent of one share of Common Stock. The rights will be exercisable only if a person or group acquires 20% or more of the Company's Common Stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 20% or more of the Common Stock. The rights, which do not have voting privileges, expire in 1999, but may be redeemed by the Company prior to that time under certain circumstances, for $0.01 per right. These rights should not interfere with a business combination approved by the Company's Board of Directors; however, they could cause substantial dilution to a person or group attempting to acquire the Company without conditioning the offer on redemption of the rights or acquiring a substantial number of the rights. Until the rights become exercisable, they have no dilutive effect on earnings per share. J EMPLOYEE BENEFIT PLANS The Company and its subsidiaries have a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's career average earnings. The Company's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company may determine to be appropriate from time to time. Approximately 75% of the plan assets at December 31, 1994 were invested in listed stocks and bonds. Another 23% is invested in a money market fund sponsored by Signet Trust Company (a subsidiary of the Parent Company). Net periodic pension cost included the following components: 1994 1993 1992 Service cost-benefits earned during the period $ 7,379 $ 6,505 $ 5,737 Interest cost on projected benefit obligation 6,737 6,482 5,873 Actual return on plan assets 5,548 (3,532) (4,477) Net amortization and deferral (14,256) (5,435) (4,097) Net periodic pension cost $ 5,408 $ 4,020 $ 3,036 The following sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheet: December 31 1994 1993 Actuarial present value of benefit obligations: Vested benefit obligation $ (95,548) $(87,063) Accumulated benefit obligation $(103,370) $(93,249) Projected benefit obligation $(103,370) $(93,249) Plan assets, at fair value 104,707 89,979 Plan assets in excess (less than) of projected benefit obligation 1,337 (3,270) Unrecognized net asset (5,966) (6,962) Unrecognized prior service cost 2,293 2,844 Unrecognized net loss 25,406 13,965 Additional minimum liability (9,847) Net pension asset (liability) $ 23,070 $ (3,270) Assumptions used were as follows: 1994 1993 1992 Discount rates 8.50% 7.25% 8.25% Rates of increase in compensation levels of employees 5.00 5.00 5.75 Expected long-term rate of return on plan assets 8.75 8.75 8.75 Effective January 1, 1993, the Company adopted a cash balance pension plan. The plan will enable the Company to better project its future pension costs. The Company sponsors a contributory savings plan and a profit sharing plan. The savings plan allows substantially all full-time employees to participate while the profit sharing plan allows participation after satisfaction of service requirements. The Company matches a portion of the contribution made by employees, which is based upon a percent of defined compensation, to the savings plan. The profit sharing contribution is based upon the income of the Company. The Company's expense was $23,729, $22,235, and $15,881 in 1994, 1993 and 1992 under these plans, respectively. At December 31, 1994, employees of the Company held options to purchase 1,060,331 common shares at an average option price of $21.35 per share. These options expire on various dates beginning February 6, 1995 and ending October 31, 2004. At the time options are exercised, proceeds from the shares issued are credited to capital and no charges or credits to income are made with respect to any of the options. As of the date of the Capital One spin-off, on February 28, 1995, the number of options outstanding and the related price per share will be adjusted. No compensation expense will be reflected in the income statement as a result of this transaction. Under the 1992 Stock Option Plan, options for the purchase of up to 2,000,000 shares of Common Stock may be granted to key personnel at prices not less than the market price per share on the date of grant, and are exercisable not more than ten years from the date of grant. At December 31, 1994 and 1993, options to purchase 1,179,371 and 1,397,498 shares, respectively, of Common Stock were available for future grants. Under the 1992 Stock Option Plan, a feature was established by the Company, whereby an employee is automatically granted a reload option when shares of Common Stock owned by the employee are delivered for cancellation to the Company in order to exercise options. The option price of the reload options is the fair market value of Common Stock on the date that the employee delivers shares to the Company. The reload options are not exercisable within the first six months after grant unless the employee dies or becomes disabled during the six month period. On February 22, 1994, the Company adopted the 1994 Stock Incentive Plan. Under the plan, employees holding management positions with the Company can be awarded Restricted Stock or Incentive Stock at the discretion of a committee of three Directors of the Company when performance goals are achieved. The 1994 plan authorizes the reservation of 300,000 shares of Common Stock, however, no stock had been reserved or issued at December 31, 1994. A summary of changes, under several plans, in shares of Common Stock under option for the years 1994, 1993 and 1992 is as follows: Option Price Shares Per Share Outstanding December 31, 1991 1,437,140 $ 3.72-18.63 Granted 330,872 13.53-22.84 Exercised (503,330) 3.72-17.06 Cancelled (49,314) 6.50-17.06 Outstanding December 31, 1992 1,215,368 3.72-22.84 Granted 306,666 23.72-31.25 Exercised (446,032) 3.72-23.72 Cancelled (42,494) 12.72-23.72 Outstanding December 31, 1993 1,033,508 3.72-31.25 GRANTED 219,027 33.75-42.50 EXERCISED (191,304) 3.72-36.56 CANCELLED (900) 36.56 OUTSTANDING DECEMBER 31, 1994 1,060,331 $ 3.72-42.50 The Company has an employee stock purchase plan whereby employees of the Company and its subsidiaries are eligible to participate through monthly salary deduction of a maximum of 15% and a minimum of 2% of monthly base pay. The amounts deducted are applied to the purchase of unissued Common Stock of the Company at 85% of the current market price. No charges or credits to income are made with respect to this plan. The Company sponsors postretirement defined benefit plans that provide medical and life insurance benefits to retirees. Employees who retire after age 55 with 10 years of service are eligible to participate. The postretirement health care plan is contributory for participants who retire after June 1, 1991 with retiree contributions adjusted annually and contains other cost sharing features such as deductibles and coinsurance. The life insurance is noncontributory. The accounting for the health care plan anticipates future cost sharing changes to the written plan that are consistent with the Company's expressed intent to increase retiree contributions annually in accordance with increases in health care costs. The Company's policy is to fund the cost of medical benefits in amounts determined at the discretion of management. In 1993, the Company adopted SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions." The effect of adopting the new rules increased 1993 net periodic postretirement benefit cost by $4,571. Postretirement benefit cost for 1992, which was recorded on a cash basis, has not been restated. The following table sets forth the plans' combined funded status reconciled with the amount shown in the Company's consolidated balance sheet: December 31 1994 1993 Accumulated postretirement benefit obligation: Retirees $(33,918) $(35,105) Fully eligible active plan participants (2,146) (2,220) Other active plan participants (11,016) (14,475) (47,080) (51,800) Plan assets at fair value, primarily listed stocks and bonds 4,957 5,245 Accumulated postretirement benefit obligation in excess of plan assets (42,123) (46,555) Unrecognized transition obligation 32,390 39,525 Unrecognized net (gain) loss (10,644) 1,919 Accrued postretirement benefit cost $(20,377) $ (5,111) Net periodic postretirement benefit cost includes the following components: Year Ended December 31 1994 1993 Service cost $1,457 $1,230 Interest cost 3,758 3,800 Actual return on plan assets (74) (133) Amortization of transition obligation over 20 years 2,010 2,080 Net amortization and deferral (385) (366) Net periodic postretirement benefit cost $6,766 $6,611 For measurement purposes, a 11% and 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1994 for participants under 65 years of age and 65 years and over, respectively; the rate was assumed to decrease gradually to 6.50% in 2005 and remain at that level thereafter. For 1993, a 13% and 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for participants under 65 years of age and 65 years and over, respectively; the rate was assumed to decrease gradually to 5.25% in 2007 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation for the medical plans as of December 31, 1994 and 1993 by $6.9 million and $6.1 million, respectively, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1994 and 1993 by $.6 million. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8.50% and 7.25% for 1994 and 1993, respectively. The expected long-term rate of return on plan assets, after estimated income taxes, was 8.75% for both periods. In November 1992, SFAS No. 112, "Employers' Accounting for Postemployment Benefits," was issued establishing accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. Postemployment benefits are all types of benefits including salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits and continuation of benefits such as health care benefits and life insurance coverage. Employers were required to recognize the obligation to provide such benefits on an accrual basis for fiscal years beginning after December 15, 1993, instead of recognizing an expense for these benefits when paid. The Company elected to adopt this accounting standard in 1993. No related expense was reported in 1994. The related expense reflected on the 1993 income statement was approximately $6.0 million. Effective April 1, 1993, the Company adopted a Flexible Benefits Plan for its employees. The plan allows employees to select their benefit options, including medical coverage, disability insurance and paid leave. The plan enables the Company to better manage its rising health care costs, as well as provide employees more choice in the selection of their benefits package. As described in Note M, Signet implemented a comprehensive improvement plan in 1994. As a result of restructuring the Company, charges of $9.0 million and $10.5 million relating to the pension plan and postretirement benefits other than pensions, respectively, were incurred and reported on the income statement as restructuring charges in 1994. K DIVIDENDS AND OTHER RESTRICTIONS Certain regulatory restrictions exist regarding the ability of the subsidiaries to transfer funds to the Parent Company in the form of cash dividends, loans or advances. At December 31, 1994, approximately $143,926, $40,087, $15,370 and $2,655 of the retained earnings of Signet Bank/Virginia, Signet Bank/Maryland, Signet Bank N.A. and Signet Trust Company, respectively, and approximately $8,583 of the retained earnings of the nonbank subsidiaries were available for payment of dividends to the Parent Company, without prior approval by regulatory authorities. The regulatory authorities may also consider factors such as the level of current and expected earnings stream, maintenance of an adequate loan loss reserve and an adequate capital base when determining amounts available for the payment of dividends. The restricted net assets of the domestic bank subsidiaries amounted to $458,247 at December 31, 1994. L INCOME TAXES Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." Under SFAS 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Prior to the adoption of SFAS 109, income tax expense was determined using the deferred method. Deferred tax expense was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rate in effect in the year the difference originated. As permitted by SFAS 109, the Company has elected not to restate the financial statements of any prior years. The effect of the change on pretax income from continuing operations for the year ended December 31, 1993, and the cumulative effect of the change as of January 1, 1993, were not material. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows: December 31 1994 1993 Deferred tax assets: Allowance for loan losses $ 79,788 $ 92,268 Foreclosed property 6,224 9,589 Unrealized losses on securities 11,733 Other 38,593 23,159 Total deferred tax assets 136,338 125,016 Deferred tax liabilities: Leasing 81,838 63,671 Other 33,761 21,162 Total deferred tax liabilities 115,599 84,833 Net deferred tax assets $ 20,739 $ 40,183 Differences between applicable income taxes (benefit) and the amount computed by applying statutory income tax rates are summarized as follows: Year Ended December 31 1994 1993 1992 LIABILITY Liability Deferred METHOD Method Method Amounts at statutory rates (35% in 1994 and 1993, 34% in 1992) $76,011 $87,211 $ 48,320 Effect of: Tax exempt income (8,582) (9,913) (11,403) Alternative minimum tax (6,303) State taxes net of federal benefit 2,248 2,066 1,101 Other (2,338) (4,604) 1,203 Applicable income taxes $67,339 $74,760 $ 32,918 Taxes currently payable $33,156 $58,201 $ 15,989 Deferred income taxes 34,183 16,559 16,929 Applicable income taxes $67,339 $74,760 $ 32,918 Applicable income taxes include $1,243 in 1994, $1,513 in 1993 and ($2,532) in 1992 relating to securities available for sale gains and investment securities gains (losses). The components of the deferred tax expense resulting from timing differences are as follows: Year Ended December 31 1992 Allowance for loan losses $ 20,681 Foreclosed property 2,784 Alternative minimum tax (12,374) Leasing 8,790 Depreciation (521) Other (2,431) $ 16,929 The components of income tax expense are as follows: Year Ended December 31 1994 1993 1992 LIABILITY METHOD Liability Method Deferred Method CURRENT DEFERRED Current Deferred Current Deferred Federal $34,396 $29,484 $57,960 $13,621 $15,694 $15,555 State (1,240) 4,699 241 2,938 295 1,374 $33,156 $34,183 $58,201 $16,559 $15,989 $16,929 M RESTRUCTURING CHARGES AND CONTRACT TERMINATION CHARGE With the anticipated Capital One spin-off, Signet began a major refocus on its core businesses. In the third quarter of 1994, Signet's Board of Directors approved a comprehensive core bank improvement plan aimed at reducing Signet's efficiency ratio through cost reductions and revenue initiatives in order to enhance its competitive position. This impacted employees and operations throughout the organization. The consolidated statement of income includes a pre-tax charge of $43.2 million related to the plan. The charge includes approximately $15.6 million primarily for increased retiree medical and pension benefits related to an early retirement program in which 225 employees participated, approximately $13.0 million of accelerated retiree medical and pension expense and anticipated severance benefits for approximately 750 employees, and approximately $14.6 million related to the writedown of bank- owned properties and lease termination costs due to the expected abandonment of facilities resulting from the reduction in employees. As of December 31, 1994, Signet had reduced the restructuring liability by approximately $1.8 million for severance payments to approximately 400 employees, $.6 million for payments made under the early retirement program and approximately $5.9 million for lease termination and other facilities related costs. Also, in conjunction with the anticipated Capital One spin-off, Signet recorded a special pre-tax charge of $49.0 million for terminating data processing contracts related to the credit card business in 1994. As the contract termination charge was paid in 1994, no related liability remains. N OTHER NON-INTEREST INCOME AND EXPENSE The following schedule represents the items comprising other non-interest income and expense: Year Ended December 31 1994 1993 1992 Other non-interest income: Mortgage servicing and origination $ 18,661 $ 24,210 $ 16,529 Other service charges and fees 15,112 16,260 17,540 Gain on sale of mortgage servicing 6,000 Trading profits (losses) (268) (1,396) 11,193 Other 28,931 23,734 20,068 Total $ 68,436 $ 62,808 $ 65,330 Other non-interest expense: Professional services $ 26,108 $ 16,159 $ 14,278 FDIC assessment 16,754 18,253 18,769 Public relations, sales and advertising 16,662 17,213 7,868 Credit and collection 11,646 10,619 9,231 Taxes and licenses other than payroll and income 3,448 2,962 1,966 Insurance 1,783 2,030 2,069 Other 43,949 44,615 57,702 Total $120,350 $111,851 $111,883 O OFF-BALANCE SHEET ITEMS AND CONTINGENT LIABILITIES The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers, to reduce its own exposure to fluctuations in interest rates and to participate in trading activities. These financial instruments include commitments to extend credit, standby and commercial letters of credit and mortgages sold with recourse. These financial instruments also include the following derivative financial instruments: forward and futures contracts, options and interest rate swaps, caps and floors. These instruments involve, to varying degrees, elements of credit or interest rate risk in excess of the amount recognized in the balance sheet. The Company is also a party to derivative financial instruments that do not have off-balance sheet credit risk (e.g. options written and interest rate caps and floors written). The contract or notional amounts of these instruments shown in the Table represent the extent of involvement the Company has in particular classes of financial instruments at December 31, 1994 and 1993. Off-Balance Sheet Items December 31 (in millions) 1994 1993 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit (unused) - net $11,723 $7,461 Standby and commercial letters of credit 289 337 Derivative financial instruments held for trading whose contract amounts exceed the amount of credit risk: Forward and futures contracts 2,806 4,517 Interest rate swap agreements 277 328 Interest rate caps and floors and options (a) 969 696 Derivative financial instruments held for purposes other than trading whose contract amounts exceed the amount of credit risk: Forward and futures contracts 330 200 Interest rate swap agreements 3,863 2,558 Interest rate caps and floors (b) 750 5,075 (a) Includes purchased interest rate caps and floors and purchased options which have no credit risk of $925 and $596 at December 31, 1994 and December 31, 1993, respectively. (b) Includes purchased interest rate caps and floors which have no credit risk of $750 and $3,075 at December 31, 1994 and December 31, 1993, respectively. Commitments to extend credit include the unused portions of commitments that obligate a bank to extend credit in the form of loans, participations in loans or similar transactions. Commitments to extend credit would also include loan proceeds that a bank is obligated to advance, such as loan draws, construction progress payments, seasonal or living advances to farmers under prearranged lines of credit, rotating or revolving credit arrangements (other than credit cards and related plans), or similar transactions. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the counterparty. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby and commercial letters of credit are conditional commitments issued by the Company, and unless discussed otherwise, have the same characteristics as discussed for commitments. Standby letters of credit are instruments issued by the Company which represent an obligation to guarantee payments on certain transactions. If a customer defaults on loan payments, the issuer of the letter would be called upon to make payments. Standby letters of credit represent contingent liabilities; therefore, they are not included on the Company's balance sheet. Commercial letters of credit are conditional commitments on the part of a bank to provide payment on drafts drawn in accordance with the terms of a document. A commercial letter of credit is issued to specifically facilitate trade or commerce. Under the terms of a commercial letter of credit, as a general rule, drafts will be drawn when the underlying transaction is consummated as intended. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral deemed necessary by the Company upon extension of credit is based on management's credit evaluation of the counterparty and the particular transaction. Collateral held varies but may include accounts receivable, marketable securities, deposit accounts, inventory and property, plant and equipment. Credit risk (the possibility that a loss may occur from the failure of another party to perform according to the terms of a contract) exists to the extent of the contract amount in the case of commitments and letters of credit. No significant losses are anticipated as a result of these transactions. The Company sells residential mortgage loans with recourse to the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Company (FHLMC). Credit risk exists to the extent of recourse, which totaled $18,739 and $25,976 at December 31, 1994 and 1993, respectively. Mortgages are collateralized by 1-4 family residential homes. The Company's policy is for an average 85% loan-to-value ratio upon inception of the loan. Loans above 80% have mortgage insurance. The Company enters into a variety of interest rate contracts-including futures and forward contracts, options, interest rate swaps, caps and floors in its trading activities and managing its interest rate exposure. Notional principal amounts often are used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. The Company's credit exposure that results from entering into derivative financial instruments is limited to the current fair value of contracts with a positive fair value expected to be received from counterparties. The Company does not expect any counterparties to fail to meet their obligations. Futures contracts are legal agreements to buy or sell a standardized quantity of a commodity or standardized financial instrument at a specified future date and price. Futures contracts are traded on organized exchanges. Forward contracts are legal contracts between two parties to purchase and sell a specific quantity of a financial instrument or commodity at a price specified now, with delivery and settlement at a specified future date. Exchange traded futures do not have any credit risk; however, risks related to futures and forwards traded over-the-counter arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities values and interest rates. Failure of a counterparty would result in purchasing the underlying security in the market. While in theory futures and forwards represent obligations to make or take delivery, in fact most are closed out by taking an exact but opposite position in the same contract. Cash requirements of futures and forwards include receipt/payment of cash for the sale or purchase of the contracts. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Entering into interest rate swap agreements involves not only the risk of dealing with counter-parties and their ability to meet the terms of the contracts but also the interest rate risk associated with unmatched positions. Interest rate corridors are tools to manage exposure to interest rate risk by maintaining a minimum spread within a specified range of rates. Interest rate caps are tools used to manage exposure to interest rate risk by modifying the rate sensitivity of selected liabilities by setting an upper limit on a certain interest rate index. The Company typically pays a fee for the cap and receives the amount by which the actual rate exceeds the contractual rate, if any. Interest rate floors are tools to manage exposure to interest rate risk by modifying the rate sensitivity of selected assets by setting a lower limit on a certain interest rate index. The Company typically pays a fee for the floor and receives the amount by which the contractual rate exceeds the actual rate, if any. Cash flows from swaps, caps and floors are received or paid on the established contract dates. Options are contracts that give the holder the right to buy (call) or sell (put) a specified quantity of an asset from/to the issuer of such a contract at a fixed price within a specified period of time. As a writer of options, the Company receives a premium at the outset and then bears the risk of an unfavorable change in the price of the financial instrument underlying the option. The Company maintains active trading positions in futures and forward contracts, interest rate swaps, interest rate caps and floors and options. All positions are carried at fair value and changes in fair values are reflected in trading income as they occur. Net trading gains/(losses) in earnings on derivative financial instruments totaled ($22,168), ($1,000) and $6,721 in the years ended December 31, 1994, 1993 and 1992, respectively. The Company manages the potential credit exposure through careful evaluation of counterparty credit standing, collateral agreements and other contract provisions. The potential credit exposure from future market movements is evaluated by using models that take into consideration possible changes over time in interest rates and other relevant factors. The amounts below represent the end of period fair value and average aggregate fair values during the year for derivatives held for trading purposes as of December 31, 1994: Fair Value Average Fair Value Forward and futures contracts $ 576 $ (1,603) Interest rate swaps (1,468) (836) Interest rate caps and floors and options 3,077 7,367 The Company's principal objective in holding or issuing derivatives for purposes other than trading is asset-liability management. The operations of the Company are subject to a risk of interest-rate fluctuations to the extent there is a difference between the amount of the Company's interest-earning assets and the amount of interest-bearing liabilities that mature or reprice in specified periods. The main objective of the Company's asset-liability management activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest-rate and liquidity risk and facilitating the funding needs of the Company. To achieve that objective, the Company uses a combination of derivative financial instruments that include interest rate swaps and corridors, interest rate caps and floors and futures contracts. The majority of the asset-liability management activities involve the use of interest rate swaps whereby fixed rate assets are converted to variable rate assets or fixed rate liabilities are converted to variable rate liabilities. Derivatives held or issued for purposes other than trading are not marked to market. Related income or expense including amortization of purchase premiums or settlement gains or losses are recorded as an adjustment to the yield of the related interest earning asset or interest bearing liability over the periods covered by the contracts. The Company also uses interest rate swaps to manage the interest rate risk associated with securitizations. Income or expense from these swaps is recorded on an accrual basis along with securitization income in non-interest income. If an instrument is terminated, any gain or loss is deferred and amortized as an adjustment to the yield of the designated assets or liabilities over the remaining periods originally covered by the contract. During 1994, the Company terminated $2 billion of interest rate corridors for a $4.9 million gain and is amortizing the gain in the above prescribed manner. In addition, the Company has entered into a forward starting interest rate swap for a variable notional amount ranging from $0.6 to $4.8 billion whereby the Company pays a fixed rate of 5.875% and receives one month LIBOR from January 3, 1995 through April 13, 1995. This interest rate swap was transferred to Capital One Bank in connection with the Separation. The Company also acts as an intermediary in arranging interest rate swaps, caps and floors. As an intermediary, the Company becomes a principal in the exchange of interest payments between the parties and, therefore, is exposed to loss should one of the parties default. The Company minimizes the risk by performing normal credit reviews on its customers. As a writer of interest rate caps and floors, the Company receives a fee at the outset and then bears the risk of an unfavorable change in interest rates. The Company minimizes its exposure to interest rate risk by entering into offsetting positions that essentially counterbalance each other. These activities are immaterial to operations. At December 31, 1994, the Company has reported the balance sheet impact of derivative financial instruments in accordance with FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts." FASB Interpretation No. 39 which became effective in 1994, defines the right of setoff, addresses the applicability of that general principle to forward, interest rate, option and other conditional or exchange contracts and clarifies circumstances in which it is appropriate to offset amounts recognized for those contracts in the statement of financial position. It also permits the offsetting of fair value amounts recognized for various conditional and exchange contracts executed with the same counterparty under a master netting arrangement. In the past, the Company has, in all material respects, reported the discussed instruments on a net basis; thus, the adoption of this Interpretation has an immaterial impact on the Company. Certain premises and equipment are leased under agreements which expire at various dates through 2051, without taking into consideration renewal options available to the lessee. Many of these leases provide for payment by the lessee of property taxes, insurance premiums, cost of maintenance and other costs. In some cases, rentals are subject to increase in relation to a cost of living index. Total rental expense amounted to approximately $21,947 in 1994, $18,541 in 1993 and $17,715 in 1992. Future minimum rental commitments as of December 31, 1994 for all non- cancelable operating leases with initial or remaining terms of one year or more amounted to $145,743 and rental commitments for the next five years are as follows: 1995 $21,798 1997 $19,633 1999 $12,200 1996 22,117 1998 17,230 The Company has entered into several agreements under which certain data processing services, including management of the Company's data center and installation of various new application systems, will be provided by outside parties. The cost of these services is determined by volume considerations, in addition to an agreed base rate, for remaining terms up to seven years. P SECURITIZATIONS The Company securitized $2,398,801 of credit card receivables in 1994, $2,289,656 in 1993 and $500,000 in 1991 and 1990. These transactions were recorded as sales in accordance with SFAS No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse." Receivables outstanding under securitizations were $5,116,791 and $3,289,656 at December 31, 1994 and 1993, respectively. Proceeds from the sales in 1994 and 1993 totaled $2,393,936 and $2,283,329, respectively. 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 $146,910 at December 31, 1994 and $68,421 at December 31, 1993. Q SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK During 1994 and 1993, the Company maintained a concentration of business activities with customers located within Virginia, Maryland, California and the District of Columbia. As of December 31, 1994 and 1993, the Company held approximately $1.3 billion and $1.8 billion, respectively, in U.S. Government sponsored and U.S. Government agency financial instruments, which have little, if any, credit risk. The Company's current commercial lending policies are strongly oriented toward diversified middle market borrowers. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, marketable securities, deposit accounts, inventory, property, plant and equipment, real estate and income-producing commercial properties. R DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements though the Company has decided to include certain of the non-required items. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating the fair value for its financial instruments and other non-required items as defined by SFAS No. 107: CASH AND DUE FROM BANKS, INTEREST BEARING DEPOSITS WITH OTHER BANKS AND FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER RESALE AGREEMENTS: The carrying amount approximates fair value. TRADING ACCOUNT SECURITIES, LOANS HELD FOR SALE, SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES: Fair values are based on published market prices or dealer quotes. LOANS: For credit card and equity line receivables with short-term and/or variable characteristics, the total receivables outstanding approximates fair value. This amount excludes any value related to account relationship. The fair value of other types of loans is estimated by discounting the future cash flows using the comparable risk-free rate and adjusting for credit risk and operating costs. INTEREST RECEIVABLE AND INTEREST PAYABLE: The carrying amount approximates fair value. OTHER ASSETS AND OTHER LIABILITIES: For financial instruments included in these categories, the carrying amount approximates fair value. NON-INTEREST BEARING DEPOSITS: The fair value of these instruments, by the SFAS No. 107 definition, is the amount payable on demand at the reporting date. INTEREST BEARING DEPOSITS: The fair value of demand deposits, savings accounts and money market deposits with no defined maturity, by SFAS No. 107 definition, is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the current rates at which similar deposits would be made. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS, FEDERAL FUNDS PURCHASED, COMMERCIAL PAPER, BRIDGE FINANCING FACILITY AND OTHER SHORT-TERM BORROWINGS: For these short-term instruments, the carrying amount approximates fair value. LONG-TERM BORROWINGS: Fair value is based on dealer quotes, where available, and on estimates made by discounting the future cash flows using the current rates at which similar borrowings would be made. COMMITMENTS TO EXTEND CREDIT AND STANDBY AND COMMERCIAL LETTERS OF CREDIT: The fair value of commercial lending related letters of credit and commitments is estimated as the amount of fees currently charged to enter into similar agreements, taking into account the present creditworthiness of the counterparties. This amount is included with the fair value of the related loans. The Company has commitments of $147,246 related to the mortgage loan portfolio. It is not practicable to separately estimate the value of these commitments due to the excessive cost involved. These values are included in the loans held for sale valuation. FORWARD AND FUTURES CONTRACTS, OPTIONS, INTEREST RATE CAPS AND FLOORS: Fair values are based on quoted market prices. INTEREST RATE SWAP AGREEMENTS: The fair value of these instruments is the estimated amount that the Company would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. CORE DEPOSIT INTANGIBLES: The estimated value ascribed to core deposits is computed by discounting the estimated cost savings from these deposits over their estimated life, using an incremental cost of funds rate. SERVICING PORTFOLIO FOR MORTGAGE LOANS: Fair value is estimated by using an internal valuation model.
December 31 1994 1993 CARRYING FAIR Carrying Fair VALUE VALUE Value Value The estimated fair values of the Company's financial instruments required to be disclosed under SFAS No. 107: Assets: Cash and due from banks $ 531,747 $ 531,747 $ 463,358 $ 463,358 Interest bearing deposits with other banks (a) 355,503 355,503 540,312 540,312 Federal funds sold and securities purchased under resale agreements 1,135,821 1,135,821 1,075,754 1,075,754 Trading account securities (a) 352,719 352,719 379,638 379,638 Loans held for sale (a) 69,585 69,585 421,361 421,361 Securities available for sale 1,241,696 1,241,696 248,163 252,770 Investment securities 398,783 399,666 1,769,615 1,829,232 Loans (b) 7,440,679 7,579,923 5,851,263 6,094,574 Interest receivable 98,557 98,557 84,118 84,118 Other assets (a)(c) 319,866 319,866 141,264 141,264 Liabilities: Non-interest bearing deposits 1,542,349 1,542,349 1,544,852 1,544,852 Interest bearing deposits 6,279,164 6,192,484 6,275,761 6,304,724 Securities sold under repurchase agreements 875,458 875,458 1,281,645 1,281,645 Federal funds purchased 881,693 881,693 942,969 942,969 Commercial paper 108,664 108,664 168,488 168,488 Bridge financing facility 1,300,000 1,300,000 Other short-term borrowings 146,955 146,955 232,024 232,024 Long-term borrowings 253,641 257,325 266,152 282,269 Interest payable 31,078 31,078 28,205 28,205 Other liabilities (a)(c) 114,801 114,801 7,743 7,743 Derivative Financial Instruments: Held for trading: Forward and futures contracts 576 576 Interest rate swap agreements (1,468) (1,468) Interest rate caps and floors and options 3,077 3,077 Held for purposes other than trading: Forward and futures contracts 153 Interest rate swap agreements (133,575) 105,245 Interest rate caps and floors 10,554 2,194 11,310 The estimated fair value of items not required to be disclosed under SFAS No. 107: Core deposit intangibles 16,019 706,805 11,730 366,043 Servicing portfolio for mortgage loans 29,431 73,126 12,847 44,235
(a) The December 31, 1994 carrying values in the table are included in the statement of financial position under the indicated captions, except for following derivative amounts: forward and futures contracts are included in interest bearing deposits with other banks, trading account securities, loans held for sale and other assets; interest rate swaps are included in other assets; interest rate caps and floors are included in other assets; purchased options are included in other assets and loans held for sale; and sold options are included in other liabilities. The amounts in the table are presented net of amounts offset in accordance with FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts." (b) As required by SFAS No. 107, lease receivables (net of unearned income) with a carrying value totaling $262,979 and $205,736 at December 31, 1994 and 1993, respectively, are excluded. The carrying values are net of the allowance for loan losses and related unearned income. (c) Only financial instruments as defined by SFAS No. 107 are included in this category. S SIGNET BANKING CORPORATION (PARENT COMPANY ONLY) CONDENSED FINANCIAL INFORMATION December 31 BALANCE SHEET 1994 1993 Assets Interest bearing deposits with other banks $ 110,000 $ 55,000 Securities available for sale 17,795 850 Investment securities 16,675 Commercial loans 4,131 Advances to: Bank subsidiaries 204,878 304,360 Non-bank subsidiaries 1,201 Investments in: Bank subsidiaries 692,516 954,656 Non-bank subsidiaries 382,864 9,769 Other assets 65,582 58,980 $1,477,766 $1,401,491 Liabilities Commercial paper $ 108,664 $168,488 Long-term borrowings: Senior debentures 11,900 Subordinated notes 250,000 250,000 Other 43 Other liabilities 7,623 6,398 Total liabilities 366,287 436,829 Common Stockholders' Equity 1,111,479 964,662 $1,477,766 $1,401,491 Year Ended December 31 STATEMENT OF INCOME 1994 1993 1992 Income: Dividends from bank subsidiaries $ 75,531 $ 50,328 $ 19,923 Interest from: Bank subsidiaries 10,545 8,716 9,006 Non-bank subsidiaries 286 127 816 Others 4,528 2,674 3,037 Other income - net 5,562 2,738 1,251 96,452 64,583 34,033 Expense: Interest 20,983 18,002 19,631 Non-interest 4,489 3,795 1,029 25,472 21,797 20,660 Income before income taxes benefit and equity in undistributed net income of subsidiaries 70,980 42,786 13,373 Applicable income taxes benefit (1,204) (2,122) (3,119) 72,184 44,908 16,492 Equity in undistributed net income: Bank subsidiaries 64,829 129,455 91,464 Non-bank subsidiaries 12,821 51 1,244 Net income $149,834 $174,414 $109,200
Year Ended December 31 STATEMENT OF CASH FLOWS 1994 1993 1992 OPERATING ACTIVITIES Net Income $149,834 $ 174,414 $109,200 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (77,650) (129,506) (92,708) Realized securities available for sale (gains) losses (459) 12 193 Realized investment security gains (107) (119) Decrease (increase) in other assets (8,160) (12,472) 4,227 Increase (decrease) in other liabilities 454 769 (485) Net cash provided by operating activities 64,019 33,110 20,308 INVESTING ACTIVITIES Increase in interest bearing deposits with other banks (55,000) (50,000) Net sales (purchases) of securities available for sale 3,662 (95) (755) Net sales (purchases) of investment securities (671) 15,481 Net sales (purchases) of trading account securities 10,000 (10,000) Decrease (increase) in advances to subsidiaries 100,683 (47,121) 60,839 Increase in investment in subsidiaries (56,535) (1,413) (17,500) Net increase in commercial loans (4,131) Net cash used by investing activities (11,321) (39,300) (1,935) FINANCING ACTIVITIES Increase (decrease) in commercial paper (59,824) 43,362 (20,191) Decrease in long-term borrowings (11,943) (848) (95) Proceeds from issuance of common stock 75,972 9,203 26,625 Payment of cash dividends (57,192) (45,058) (24,768) Net cash provided (used) by financing activities (52,987) 6,659 (18,429) Increase (decrease) in cash and cash equivalents (289) 469 (56) Cash and cash equivalents at beginning of year 508 39 95 Cash and cash equivalents at end of year $ 219 $ 508 $ 39
Maturities of long-term borrowings for the next five years are as follows: 1995-$0, 1996-$0, 1997-$50,000, 1998-$100,000, 1999-$100,000. Cash paid during the years ended December 31, 1994, 1993 and 1992 for interest was $20,692, $18,029 and $19,893, respectively. Net cash paid (received) for income taxes for the same time periods was $5,288, $9,238 and ($4,543), respectively. T CAPITAL ONE FINANCIAL CORPORATION ("CAPITAL ONE") On July 27, 1994, Signet announced plans to spin-off substantially all of its credit card business. Under such plans, designated assets and liabilities of Signet Bank/Virginia's credit card division were transferred to Capital One Bank, a newly chartered limited purpose credit card bank. Capital One Bank became, in conjunction with the transfer, a wholly-owned subsidiary of Capital One, a wholly-owned subsidiary of Signet (the "Separation"). Accounts representing approximately $335 million, or 5%, of the managed credit card portfolio were retained by Signet. The Separation occurred November 22, 1994, at which time 7,125,000 shares of common stock of Capital One were sold in an initial public offering. Included in Signet's non-interest expense is $1,272 of minority interest in Capital One's earnings. Capital One is listed on the New York Stock Exchange under the symbol COF. Signet's Board of Directors believe the spin-off will enhance shareholder value by creating two independent financial institutions, each possessing substantial financial and managerial strength and each pursuing separate and attractive long-term business strategies. Prior to November 22, 1994, the date of the Separation, Capital One operated as a division of Signet Bank/Virginia ("SBV"), a wholly-owned subsidiary of Signet. Subsequent to the Separation, Capital One has operated as an independently funded and stand-alone company. The accompanying financial summary data covers the time periods prior and subsequent to the Separation. The basis of preparation of the accompanying financial summary data for the periods prior to the Separation is as follows:(1) The data includes interest expense paid on borrowings from SBV. For purposes of constructing the accompanying financial summary data, three funding pools (short-term, medium-term and long-term pools) were assumed, each with costs based on the average relevant historical rates paid by Signet. (2) The accompanying financial summary data also includes an allocation of expenses for data processing, accounting, audit, human resources, corporate secretary, treasury, legal and other administrative support provided by Signet. Such expenses were allocated based on actual usage or using other allocation methods which, in the opinion of management, approximate actual usage. Management believes the allocation methods were reasonable. Certain services currently provided by affiliates are expected to continue on a transitional basis. (3) Additionally, SBV retained a credit card portfolio of approximately $335 million for all periods presented that is associated with its deposit customer base. The financial summary data assumes Capital One assessed SBV a normal servicing fee for servicing this retained portfolio for all periods presented. Included in Capital One's 1994 non-interest expense is a special pre- tax charge of $49.0 million for terminating data processing contracts related to the credit card business. Capital One summary financial data follows: December 31 1994 1993 Total assets $3,072,546 $1,991,207 Total stockholders'/division equity 474,557 168,879 Year Ended December 31 1994 1993 1992 Net interest income $164,977 $191,863 $ 90,742 Provision for loan losses 30,727 34,030 55,012 Net interest income after provision for loan losses 134,250 157,833 35,730 Non-interest income 396,902 194,825 121,642 Non-interest expense (includes a $49,000 contract termination fee) 384,325 181,804 108,508 Income before income taxes 146,827 170,854 48,864 Applicable income taxes 51,564 60,369 16,614 Net income $ 95,263 $110,485 $ 32,250 U SUBSEQUENT EVENT On February 28, 1995, Signet distributed all of the common stock it held in Capital One Financial Corporation to Signet stockholders in a tax-free distribution. REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Stockholders and Board of Directors Signet Banking Corporation We have audited the accompanying consolidated balance sheet of Signet Banking Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Signet Banking Corporation and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note A to the consolidated financial statements, in 1994, the Company changed its method of accounting for certain investments in debt and equity securities. Richmond, Virginia January 24, 1995, except for Note U, as to which the date is February 28, 1995 Signet Banking Corporation and Subsidiaries Selected Financial Data
(dollars in thousands) 1994 1993 1992 1991 1990 1989 YEAR-END BALANCES Cash and due from banks $ 531,747 $ 463,358 $ 502,998 $ 530,557 $ 534,859 $ 522,763 Interest bearing deposits with other banks 355,795 540,312 418,822 350,193 459,779 231,054 Federal funds and resale agreements 1,135,821 1,075,754 1,479,061 396,458 322,422 419,223 Trading account securities 353,040 379,638 668,310 188,171 67,603 15,246 Credit card loans held for securitization 400,000 Loans held for sale 69,506 421,361 215,084 134,809 103,054 44,823 Securities available for sale 1,241,696 248,163 346,843 590,036 1,887,964 99,800 Investment securities-taxable 225,212 1,510,800 1,781,735 1,586,269 284,391 3,015,958 Investment securities-nontaxable 173,571 258,815 291,727 313,897 321,091 376,230 Loans: Commercial 2,472,620 2,299,973 2,181,218 2,351,990 2,549,462 2,586,273 Credit card 2,559,172 1,808,515 1,243,873 700,488 679,854 1,418,415 Other consumer 2,053,461 1,297,309 1,179,303 1,233,310 1,319,432 1,399,772 Real estate-construction 209,183 309,842 549,001 952,687 1,199,599 1,199,085 Real estate-commercial mortgage 526,956 581,529 632,072 587,644 617,621 531,498 Real estate-residential mortgage 191,508 71,411 77,844 113,466 135,227 132,072 Gross loans 8,012,900 6,368,579 5,863,311 5,939,585 6,501,195 7,267,115 Less: Unearned income (88,723) (58,267) (54,689) (55,923) (56,205) (52,220) Allowance for loan losses (220,519) (253,313) (265,536) (329,371) (163,669) (93,572) Net loans 7,703,658 6,056,999 5,543,086 5,554,291 6,281,321 7,121,323 Premises and equipment (net) 258,715 216,524 199,153 216,378 218,985 205,100 Other assets 882,468 677,498 645,928 1,377,741 523,855 424,572 Total assets $12,931,229 $11,849,222 $12,092,747 $11,238,800 $11,405,324 $12,476,092 Deposits: Non-interest bearing $ 1,542,349 $ 1,544,852 $ 1,432,977 $ 1,341,490 $ 1,258,902 $ 1,383,285 Money market and interest checking 1,050,176 1,039,215 973,319 808,045 655,786 597,025 Money market savings 1,453,629 1,745,066 1,855,374 1,901,670 1,601,282 1,472,702 Savings accounts 1,170,990 880,072 674,860 449,366 406,001 417,909 Savings certificates 1,952,090 2,051,300 2,530,227 3,502,677 3,478,090 2,561,531 Large denomination certificates 643,054 347,820 257,225 455,507 897,693 952,754 Foreign 9,225 212,288 99,332 21,783 46,376 209,854 Total deposits 7,821,513 7,820,613 7,823,314 8,480,538 8,344,130 7,595,060 Federal funds and repurchase agreements 1,757,151 2,224,614 2,702,441 1,366,280 1,626,763 3,074,898 Other short-term borrowings 1,555,619 400,512 293,399 226,177 209,299 497,270 Long-term borrowings 253,641 266,152 297,962 299,021 350,292 361,186 Other liabilities 431,826 172,669 148,999 155,233 138,485 196,934 Common stockholders' equity 1,111,479 964,662 826,632 711,551 736,355 750,744 Total liabilities and stockholders' equity $12,931,229 $11,849,222 $12,092,747 $11,238,800 $11,405,324 $12,476,092 SUPPLEMENTAL DATA Number of employees at year-end: Full-time 6,028 5,753 4,702 4,697 5,330 5,677 Part-time 1,311 1,386 1,126 1,035 946 915 Number of common stockholders at year-end 15,503 14,606 14,823 16,822 17,466 16,417
Signet Banking Corporation and Subsidiaries Selected Financial Data (continued)
(dollars in thousands) 1994 1993 1992 1991 1990 1989 AVERAGE BALANCES Cash and due from banks $ 501,821 $ 461,249 $ 446,084 $ 429,020 $ 454,276 $ 464,933 Interest bearing deposits with other banks 251,266 262,910 578,464 671,770 235,430 136,869 Federal funds and resale agreements 970,300 752,510 835,398 678,826 529,737 361,551 Trading account securities 287,192 484,383 308,815 160,664 65,415 116,259 Credit card loans held for securitization 432,581 393,836 92,055 1,096 Loans held for sale 200,712 249,797 197,263 133,157 77,888 25,262 Securities available for sale 1,338,449 299,023 527,440 1,855,272 79,137 85,540 Investment securities-taxable 66,829 1,628,855 1,809,648 557,092 2,801,688 2,497,587 Investment securities-nontaxable 197,231 274,967 305,814 317,781 366,148 379,038 Loans (net of unearned income): Commercial 2,148,726 2,101,423 2,235,382 2,339,531 2,535,436 2,455,966 Credit card 1,838,392 1,764,277 709,266 628,531 1,331,523 1,241,347 Other consumer 1,512,767 1,207,323 1,199,711 1,291,047 1,340,139 1,402,238 Real estate-construction 249,353 448,859 776,447 1,082,342 1,245,071 1,135,575 Real estate-commercial mortgage 560,542 607,573 603,934 606,610 593,976 554,111 Real estate-residential mortgage 97,855 76,962 93,672 123,006 171,502 126,320 Total loans 6,407,635 6,206,417 5,618,412 6,071,067 7,217,647 6,915,557 Less: Allowance for loan losses (241,633) (263,593) (307,558) (191,856) (118,240) (88,211) Net loans 6,166,002 5,942,824 5,310,854 5,879,211 7,099,407 6,827,346 Premises and equipment (net) 242,933 201,792 207,186 217,386 210,462 198,383 Other assets 813,312 665,305 640,920 541,489 428,395 374,247 Total assets $11,468,628 $11,617,451 $11,167,886 $11,533,723 $12,349,079 $11,467,015 Deposits: Non-interest bearing $ 1,550,902 $ 1,424,260 $ 1,270,364 $ 1,162,973 $ 1,131,186 $ 1,206,302 Money market and interest checking 1,020,838 960,342 875,654 709,136 613,871 571,538 Money market savings 1,618,550 1,738,336 1,912,875 1,692,870 1,524,107 1,487,758 Savings accounts 1,019,068 772,194 563,932 434,484 417,276 433,559 Savings certificates 1,981,823 2,364,320 2,967,714 3,597,228 2,909,487 2,482,965 Large denomination certificates 318,659 272,693 268,713 727,160 1,125,161 967,397 Foreign 236,765 200,440 26,919 38,271 179,058 191,961 Total deposits 7,746,605 7,732,585 7,886,171 8,362,122 7,900,146 7,341,480 Federal funds and repurchase agreements 1,677,884 2,043,207 1,793,836 1,755,343 2,764,929 2,332,701 Other short-term borrowings 477,424 482,405 292,210 233,945 404,033 555,905 Long-term borrowings 254,917 286,809 298,475 317,799 353,452 320,302 Other liabilities 265,899 183,284 129,231 114,607 171,749 182,855 Preferred stock 24,657 Common stockholders' equity 1,045,899 889,161 767,963 749,907 754,770 709,115 Total liabilities and stockholders' equity $11,468,628 $11,617,451 $11,167,886 $11,533,723 $12,349,079 $11,467,015 AVERAGE YIELDS (TAXABLE EQUIVALENT BASIS): Interest bearing deposits with other banks 4.52% 4.58% 4.17% 6.28% 8.35% 9.28% Federal funds and resale agreements 4.50 3.08 3.59 5.80 8.25 9.50 Trading account securities 7.48 6.46 7.05 8.41 8.55 8.42 Credit card loans held for securitization 9.48 9.21 17.14 16.70 Loans held for sale 6.39 6.81 7.16 7.28 8.44 6.35 Securities available for sale 5.41 5.71 7.30 8.92 9.25 10.00 Investment securities-taxable 6.58 5.76 6.19 7.30 9.48 9.57 Investment securities-nontaxable 12.12 11.77 11.71 11.56 11.36 11.33 Loans 9.17 8.97 9.08 10.25 11.99 12.51 Interest income to average earning assets 8.08 7.77 7.73 9.35 11.04 11.54 AVERAGE RATES: Total interest bearing deposits 3.02 2.67 3.49 5.88 7.38 7.63 Federal funds and repurchase agreements 3.87 3.13 3.65 5.93 8.08 8.75 Other short-term borrowings 5.64 5.29 5.44 6.11 7.82 9.05 Long-term borrowings 6.46 5.82 6.51 7.57 8.74 9.24 Total borrowed funds 3.45 3.01 3.68 5.95 7.63 8.05 Interest expense to average earning assets 2.92 2.60 3.26 5.37 6.91 7.15 Net yield margin 5.16 5.17 4.47 3.98 4.13 4.39
Signet Banking Corporation and Subsidiaries Selected Financial Data (continued)
(dollars in thousands-except per share) 1994 1993 1992 1991 1990 1989 SUMMARY OF OPERATIONS Interest income: Loans, including fees $582,761 $552,071 $503,402 $613,601 $ 855,644 $ 854,890 Investment securities-taxable 4,395 93,538 111,550 39,335 264,176 237,802 Investment securities-nontaxable 15,843 21,390 24,082 24,996 28,566 29,544 Other earning assets 204,014 136,726 128,228 285,654 81,226 64,684 Total interest income 807,013 803,725 767,262 963,586 1,229,612 1,186,920 Interest expense: Deposits 187,130 168,197 230,776 423,210 499,752 468,028 Other borrowings 109,872 106,188 100,876 142,406 285,932 284,032 Total interest expense 297,002 274,385 331,652 565,616 785,684 752,060 Net interest income 510,011 529,340 435,610 397,970 443,928 434,860 Provision for loan losses 14,498 47,286 67,794 287,484 182,724 58,530 Net interest income after provision for loan losses 495,513 482,054 367,816 110,486 261,204 376,330 Credit card servicing income 337,284 153,018 101,185 62,664 12,435 138 Credit card service charges 73,321 63,222 31,553 42,276 59,574 55,109 Service charges on deposit accounts 66,141 64,471 66,971 62,924 57,799 52,328 Trust income 19,442 17,599 15,949 16,019 15,006 13,215 Gain on sale of credit card accounts 16,335 Other 68,436 62,808 65,330 64,654 43,757 38,685 Non-interest operating income 564,624 361,118 280,988 248,537 188,571 175,810 Securities gains (losses) 3,459 4,318 (7,447) 93,221 12,971 9,438 Total non-interest income 568,083 365,436 273,541 341,758 201,542 185,248 Non-interest expense: Salaries 257,297 212,665 186,600 177,626 174,517 169,480 Employee benefits 66,188 65,249 49,388 31,366 33,615 45,280 Credit card solicitation 100,886 55,815 23,133 14,648 21,382 14,527 Travel and communications 57,543 35,416 25,662 24,688 23,027 22,508 Supplies and equipment 54,862 40,550 32,536 36,660 45,061 43,394 Occupancy 47,059 40,192 38,899 39,231 37,388 33,310 Contract termination 49,000 Restructuring charge 43,212 Other 170,376 148,429 143,021 184,706 79,545 66,562 Non-interest expense 846,423 598,316 499,239 508,925 414,535 395,061 Income (loss) before income taxes (benefit) 217,173 249,174 142,118 (56,681) 48,211 166,517 Applicable income taxes (benefit) 67,339 74,760 32,918 (30,934) 6,833 43,197 Net income (loss) $149,834 $174,414 $109,200 $ (25,747) $ 41,378 $ 123,320 OPERATING RATIOS Net income to: Average common stockholders' equity 14.33% 19.62% 14.22% N/M 5.48% 17.12% Average assets 1.31 1.50 .98 N/M .34 1.08 Net yield margin 5.16 5.17 4.47 3.98% 4.13 4.39 Net loan losses to average loans .71 .91 2.34 2.03 1.51 .74 At year-end: Allowance for loan losses to loans 2.78 4.01 4.57 5.60 2.54 1.30 Allowance for loan losses to non-performing loans 846.32 342.63 228.25 156.84 117.15 116.53 Common equity to assets 8.60 8.14 6.84 6.33 6.46 6.02 COMMON SHARES Outstanding at year-end 58,477,850 56,608,578 27,980,824 27,017,550 26,614,593 26,672,896 Average (includes common stock equivalents)* 57,862,927 56,920,090 55,727,358 53,994,340 53,026,764 53,372,898 PER COMMON SHARE* Book value at year-end $ 18.96 $ 17.04 $ 14.77 $ 13.17 $ 13.83 $ 14.07 Market price range 43 7/8-27 1/4 36 7/8-21 1/2 23 3/8-10 7/8 12 5/16-3 5/8 16 11/16-4 1/16 21 5/8-14 3/8 Earnings (loss) 2.59 3.06 1.96 (.48) .78 2.27 Cash dividends declared 1.00 .80 .45 .30 .78 .76
* The per common share and average common shares outstanding data above reflect a two-for-one common stock split in the form of a dividend which was declared on June 23, 1993 to shareholders of record July 6, 1993 and distributed July 27, 1993. Signet Banking Corporation and Subsidiaries Consolidating Balance Sheet December 31, 1994
Signet Banking Signet Signet Capital One Signet (in thousands) Corporation Bank/ Bank/ Signet Financial Banking (unaudited) (Parent Virginia Maryland Bank Corporation Other Corporation Company) Consolidated Consolidated N.A. Consolidated(a) Subsidiaries Eliminations Consolidated ASSETS Cash and due from banks $ 219 $ 348,316 $ 223,204 $ 35,531 $ 93,880 $ 8,143 $ (177,546) $ 531,747 Interest bearing deposits with other banks 110,000 230,515 13,000 2,280 355,795 Fed funds sold and resale agreements 835,821 300,000 1,135,821 Trading account securities 353,040 353,040 Loans held for sale 67,700 1,806 69,506 Securities available for sale 17,795 763,673 323,444 37,625 99,070 89 1,241,696 Investment securities 101,380 452,432 195,472 397,387 13,500 1,578 (762,966) 398,783 Loans 106,770 3,190,950 2,515,442 120,583 2,228,455 (149,300) 8,012,900 Less: Unearned income (139) (827) (87,757) (88,723) Allowance for loan losses (85,624) (60,211) (6,168) (68,516) (220,519) Net loans 106,631 3,104,499 2,367,474 114,415 2,159,939 (149,300) 7,703,658 Premises and equipment 115,732 35,201 4,300 99,684 3,798 258,715 Other assets 1,141,741 486,919 68,129 30,206 293,473 13,014 (1,151,014) 882,468 $1,477,766 $6,758,647 $3,212,924 $619,464 $3,072,546 $30,708 $(2,240,826) $12,931,229 LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest bearing deposits $ 918,725 $ 640,389 $156,134 $ 4,647 $ (177,546) $ 1,542,349 Interest bearing deposits 3,945,528 1,606,269 278,166 474,201 (25,000) 6,279,164 Total deposits 4,864,253 2,246,658 434,300 478,848 (202,546) 7,821,513 Other short-term borrowings $ 108,664 1,289,127 673,507 88,049 2,040,688 (887,265) 3,312,770 Long-term borrowings 250,000 3,602 39 253,641 Other liabilities 7,623 216,910 78,081 16,407 78,453 $ 3,087 31,265 431,826 Stockholders' equity 1,111,479 384,755 214,639 80,708 474,557 27,621 (1,182,280) 1,111,479 $1,477,766 $6,758,647 $3,212,924 $619,464 $3,072,546 $ 30,708 $(2,240,826) $12,931,229
Statement of Consolidating Income
Year ended December 31, 1994 (in thousands) (unaudited) Interest income $ 15,975 $ 588,973 $ 196,728 $ 33,470 $ 29,389 $ 208 $(57,730) $ 807,013 Interest expense 21,598 234,101 68,720 12,006 17,431 278 (57,132) 297,002 Net interest income (expense) (5,623) 354,872 128,008 21,464 11,958 (70) (598) 510,011 Provision for loan losses 12,948 2,196 (3,000) 2,354 14,498 Net interest income (expense) after provision for loan losses (5,623) 341,924 125,812 24,464 9,604 (70) (598) 495,513 Non-interest operating income 5,102 440,288 33,073 7,007 49,905 32,222 (2,973) 564,624 Securities gains (losses) 459 3,232 347 246 89 (914) 3,459 Non-interest expense 4,489 621,408 131,779 23,887 42,205 25,480 (2,825) 846,423 Income (loss) before income taxes (benefit) (4,551) 164,036 27,453 7,830 17,304 6,761 (1,660) 217,173 Applicable income taxes (benefit) (1,204) 48,759 7,336 4,025 6,232 2,579 (388) 67,339 Net income (loss) $ (3,347) $115,277 $ 20,117 $ 3,805 $ 11,072 $ 4,182 $(1,272)(b) $ 149,834
(a) The Capital One Financial Corporation Income Statement covers the time period from its inception (November 22, 1994) through December 31, 1994. (b) The $1,272 represents the minority interest in Capital One Financial Corporation's net income which is recorded in other non-interest expense in the eliminations column. EX-21 7 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF SIGNET BANKING CORPORATION December 31, 1994 Subsidiary Place of Incorporation Signet Bank/Virginia Virginia 800 Building Corporation Virginia Signet Mortgage Corporation Virginia Signet Second Mortgage Corporation Virginia Signet Bank (Bahamas), Ltd. Bahamas Second Eleutheran Investment Co., Ltd. Bahamas Signet Trust Company Virginia Signet Insurance Services, Inc. Virginia Signet Financial Services, Inc. Virginia Signet Commercial Credit Corporation Virginia Signet Strategic Capital Corporation Virginia General Finance Service Corporation Pennsylvania Elgin Corporation Virginia Signet Investment Banking Company Virginia Signet Bank/Maryland Maryland St. Paul Realty, Inc. Maryland Signet Equipment Company Maryland Wharton & Bennett, Inc. Maryland UTC Prop. No. 2, Inc. Maryland UTC Prop. No. 3, Inc. Maryland UTC Prop. No. 4, Inc. Maryland UTC Prop. No. 5, Inc. Maryland UTC Prop. No. 6, Inc. Maryland Landexco, Inc. Maryland Signet Leasing and Financial Corporation Maryland Signet Insurance Services Inc./Maryland Maryland Signet Realty, Inc. Maryland Signet Bank N.A. Washington, D.C. Signet Municipal LeaseCorp., Inc. Virginia The Budget Plan Company of Virginia Virginia Signet Lending Services, Inc. Tennessee DOPWO, Inc. Virginia NP Corporation Maryland NP No. 2 Corporation Maryland NP No. 3 Corporation Maryland NP No. 4 Corporation Maryland NP No. 5 Corporation Maryland NP No. 6 Corporation Maryland NP No. 7 Corporation Maryland NP No. 8 Corporation Maryland NP No. 9 Corporation Maryland NP No. 10 Corporation Maryland VMD Servicing Corporation Maryland MWG VII, Inc. Maryland FH Properties, No. 3, Inc. Virginia FH Properties, No. 4, Inc. Virginia FH Properties, No. 6, Inc. Virginia FH Properties, No. 7, Inc. Virginia FH Properties, No. 9, Inc. Virginia FH Properties, No. 10, Inc. Virginia FH Properties, No. 13, Inc. Virginia FH Properties, No. 15, Inc. Virginia RE IV, Inc. Maryland RE VIII, Inc. Maryland RE IX, Inc. Maryland RE X, Inc. Maryland RE XI, Inc. Maryland RE XV, Inc. Maryland SM II, Inc. Maryland SM III, Inc. Maryland SM IV, Inc. Maryland SM V, Inc. Maryland SM VI, Inc. Maryland SM VII, Inc. Maryland SM VIII, Inc. Maryland SM IX, Inc. Maryland SM X, Inc. Maryland SM XI, Inc. Maryland SM XII, Inc. Maryland SM XIII, Inc. Maryland SM XIV, Inc. Maryland SM XV, Inc. Maryland SM XVI, Inc. Maryland Signet Asset Management, Inc./Delaware Delaware Signet Banking Corporation/Delaware Delaware Signet Commercial Credit Corporation/Delaware Delaware Signet Credit Corporation/Delaware Delaware Signet Equipment Company/Delaware Delaware Signet Financial Corporation/Delaware Delaware Signet Insurance Services, Inc./Delaware Delaware Signet Investment Banking Corporation/Delaware Delaware Signet Investment Corporation/Delaware Delaware Signet Leasing & Financial Corporation/Delaware Delaware Signet Properties Company/Delaware Delaware Signet Services Corporation/Delaware Delaware Signet Venture Capital Corporation/Delaware Delaware Signet Asset Management, Inc. Maryland Pioneer Properties, Inc. Virginia Pioneer Asset Management Virginia Pioneer Mortgage Corporation Virginia Pioneer Development Corporation Virginia PFR Corporation Virginia Pioneer Properties I, Inc. Virginia Pioneer Properties II, Inc. Virginia Pioneer Properties III, Inc. Virginia Pioneer Capital I, Inc. Virginia Maxsel-PTNSP - 50% Virginia EX-23 8 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Signet Banking Corporation of our report dated January 24, 1995, except for note U, as to which the date is February 28, 1995, included in the 1994 Annual Report to Shareholders of Signet Banking Corporation. We also consent to the incorporation by reference in the following Registration Statements, or most recent post-effective amendments thereto, filed prior to March 20, 1995 of our report dated January 24, 1995 except for note U, as to which the date is February 28, 1995, with respect to the consolidated financial statements incorporated herein by reference: - Form S-8 (2-82600) - Form S-3 (33-4491) - Form S-8 (33-2498) - Form S-3 (33-21963) - Form S-8 (33-43190) - Form S-3 (33-28089) - Form S-8 (33-10637) - Form S-3 (2-92081) - Form S-8 (33-47591) - Form S-3 (33-54803) - Form S-8 (33-47590) - Form S-8 (33-57455) ERNST & YOUNG LLP Richmond, Virginia March 20, 1995 EX-27 9 EXHIBIT 27.1
9 1,000 YEAR DEC-31-1994 DEC-31-1994 531,747 355,795 1,135,821 353,040 69,506 398,783 399,666 8,012,900 220,519 12,931,229 7,821,513 3,312,770 431,826 253,641 293,184 0 0 818,295 12,931,229 582,761 20,238 204,014 807,013 187,130 297,002 510,011 14,498 3,459 846,423 217,173 217,173 0 0 149,834 2.59 2.59 5.16 25,056 65,333 1,000 0 253,313 74,533 28,783 220,519 188,666 0 31,853
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