-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MHUAjCVeJpqOi0rykP1wYMMu3sQsqkNsksfuHYLoSBqiuZzIhgDs0QgL9wq/waK3 8JnQVmFbGY5Wll1vxB+/NA== 0000916641-96-000636.txt : 19960809 0000916641-96-000636.hdr.sgml : 19960809 ACCESSION NUMBER: 0000916641-96-000636 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960808 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGNET BANKING CORP CENTRAL INDEX KEY: 0000009659 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 546037910 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06505 FILM NUMBER: 96605604 BUSINESS ADDRESS: STREET 1: 7 N EIGHTH ST STREET 2: PO BOX 25970 CITY: RICHMOND STATE: VA ZIP: 23260 BUSINESS PHONE: 8047472000 MAIL ADDRESS: STREET 1: 7 N EIGHTH ST STREET 2: PO BOX 25970 CITY: RICHMOND STATE: VA ZIP: 23260 FORMER COMPANY: FORMER CONFORMED NAME: BANK OF VIRGINIA CO DATE OF NAME CHANGE: 19860717 FORMER COMPANY: FORMER CONFORMED NAME: VIRGINIA COMMONWEALTH BANKSHARES INC DATE OF NAME CHANGE: 19721020 FORMER COMPANY: FORMER CONFORMED NAME: VIRGINIA COMMONWEALTH CORP DATE OF NAME CHANGE: 19701113 10-Q 1 SIGNET 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities Act of 1934 for the quarterly period ended June 30, 1996 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act for the transition period from _______ to _______. Commission file number 1-6505 SIGNET BANKING CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-6037910 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7 North Eighth Street, Richmond, Virginia 23219 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 804 747-2000 Not Applicable Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ----- Common Shares outstanding as of July 31, 1996 - 59,578,574 Index SIGNET BANKING CORPORATION AND SUBSIDIARIES June 30, 1996 Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheet 3 Statement of Consolidated Income 4 Statement of Consolidated Cash Flows 5 Statement of Changes in Consolidated Stockholders' Equity 6 Supplemental Notes to Quarterly Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings 24 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 6. Exhibits and Reports on Form 8-K 25 SIGNATURES 25 PART 1. FINANCIAL INFORMATION Signet Banking Corporation Item 1. Financial Statements Consolidated Balance Sheet (in thousands--except per share) (unaudited)
- ------------------------------------------------------------------------------------------------------- June 30 December 31 1996 1995 1995 - ------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 533,728 $ 529,205 $ 599,113 Interest bearing deposits with other banks 1,977 14,610 3,129 Federal funds sold and securities purchased under resale agreements 599,027 638,641 460,217 Trading account securities 546,756 439,737 478,723 Loans held for securitization 300,000 450,300 389,700 Loans held for sale 320,316 259,372 361,260 Securities available for sale 2,547,445 1,651,554 2,333,971 Investment securities 375,677 Loans: Consumer 2,016,363 2,116,882 1,751,274 Commercial 3,209,292 2,820,339 3,090,904 Real estate-construction 255,822 227,531 236,103 Real estate-commercial mortgage 332,856 433,701 366,698 Real estate-residential mortgage 258,996 224,433 122,584 - ----------------------------------------------------------------------------------------------------- Gross loans 6,073,329 5,822,886 5,567,563 Less: Unearned income (161,109) (138,459) (151,535) Allowance for loan losses (126,442) (136,497) (129,702) - ----------------------------------------------------------------------------------------------------- Net loans 5,785,778 5,547,930 5,286,326 Premises and equipment (net) 195,410 166,731 192,431 Interest receivable 116,767 90,190 104,437 Other assets 578,609 458,370 768,558 - ----------------------------------------------------------------------------------------------------- Total assets $11,525,813 $10,622,317 $10,977,865 - ----------------------------------------------------------------------------------------------------- Liabilities Non-interest bearing deposits $ 1,669,006 $ 1,647,309 $ 1,726,378 Interest bearing deposits: Interest bearing demand 2,530,148 2,358,788 2,441,125 Savings accounts 705,910 1,291,289 1,395,514 Savings certificates 2,290,154 1,809,051 1,850,397 Large denomination certificates 146,500 99,020 129,711 Foreign 138,168 96,084 49,846 - ----------------------------------------------------------------------------------------------------- Total interest bearing deposits 5,810,880 5,654,232 5,866,593 - ----------------------------------------------------------------------------------------------------- Total deposits 7,479,886 7,301,541 7,592,971 Securities sold under repurchase agreements 1,767,963 1,229,433 1,124,105 Federal funds purchased 948,969 816,946 780,193 Long-term borrowings 250,021 253,222 253,033 Interest payable 26,010 18,030 19,460 Other liabilities 190,616 185,140 344,154 - ----------------------------------------------------------------------------------------------------- Total liabilities 10,663,465 9,804,312 10,113,916 Stockholders' Equity Common stock, $5 par value; authorized 100,000,000 shares, issued and outstanding 59,563,853, 58,835,011 and 59,208,745 shares, respectively 297,819 294,175 296,044 Capital surplus 204,763 195,899 200,093 Retained earnings 359,766 327,931 367,812 - ----------------------------------------------------------------------------------------------------- Total stockholders' equity 862,348 818,005 863,949 - ----------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $11,525,813 $10,622,317 $10,977,865 - -----------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements Signet Banking Corporation Statement of Consolidated Income (in thousands--except per share) (unaudited)
- ------------------------------------------------------------------------------------------------------- Three Months Ended June 30 Six Months Ended June 30 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------- Interest income: Loans, including fees: Consumer $ 54,725 $ 62,068 $107,787 $179,702 Commercial 56,568 50,358 111,920 96,723 Real estate-construction 6,064 5,628 12,126 10,780 Real estate-commercial mortgage 7,710 11,276 15,860 23,407 Real estate-residential mortgage 4,176 5,074 7,380 9,353 - ----------------------------------------------------------------------------------------------------- Total loans, including fees 129,243 134,404 255,073 319,965 Interest bearing deposits with other banks 43 358 197 1,796 Federal funds sold and resale agreements 9,543 8,232 17,731 23,541 Trading account securities 7,865 8,936 15,987 15,654 Loans held for securitization 5,992 6,420 13,411 10,625 Loans held for sale 9,579 5,858 19,665 7,337 Securities available for sale 43,961 31,342 85,744 59,079 Investment securities-taxable 4,257 8,203 Investment securities-nontaxable 2,928 6,067 - ----------------------------------------------------------------------------------------------------- Total interest income 206,226 202,735 407,808 452,267 Interest expense: Interest bearing demand 18,209 18,643 36,289 36,742 Savings accounts 7,530 11,800 19,025 22,527 Savings certificates 25,395 20,747 47,930 37,894 Large denomination certificates 1,731 1,186 3,256 8,886 Foreign 2,415 2,235 3,694 3,488 - ----------------------------------------------------------------------------------------------------- Total interest on deposits 55,280 54,611 110,194 109,537 Securities sold under repurchase agreements 17,084 13,880 31,595 25,707 Federal funds purchased 12,693 12,266 24,502 24,137 Other short-term borrowings 413 15,302 Long-term borrowings 3,796 4,119 7,910 16,889 - ----------------------------------------------------------------------------------------------------- Total interest expense 88,853 85,289 174,201 191,572 - ----------------------------------------------------------------------------------------------------- Net interest income 117,373 117,446 233,607 260,695 Provision for loan losses 13,794 4,250 25,051 11,430 - ----------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 103,579 113,196 208,556 249,265 Non-interest income: Service charges on deposit accounts 17,100 17,212 33,331 33,683 Consumer loan servicing and service charge income 15,276 1,633 27,432 85,410 Trust and other financial services income 10,108 7,104 19,713 14,445 Other 21,223 16,743 40,6552 9,912 - ----------------------------------------------------------------------------------------------------- Non-interest operating income 63,707 42,692 121,131 163,450 Securities available for sale gains 164 244 756 346 Investment securities gains 3 258 - ----------------------------------------------------------------------------------------------------- Total non-interest income 63,871 42,939 121,887 164,054 Non-interest expense: Salaries 52,302 43,668 101,002 101,369 Employee benefits 10,466 12,076 22,867 30,417 Occupancy 9,520 9,434 19,714 21,388 Supplies and equipment 9,985 8,715 19,590 23,241 External data processing services 8,333 6,748 15,479 15,794 Travel and communications 6,706 5,604 12,626 18,757 Credit card solicitation 29,050 Other 24,199 25,199 45,848 62,354 - ----------------------------------------------------------------------------------------------------- Total non-interest expense 121,511 111,444 237,126 302,370 - ----------------------------------------------------------------------------------------------------- Income before income taxes (Capital One Financial Corporation amounted to $0, $0, $0 and $27,407, respectively) 45,939 44,691 93,317 110,949 Applicable income taxes 15,458 15,005 31,641 39,038 - ----------------------------------------------------------------------------------------------------- Net income $ 30,481 $ 29,686 $ 61,676 $ 71,911 - ----------------------------------------------------------------------------------------------------- Earnings per common share $ 0.50 $ 0.50 $ 1.02 $ 1.21 Cash dividends declared per share 0.20 0.17 0.40 0.42 Average common shares outstanding 60,502 59,760 60,429 59,462 - -----------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements Signet Banking Corporation and Subsidiaries Statement of Consolidated Cash Flows (in thousands)(unaudited)
- ----------------------------------------------------------------------------------------------------- Six months ended June 30 1996 1995 - ----------------------------------------------------------------------------------------------------- Operating Activities Net income $ 61,676 $ 71,911 Adjustments to reconcile net income to net cash (used) provided by operating activities: Provision for loan losses 25,051 11,430 Provision and writedowns on foreclosed property 86 1,924 Depreciation and amortization 20,003 17,417 Investment securities gains (258) Securities available for sale gains (756) (346) (Increase) decrease in interest receivable (12,330) 8,367 Decrease (increase) in other assets 179,700 (304,084) Increase in interest payable 6,550 8,369 Decrease in other liabilities (192,792) (13,659) Proceeds from securitization of credit card loans 90,000 Proceeds from sales of loans held for sale 16,175,617 17,543,403 Purchases and originations of loans held for sale (16,103,597) (17,733,269) Proceeds from sales of trading account securities 8,405,720 8,348,697 Purchases of trading account securities (8,473,753) (8,435,394) - ----------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 181,175 (475,492) Investing Activities Proceeds from maturities of investment securities 35,748 Purchases of investment securities (25,511) Proceeds from sales of securities available for sale 812,459 489,794 Proceeds from maturities of securities available for sale 275,049 460,980 Purchases of securities available for sale (1,303,843) (1,711,711) Net increase in loans (558,069) (851,348) Recoveries of loans previously charged-off 2,190 6,791 Purchases of premises and equipment (15,909) (33,913) - ----------------------------------------------------------------------------------------------------- Net cash used by investing activities (788,123) (1,629,170) Financing Activities Net (decrease) increase in deposits (113,085) 102,926 Net increase (decrease) in short-term borrowings 812,634 (200,288) Increase in Capital One Financial Corporation long-term debt prior to spin-off 1,388,153 Net decrease in other long-term debt (3,012) (419) Net issuance (purchase) of common stock 6,445 (1,979) Payment of cash dividends (23,761) (24,638) - ----------------------------------------------------------------------------------------------------- Net cash provided by financing activities 679,221 1,263,755 - ----------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 72,273 (840,907) Cash and cash equivalents at beginning of period 1,062,459 2,023,363 - ----------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 1,134,732 $ 1,182,456 - ----------------------------------------------------------------------------------------------------- Supplemental disclosures Interest paid $ 167,652 $ 204,620 Income taxes paid 9,697 20,710 Transfer of loans to foreclosed property 6,100 214 Transfer of loans to loans held for securitization 450,000 - -----------------------------------------------------------------------------------------------------
See notes to consolidated financial statements Signet Banking Corporation Statement of Changes in Consolidated Stockholders' Equity (in thousands) (unaudited)
- ----------------------------------------------------------------------------------------------------- Common Capital Retained Stock Surplus Earnings - ----------------------------------------------------------------------------------------------------- Six Months Ended June 30, 1996 Balance at beginning of period $296,044 $200,093 $367,812 Net income 61,676 Issuance of Common Stock 1,775 4,670 Cash dividends (23,761) Net unrealized losses on securities available for sale, net of tax benefit of $24,748 (45,961) - ----------------------------------------------------------------------------------------------------- Balance at end of period $297,819 $204,763 $359,766 - ----------------------------------------------------------------------------------------------------- Six Months Ended June 30, 1995 Balance at beginning of period $ 293,184 $ 198,869 $ 619,426 Net income 71,911 Issuance of Common Stock 2,283 4,237 Purchase of Common Stock (1,292) (7,207) Cash dividends (24,638) Spin-off of Capital One Financial Corporation (383,200) Net unrealized gains on securities available for sale, net of tax of $23,925 44,432 - ----------------------------------------------------------------------------------------------------- Balance at end of period $ 294,175 $ 195,899 $ 327,931 - -----------------------------------------------------------------------------------------------------
Supplemental Notes to Quarterly Financial Statements (dollars in thousands) (unaudited) General The accompanying financial statements (unaudited) reflect all adjustments which are, in the opinion of management, necessary for a fair presentation. All such adjustments are of a normal recurring nature. The financial statements have been prepared based on the accounting policies as described in the 1995 annual report and as noted below, except certain amounts which have been reclassified for prior periods to conform to the 1996 presentation format. Statement of Consolidated Cash Flows Cash and cash equivalents, as presented in this statement, includes cash and due from banks, interest bearing deposits with other banks and federal funds sold and securities purchased under resale agreements. A significant noncash transaction in the first six months of 1995 included a transfer of $3,639,288 of assets (primarily $2,538,554 of loans), $3,256,088 of liabilities (primarily $1,388,153 related to long-term borrowings) and a decrease in retained earnings of $383,200 related to the spin-off of Capital One. Securities Available for Sale Securities available for sale are summarized as follows:
June 30, 1996 June 30, 1995 December 31, 1995 Fair Fair Fair Cost Value Cost Value Cost Value - ----------------------------------------------------------------------------------------------------- U.S. Government and agency obligations - Mortgage-backed securities $1,896,047 $1,890,831 $1,085,645 $1,121,329 $1,478,517 $1,530,818 Other 452,014 456,124 413,888 422,333 562,815 583,275 States and political subdivisions 33,774 34,702 111 119 53,031 54,696 Other 170,324 165,788 119,794 107,773 173,137 165,182 - ----------------------------------------------------------------------------------------------------- Total $2,552,159 $2,547,445 $1,619,438 $1,651,554 $2,267,500 $2,333,971 - -----------------------------------------------------------------------------------------------------
Investment Securities The Company reclassified all of its investment securities to available for sale in December 1995 as allowed by implementation guidance for Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Income Taxes Differences between the effective rate of income taxes and the statutory rate arise principally from non-taxable interest on investments and loans. Net Unrealized Gains (Losses) on Securities Available-for-Sale, Net of Tax - -------------------------------------------------------------------------------- Six Months Ended June 30 1996 1995 - -------------------------------------------------------------------------------- Balance at beginning of period $ 45,202 $(21,790) First Quarter (31,940) 20,386 Second Quarter (14,021) 24,046 - -------------------------------------------------------------------------------- Total change (45,961) 44,432 - -------------------------------------------------------------------------------- Balance at end of period $ (759) $ 22,642 - -------------------------------------------------------------------------------- Securitizations The Company securitized $90,000 of credit card receivables in February, 1996 and $185,000 in September, 1995. These transactions were recorded as sales in accordance with SFAS No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse." Proceeds from these sales in 1996 and 1995 totaled $90,000 and $184,900, respectively. Receivables outstanding under credit card securitizations were $275,000 at June 30, 1996. Recourse obligations related to these transactions are not material. Excess servicing fees related to the credit card securitizations are recorded over the life of each sale transaction. The excess servicing fee is based upon the difference between finance charges received from the cardholders less the yield paid to investors, credit losses, and a normal servicing fee, which is also retained by the Company. In accordance with the sale agreements, a fixed amount of excess servicing fees may be set aside to absorb credit losses. The amount available to absorb credit losses was zero at June 30, 1996. In December, 1995, the Company also securitized $480,702 of home equity lines of credit. This transaction was also recorded as a sale in accordance with SFAS No. 77. Proceeds from the sale totaled $478,794. Receivables outstanding under this securitization were $438,368 at June 30, 1996. Recourse obligations related to this transaction are not material. A gain, equal to the present value of anticipated future net cash flows, net of transaction expenses and any unamortized deferred loan origination costs, of $9,562 was recorded as a result of the sale. Gains resulting from ongoing sales of receivables are recorded over the life of the transaction. In accordance with the sale agreement, a fixed amount of excess servicing fees is set aside to absorb credit losses. The amount available to absorb credit losses at June 30, 1996 was $5,288. Recent Accounting Statements The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," on January 1, 1996. The Statement requires that long-lived assets and certain identifiable intangibles to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In determining the recoverability of an asset, the enterprise should estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted cash flows is less than the carrying amount of the asset, an impairment loss would be recognized. The Statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less selling costs. Adoption of the Statement did not have a material impact on the Company's financial position or results of operations. In June 1996, the Financial Accounting Standards Board issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The statement provides accounting for transfers and servicing of financial assets and extinguishment of liabilities. In accordance with the statement, an entity recognizes the financial assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The statement also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of transfer. Servicing assets and liabilities would subsequently be measured by (a) amortization in proportion to and over the period of estimated net servicing income or loss and (b) assessment for asset impairment or increased obligation based on their fair values. The statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. The Company is currently in the process of assessing the impact of adopting SFAS 125. Commercial Fraud Loss On March 19, 1996, subsequent to the announcement of 1995 earnings, Signet's management discovered the Company was one of several major financial institutions that were victims of fraudulent commercial loan transactions which occurred prior to 1996. After taking into account sales of interests in and repayments of such loans, the Company had loan outstandings related to these transactions of approximately $81 million. Federal authorities informed the Company that they believe there will be substantial recoveries of assets related to these transactions. Management recorded a $35 million commercial fraud loss in non-interest expense at December 31, 1995 and recorded the estimated probable recovery amount of $46 million in other assets as a receivable. The receivable represents an amount that management believes is likely to be recovered based on current facts and circumstances. The amount of the recovery was based on the Company's pro-rata share of known claims to the total amount currently restrained by federal authorities, less associated costs. The restrained assets were turned over to a trustee. The recovery amount is subject to change, even in the near term, as additional assets are recovered, additional claims are asserted or the market value of the restrained assets fluctuates. Management continues to believe the $35 million charge to 1995 earnings is adequate to cover estimated losses related to these fraudulent transactions based on currently available information, but is unable to predict the timing of the recovery. The Company will vigorously pursue all other sources of recovery, but currently is unable to determine the probability or amount of additional recoveries. Capital One Financial Corporation ("Capital One") On February 28, 1995, Signet distributed to Signet stockholders in a tax free distribution all of the common stock it held in Capital One. Included in Signet's six months ended June 30, 1995 non-interest expense is $2,018 of minority interest in Capital One's earnings. Capital One's results of operations and financial position are excluded from the Company for periods subsequent to February 28,1995. Capital One summary financial data follows: Two Months Ended February 28, 1995 - --------------------------------------------------------------------------- Net interest income $25,167 Provision for loan losses 3,929 - --------------------------------------------------------------------------- Net interest income after provision for loan losses 21,238 Non-interest income 87,679 Non-interest expense 81,510 - --------------------------------------------------------------------------- Income before income taxes 27,407 Applicable income taxes 9,870 - --------------------------------------------------------------------------- Net income $17,537 Signet Banking Corporation and Subsidiaries Financial Highlights (dollars in thousands--except per share) Signet Banking Corporation (Signet) completed the spin-off of its subsidiary, Capital One Financial Corporation on February 28, 1995. Due to the significance of the spin-off, pro forma financial information for the first six months of 1995 is provided below to illustrate Signet's financial results and other data assuming the spin-off had occurred prior to January 1, 1995.
- ----------------------------------------------------------------------------------------------------- Consolidated Consolidated Pro Forma Consolidated Three Months Ended Six Months Ended Six Months Ended June 30 Percent June 30 Percent June 30 1996 1995 Change 1996 1995 Change 1995 - ----------------------------------------------------------------------------------------------------- Earnings Net interest income (taxable equivalent) $ 119,122 $ 120,401 (1.1)% $ 237,500 $ 241,745 (1.8)% $ 266,912 Net interest income 117,373 117,446 (0.1) 233,607 235,528 (0.8) 260,695 Net income 30,481 29,686 2.7 61,676 56,392 9.4 71,911 - ----------------------------------------------------------------------------------------------------- Per Common Share Net income $ 0.50 $ 0.50 -- $ 1.02 $ 0.95 7.4 $ 1.21 Cash dividends declared 0.20 0.17 17.6 0.40 -- -- 0.42 Book value 14.48 13.90 4.2 Period-end price 23.25 21.88 6.3 - ----------------------------------------------------------------------------------------------------- Average Daily Balance Assets $11,346,682 $10,486,466 8.2 $11,207,156 $10,341,511 8.4 $11,404,229 Earning assets 10,075,496 9,395,228 7.2 9,890,747 9,240,876 7.0 10,193,024 Loans (net of unearned income) 5,814,446 5,836,803 (0.4) 5,690,458 5,819,367 (2.2) 6,535,555 Managed loan portfolio 6,840,564 5,965,322 14.7 6,725,763 5,804,252 15.9 8,384,076 Deposits 7,525,462 7,248,162 3.8 7,538,362 7,259,866 3.8 7,432,448 Core deposits 7,219,199 7,008,673 3.0 7,282,917 7,036,233 3.5 7,024,484 Common stockholders' equity 847,007 793,728 6.7 853,198 774,618 10.1 897,175 Common shares outstanding 60,502,076 59,760,041 1.2 60,429,366 59,461,721 1.6 59,461,721 - ----------------------------------------------------------------------------------------------------- Ratios - ----------------------------------------------------------------------------------------------------- Return on average assets 1.08% 1.14% (5.3) 1.11% 1.10% 0.9 1.27% Return on average common stockholders' equity 14.47 15.00 (3.5) 14.54 14.68 (1.0) 16.16 Net yield margin 4.75 5.14 (7.6) 4.83 5.28 (8.5) 5.28 Allowance for loan losses to: Non-performing loans 371.73 297.24 25.1 Non-performing assets 230.46 237.60 (3.0) Net loans 2.14 2.40 (10.8) Non-performing assets to loans and foreclosed properties 0.92 1.01 (8.9) Stockholders' equity to assets 7.48 7.70 (2.9) - ----------------------------------------------------------------------------------------------------- At Period-end Assets $11,525,813 $10,622,317 8.5 Earning assets 10,227,741 9,514,318 7.5 Loans (net of unearned income) 5,912,220 5,684,427 4.0 Managed loan portfolio 6,925,588 6,107,340 13.4 Deposits 7,479,886 7,301,541 2.4 Core deposits 7,195,218 7,106,437 1.2 Common stockholders' equity 862,348 818,005 5.4 Non-performing assets 54,864 57,447 (4.5) Number of common stockholders 15,137 15,259 (0.8) Full-time employees 4,221 3,743 12.8 Part-time employees 1,003 1,133 (11.5) - -----------------------------------------------------------------------------------------------------
Note: The common stock of Signet Banking Corporation is traded on the New York Stock Exchange under the symbol "SBK." Table 1 Signet Banking Corporation Selected Quarterly Financial Information
- -------------------------------------------------------------------------------------------------------------- 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1996 1996 1995 1995 1995 - -------------------------------------------------------------------------------------------------------------- Summary of Operations (dollars in thousands--except per share) Net interest income (taxable equivalent) $119,122 $118,378 $117,443 $119,482 $120,401 Less: taxable equivalent adjustment 1,749 2,144 1,848 2,538 2,955 - -------------------------------------------------------------------------------------------------------------- Net interest income 117,373 116,234 115,595 116,944 117,446 Provision for loan losses 13,794 11,257 18,604 8,681 4,250 - -------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 103,579 104,977 96,991 108,263 113,196 Non-interest income 63,871 58,016 68,120 47,094 42,939 - -------------------------------------------------------------------------------------------------------------- Non-interest expense (1) 121,511 115,615 152,191 109,507 111,444 - -------------------------------------------------------------------------------------------------------------- Income before income taxes 45,939 47,378 12,920 45,850 44,691 Applicable income taxes 15,458 16,183 3,894 15,707 15,005 - -------------------------------------------------------------------------------------------------------------- Net income $ 30,481 $ 31,195 $ 9,026 $ 30,143 $ 29,686 Net income excluding commercial fraud loss $ 30,481 $ 31,195 $ 31,776 $ 30,143 $ 29,686 - -------------------------------------------------------------------------------------------------------------- Per common share: Net income (1) $ 0.50 $ 0.52 $ 0.15 $ 0.50 $ 0.50 Net income excluding commercial fraud loss 0.50 0.52 0.53 0.50 0.50 Cash dividends declared 0.20 0.20 0.20 0.17 0.17 Book value 14.48 14.39 14.59 14.27 13.90 Average common shares outstanding 60,502,076 60,356,655 60,230,489 60,145,919 59,760,041 Selected Average Balances (dollars in millions) Assets $ 11,347 $ 11,068 $ 10,982 $ 10,756 $ 10,486 Earning assets 10,075 9,706 9,745 9,555 9,395 Loans (net of unearned income) 5,814 5,566 5,598 5,825 5,837 Managed loan portfolio 6,841 6,611 6,482 6,234 5,965 Deposits 7,525 7,551 7,346 7,260 7,248 Core deposits 7,219 7,347 7,164 7,043 7,009 Interest bearing liabilities 8,694 8,336 8,353 8,158 7,985 Stockholders' equity 847 859 856 824 794 Ratios Return on average assets (2) 1.08% 1.13% 0.33% 1.11% 1.14% Return on average common stockholders' equity (2) 14.47 14.60 4.18 14.51 15.00 Efficiency ratio (excluding foreclosed prop. exp.) (3) 66.16 66.23 63.47 65.99 68.67 Net interest spread 4.19 4.32 4.16 4.32 4.50 Net yield margin 4.75 4.91 4.78 4.96 5.14 Stockholders' equity to assets 7.48 7.19 7.87 7.59 7.70 Credit Quality Data Non-performing assets $ 54,864 $ 47,203 $ 54,303 $ 51,504 $ 57,447 Net charge-offs (4) 13,785 14,526 15,622 12,965 18,593 Allowance for loan losses to: Non-performing loans 371.73% 395.64% 337.05% 339.92% 297.24% Non-performing assets 230.46 267.85 238.85 251.77 237.60 Net loans 2.14 2.18 2.39 2.35 2.40 Non-performing assets to loans and foreclosed properties 0.92 0.81 1.00 0.93 1.01 Net loan losses to average loans 0.95 1.04 1.12 0.89 1.27 - --------------------------------------------------------------------------------------------------------------
(1) The fourth quarter of 1995 included a $35.0 million commercial fraud loss. (2) The fourth quarter 1995 return on average assets and return on average stockholders equity excluding the $35.0 million commercial fraud loss were 1.15% and 14.72%, respectively. (3) The fourth quarter 1995 efficiency ratio excludes the $35.0 million commercial fraud loss. (4) The second quarter of 1995 included approximately $13.9 million of charge-offs related to the sale of approximately $55.0 million of real estate related loans for which there was sufficient allowance. Table 2 Signet Banking Corporation Net Interest Income Analysis Taxable Equivalent Basis (in thousands)
- --------------------------------------------------------------------------------------------------------------------------- Second Quarter 1996 Compared Second Quarter 1996 Compared YTD June 30, 1996 Compared with Second Quarter 1995 with First Quarter 1996 with YTD June 30, 1995 - --------------------------------------------------------------------------------------------------------------------------- Increase Change due to * Increase Change due to * Increase Change due to * (Decrease) Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume - --------------------------------------------------------------------------------------------------------------------------- Interest income: Loans, including fees $(5,188) $ (4,985) $ (203) $3,114 $(2,450) $5,564 $(64,804) $(16,059) $(48,745) Securities available for sale 12,903 204 12,699 2,082 770 1,312 27,293 643 26,650 Investment securities (8,648) 0 (8,648) 0 0 0 (17,310) 0 (17,310) Other earning assets 3,218 (7,141) 10,359 (947) (1,298) 351 8,038 (3,700) 11,738 - --------------------------------------------------------------------------------------------------------------------------- Total interest income 2,285 (19,037) 21,322 4,249 (3,383) 7,632 (46,783) (26,473) (20,310) Interest expense: Interest bearing deposits 669 (1,965) 2,634 366 (343) 709 657 734 (77) Fed funds and repurchase agreements 3,631 (5,855) 9,486 3,457 42 3,415 6,253 (3,386) 9,639 Other short-term borrowings (413) 0 (413) 0 0 0 (15,302) 0 (15,302) Long-term borrowings (323) (306) (17) (318) (279) (39) (8,979) (987) (7,992) - --------------------------------------------------------------------------------------------------------------------------- Total interest expense 3,564 (6,613) 10,177 3,505 (191) 3,696 (17,371) (9,641) (7,730) Net interest income $(1,279) $(14,189) $12,910 $ 744 $(3,816) $4,560 $(29,412) $(17,362) $(12,050) - ---------------------------------------------------------------------------------------------------------------------------
* The change in interest due to both volume and rates has been allocated in proportion to the relationship of the absolute dollar amountof the changes in each. The changes in income and expense are calculated independently for each line in the schedule. The totals for the volume and rate columns are not the sum of the individual lines. Signet Banking Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------------- Introduction Signet Banking Corporation ("Signet" or "the Company"), with headquarters in Richmond, Virginia, is a registered multi-state bank holding company whose stock is listed on the New York Stock Exchange under the symbol SBK. At June 30, 1996, Signet had assets of approximately $11.5 billion and provided interstate financial services through its principal subsidiary, Signet Bank, a Virginia banking corporation headquartered in Richmond, Virginia. Signet Bank was formed by the merger of Signet Bank/Virginia and Signet Bank/Maryland in 1995. In 1996, Signet Bank N.A. also merged into Signet Bank. Signet engages in general commercial and consumer banking businesses and provides a full range of financial services to individuals, businesses and organizations through 241 banking offices, 252 automated teller machines and a 24-hour full-service Telephone Banking Center. Signet offers investment services including municipal bond, government, federal agency and money market sales and trading, foreign exchange trading, mutual funds and discount brokerage. In addition, specialized services for trust, leasing, asset based lending, cash management, real estate, insurance, consumer financing and trade finance are offered. Signet's primary market area extends from Baltimore to Washington, south to Richmond, and on to Hampton Roads/Tidewater, Virginia. The Company markets several of its products nationally. On March 19, 1996, subsequent to the announcement of 1995 earnings, Signet's management discovered the Company was one of several major financial institutions that were victims of fraudulent commercial loan transactions which occurred prior to 1996. The Company had loan outstandings related to these transactions of approximately $81 million. Federal authorities informed the Company that they believe there will be substantial recoveries of assets related to these transactions. Management recorded a $35 million commercial fraud loss in non-interest expense at December 31, 1995 ("the fraud loss") and recorded the estimated probable recovery amount of $46 million in other assets as a receivable. The receivable represents an amount management believes is likely to be recovered based on current facts and circumstances. The amount of the recovery was based on the Company's pro-rata share of known claims to the total amount currently restrained by federal authorities, less associated costs. The restrained assets were turned over to a trustee. The recovery amount is subject to change, even in the near term, as additional assets are recovered, additional claims are asserted or the market value of the restrained assets fluctuates. Management continues to believe the $35 million charge to 1995 earnings is adequate to cover estimated losses related to these fraudulent transactions based on currently available information, but is unable to predict the timing of the recovery. The Company will vigorously pursue all other sources of recovery, but currently is unable to determine the probability or amount of additional recoveries. On February 28, 1995, Signet distributed all of the remaining Capital One Financial Corporation ("Capital One") common stock it held to Signet stockholders in a tax-free distribution (the "spin-off"). Related assets of $3.6 billion and equity of $0.4 billion were spun off at this time. The spin-off created two independent financial institutions, each possessing substantial financial and managerial strength and each pursuing separate long-term business strategies. In 1995, Signet began construction on a new operations center located close to Richmond, Virginia which will be completed in 1996 at a total cost of approximately $55 million, the majority of which has already been incurred. Occupancy will be completed during the third quarter of 1996. The following discussion should be read in conjunction with the accompanying financial statements, notes and other supplemental information contained in this document. Results of operations for the three and six months ended June 30, 1996 are not necessarily indicative of results to be attained for any other period. In addition to the discussion of consolidated information, Signet Banking Corporation excluding Capital One ("pro forma") data is provided for the same periods where it was meaningful to discuss the Company's results excluding Capital One. Consolidated and pro forma results are the same for time periods subsequent to February 28, 1995, the date of the spin-off. Earnings Analysis Signet reported consolidated net income for the 1996 second quarter of $30.5 million, or $.50 per share, compared with $29.7 million, or $.50 per share, in the second quarter of 1995. Net income for the first six months of 1996 was $61.7 million, or $1.02 per share, compared with $71.9 million, or $1.21 per share, for the same period last year. Consolidated earnings for the first six months of 1995 included the results of Capital One for the two months prior to the spin-off on February 28, 1995. The first six months' 1996 net income increased 9% from $56.4 million, or $.95 per share, in the first six months of 1995, on a pro forma basis. The 1996 performance reflected a 13% increase in total revenues (net interest income and non-interest income) for the quarter compared with pro forma results for the 1995 first six months. The return on assets ("ROA") for the quarter and six months ended June 30, 1996 was 1.08% and 1.11%, respectively. This compares with 1.14% and 1.27% for the comparable periods last year. The ROA for the first six months of 1996 was up slightly from the 1.10% reported for the first half of 1995, on a pro forma basis. The return on equity ("ROE") for the quarter and six months ended June 30, 1996 was 14.47% and 14.54%, respectively. This compares with 15.00% and 16.16% for the comparable periods last year. The ROE for the first six months of 1996 was down slightly from 14.68% for the first half of 1995, on a pro forma basis, as the average equity grew at a faster rate than income. Net Interest Income Taxable equivalent net interest income, a primary contributor to earnings, totaled $119.1 million for the 1996 second quarter and $237.5 million for the six months ended June 30, 1996. The net interest income in the second quarter of 1996 was relatively flat compared with the $120.4 million reported in the second quarter of 1995. On a pro forma basis, taxable equivalent net interest income amounted to $241.7 million in the first half of 1995. The net yield margin for the second quarter of 1996 was 4.75%, a 16 basis point decline from the first quarter of 1996, primarily the result of a change in the yield and mix on earning assets. Table 3 analyzes the change in the net yield margin from the first to the second quarter of 1996. The second quarter 1996 net yield margin decreased 39 basis points from 5.14% in the second quarter of 1995. The decline in the net yield margin was principally the result of lower yields on earning assets partially offset by lower funding rates. The lower yield on earning assets from the same quarter last year was partly due to the securitization of higher yielding home equity line and credit card loans. The net interest spread of 4.19% for the second quarter of 1996 declined 13 basis points from the first quarter of 1996 and declined 31 basis points from the second quarter 1995 level of 4.50%. Signet uses various off-balance sheet interest rate derivatives as an integral part of its asset and liability management and trading activities. For Signet's core business, variable rate assets generally exceed variable rate liabilities. To manage the resulting interest rate risk, Signet enters into derivative transactions. Derivative contracts, used for interest rate risk management purposes, reduced interest on earning assets by $1.4 million, $1.8 million and $4.0 million and decreased borrowing costs by $3.9 million, $3.8 million and $5.3 million for the second quarter of 1996, first quarter of 1996 and second quarter of 1995, respectively. The overall increase in the net yield margin as a result of these instruments amounted to 10, 8 and 5 basis points for the same respective periods. Table 3 Signet Banking Corporation Analysis of Change in Net Yield Margin First Quarter 1996 Versus Second Quarter 1996 - ------------------------------------------------------ Net Yield Margin for First Quarter 1996 4.91% Higher average and lower yield on total on balance sheet consumer loans (0.11) Higher average and lower yield on Federal funds and resale agreements (0.05) Increase in derivative income 0.02 Other (net) -- primarily change in mix and yield on remaining earning assets (0.02) - ------------------------------------------------------ Net Yield Margin for Second Quarter 1996 4.75% - ------------------------------------------------------ Table 4 Signet Banking Corporation Statement of Changes in Allowances for Loan Losses (dollars in thousands)
- ----------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended Consolidated Pro Forma June 30 March 31 June 30 1996 1995 1996 1996 1995 1995 - ----------------------------------------------------------------------------------------------------- Balance at beginning of period $126,433 $151,729 $129,702 $129,702 $220,519 $152,003 Additions to allowance charged to expense 13,794 4,250 11,257 25,051 11,430 7,501 Transfer to loans held for securitization/sale (1) (889) (2,378) (1,639) Transfer to Capital One Financial Corporation (68,516) Loans charged off: Consumer (2) 12,656 5,744 11,281 23,937 14,864 9,766 Commercial (3) 55 1,413 2,881 2,936 1,841 1,841 Real estate-construction (3) 389 839 839 397 397 Real estate-mortgage (3) 2,186 13,343 603 2,789 14,247 14,247 - ----------------------------------------------------------------------------------------------------- Total loans charged off 14,897 20,889 15,604 30,501 31,349 26,251 Recoveries of loans previously charged off: Consumer (2) 440 315 354 794 2,561 653 Commercial 440 1,056 391 831 3,042 3,042 Real estate-construction 132 833 48 180 1,070 1,070 Real estate-mortgage (3) 100 92 285 385 118 118 - ----------------------------------------------------------------------------------------------------- Total recoveries 1,112 2,296 1,078 2,190 6,791 4,883 Net loans charged off 13,785 18,593 14,526 28,311 24,558 21,368 - ----------------------------------------------------------------------------------------------------- Balance at end of period $126,442 $136,497 $126,433 $126,442 $136,497 $136,497 - ----------------------------------------------------------------------------------------------------- Net loan losses (annualized) as a percentage of average loans: Consumer 2.38% 0.92% 2.29% 2.34% 0.78% 0.75% Commercial (0.05) 0.06 0.34 0.14 (0.10) (0.10) Real estate 0.94 5.49 0.58 0.76 2.88 2.88 - ----------------------------------------------------------------------------------------------------- Total 0.95% 1.27% 1.04% 1.00% 0.75% 0.73% - ----------------------------------------------------------------------------------------------------- Allowance for loan losses to net loans at end of period 2.18% 2.14% 2.40% 2.40%
(1) The amount transferred to loans held for sale related to Capital One assets was $2,651 for the first quarter of 1995. (2) Consumer includes loan-by-check net charge-offs as noted below: Loan-by-check risk tests $ 6,504 $ 2,151 $ 7,233 $ 13,737 $ 2,174 $ 2,174 Other loan-by-check 4,626 776 2,672 7,298 993 993 - ---------------------------------------------------------------------------------------------------- Total loan-by-check net charge-offs $ 11,130 $ 2,927 $ 9,905 $ 21,035 $ 3,167 $ 3,167 - ---------------------------------------------------------------------------------------------------- Average loan-by-check: Loan-by-check risk tests $136,598 $224,583 $158,523 $147,561 $229,028 $229,028 Other loan-by-check 676,586 183,175 515,743 596,164 130,799 130,799 - ----------------------------------------------------------------------------------------------------- Total loan-by-check $813,184 $407,758 $674,266 $743,725 $359,827 $359,827 - ----------------------------------------------------------------------------------------------------- Net loan losses (annualized) as a percentage of average loan-by-check: Loan-by-check risk tests 19.05% 3.83% 18.25% 18.62% 1.90% 1.90% Other loan-by-check 2.73 1.69 2.07 2.45 1.52 1.52 - ----------------------------------------------------------------------------------------------------- Total loan-by-check 5.47% 2.87% 5.88% 5.66% 1.76% 1.76% - -----------------------------------------------------------------------------------------------------
(3) Real estate-mortgage includes real estate-commercial mortgage and real estate-residential mortgage. Real estate-residential mortgage charge-offs and recoveries were not significant for the periods presented. Provision and Allowance for Loan Losses The $13.8 million provision for loan losses in the second quarter of 1996 represented a $9.5 million increase from the 1995 second quarter level of $4.3 million. The increase in the provision resulted from the growth and increased losses in consumer loans, primarily the loan-by-check portfolio. The Company provided $11.3 million for the allowance for loan losses in the 1996 first quarter. (See the following paragraph and the Consumer Loan Growth section for further discussion concerning the loan-by-check product.) Net charge-offs amounted to $13.8 million in the second quarter of 1996, a $0.7 million decline from the first quarter 1996 level of $14.5 million. Net charge-offs totaled $18.6 million in the second quarter of 1995, $13.9 million of which resulted from the sale of real estate related loans for which there was already sufficient specific allowance. The $9.1 million increase in net charge-offs from the prior year's second quarter, excluding the loan sale charge-offs, was primarily caused by a $4.4 million rise in loan-by-check risk test charge-offs and a $3.9 million increase in other loan-by-check charge-offs. The loan-by-check risk test charge-offs were on loans generated from direct mail solicitations in late 1994 as Signet ran controlled tests to determine the criteria to be used when Signet expands loan-by-check solicitations. (See footnote 2 in Table 4 for more detailed information on the loan-by-check charge-offs.) The allowance for loan losses at June 30, 1996 was $126.4 million, or 2.14% of period-end loans, compared with $136.5 million, or 2.40% of loans at June 30, 1995 and the March 31, 1996 allowance of $126.4 million, or 2.18% of loans. The June 30, 1996 allowance for loan losses equated to 3.7 times non-performing loans and 2.3 times non-performing assets, compared with June 30, 1995 when the allowance for loan losses amounted to 3.0 times non-performing loans and 2.4 times non-performing assets. The decline in the level of the allowance from June 30, 1995 resulted primarily from charge-offs on commercial and real estate loans for which sufficient specific allowance had already been provided. At June 30, 1996, Signet's loans that were considered to be impaired under Statement of Financial Accounting Standards ("SFAS") No. 114 were comprised of $29.0 million of non-accrual loans for which the related allowance was $7.6 million. The average recorded investment in impaired loans during the six months ended June 30, 1996 was approximately $26.1 million. Collateral dependent loans, which were measured at the fair value of the loan's collateral made up the majority of impaired loans at June 30, 1996. Non-Interest Income A significant portion of Signet's revenue is derived from non-interest related sources including deposit account service charges, consumer loan servicing and service charge income and trust and other financial services income. Signet's business strategies continued to emphasize non-interest operating income sources. Table 5 details the various components of non-interest income for the second quarter and first half of 1996 compared with the second quarter and first half of 1995, excluding Capital One, as well as the first quarter of 1996. Non-interest income for the second quarter of 1996 was $63.9 million, a $20.9 million, or 49%, increase over the second quarter of 1995 and a $5.9 million, or 10%, increase over the first quarter of 1996. Several factors contributed to the increase in non-interest income in the second quarter of 1996 compared to the same quarter of 1995. Consumer loan servicing and service charge income, which includes ongoing gains and servicing income on securitized assets, increased $13.6 million primarily due to an approximately $500 million increase in securitized consumer loans since the end of the second quarter of 1995. A $3.4 million increase in mortgage servicing and origination resulted from a rise in residential mortgage loan origination volume and an increase in the amount of residential mortgage loans serviced. Trust and other financial services income increased $3.0 million, or 42%, primarily from additional fee income related to the Blanchard funds acquisition in the second quarter of 1995. Signet recorded gains of $3.1 million and $3.4 million from the sale of mortgage servicing rights in the second and first quarters of 1996, respectively, and $1.0 million in the second quarter of 1995. The $5.9 million rise in non-interest income from the first to the second quarter of 1996 resulted primarily from a $3.1 million rise in consumer loan servicing and service charge income, a $2.2 million rise in trading profits, a $1.1 million increase in mortgage servicing and origination and a $1.0 million advance in gains on sales of mortgage loans. These positive factors were partially offset by a $2.3 million drop in "other" non-interest income principally due to a decline in income from Signet's servicing agreements with Capital One as many of these agreements expired during 1996. Non-Interest Expense Non-interest expense for the second quarter of 1996 totaled $121.5 million, an increase of $10.1 million, or 9%, from the second quarter of 1995 reflecting continued investment in people and systems to build the infrastructure for information based businesses. The largest increase was $7.0 million in staff expense resulting primarily from a 13% increase in the number of full-time employees. The $1.3 million increase in supplies and equipment expense, the $1.6 million rise in external data processing services and the $1.1 million growth in travel and communications were all attributable to servicing the expanded consumer loan base. Credit and collection expenses increased $1.0 million also due to increased costs associated with the growth in Signet's consumer loan portfolio. The FDIC assessment declined $4.0 million due to lower rates that became effective January 1, 1996. Non-interest expense rose $5.9 million, or 5%, from the first to the second quarter of 1996 largely as a result Table 5 Signet Banking Corporation (excluding Capital One) Non-Interest Income and Expense (in thousands)
- ----------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 March 31 June 30 1996 1995 1996 1996 1995 - ----------------------------------------------------------------------------------------------------- Non-interest income: Service charges on deposit accounts $ 17,100 $ 17,139 $ 16,231 $ 33,331 $ 33,535 Consumer loan servicing and service charge income 15,276 1,633 12,156 27,432 4,184 Trust and other financial services income 10,108 7,104 9,605 19,713 14,200 Mortgage servicing and origination 8,797 5,445 7,668 16,465 9,607 Other service charges and fees 3,916 3,229 3,882 7,798 6,697 Gain on sale of mortgage servicing 3,073 977 3,426 6,499 977 Gains (losses) on sale of mortgage loans 2,606 (545) 1,576 4,182 (737) Trading profits 3,000 3,816 767 3,767 6,209 Other (169) 3,894 2,113 1,944 5,079 - ----------------------------------------------------------------------------------------------------- Non-interest operating income 63,707 42,692 57,424 121,131 79,751 Securities available for sale gains 164 244 592 756 346 Investment securities gains 3 258 - ----------------------------------------------------------------------------------------------------- Total non-interest income $ 63,871 $ 42,939 $ 58,016 $121,887 $ 80,355 - ----------------------------------------------------------------------------------------------------- Non-interest expense: Salaries $ 52,302 $ 43,668 $ 48,700 $101,002 $ 86,306 Employee benefits 10,466 12,076 12,401 22,867 25,774 - ----------------------------------------------------------------------------------------------------- Total staff expense 62,768 55,744 61,101 123,869 112,080 Occupancy 9,520 9,434 10,194 19,714 19,277 Supplies and equipment 9,985 8,715 9,605 19,590 17,273 External data processing services 8,333 6,748 7,146 15,479 12,958 Travel and communications 6,706 5,604 5,920 12,626 11,198 Public relations, sales and advertising 4,559 4,272 4,889 9,448 7,527 Professional services 3,797 4,069 3,313 7,110 7,455 Credit and collection 1,307 265 1,347 2,654 337 FDIC assessment 180 4,139 170 350 8,277 Foreclosed property - net 552 (556) (820) (268) 16 Other 13,804 13,010 12,750 26,554 26,424 - ----------------------------------------------------------------------------------------------------- Total non-interest expense $121,511 $111,444 $115,615 $237,126 $222,822 - -----------------------------------------------------------------------------------------------------
of a $1.7 million increase in staff expense, a $1.4 million rise in foreclosed property expense and a $1.2 million increase in external data processing expense. Signet's efficiency ratio (the ratio of non-interest expense, excluding foreclosed property expense, to taxable equivalent operating income) of 66.16% for the second quarter of 1996 showed improvement from the 68.67% reported for the second quarter of 1995. In addition, this ratio was down slightly from 66.23% for the first quarter of 1996. In the third quarter of 1994, Signet recorded a $43.2 million restructuring charge related to a comprehensive plan for reducing costs and increasing revenue in order to enhance its competitive position. As of June 30, 1996, the amounts actually paid and charged against the restructuring liability were approximately $7.0 million for severance payments to approximately 700 employees, $2.5 million for payments made under the early retirement program and approximately $12.8 million for lease termination and other facilities related costs. In addition, $19.5 million was transferred from the restructuring liability to Signet's pension benefit liability and postretirement benefit liability, approximately $1.4 million of the liability was reversed due to a change in management's intent to sell certain bank-owned properties. The restructuring plan was fully implemented as of June 30, 1996. Income Taxes Income tax expense for the second quarter of 1996 was $15.5 million compared with the second quarter 1995 expense of $15.0 million and first quarter 1996 expense of $16.2 million. This represented an effective tax rate of approximately 34% for all three quarters. Financial Condition Average earning assets totaled $10.1 billion for the second quarter of 1996, up $680 million, or 7%, from the second quarter 1995 and up $370 million, or 4%, from the Table 6 Signet Banking Corporation Average Balance Sheet (dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------- Three Months Ended June 30 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate - ---------------------------------------------------------------------------------------------------------------------------- Assets Earning assets (tax equivalent basis):* Interest bearing deposits with other banks $ 2,862 $ 43 5.94% $ 22,799 $ 358 6.21% Federal funds and resale agreements 703,429 9,543 5.37 532,922 8,232 6.11 Trading account securities 493,912 7,865 6.40 553,080 8,936 6.48 Loans held for securitization 300,000 5,992 8.03 153,300 6,420 16.75 Loans held for sale 381,530 9,579 9.93 234,107 5,858 9.90 Securities available for sale 2,379,317 44,315 7.45 1,679,836 31,412 7.40 Investment securities-taxable 235,514 4,257 7.23 Investment securities-nontaxable 146,867 4,391 11.96 Loans (net of unearned income): Consumer 2,055,518 54,725 10.71 2,349,345 62,068 10.59 Commercial 2,923,535 57,485 7.91 2,553,554 51,058 8.02 Real estate-construction 252,540 6,064 9.50 217,685 5,628 10.23 Real estate-commercial mortgage 348,219 8,188 9.46 480,112 11,998 10.02 Real estate-residential mortgage 234,634 4,176 7.12 236,107 5,074 8.60 - ---------------------------------------------------------------------------------------------------------------------------- Total loans 5,814,446 130,638 9.04 5,836,803 135,826 9.33 - ---------------------------------------------------------------------------------------------------------------------------- Total earning assets 10,075,496 $207,975 8.30% 9,395,228 $205,690 8.78% - ---------------------------------------------------------------------------------------------------------------------------- Non-rate related assets: Cash and due from banks 514,523 509,633 Allowance for loan losses (126,569) (144,407) Premises and equipment (net) 197,471 164,536 Other assets 685,761 561,476 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $11,346,682 $10,486,466 - ---------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Interest bearing liabilities: Deposits: Interest bearing demand $ 2,537,684 $ 18,209 2.89% $ 2,378,621 $ 18,643 3.14% Savings accounts 949,193 7,530 3.19 1,255,593 11,800 3.77 Savings certificates 2,158,040 25,395 4.73 1,876,689 20,747 4.43 Large denomination certificates 126,537 1,731 5.41 92,660 1,186 5.06 Foreign 179,726 2,415 5.32 146,829 2,235 6.02 Total interest bearing deposits 5,951,180 55,280 3.74 5,750,392 54,611 3.81 - ---------------------------------------------------------------------------------------------------------------------------- Federal funds and repurchase agreements 2,491,809 29,777 4.73 1,950,959 26,146 5.30 Other short-term borrowings 30,098 413 5.43 Long-term borrowings 250,606 3,796 5.99 253,427 4,119 6.43 - ---------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 8,693,595 $ 88,853 4.11% 7,984,876 $ 85,289 4.28% - ---------------------------------------------------------------------------------------------------------------------------- Non-interest bearing liabilities: Demand deposits 1,574,282 1,497,770 Other liabilities 231,798 210,092 Common stockholders' equity 847,007 793,728 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $11,346,682 $10,486,466 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income / spread $119,122 4.19% $120,401 4.50% - ---------------------------------------------------------------------------------------------------------------------------- Interest income to average earning assets 8.30% 8.78% Interest expense to average earning assets 3.55 3.64 - ---------------------------------------------------------------------------------------------------------------------------- Net yield margin 4.75% 5.14% - ----------------------------------------------------------------------------------------------------------------------------
*Includes the effects of taxable equivalent adjustments using a tax rate of 35%. Table 6 Signet Banking Corporation Average Balance Sheet (dollars in thousands)
- ------------------------------------------------------------------------------------- March 31 1996 - ------------------------------------------------------------------------------------- Average Income/ Yield/ Balance Expense Rate - ------------------------------------------------------------------------------------- Assets Earning assets (tax equivalent basis):* Interest bearing deposits with other banks $ 12,633 $ 154 4.82% Federal funds and resale agreements 591,396 8,188 5.48 Trading account securities 506,040 8,122 6.46 Loans held for securitization 330,557 7,419 9.03 Loans held for sale 389,569 10,086 10.24 Securities available for sale 2,309,330 42,233 7.32 Investment securities-taxable Investment securities-nontaxable Loans (net of unearned income): Consumer 1,906,768 53,062 11.19 Commercial 2,892,389 56,506 7.86 Real estate-construction 245,237 6,062 9.78 Real estate-commercial mortgage 357,989 8,690 9.76 Real estate-residential mortgage 164,087 3,204 7.81 - ------------------------------------------------------------------------------------- Total loans 5,566,470 127,524 9.21 - ------------------------------------------------------------------------------------- Total earning assets 9,705,995 $203,726 8.44% - ------------------------------------------------------------------------------------- Non-rate related assets: Cash and due from banks 529,040 Allowance for loan losses (128,503) Premises and equipment (net) 196,314 Other assets 764,784 - ------------------------------------------------------------------------------------- Total assets $11,067,630 - ------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Interest bearing liabilities: Deposits: Interest bearing demand $ 2,474,573 $ 18,080 2.94% Savings accounts 1,248,406 11,495 3.70 Savings certificates 1,949,398 22,535 4.65 Large denomination certificates 111,194 1,525 5.43 Foreign 93,435 1,279 5.42 Total interest bearing deposits 5,877,006 54,914 3.76 - ------------------------------------------------------------------------------------- Federal funds and repurchase agreements 2,205,733 26,320 4.72 Other short-term borrowings Long-term borrowings 252,991 4,114 6.43 - ------------------------------------------------------------------------------------- Total interest bearing liabilities 8,335,730 $ 85,348 4.12% - ------------------------------------------------------------------------------------- Non-interest bearing liabilities: Demand deposits 1,674,258 Other liabilities 198,254 Common stockholders' equity 859,388 - ------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $11,067,630 - ------------------------------------------------------------------------------------- Net interest income / spread $118,378 4.32% - ------------------------------------------------------------------------------------- Interest income to average earning assets 8.44% Interest expense to average earning assets 3.54 - ------------------------------------------------------------------------------------- Net yield margin 4.91% - -------------------------------------------------------------------------------------
*Includes the effects of taxable equivalent adjustments using a tax rate of 35%. Table 6 Signet Banking Corporation Average Balance Sheet (dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate - --------------------------------------------------------------------------------------------------------------------------- Assets Earning assets (tax equivalent basis):* Interest bearing deposits with other banks $ 7,747 $ 197 5.03% $ 60,327 $ 1,796 5.92% Federal funds and resale agreements 647,413 17,731 5.42 784,948 23,541 5.96 Trading account securities 499,976 15,987 6.43 485,918 15,654 6.50 Loans held for securitization 315,279 13,411 8.55 150,002 10,625 14.17 Loans held for sale 385,550 19,665 10.09 164,798 7,337 8.86 Securities available for sale 2,344,324 86,548 7.38 1,630,038 59,255 7.23 Investment securities-taxable 229,230 8,203 7.16 Investment securities-nontaxable 152,208 9,107 11.97 Loans (net of unearned income): Consumer 1,981,143 107,787 10.94 3,143,354 179,702 11.49 Commercial 2,907,962 113,991 7.88 2,458,729 98,192 8.05 Real estate-construction 248,889 12,126 9.64 212,773 10,782 10.08 Real estate-commercial mortgage 353,104 16,878 9.61 500,115 24,937 10.06 Real estate-residential mortgage 199,360 7,380 7.40 220,584 9,353 8.48 - --------------------------------------------------------------------------------------------------------------------------- Total loans 5,690,458 258,162 9.12 6,535,555 322,966 9.97 - --------------------------------------------------------------------------------------------------------------------------- Total earning assets 9,890,747 $411,701 8.37% 10,193,024 $458,484 9.07% - --------------------------------------------------------------------------------------------------------------------------- Non-rate related assets: Cash and due from banks 521,782 507,352 Allowance for loan losses (127,536) (170,298) Premises and equipment (net) 196,892 196,380 Other assets 725,271 677,771 - --------------------------------------------------------------------------------------------------------------------------- Total assets $11,207,156 $11,404,229 - --------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Interest bearing liabilities: Deposits: Interest bearing demand $ 2,506,128 $ 36,289 2.91% $ 2,397,358 $ 36,742 3.09% Savings accounts 1,098,800 19,025 3.48 1,222,274 22,527 3.72 Savings certificates 2,053,719 47,930 4.69 1,913,176 37,894 3.99 Large denomination certificates 118,865 3,256 5.42 292,507 8,886 6.04 Foreign 136,580 3,694 5.35 115,457 3,488 6.01 Total interest bearing deposits 5,914,092 110,194 3.75 5,940,772 109,537 3.72 - --------------------------------------------------------------------------------------------------------------------------- Federal funds and repurchase agreements 2,348,771 56,097 4.72 1,870,438 49,844 5.30 Other short-term borrowings 460,932 15,302 6.60 Long-term borrowings 251,799 7,910 6.21 478,146 16,889 7.03 - --------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 8,514,662 $174,201 4.11% 8,750,288 $191,572 4.41% - --------------------------------------------------------------------------------------------------------------------------- Non-interest bearing liabilities: Demand deposits 1,624,270 1,491,676 Other liabilities 215,026 265,090 Common stockholders' equity 853,198 897,175 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $11,207,156 $11,404,229 - --------------------------------------------------------------------------------------------------------------------------- Net interest income / spread $237,500 4.26% $266,912 4.66% - --------------------------------------------------------------------------------------------------------------------------- Interest income to average earning assets 8.37% 9.07% Interest expense to average earning assets 3.54 3.79 - --------------------------------------------------------------------------------------------------------------------------- Net yield margin 4.83% 5.28% - ---------------------------------------------------------------------------------------------------------------------------
*Includes the effects of taxable equivalent adjustments using a tax rate of 35%. $9.7 billion reported for the first quarter of 1996. Loan securitizations reduced consumer loans by transferring assets off the balance sheet. Adding average securitized loans to both years' quarterly average earning assets and adjusting for loans that may be sold to Capital One, in accordance with previously agreed upon terms of the spin-off, results in a 15% increase in managed earning assets from the second quarter of 1995 compared with the second quarter of 1996. Loans (net of unearned income) for the second quarter of 1996 averaged $5.8 billion, level with the second quarter of 1995 and up 4% from the first quarter of 1996. Including securitized assets and loans held for securitization, managed loans grew $97 million during the quarter and totaled approximately $6.9 billion at June 30, 1996. The average amount of commercial loans increased $370 million when comparing the second quarter of 1996 to the same period in 1995, as Signet successfully grew its leasing portfolio and targeted certain specialized industries, such as media and health care, as well as a diverse group of middle market borrowers. The drop in average real estate-residential mortgage outstandings was not significant even though Signet sold approximately $179 million of adjustable rate mortgages in December, 1995. Strong growth in residential mortgage loan originations helped sustain the average balance. Investment securities declined from $382 million on average in the second quarter of 1995 to zero in the second quarter of 1996, reflecting the reclassification of all of the Company's investment securities to securities available for sale in December, 1995, as allowed by implementation guidance for SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Average securities available for sale increased $699 million, or 42%, in the second quarter of 1996 compared with the average for the same quarter of 1995. A portion of this increase resulted from the reclassification of investment securities to securities available for sale in December, 1995, as noted above. Interest bearing liabilities averaged $8.7 billion in the second quarter of 1996, up $709 million, or 9%, from the second quarter of 1995. The increase was comprised of a $541 million increase in average federal funds and repurchase agreements and a $201 million growth in average deposits. Average non-interest bearing demand deposits increased $77 million, or 5%, from the second quarter of 1995 to the same quarter of 1996. The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," on January 1, 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In determining the recoverability of an asset, the enterprise should estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted cash flows is less than the carrying amount of the asset, an impairment loss would be recognized. SFAS No. 121 also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of the carrying amount or the fair value less selling costs. Adoption of SFAS No. 121 did not have a material impact on the Company's financial position or results of operations. Consumer Loan Growth In 1994, Signet expanded its use of information-based strategies to all types of consumer loans, which significantly increased growth in this portfolio. This technique involved generating a data base of potentially creditworthy customers for particular products and then following up with direct mail solicitations. Much of the growth was in a new loan product, "loan-by-check," whereby customers received direct-mail solicitations and were offered installment loans in the form of a check. To activate the loan, a customer endorses and deposits the check. Signet is also applying information-based strategies to home equity, student and small business loans. Solicitations in these areas are mostly in the early testing stages. These tests are designed to help Signet develop products that are both appealing to customers and economically feasible for the Company. As a result of these solicitations, from June 30, 1995, to June 30, 1996, the installment loan portfolio grew $301 million; the student loan portfolio (including $300 million in student loans held for securitization) increased $136 million; and the home equity loan portfolio (including $438 million of securitized loans) was up $49 million. In total, the managed consumer loan portfolio increased $490 million, or 19%. The portfolio declined $92 million from the end of the first quarter as Signet elected to delay some of its more aggressive marketing programs while re-examining market conditions and further calibrating the models used for targeting customers. Signet focused its efforts on improving product design and delivery, and on developing new customer management techniques to improve account profitability. The Company expects to resume more active direct mail solicitations during the second half of 1996. The managed consumer loan portfolio is composed of consumer loans, consumer loans held for sale, consumer loans held for securitization and securitized consumer loans, less loans that may be sold to Capital One in accordance with previously agreed upon terms of the spin-off. Securitized consumer loans are not assets of the Company and, therefore, are not shown on the balance sheet. Table 7 Signet Banking Corporation Managed Consumer Loan Portfolio (in thousands)
- ----------------------------------------------------------------------------------------------------- Three Months Ended - ----------------------------------------------------------------------------------------------------- June 30 March 31 December 31September 30 June 30 1996 1996 1995 1995 1995 - ----------------------------------------------------------------------------------------------------- Average balances: Student loans $ 776,326 $ 746,038 $ 683,704 $ 645,145 $ 922,956 Installment loans 1,035,592 921,869 773,134 730,186 651,052 Home equity loans 122,649 101,404 87,915 525,232 519,498 Credit card 60,792 73,166 218,933 195,115 160,381 Other loans 60,159 64,291 60,801 87,046 95,458 - ----------------------------------------------------------------------------------------------------- Sub-total average consumer loan portfolio 2,055,518 1,906,768 1,824,487 2,182,724 2,349,345 - ----------------------------------------------------------------------------------------------------- Consumer loans held for sale 202,029 231,968 196,296 163,082 133,163 Credit card loans held for securitization 30,557 975 120,652 150,003 Home equity loans held for securitization 322,826 4,891 Student loans held for securitization 300,000 300,000 300,000 300,000 3,297 - ----------------------------------------------------------------------------------------------------- Total average on-balance sheet portfolio 2,557,547 2,469,293 2,644,584 2,771,349 2,635,808 Securitized home equity loans 451,118 469,593 135,850 Securitized credit card loans 275,000 244,341 234,330 195,390 266,493 - ----------------------------------------------------------------------------------------------------- Total securitized consumer loans 726,118 713,934 370,180 195,390 266,493 Less loans that may be sold to Capital One (202,029) (231,968) (306,054) (374,960) (424,437) - ----------------------------------------------------------------------------------------------------- Total average managed consumer loan portfolio $3,081,636 $2,951,259 $2,708,710 $2,591,779 $2,477,864 - ----------------------------------------------------------------------------------------------------- Period-end balances: Student loans $ 773,196 $ 776,663 $ 709,583 $ 675,348 $ 636,925 Installment loans 994,243 1,072,831 810,999 753,631 693,517 Home equity loans 135,064 111,579 87,348 89,843 524,625 Credit card 49,630 64,261 81,532 197,419 167,792 Other loans 64,230 61,185 61,812 60,193 94,023 - ----------------------------------------------------------------------------------------------------- Sub-total period-end consumer loan portfolio 2,016,363 2,086,519 1,751,274 1,776,434 2,116,882 - ----------------------------------------------------------------------------------------------------- Consumer loans held for sale 194,097 215,961 240,902 165,205 157,289 Credit card loans held for securitization 89,700 150,300 Home equity loans held for securitization 450,000 Student loans held for securitization 300,000 300,000 300,000 300,000 300,000 - ----------------------------------------------------------------------------------------------------- Total period-end on-balance sheet portfolio 2,510,460 2,602,480 2,381,876 2,691,639 2,724,471 Securitized home equity loans 438,368 459,949 480,702 Securitized credit card loans 275,000 275,000 185,000 290,833 213,331 - ----------------------------------------------------------------------------------------------------- Total securitized consumer loans 713,368 734,949 665,702 290,833 213,331 Less loans that may be sold to Capital One (194,097) (215,961) (240,902) (318,160) (398,007) - ----------------------------------------------------------------------------------------------------- Total period-end managed consumer loan portfolio $3,029,731 $3,121,468 $2,806,676 $2,664,312 $2,539,795 - -----------------------------------------------------------------------------------------------------
Table 8 Signet Banking Corporation Impact of Consumer Loan Securitizations (dollars in thousands)
- --------------------------------------------------------------------------------------------------------- 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1996 1996 1995 1995 1995 - --------------------------------------------------------------------------------------------------------- Statement of Income Net interest income $ 117,373 $ 116,234 $ 115,595 $ 116,944 $ 117,446 Provision for loan losses 13,794 11,257 18,604 8,681 4,250 Non-interest income 63,871 58,016 68,120 47,094 42,939 Non-interest expense 121,511 115,615 152,191 109,507 111,444 - --------------------------------------------------------------------------------------------------------- Income before income taxes $ 45,939 $ 47,378 $ 12,920 $ 45,850 $ 44,691 - --------------------------------------------------------------------------------------------------------- Adjustments for Securitizations Net interest income $ 12,484 $ 11,849 $ 7,071 $ 5,889 $ 7,857 Provision for loan losses 2,322 2,011 1,876 2,314 3,205 Non-interest income (11,750) (9,061) (14,757) (3,575) (4,652) Non-interest expense - --------------------------------------------------------------------------------------------------------- Increase (decrease) to income before income taxes $ (1,588) $ 777 $ (9,562) $ 0 $ 0 - --------------------------------------------------------------------------------------------------------- Adjustments for Loans That May Be Sold to Capital One Net interest income $ (3,322) $ (2,724) $ (2,951) $ (2,632) $ (2,218) Provision for loan losses 0 0 (3,957) (4,352) (4,618) Non-interest income 3,322 2,724 (1,006) (1,720) (2,400) Non-interest expense - --------------------------------------------------------------------------------------------------------- Increase (decrease) to income before income taxes $ 0 $ 0 $ 0 $ 0 $ 0 - --------------------------------------------------------------------------------------------------------- Managed Statement of Income (adjusted) Net interest income $ 126,535 $ 125,359 $ 119,715 $ 120,201 $ 123,085 Provision for loan losses 16,116 13,268 16,523 6,643 2,837 Non-interest income 55,443 51,679 52,357 41,799 35,887 Non-interest expense 121,511 115,615 152,191 109,507 111,444 - --------------------------------------------------------------------------------------------------------- Income before income taxes $ 44,351 $ 48,155 $ 3,358 $ 45,850 $ 44,691 - --------------------------------------------------------------------------------------------------------- As reported: Average earning assets $10,075,496 $ 9,705,995 $9,745,118 $9,555,056 $9,395,228 Return on assets 1.08% 1.13% 0.33% 1.11% 1.14% Net yield margin 4.75% 4.91% 4.78% 4.96% 5.14% On a managed basis: Average earning assets $10,599,585 $10,187,961 $9,809,244 $9,375,586 $9,237,284 Return on assets 0.98% 1.11% 0.10% 1.13% 1.15% Net yield margin 4.87% 5.03% 4.92% 5.19% 5.47% Yield on managed consumer loan portfolio 10.89% 11.21% 10.85% 10.86% 10.88% - ---------------------------------------------------------------------------------------------------------
Table 9 Signet Banking Corporation Non-Performing Assets (dollars in thousands)
- ----------------------------------------------------------------------------------------------------- June 30 March 31 December 31 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------- Non-accrual loans: Commercial $ 7,552 $10,785 $ 5,873 $ 9,033 Consumer 1,694 1,434 1,684 1,572 Real estate - construction 9,596 4,116 1,820 2,988 Real estate - mortgage * 15,172 29,587 22,580 24,888 - ----------------------------------------------------------------------------------------------------- Total non-accrual loans 34,014 45,922 31,957 38,481 Foreclosed properties 20,850 11,525 15,246 15,822 - ----------------------------------------------------------------------------------------------------- Total non-performing assets $54,864 $57,447 $47,203 $54,303 - ----------------------------------------------------------------------------------------------------- Percentage to loans (net of unearned) and foreclosed properties 0.92% 1.01% 0.81% 1.00% Allowance for loan losses to: Non-performing loans 371.73 297.24 395.64 337.05 Non-performing assets 230.46 237.60 267.85 238.85 - -----------------------------------------------------------------------------------------------------
* Real estate-mortgage includes real estate-commercial mortgage and real estate-residential mortgage. Real estate-residential mortgage non-accrual loans were not significant for the periods presented. Risk Elements Non-performing assets at June 30, 1996 totaled $54.9 million, or 0.92% of loans and foreclosed properties, down from $57.4 million, or 1.01%, at June 30, 1995 but up from $47.2 million, or 0.81%, at March 31, 1996, respectively. Overall, non-performing commercial loans declined $3.2 million from June 30, 1995 to June 30, 1996. Over the same period, real estate-construction loans increased $5.5 million and real estate-mortgage loans declined $14.4 million. During the quarter ended June 30, 1996, Signet placed one real estate-construction loan amounting to $8.4 million on non-accrual. Foreclosed properties rose to $20.9 million and were equal to 38% of total non-performing assets and 46% of non-performing real estate assets as of June 30, 1996. In accordance with SFAS No. 114, a loan is classified as foreclosed property where possession has been taken of the collateral, regardless of whether formal foreclosure proceedings have taken place. Table 9 provides details on the various components of non-performing assets at the dates indicated. Accruing loans contractually past due 90 days or more as to principal or interest payments totaled $70.8 million, $54.5 million and $65.2 million as of June 30, 1996, June 30, 1995 and March 31, 1996, respectively. The details of these past due loans are displayed in Table 10. The past due commercial and real estate loans were in the process of collection and were adequately collateralized. Past due student loans accounted for $37.4 million, or 53%, of all past due loans. Of the past due student loan balances, 96% were indirectly government guaranteed and do not represent material loss exposure to Signet. Table 10 Signet Banking Corporation Accruing Loans Past Due 90 Days or More (dollars in thousands)
- ----------------------------------------------------------------------------------------------------- June 30 March 31 December 31 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------- Commercial $ 5,308 $ 5,536 $ 5,679 $ 6,326 Consumer: Student loans 37,374 21,919 35,056 32,308 Credit card 3,396 7,222 3,171 5,118 Loan-by-check-risk tests 7,530 6,208 7,969 8,812 Loan-by-check other 5,666 530 3,617 2,424 Other consumer 2,286 1,351 2,366 2,068 - ----------------------------------------------------------------------------------------------------- Total consumer 56,252 37,230 52,179 50,730 - ----------------------------------------------------------------------------------------------------- Mortgage 6,197 10,646 6,953 9,200 Construction 3,005 1,126 388 115 - ----------------------------------------------------------------------------------------------------- Total $70,762 $54,538 $65,199 $66,371 - -----------------------------------------------------------------------------------------------------
Table 11 Signet Banking Corporation Selected Capital Data (dollars in thousands)
- --------------------------------------------------------------------------------------------------- June 30 December 31 1996 1995 1995 - --------------------------------------------------------------------------------------------------- Qualifying common stockholders' equity $ 861,171 $ 792,406 $ 815,342 Less goodwill and other disallowed intangibles (55,525) (39,974) (58,881) - --------------------------------------------------------------------------------------------------- Total Tier I capital 805,646 752,432 756,461 - --------------------------------------------------------------------------------------------------- Qualifying debt 63,667 116,134 114,534 Qualifying allowance for loan losses 97,863 93,672 96,751 - --------------------------------------------------------------------------------------------------- Total Tier II capital 161,530 209,806 211,285 Total risked-based capital $ 967,176 $ 962,238 $ 967,746 - --------------------------------------------------------------------------------------------------- Total risk-adjusted assets $7,800,477 $ 7,450,922 $7,707,111 - --------------------------------------------------------------------------------------------------- Ratios: Tier I capital 10.33% 10.10% 9.82% Total risk-based capital 12.40 12.91 12.56 Tier I leverage 7.14 7.20 6.93 Tangible Tier I leverage 6.49 6.83 6.36 Common equity to assets 7.48 7.70 7.87 Common dividend payout ratio (year-to-date) 39.22 34.71 42.47 Book value per share $ 14.48 $ 13.90 $ 14.59
Stockholders' Equity Stockholders' equity provides a source of permanent funding, allows for future growth and assists the Company in withstanding unforeseen adverse developments. At June 30, 1996, stockholders' equity totaled $862 million, an increase of $44 million, or 5%, from the June 30, 1995 level of $818 million. Since March 31, 1996, stockholders' equity rose $8 million as net income and the issuance of common stock exceeded net unrealized losses on securities available for sale and dividends declared. Unrealized gains and losses, net of tax, on securities available for sale reduced equity by $14 million in the second quarter of 1996. At June 30, 1996, the net unrealized losses, net of tax, related to securities available for sale, totaled $0.8 million. The dividends declared during the second quarter of 1996 were $11.9 million or $0.20 per common share. At June 30, 1996, Signet's banking subsidiary, Signet Bank, met the criteria established by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") for "well capitalized" institutions. The Company's risk-based capital ratios at June 30, 1996 were 12.40% and 10.33% for Total Capital and Tier I Capital, respectively. The improvement in these capital ratios from March 31, 1996 reflected the impact of lower asset levels at June 30, 1996 than at the prior quarter-end along with a rise in equity. The high asset level at March 31, 1996 was temporary since it was primarily due to certain large amounts due to and due from brokers related to purchases and sales of securities available for sale. Signet's leverage ratio at June 30, 1996 was 7.14% which was unchanged from the end of the first quarter. Interest Rate Sensitivity Signet's interest rate sensitivity position is managed by the Asset and Liability Committee ("ALCO") and monitored through the use of simulations on rate sensitive pre-tax income. Interest rate sensitivity is the relationship between changes in market interest rates and changes in rate sensitive income due to the repricing characteristics of assets and liabilities. For example, in periods of rising rates, banking businesses will experience wider spreads as consumer deposit costs lag increases in market interest rates. Improved spreads due to the lag in pricing on consumer deposits will be partially offset to the extent that the funding cost on the investment portfolio increases. ALCO routinely uses derivatives such as interest rate swaps to manage the Company's interest rate risk. ALCO, in managing interest rate sensitivity, also uses simulations to measure the impact that market changes and alternative strategies might have on net interest income and other income exposed to changing rates. Current period maturity, repricing information and projected balance sheet strategies are used to simulate rate sensitivity. The lag effect of consumer deposit rates, determined through historical analysis and forecasting techniques, is also modeled. These simulations show that an immediate and sustained 100 basis point change in interest rates would have less than a 3% impact on rate sensitive income over the next twelve months, reflecting Signet's conservative balance sheet strategy. ALCO operates under a policy designed to limit the impact of a sudden 100 basis point change in interest rates to no more than a 5% change in rate sensitive income over a twelve month period. During the first half of 1996, Signet's balance sheet was in a moderately liability sensitive position. The Company has taken steps to limit its exposure to rising interest rates through the use of derivative products. At June 30, 1996, the notional values of the Company's derivative products for the purpose of managing interest rate risk were $2.4 billion of interest rate swaps, $650 million of interest rate floors and $300 million of interest rate caps. Asset liquidity is generally provided by interest bearing deposits with other banks, federal funds sold and securities purchased under agreements to resell, securities available for sale, loans held for sale and trading account securities. Liability liquidity is measured by the Company's ability to obtain deposits and purchased funds at favorable rates and in adequate amounts and by the length of maturities. Since core deposits are the most stable source of liquidity a bank can have because they are government insured, the high level of average core deposits during the first half of 1996 maintained the Company's strong liquidity position. During the first half of 1996, Signet's average loan balances were entirely funded with core deposits. Approximately $462 million of core deposits held on behalf of Capital One under terms of the separation agreement relating to the spin-off were transferred to another financial institution in the first quarter of 1996 and another $237 million of these deposits were transferred to Capital One at the end of the second quarter of 1996. During the second quarter, Signet Bank established a $2.5 billion Senior and Subordinated Bank Note facility, due from 30 days to 30 years from date of issue. No Notes had been issued under the facility at June 30, 1996. Signet's equity base, as noted earlier, also provides a stable source of funding. The parent company has not recently relied on the capital markets for funding. For the first half of 1996, cash and cash equivalents increased $72 million. Cash provided by operating activities amounted to $181 million resulting mainly from net proceeds from sales of loans held for sale. Cash used by investing activities amounted to $788 million principally due to net purchases of securities available for sale and an increase in loans. Cash provided by financing activities amounted to $72 million due primarily to an increase in short-term borrowings. PART II. OTHER INFORMATION Item 1. Legal Proceedings On March 19, 1996, subsequent to the announcement of 1995 earnings, Signet's management discovered the Company was one of several major financial institutions that were victims of fraudulent commercial loan transactions which occurred prior to 1996. After taking into account sales of interests in and repayments of such loans, the Company had loan outstandings related to these transactions of approximately $81 million. Federal authorities informed the Company that they believe there will be substantial recoveries of assets related to these transactions. Management recorded a $35 million commercial fraud loss in non-interest expense at December 31, 1995 and recorded the estimated probable recovery amount of $46 million in other assets as a receivable. The receivable represents an amount management believes is likely to be recovered based on current facts and circumstances. The amount of the recovery was based on the Company's pro rata share of known claims to the total amount currently restrained by federal authorities, less associated costs. The restrained assets were turned over to a trustee. The recovery amount is subject to change, even in the near term, as additional assets are recovered, additional claims are asserted or the market value of the restrained assets fluctuates. Management continues to believe the $35 million charge to 1995 earnings is adequate to cover estimated losses related to these fraudulent transactions based on currently available information, but is unable to predict the timing of the recovery. The Company will vigorously pursue all other sources of recovery, but currently is unable to determine the probability or amount of additional recoveries. In connection with the fraudulent loan transactions referred to above, the Company has initiated a proceeding in the United States District Court for the Eastern District of Virginia in which the relief sought is a declaratory judgment that the Company has no on-going duties, or any liabilities, to any of the financial institutions to which the Company sold interests in the fraudulent loans and that the assets recovered in connection with the fraud that are to be distributed to the victimized financial institutions be allocated on a pro rata basis. One of the defendant financial institutions has moved to dismiss the proceeding. Three of the defendant financial institutions have filed suit against the Company in other federal courts asking generally that the Company repurchase their interests in the loans on the grounds of breach of contract, mutual mistake, frustration of purpose and unjust enrichment. These three defendant financial institutions are suing for recovery of approximately $130 million in the aggregate, plus unspecified amounts for interest, costs and attorneys' fees. Management plans to vigorously defend any claims made against it in these and any other similar proceedings. Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders of the Registrant was held on May 28, 1996. At the meeting, the following individuals were elected directors of the Registrant:
Vote Against Name of Director In Favor or Withheld Abstain J. Henry Butta 43,452,297 446,208 15,499,913 Norwood H. Davis, Jr. 43,470,202 428,303 15,499,913 William C. DeRusha 43,506,448 392,057 15,499,913 Robert M. Freeman 43,453,180 445,325 15,499,913 C. Stephenson Gillispie, Jr. 43,507,649 390,856 15,499,913 Bruce C. Gottwald, Jr. 41,862,837 2,035,668 15,499,913 William R. Harvey 43,508,051 390,454 15,499,913 Elizabeth G. Helm 43,521,273 377,232 15,499,913 Robert M. Heyssel 43,466,978 431,527 15,499,913 Malcolm S. McDonald 43,459,143 439,362 15,499,913 Henry A. Rosenberg, Jr. 43,510,554 387,951 15,499,913 Louis B. Thalheimer 43,530,346 368,159 15,499,913
The shareholders also approved: (i) the Corporation's 1996 Non-Employee Directors Stock Option Plan. 38,522,487 shares voted for, 4,925,423 shares voted against and 15,950,508 abstained from approval of the Plan and (ii) ratification of the selection of Ernst & Young LLP as independent auditors to audit the financial statements of the Corporation for 1996. 43,572,594 shares voted for, 204,027 shares voted against and 15,621,797 abstained from ratification. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 11 - Computation of Earnings Per Share (b) Reports on Form 8-K: none SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SIGNET BANKING CORPORATION -------------------------- (Registrant) Date: August 8, 1996 /s/ WALLACE B. MILLNER III -------------- -------------------------- Wallace B. Millner III Vice Chairman and Chief Financial Officer (Principal Financial Officer) Date: August 8, 1996 /s/ W. H. CATLETT, JR. -------------- ---------------------- W. H. Catlett, Jr. Executive Vice President and Controller (Principal Accounting Officer) EX-11 2 EXHIBIT 11 SIGNET BANKING CORPORATION AND SUBSIDIARIES FORM 10-Q EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE (dollars in thousands--except per share)
Three Months Six Months Ended June 30 Ended June 30 - -------------------------------------------------------------------------------------------------------- 1996 1995 1996 1995 - -------------------------------------------------------------------------------------------------------- Common and common equivalent: Average shares outstanding 59,471,286 58,740,522 59,383,180 58,665,203 Dilutive stock options--based on the treasury stock method using average market price 1,030,790 1,017,922 1,041,210 764,466 Shares used 60,502,076 59,758,444 60,424,390 59,429,669 - -------------------------------------------------------------------------------------------------------- Net income applicable to Common Stock $ 30,481 $ 29,686 $ 61,676 $ 71,911 - -------------------------------------------------------------------------------------------------------- Per share amount $ 0.50 $ 0.50 1.02 1.21 - -------------------------------------------------------------------------------------------------------- Assuming full dilution: Average shares outstanding 59,471,286 58,740,522 59,383,180 58,665,203 Dilutive stock options--based on the treasury stock method using the period end market price, if higher than the average market price 1,030,790 1,019,519 1,046,186 796,518 - -------------------------------------------------------------------------------------------------------- Shares used 60,502,076 59,760,041 60,429,366 59,461,721 - -------------------------------------------------------------------------------------------------------- Net income applicable to Common Stock $ 30,481 $ 29,686 $ 61,676 $ 71,911 - -------------------------------------------------------------------------------------------------------- Per share amount $ 0.50 $ 0.50 $ 1.02 $ 1.21 - --------------------------------------------------------------------------------------------------------
The calculations of common and common equivalent earnings per share and fully diluted earnings per share are submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although both are not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because there is dilution of less than 3%. The Registrant has elected to show fully diluted earnings per share in its financial statements. EX-27 3 EXHIBIT 27
9 1,000 6-MOS DEC-31-1996 JUN-30-1996 533,728 1,977 599,027 546,756 320,316 0 0 6,073,329 (126,442) 11,525,813 7,479,886 2,716,932 216,627 250,021 297,819 0 297,819 564,529 11,525,813 255,073 0 152,736 407,808 110,194 174,201 208,556 25,051 756 237,126 93,317 93,317 0 0 61,676 1.02 1.02 4.83 54,864 70,762 0 0 129,702 30,501 2,190 126,442 126,442 0 3,504
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