-----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, Jpe2kL37No0c5w9IMzGvYpC9zCWxhR72Yc2OYEVbg0+udR3NaosfiPPGnDqa9vm2 Uuy2NV8r7ORZPhw5vgU5eg== 0000916641-97-000810.txt : 19970812 0000916641-97-000810.hdr.sgml : 19970812 ACCESSION NUMBER: 0000916641-97-000810 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970811 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: 97656076 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 BANKING CORP. 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 1997 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______ to _______. Commission file number 1-6505 SIGNET BANKING CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-6037910 (State or other jurisdiction 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, 1997 - 60,484,553 Index SIGNET BANKING CORPORATION AND SUBSIDIARIES June 30, 1997
Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheet 3 Statement of Consolidated Income 4 Statement of Changes in Consolidated Stockholders' Equity 5 Statement of Consolidated Cash Flows 6 Supplemental Notes to Quarterly Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings 24 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 24
2 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Signet Banking Corporation and Subsidiaries Consolidated Balance Sheet
- ---------------------------------------------------------------------------------------------------------------------------- June 30 December 31 (in thousands-- except per share) (unaudited) 1997 1996 1996 - ---------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 543,005 $ 533,728 $ 566,520 Interest bearing deposits with other banks 215,871 1,977 3,200 Federal funds sold and securities purchased under resale agreements 1,010,194 599,027 777,999 Trading account securities 554,546 546,756 546,372 Loans held for securitization 300,000 Loans held for sale 27,155 320,316 102,826 Securities available for sale 2,420,624 2,547,445 2,623,280 Loans: Consumer 2,471,309 2,016,363 2,300,558 Commercial 3,430,266 3,209,292 3,451,230 Real estate-construction 238,575 255,822 244,653 Real estate-commercial mortgage 199,224 332,856 254,060 Real estate-residential mortgage 228,483 258,996 329,466 - ---------------------------------------------------------------------------------------------------------------------------- Gross loans 6,567,857 6,073,329 6,579,967 Less: Unearned income (222,661) (161,109) (225,081) Allowance for loan losses (119,740) (126,442) (136,707) - ---------------------------------------------------------------------------------------------------------------------------- Net loans 6,225,456 5,785,778 6,218,179 Premises and equipment (net) 177,629 195,410 184,413 Interest receivable 103,986 116,767 107,504 Other assets 574,435 578,609 590,125 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $11,852,901 $11,525,813 $11,720,418 ============================================================================================================================ Liabilities Non-interest bearing deposits $ 1,928,931 $ 1,669,006 $ 1,751,238 Interest bearing deposits: Interest bearing demand 3,109,712 2,530,148 2,955,576 Savings accounts 630,962 705,910 651,544 Savings certificates 2,196,767 2,290,154 2,256,838 Large denomination certificates 162,675 146,500 228,879 Foreign 25,478 138,168 43,267 - ---------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 6,125,594 5,810,880 6,136,104 - ---------------------------------------------------------------------------------------------------------------------------- Total deposits 8,054,525 7,479,886 7,887,342 Securities sold under repurchase agreements 1,782,488 1,767,963 1,467,565 Federal funds purchased 413,164 948,969 495,171 Long-term borrowings 350,007 250,021 400,014 Interest payable 27,878 26,010 30,507 Due to broker 25,812 300,000 Other liabilities 262,991 190,616 215,704 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 10,916,865 10,663,465 10,796,303 Stockholders' Equity Common stock, $5 par value; authorized 100,000,000 shares, issued and outstanding 60,382,648, 59,563,853 and 60,077,489 shares, respectively 301,913 297,819 300,387 Capital surplus, net 213,961 204,763 209,327 Retained earnings 405,020 360,529 399,268 Unrealized gains (losses) on securities available for sale, net of deferred taxes 15,142 (763) 15,133 - ---------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 936,036 862,348 924,115 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $11,852,901 $11,525,813 $11,720,418 ============================================================================================================================
See notes to consolidated financial statements. 3 Signet Banking Corporation and Subsidiaries Statement of Consolidated Income
- ------------------------------------------------------------------------------------------------------------------------ Three Months Ended June 30 Six Months Ended June 30 - ------------------------------------------------------------------------------------------------------------------------ (in thousands-- except per share) (unaudited) 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Interest income: Loans, including fees: Consumer $ 65,333 $ 54,725 $129,058 $107,787 Commercial 61,320 56,568 122,349 111,920 Real estate-construction 5,792 6,064 11,356 12,126 Real estate-commercial mortgage 6,573 7,710 11,308 15,860 Real estate-residential mortgage 4,283 4,176 9,873 7,380 - ----------------------------------------------------------------------------------------------------------------------- Total loans, including fees 143,301 129,243 283,944 255,073 Interest bearing deposits with other banks 1,800 43 2,531 197 Federal funds sold and resale agreements 13,089 9,543 24,042 17,731 Trading account securities 7,298 7,865 14,378 15,987 Loans held for securitization 5,992 13,411 Loans held for sale 1,011 9,579 2,598 19,665 Securities available for sale 45,209 43,961 91,304 85,744 - ----------------------------------------------------------------------------------------------------------------------- Total interest income 211,708 206,226 418,797 407,808 Interest expense: Interest bearing demand 27,427 18,209 53,996 36,289 Savings accounts 4,214 7,530 8,429 19,025 Savings certificates 26,316 25,395 52,137 47,930 Large denomination certificates 2,622 1,731 5,473 3,256 Foreign 774 2,415 1,849 3,694 - ----------------------------------------------------------------------------------------------------------------------- Total interest on deposits 61,353 55,280 121,884 110,194 Securities sold under repurchase agreements 17,618 17,084 34,339 31,595 Federal funds purchased 6,690 12,693 13,568 24,502 Long-term borrowings 6,004 3,796 11,807 7,910 - ----------------------------------------------------------------------------------------------------------------------- Total interest expense 91,665 88,853 181,598 174,201 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 120,043 117,373 237,199 233,607 Provision for loan losses 13,350 13,794 29,750 25,051 - ----------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 106,693 103,579 207,449 208,556 Non-interest income: Service charges on deposit accounts 17,250 17,100 34,430 33,331 Consumer loan servicing and service charge income 11,756 15,276 24,041 27,432 Trust and other financial services income 9,758 10,108 20,553 19,713 Other 21,371 21,223 45,123 40,655 - ----------------------------------------------------------------------------------------------------------------------- Non-interest operating income 60,135 63,707 124,147 121,131 Securities available for sale gains 10 164 113 756 - ----------------------------------------------------------------------------------------------------------------------- Total non-interest income 60,145 63,871 124,260 121,887 Non-interest expense: Salaries 47,668 52,302 95,024 101,002 Employee benefits 10,121 10,466 22,342 22,867 Supplies and equipment 10,790 9,985 21,508 19,590 Occupancy 9,104 9,520 18,096 19,714 External data processing services 9,090 8,333 17,894 15,479 Travel and communications 5,107 6,706 10,775 12,626 Restructuring charge 58,712 58,712 Other 21,588 24,199 42,659 45,848 - ----------------------------------------------------------------------------------------------------------------------- Total non-interest expense 172,180 121,511 287,010 237,126 - ----------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) (5,342) 45,939 44,699 93,317 Applicable income taxes (benefit) (3,368) 15,458 13,623 31,641 - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (1,974) $ 30,481 $ 31,076 $ 61,676 ======================================================================================================================= Earnings per common share $ (0.03) $ 0.50 $ 0.51 $ 1.02 Cash dividends declared per share 0.21 0.20 0.42 0.40 Average common shares outstanding 61,566 60,502 61,424 60,429
See notes to consolidated financial statements. 4 Signet Banking Corporation and Subsidiaries Statement of Changes in Consolidated Stockholders' Equity
- ---------------------------------------------------------------------------------------------------- Common Stock Capital Deferred (in thousands) (unaudited) Shares Amount Surplus Compensation - ---------------------------------------------------------------------------------------------------- Six Months Ended June 30, 1997 Balance at beginning of period 60,077,489 $300,387 $212,416 $(3,089) Net income Issuance of Common Stock 299,757 1,499 4,257 Restricted stock awards 5,402 27 159 (186) Amortization of deferred compensation 404 Cash dividends Change in net unrealized gains on securities available for sale, net of tax of $5 - ---------------------------------------------------------------------------------------------------- Balance at end of period 60,382,648 $301,913 $216,832 $(2,871) ==================================================================================================== Six Months Ended June 30, 1996 Balance at beginning of period 59,208,745 $ 296,044 $ 200,093 Net income Issuance of Common Stock 355,108 1,775 4,670 Cash dividends Change in net unrealized gains (losses) on securities available for sale, net of tax benefit of $24,748 - ---------------------------------------------------------------------------------------------------- Balance at end of period 59,563,853 $ 297,819 $ 204,763 ====================================================================================================
- ----------------------------------------------------------------------------------------- Unrealized Total Gains/(Losses) Retained Stockholders' (in thousands) (unaudited) on Securities Earnings Equity - ----------------------------------------------------------------------------------------- Six Months Ended June 30, 1997 Balance at beginning of period $15,133 $399,268 $924,115 Net income 31,076 31,076 Issuance of Common Stock 5,756 Restricted stock awards Amortization of deferred compensation 404 Cash dividends (25,324) (25,324) Change in net unrealized gains on securities available for sale, net of tax of $5 9 9 - ----------------------------------------------------------------------------------------- Balance at end of period $15,142 $405,020 $936,036 ========================================================================================= Six Months Ended June 30, 1996 Balance at beginning of period $ 45,198 $ 322,614 $ 863,949 Net income 61,676 61,676 Issuance of Common Stock 6,445 Cash dividends (23,761) (23,761) Change in net unrealized gains (losses) on securities available for sale, net of tax benefit of $24,748 (45,961) (45,961) - ----------------------------------------------------------------------------------------- Balance at end of period $ (763) $ 360,529 $ 862,348 =========================================================================================
5 Signet Banking Corporation and Subsidiaries Statement of Consolidated Cash Flows
- ------------------------------------------------------------------------------------------------------------------------ Six Months Ended June 30 - ------------------------------------------------------------------------------------------------------------------------ (in thousands) (unaudited) 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ Operating Activities Net Income $ 31,076 $ 61,676 Adjustments to reconcile net income to net cash (used) provided by operating activities: Provision for loan losses 29,750 25,051 Writedowns on foreclosed property 211 86 Depreciation and amortization 32,411 20,003 Securities available for sale gains (113) (756) Other gains, net (17,417) (14,448) Increase in interest receivable 3,518 (12,330) Increase in other assets 18,477 200,621 Increase in interest payable (2,629) 6,550 (Decrease) increase in other liabilities (226,904) (192,792) Proceeds from securitization of consumer loans 90,000 Proceeds from sales of loans held for sale 12,715,814 16,186,298 Purchases and originations of loans held for sale (12,577,221) (16,103,597) Proceeds from sales of trading account securities 10,960,776 8,409,487 Purchases of trading account securities (10,955,163) (8,473,753) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 12,586 202,096 Investing Activities Proceeds from sales of securities available for sale 9,608 812,459 Proceeds from maturities of securities available for sale 198,055 275,049 Purchases of securities available for sale (1,044) (1,303,843) Net decrease (increase) in loans (108,251) (564,169) Recoveries of loans previously charged-off 5,557 2,190 Purchases of premises and equipment (9,188) (15,909) Purchases of mortgage servicing rights (16,900) (14,821) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by investing activities 77,837 (809,044) Financing Activities Net increase in deposits 167,183 (113,085) Net increase in short-term borrowings 232,916 812,634 Payments on long-term debt (50,007) (3,012) Net issuance of common stock 6,160 6,445 Payment of cash dividends (25,324) (23,761) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 330,928 679,221 - ------------------------------------------------------------------------------------------------------------------------ Increase in cash and cash equivalents 421,351 72,273 Cash and cash equivalents at beginning of period 1,347,719 1,062,459 - ------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $1,769,070 $1,134,732 - ------------------------------------------------------------------------------------------------------------------------ Supplemental disclosures Interest paid $ 184,227 $ 167,652 Income taxes paid 9,526 9,697 Transfer of loans to foreclosed property 6,375 6,100 - ------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 6 Supplemental Notes to Quarterly Financial Statements (dollars in thousands) (unaudited) - -------------------------------------------------------------------------------- General The accompanying financial statements (unaudited) reflect all adjustments which are, in the opinion of management, necessary for a fair presentation. All such adjustments are of a normal recurring nature. The financial statements have been prepared based on the accounting policies as described in the 1996 annual report and as noted below, except certain amounts which have been reclassified for prior periods to conform to the 1997 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. Securities Available for Sale Securities available for sale are summarized as follows:
June 30, 1997 June 30, 1996 December 31, 1996 Fair Fair Fair Cost Value Cost Value Cost Value - --------------------------------------------------------------------------------------------------------------------------------- U.S. Government and agency obligations- Mortgage-backed securities $2,053,649 $2,068,580 $1,896,047 $1,890,831 $2,124,019 $2,135,422 Other 173,437 176,008 452,014 456,124 298,175 302,320 States and political subdivisions 11,777 12,016 33,774 34,702 22,244 22,784 Other 160,197 164,020 170,324 165,788 160,347 162,754 - --------------------------------------------------------------------------------------------------------------------------------- Total $2,399,060 $2,420,624 $2,552,159 $2,547,445 $2,604,785 $2,623,280 =================================================================================================================================
Income Taxes Differences between the effective rate of income taxes and the statutory rate arise principally from non-taxable interest on investments and loans. Securitizations Signet periodically securitizes loans, primarily consumer loans such as credit card receivables, home equity lines and student loans. In accordance with these agreements, a fixed amount of cash or excess servicing fees may be required to be set aside to cover credit losses and is included in other assets. Recourse obligations related to these transactions are not material. Amounts related to these securitizations are as follows:
Credit Home Equity Student Card Lines Loans - ---------------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 1997: Initial Amount Securitized Initial Gain Recorded Gain on Sales of Receivables Under Revolving Structures $ 1,766 At June 30, 1997: Receivables Outstanding $252,778 377,541 $403,160 Amount Set Aside to Absorb Credit Losses 5,288 5,977 - ---------------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 1996 Initial Amount Securitized $ 90,000 Initial Gain Recorded Gain on Sales of Receivables Under Revolving Structures $ 3,988 At June 30, 1996: Receivables Outstanding 275,000 438,368 Amount Set Aside to Absorb Credit Losses 5,288 - ---------------------------------------------------------------------------------------------------------------------------- At December 31, 1996: Receivables Outstanding $ 263,889 $406,896 $ 428,435 Amount Set Aside to Absorb Credit Losses 5,288 6,317 ============================================================================================================================
7 Supplemental Notes to Quarterly Financial Statements (continued) (dollars in thousands) (unaudited) Recent Accounting Statements Signet adopted Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," on January 1, 1997. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets, including securitizations, and extinguishments of liabilities. The adoption of SFAS No. 125 did not have a material impact on the Company's financial position or results of operations. Subsequent to the issuance of SFAS No. 125, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125," was issued. SFAS No. 127 defers the effective date of accounting for secured borrowings and collateral, repurchase agreements, dollar-roll, securities lending, and similar transactions until January 1, 1998. The effect of adopting the deferred requirements of SFAS No. 125 for existing transactions is not expected to have a material impact on the Company's financial position or results of operations. In February 1997, SFAS No. 128, "Earnings per Share," was issued, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently being used to compute earnings per share and to restate all prior periods. Under the new requirements, primary earnings per share will be replaced with "basic" earnings per share which excludes the dilutive effect of stock options. The impact of calculating basic earnings per share is expected to have no impact on the quarter ended June 30, 1997 primary earnings per share and result in a $0.01 per share increase in the primary earnings per share reported for the six months ended June 30, 1997 and the quarter ended June 30, 1996. The impact of calculating basic earnings per share is expected to result in a $0.02 per share increase in the primary earnings per share reported for the six months ended June 30, 1996. The impact of SFAS No. 128 on the calculation of fully diluted earnings per share for these periods is not expected to be material. Commercial Fraud Loss On March 19, 1996, Signet's management discovered that the Company was one of several major financial institutions that were victims of fraudulent commercial loan transactions which occurred prior to 1996. The Company had loan outstandings related to these transactions of approximately $81 million. Federal authorities informed the Company that there had been substantial recoveries of assets related to these transactions. Management recorded a $35 million commercial fraud loss in non-interest expense at December 31, 1995 and recorded the estimated probable recovery amount of $46 million in other assets as a receivable. The receivable represented an amount management believed was likely to be recovered based on facts and circumstances at the time. The amount of the recovery was based on the Company's share of known claims to the total amount held by federal authorities, less associated costs. The recovery amount was subject to change as additional assets were recovered and/or additional claims were asserted. In June 1997, Federal authorities distributed funds to the various banks victimized by the fraud. Signet's share represented principal and interest earned on the funds while held by the authorities. A portion of the funds received by Signet remain in dispute with the other financial institutions involved. Signet's share, net of the disputed amount, was applied against the receivable with the resulting excess amount of $3.6 million applied to non-interest income and as a reduction to non-interest expense. The Company will vigorously pursue all other sources of recovery, but currently is unable to determine the probability or amount of additional recoveries. Restructuring Charge In the second quarter of 1997, Signet recorded a restructuring charge of $58,712, $37,022 after-tax or $0.60 per share as a result of a comprehensive redesign program which commenced in June 1997 and is expected to continue into 1999. The objectives of the program were to align Signet's infrastructure with its business strategies to better serve customers, enhance revenues, and improve efficiency. The components of the restructuring charge were as follows:
Requiring 1997 Cash Cash Total Outflow Outflow - ---------------------------------------------------------------------------------------------- Severance and other personnel related costs $24,723 $24,723 $ 511 Facilities related charges 10,079 9,076 395 Technology write-offs and other charges 15,410 12,389 10,458 Goodwill write-off 8,500 - - - ---------------------------------------------------------------------------------------------- Totals $58,712 $46,188 $11,364 - ----------------------------------------------------------------------------------------------
As of June 30, 1997, the remaining accrual for restructuring related charges was $38,848. Merger with First Union Corporation On July 21, 1997, subsequent to the release of Signet's second quarter 1997 earnings, First Union Corporation ("First Union") announced that Signet and First Union signed a definitive merger agreement which would create the leading banking company in Virginia, based on combined deposits on June 30, 1997, of approximately $20 billion. As of June 30, 1997, Signet had assets of $12 billion and First Union had assets of $143 billion. First Union agreed to exchange 0.55 shares of its common stock for each share of Signet common stock. Reflecting First Union's previously announced two-for-one stock split payable on July 31, 1997, the exchange ratio would be 1.10 shares. The merger, which would be accounted for as a pooling of interests, is expected to be consummated by December 31, 1997, pending Signet shareholder approval, regulatory approval and other customary conditions of closing. 8 Signet Banking Corporation and Subsidiaries Financial Summary
- ---------------------------------------------------------------------------------------------------------------------- Three Months Ended June 30 Percent (dollars in thousands-- except per share) 1997 1996 Change - ---------------------------------------------------------------------------------------------------------------------- Earnings Net interest income (taxable equivalent) $ 121,942 $ 119,122 2.4% Net interest income 120,043 117,373 2.3 Net income (loss) * (1,974) 30,481 N/M - ---------------------------------------------------------------------------------------------------------------------- Per Common Share Net income (loss) * $ (0.03) $ 0.50 N/M Cash dividends declared 0.21 0.20 5.0 Book value 15.50 14.48 7.0 Period-end price 36.00 23.25 54.8 - ---------------------------------------------------------------------------------------------------------------------- Average Daily Balance Assets $11,441,515 $11,346,682 0.8 Earning assets 10,245,094 10,075,496 1.7 Loans (net of unearned income) 6,238,431 5,814,446 7.3 Managed loan portfolio 7,264,493 6,840,564 6.2 Deposits 7,805,959 7,525,462 3.7 Core deposits 7,568,155 7,219,199 4.8 Common stockholders' equity 936,233 847,007 10.5 Common shares outstanding 61,565,610 60,502,076 1.8 - ---------------------------------------------------------------------------------------------------------------------- Ratios Return on average assets * N/M% 1.08% N/M Return on average common stockholders' equity * N/M 14.47 N/M Net yield margin 4.77 4.75 0.4 Allowance for loan losses to: Non-performing loans 508.47 371.73 36.8 Non-performing assets 359.44 230.46 56.0 Net loans 1.89 2.14 (11.7) Non-performing assets to loans and foreclosed properties 0.52 0.92 (43.5) Stockholders' equity to assets 7.90 7.48 5.6 - ---------------------------------------------------------------------------------------------------------------------- At Period-end Assets $11,852,901 $11,525,813 2.8 Earning assets 10,573,586 10,227,741 3.4 Loans (net of unearned income) 6,345,196 5,912,220 7.3 Managed loan portfolio 7,346,172 6,925,588 6.1 Deposits 8,054,525 7,479,886 7.7 Core deposits 7,866,372 7,195,218 9.3 Common stockholders' equity 936,036 862,348 8.5 Non-performing assets 33,313 54,864 (39.3) Number of common stockholders 14,562 15,137 (3.8) Full-time employees 3,565 4,221 (15.5) Part-time employees 893 1,003 (11.0) ======================================================================================================================
- -------------------------------------------------------------------------------------------------------- Six Months Ended June 30 Percent (dollars in thousands-- except per share) 1997 1996 Change - -------------------------------------------------------------------------------------------------------- Earnings Net interest income (taxable equivalent) $ 240,938 $ 237,500 1.4% Net interest income 237,199 233,607 1.5 Net income (loss) * 31,076 61,676 (49.6) - -------------------------------------------------------------------------------------------------------- Per Common Share Net income (loss) * $ 0.51 $ 1.02 (50.0) Cash dividends declared 0.42 0.40 5.0 Book value Period-end price - -------------------------------------------------------------------------------------------------------- Average Daily Balance Assets $11,416,262 $11,207,156 1.9 Earning assets 10,231,690 9,890,747 3.4 Loans (net of unearned income) 6,263,904 5,690,458 10.1 Managed loan portfolio 7,304,838 6,725,763 8.6 Deposits 7,770,106 7,538,362 3.1 Core deposits 7,509,733 7,282,917 3.1 Common stockholders' equity 932,329 853,198 9.3 Common shares outstanding 61,423,904 60,429,366 1.6 - -------------------------------------------------------------------------------------------------------- Ratios Return on average assets * 0.55% 1.11% (50.5) Return on average common stockholders' equity * 6.72 14.54 (53.8) Net yield margin 4.75 4.83 (1.7) ======================================================================================================== The common stock of Signet Banking Corporation is traded on the New York Stock Exchange under the symbol "SBK". * The second quarter of 1997 included a $58.7 million pre-tax and $37.0 million after-tax restructuring charge. See management's discussion for further details. 9 Table 1 Selected Quarterly Financial Information
- ----------------------------------------------------------------------------------------------------------------------- 2nd Qtr 1st Qtr 4th Qtr 1997 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Summary of Operations (dollars in thousands -- except per share) Net interest income (taxable equivalent) $121,942 $118,996 $118,992 Less: taxable equivalent adjustment 1,899 1,840 2,273 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 120,043 117,156 116,719 Provision for loan losses 13,350 16,400 29,800 - ----------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 106,693 100,756 86,919 Non-interest income 60,145 64,115 89,561 Non-interest expense * 172,180 114,830 125,337 - ----------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) (5,342) 50,041 51,143 Applicable income taxes (benefit) (3,368) 16,991 17,498 - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) * $ (1,974) $ 33,050 $ 33,645 - ----------------------------------------------------------------------------------------------------------------------- Per common share: Net income * $ (0.03) $ 0.54 $ 0.55 Cash dividends declared 0.21 0.21 0.21 Book value 15.50 15.37 15.38 Average shares outstanding (in thousands) 61,566 61,281 61,089 Selected Average Balances (in millions) Assets $ 11,442 $ 11,391 $ 11,610 Earning assets 10,245 10,218 10,391 Loans (net of unearned income) 6,238 6,290 6,320 Managed loan portfolio 7,264 7,346 7,309 Deposits 7,806 7,734 7,709 Core deposits 7,568 7,451 7,337 Interest bearing liabilities 8,646 8,667 8,867 Stockholders' equity 936 928 911 Ratios Return on average assets * N/M% 1.18% 1.15% Return on average common stockholders' equity * N/M 14.44 14.69 Efficiency ratio (excluding restructuring charge and foreclosed property expense) * 62.72 62.27 62.31 Net interest spread 4.11 4.08 3.93 Net yield margin 4.77 4.72 4.56 Stockholders' equity to assets 7.90 7.91 7.88 Credit Quality Data (dollars in thousands) Non-performing assets $ 33,313 $ 40,669 $ 38,800 Accruing loans past due 90 days or more 68,924 59,604 71,484 Net charge-offs 14,842 14,865 21,552 Allowance for loan losses to: Non-performing loans 508.47% 449.83% 483.02% Non-performing assets 359.44 298.09 352.34 Net loans 1.89 1.95 2.15 Non-performing assets to loans and foreclosed properties 0.52 0.65 0.61 Net loan losses to average loans 0.95 0.95 1.36 =======================================================================================================================
- --------------------------------------------------------------------------------------------- 3rd Qtr 2nd Qtr 1996 1996 - --------------------------------------------------------------------------------------------- Summary of Operations (dollars in thousands -- except per share) Net interest income (taxable equivalent) $120,492 $119,122 Less: taxable equivalent adjustment 2,058 1,749 - --------------------------------------------------------------------------------------------- Net interest income 118,434 117,373 Provision for loan losses 19,000 13,794 - --------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 99,434 103,579 Non-interest income 68,129 63,871 Non-interest expense * 122,855 121,511 - --------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) 44,708 45,939 Applicable income taxes (benefit) 15,102 15,458 - --------------------------------------------------------------------------------------------- Net income (loss) * $ 29,606 $ 30,481 - --------------------------------------------------------------------------------------------- Per common share: Net income * $ 0.49 $ 0.50 Cash dividends declared 0.20 0.20 Book value 14.89 14.48 Average shares outstanding (in thousands) 60,738 60,502 Selected Average Balances (in millions) Assets $ 11,429 $ 11,347 Earning assets 10,204 10,075 Loans (net of unearned income) 5,928 5,814 Managed loan portfolio 6,933 6,841 Deposits 7,569 7,525 Core deposits 7,201 7,219 Interest bearing liabilities 8,781 8,694 Stockholders' equity 864 847 Ratios Return on average assets * 1.03% 1.08% Return on average common stockholders' equity * 13.63 14.47 Efficiency ratio (excluding restructuring charge and foreclosed property expense) * 64.92 66.16 Net interest spread 4.11 4.19 Net yield margin 4.70 4.75 Stockholders' equity to assets 7.74 7.48 Credit Quality Data (dollars in thousands) Non-performing assets $ 43,851 $ 54,864 Accruing loans past due 90 days or more 78,033 70,762 Net charge-offs 16,983 13,785 Allowance for loan losses to: Non-performing loans 441.17% 371.73% Non-performing assets 292.95 230.46 Net loans 2.08 2.14 Non-performing assets to loans and foreclosed properties 0.71 0.92 Net loan losses to average loans 1.15 0.95 =============================================================================================
* The second quarter of 1997 included a $58.7 million pre-tax and $37.0 million after-tax restructuring charge. See management's discussion for further details. 10 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. Signet provides interstate financial services through its principal subsidiary, Signet Bank, a Virginia banking corporation headquartered in Richmond. Signet Bank has banking offices in Virginia, Maryland and the District of Columbia. Signet engages in general commercial and consumer banking businesses and provides a full range of financial services to individuals, businesses and organizations through 230 banking offices, 249 automated teller machines, on-line INTERNET access and a 24-hour full-service Telephone Banking Center. Signet offers investment services including municipal bond, government, federal agency and money market sales and trading, foreign exchange trading, mutual funds and discount brokerage. In addition, it provides specialized services for trust, leasing, asset based lending, cash management, real estate and insurance. Signet's primary market area for its traditional banking business extends from Baltimore to Washington, south to Richmond, and on to Hampton Roads/Tidewater, Virginia. The Company markets several of its products nationally and is exploring the national marketing of other products. On July 21, 1997, First Union Corporation ("First Union") announced that Signet and First Union had signed a definitive merger agreement which would create the leading banking company in Virginia, based on combined deposits on June 30, 1997, of approximately $20 billion. As of June 30, 1997, Signet had assets of $12 billion and First Union had assets of $143 billion. First Union agreed to exchange 0.55 shares of its common stock for each share of Signet common stock. Reflecting First Union's previously announced two-for-one stock split payable on July 31, 1997, the exchange ratio would be 1.10 shares. The merger, which would be accounted for as a pooling of interests, is expected to be consummated by December 31, 1997, pending Signet shareholder approval, regulatory approval and other customary conditions of closing. On June 3, 1997, Signet announced the results of a comprehensive redesign program, named ADVANCE, that would enable it to achieve its strategic goal of becoming a leading national, customer-focused, information- based financial services company with a strong Mid-Atlantic presence. Signet began ADVANCE in October 1996. The objective was to align Signet's infrastructure with its business strategies to better serve customers, enhance revenues, improve efficiency and create superior value for shareholders. Implementation of ADVANCE was expected to add $10 million to revenues and to reduce expenses by $58 million for an annual total benefit of $68 million pre-tax by year-end 1998. These benefits are net of implementation costs and significant investments in technology. The per share improvement was expected to be $.72 after tax by December 1998, excluding the effect of the branch sales described below. However, the announced merger with First Union may have a significant impact on the implementation of ADVANCE initiatives, the effect of which cannot be determined at this time. In connection with ADVANCE, Signet recorded a $58.7 million pre-tax restructuring charge in the second quarter of 1997. As part of the restructuring, the Company planned to sell 39 of its branches, outsource some services such as student loan servicing and consolidate certain areas such as private banking and personal trust. These actions have been placed on hold for further review as a result of the pending merger with First Union. Signet also announced that its board of directors authorized the repurchase of up to 5 percent of its common shares outstanding, to be completed by year-end 1997. The plan to repurchase common shares was rescinded by the Board of Directors on July 18, 1997. During the second quarter, Signet signed a definitive agreement to sell its Corporate Trust business. The transaction is expected to close in the third quarter. The following discussion of the operating results and financial condition at June 30, 1997 is intended to help readers analyze the accompanying financial statements, notes and other supplemental information contained in this document. Results of operations for the six months ended June 30, 1997 are not necessarily indicative of results to be attained for any other period. Forward-Looking Statements When used in this quarterly report, in Form 10-K or other filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized Company executive officer, the words or phases "would be," "will allow," "intends to," "will likely result," "are expected to," "expects to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. While forward-looking statements are provided to assist in the understanding of the Company's anticipated future financial performance, the Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. Forward- looking statements are subject to significant risks and uncertainties, many of which are beyond the Company's control. Although the Company believes that the assumptions underlying its forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate. Actual results may differ materially from those contained in or implied by such forward-looking statements for a variety of reasons. Factors that might cause such a difference include, but are not limited to: sharp and/or rapid changes in interest rates that could, among other things, 11 impact the Company's interest margins; significant changes in the economic scenario from the currently anticipated scenario which could materially change anticipated credit quality, charge-off and delinquency trends and the ability to generate new loans; significantly increased competition in the banking and financial services industries; significant delays in or inability to grow revenues and/or control expenses to improve the Company's efficiency ratio; changes in the capital markets that could affect the ability of the Company to fund itself in a cost-effective manner; and significant changes in accounting, tax, or governmental and regulatory practices or requirements. Further information about factors affecting the Company's business and operations are included in the Company's most recent Form 10-K. In addition, any forward-looking statements relating to ADVANCE involve significant risks and uncertainties. Actual results derived from ADVANCE may differ significantly from the results discussed in such forward-looking statements. Factors that could cause such a difference include, but are not limited to: expected cost savings from ADVANCE cannot be fully realized or realized within the expected time frame; income or revenues from ADVANCE are lower than expected or operating costs are higher; competitive pressures in the banking and financial services industries increase significantly, particularly in connection with nationwide product delivery; business disruption related to implementation of certain ADVANCE programs or methodologies; general economic conditions either nationally or in states in which the Company seeks to expand its business opportunities are weaker than expected; or other unanticipated occurrences which could delay the implementation of all or part of ADVANCE, increase the costs associated with the project or decrease the financial benefits of the project. Table 2
Net Interest Income Analysis - ------------------------------------------------------------------------------------------------------------------------------ Second Quarter 1997 Compared Second Quarter 1997 Compared with Second Quarter 1996 with First Quarter 1997 - ------------------------------------------------------------------------------------------------------------------------------ Increase Change due to* Increase Change due to* Taxable Equivalent Basis (in thousands) (Decrease) Rate Volume (Decrease) Rate Volume - ------------------------------------------------------------------------------------------------------------------------------ Interest income: Loans, including fees $14,423 $4,347 $10,076 $2,734 $2,915 $(181) Securities available for sale 1,033 248 785 (903) 684 (1,587) Other earning assets (9,824) (5,539) (4,285) 2,847 402 2,445 - ------------------------------------------------------------------------------------------------------------------------------ Total interest income 5,632 1,736 3,896 4,678 3,606 1,072 Interest expense: Interest bearing deposits 6,073 3,682 2,391 822 709 113 Fed funds and repurchase agreements (5,469) (655) (4,814) 709 636 73 Long-term borrowings 2,208 236 1,972 201 567 (366) - ------------------------------------------------------------------------------------------------------------------------------ Total interest expense 2,812 3,264 (452) 1,732 1,751 (19) - ------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 2,820 $ 560 $ 2,260 $2,946 $2,363 $ 583 ==============================================================================================================================
Net Interest Income Analysis - ------------------------------------------------------------------------------------ YTD June 30, 1997 Compared with YTD June 30, 1996 - ------------------------------------------------------------------------------------ Increase Change due to* Taxable Equivalent Basis (in thousands) (Decrease) Rate Volume - ------------------------------------------------------------------------------------- Interest income: Loans, including fees $29,226 $ 1,963 $27,263 Securities available for sale 5,051 358 4,693 Other earning assets (23,442) (7,996) (15,446) - ------------------------------------------------------------------------------------- Total interest income 10,835 (1,198) 12,033 Interest expense: Interest bearing deposits 11,690 4,512 7,178 Fed funds and repurchase agreements (8,190) (906) (7,284) Long-term borrowings 3,897 (96) 3,993 - ------------------------------------------------------------------------------------- Total interest expense 7,397 3,465 3,932 - ------------------------------------------------------------------------------------- Net interest income $ 3,438 $(2,512) $ 5,950 =====================================================================================
* The change in interest due to both volume and rates has been allocated in proportion to the relationship of the absolute dollar amount of the changes in each. The changes in income and expense are calculated independently for each line in the schedule. The totals for the volume and rate columns are not the sum of the individual lines. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. Earnings Analysis Signet reported a consolidated net loss for the second quarter of 1997 of $2.0 million, or $.03 per share, after a $58.7 million, pre-tax, restructuring charge. This compared with $30.5 million, or $.50 per share, of net income in the second quarter of 1996. Net income for the first six months of 1997 was $31.1 million, or $.55 per share, compared with $61.7 million, or $1.02 per share, for the same period last year. Excluding the restructuring charge, earnings for the quarter and six months would have been $35.0 million, or $.57 per share, and $68.1 million, or $1.11 per share, respectively. The return on assets ("ROA") and return on common stockholders' equity ("ROE") for the six months ended June 30, 1997 was 0.51% and 6.72%, respectively. Adjusting for the restructuring charge, Signet's ROA for the quarter and six months ended June 30, 1997 was 1.23% and 1.20%, respectively. This compares with 1.08% and 1.11% for same periods in 1996. Adjusting for the restructuring charge, Signet's ROE for the quarter and six months ended June 30, 1997 was 14.92% and 14.68%, respectively, compared with 14.47% and 14.54% for the comparable periods for last year. Net Interest Income Taxable equivalent net interest income, a primary contributor to earnings, totaled $121.9 million for the quarter and $240.9 million for the six months ended June 30, 1997, up modestly from the same periods of 1996. The net yield margin for the second quarter of 1997 was 4.77%, a 5 basis point rise from the 12 first quarter of 1997. Table 3 analyzes the change in the net yield margin from the first to the second quarter of 1997. The increase in the net yield margin was primarily the result of returning a commercial mortgage loan to accruing status. The net interest spread of 4.11% for the second Table 3
Analysis of Change in Net Yield Margin First Quarter 1997 Versus Second Quarter 1997 - --------------------------------------------------------------------------------- Net Yield Margin for First Quarter 1997 4.72% Impact of returning loans to accrual status 0.06 Rise in funding costs (0.04) Other (net) - Primarily change in mix and yield on remaining earning assets 0.03 - --------------------------------------------------------------------------------- Net Yield Margin for Second Quarter 1997 4.77% =================================================================================
quarter of 1997 increased 3 basis points from the previous quarter and declined 8 basis points from the second quarter of 1996 level of 4.19%. The decline from the 1996 second quarter resulted from funding rates rising more rapidly than yields on earning assets. One reason funding rates rose is that Signet is using its direct mail expertise to grow core deposits, some of which offer a relatively high interest rate initially. The overall yield on earning assets for the second quarter of 1997 was 8.36%, up 7 basis points from the 1997 first quarter, while the rate paid for interest bearing liabilities amounted to 4.25%, up 4 basis points from the previous quarter. Signet uses various off-balance sheet interest rate derivatives as an integral part of its asset and liability management and trading activities. For Signet, variable rate assets generally exceed variable rate liabilities. To manage the resulting interest rate risk, Signet enters into derivative transactions. Derivative contracts, used for interest rate risk management purposes, decreased interest on earning assets by $1.5 million, $1.1 million and $1.4 million and decreased borrowing costs by $4.2 million, $5.0 million and $3.9 million for the second quarter of 1997, the first quarter of 1997 and the second quarter of 1996, respectively. The overall increase in the net yield margin as a result of these instruments amounted to 10, 15 and 10 basis points for the respective periods. Loan securitizations also have an effect on net interest income and the net yield margin. For a detailed analysis of this effect, refer to the discussion of Consumer Loan Growth and Table 8 elsewhere in this report. Provision and Allowance for Loan Losses The provision for loan losses totaled $13.4 million for the second quarter of 1997 down slightly from $13.8 million in the second quarter of 1996. Table 4 provides a summary of activity in the allowance for loan losses along with details of the charge-offs and recoveries by loan category. Net charge-offs amounted to $14.8 million in the second quarter of 1997, compared with $13.8 million for the same quarter in the prior year. For the first six months of 1997, net charge-offs totaled $29.7 million, up from $28.3 million in 1996. Higher consumer loan net charge-offs were nearly offset by net recoveries of commercial loans. The loan loss provision increased $4.7 million year-to-date resulting primarily from growth and increased losses in the loan-by-check portfolio. The loan-by-check risk test loans mentioned in footnote 1 to Table 4 were generated from direct mail solicitations in late 1994 as Signet ran controlled tests to determine the criteria to be used in future loan-by-check solicitations. Signet sold the remaining loan-by-check risk test portfolio for a modest gain in March, 1997. See footnote 1 to Table 4 for more detailed information on the loan-by-check charge-offs. The allowance for loan losses at June 30, 1997 was $119.7 million, or 1.89% of period-end loans, compared with the June 30, 1996 allowance of $126.4 million, or 2.14% of loans. The June 30, 1997 allowance for loan losses equated to 5.1 times quarter-end non-performing loans and 3.6 times quarter-end non-performing assets, up from June 30, 1996 when the allowance for loan losses amounted to 3.7 times non-performing loans and 2.3 times non-performing assets. The decline in the level of the allowance reflected the first quarter 1997 sale of the Company's loan-by-check risk test portfolio, in anticipation of which, $17.0 million of the allowance for loan losses was transferred to loans held for sale. 13 Table 4
Changes in Allowance for Loan Losses - ----------------------------------------------------------------------------------------------------------- Three Months Ended - ----------------------------------------------------------------------------------------------------------- June 30 March 31 - ----------------------------------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 1997 - ----------------------------------------------------------------------------------------------------------- Balance at beginning of period $121,232 $126,433 $136,707 Additions to allowance charged to expense 13,350 13,794 16,400 Transfer to loans held for sale (17,010) Loans charged off: Consumer (1) 15,509 12,656 15,023 Commercial 1,773 55 167 Real estate-construction 45 914 Real estate-mortgage (2) 96 2,186 1,737 - ----------------------------------------------------------------------------------------------------------- Total loans charged off 17,423 14,897 17,841 Recoveries of loans previously charged off: Consumer (1) 1,202 440 961 Commercial 428 440 1,910 Real estate-construction 188 132 71 Real estate-mortgage (2) 763 100 34 - ----------------------------------------------------------------------------------------------------------- Total recoveries 2,581 1,112 2,976 - ----------------------------------------------------------------------------------------------------------- Net loans charged off 14,842 13,785 14,865 - ----------------------------------------------------------------------------------------------------------- Balance at end of period $119,740 $126,442 $121,232 =========================================================================================================== Net loan losses (annualized) as a percentage of average loans: Consumer 2.38% 2.38% 2.39% Commercial 0.17 (0.05) (0.22) Real estate (0.49) 0.94 1.33 - ----------------------------------------------------------------------------------------------------------- Total 0.95% 0.95% 0.95% =========================================================================================================== Allowance for loan losses to net loans at end of period 1.95% =========================================================================================================== (1) Consumer includes loan-by-check as noted below: Net charge-offs: Loan-by-check risk tests $ (83) $ 6,504 $ 2,732 Other loan-by-check 13,096 4,626 10,261 - ----------------------------------------------------------------------------------------------------------- Total loan-by-check net charge-offs $ 13,013 $ 11,130 $ 12,993 =========================================================================================================== Average loan-by-check: Loan-by-check risk tests $136,598 $ 55,383 Other loan-by-check $943,641 676,586 912,404 - ----------------------------------------------------------------------------------------------------------- Total loan-by-check $943,641 $813,184 $967,787 =========================================================================================================== Net loan losses (annualized) as a percentage of average loan-by-check: Loan-by-check risk tests N/M 19.05% 19.73% Other loan-by-check 5.55% 2.73 4.50 - ----------------------------------------------------------------------------------------------------------- Total loan-by-check 5.52% 5.47% 5.37% ===========================================================================================================
Changes in Allowance for Loan Losses - ----------------------------------------------------------------------------------- Six Months Ended ----------------------- June 30 ---------------- (dollars in thousands) 1997 1996 - ---------------------------------------------------------------------------------- Balance at beginning of period $136,707 $129,702 Additions to allowance charged to expense 29,750 25,051 Transfer to loans held for sale (17,010) Loans charged off: Consumer (1) 30,532 23,937 Commercial 1,940 2,936 Real estate-construction 959 839 Real estate-mortgage (2) 1,833 2,789 - ---------------------------------------------------------------------------------- Total loans charged off 35,264 30,501 Recoveries of loans previously charged off: Consumer (1) 2,163 794 Commercial 2,338 831 Real estate-construction 259 180 Real estate-mortgage (2) 797 385 - ---------------------------------------------------------------------------------- Total recoveries 5,557 2,190 - ---------------------------------------------------------------------------------- Net loans charged off 29,707 28,311 - ---------------------------------------------------------------------------------- Balance at end of period $119,740 $126,442 ================================================================================== Net loan losses (annualized) as a percentage of average loans: Consumer 2.38% 2.34% Commercial (0.03) 0.14 Real estate 0.49 0.76 - ---------------------------------------------------------------------------------- Total 0.95% 1.00% - ---------------------------------------------------------------------------------- Allowance for loan losses to net loans at end of period 1.89% 2.14% ================================================================================== (1) Consumer includes loan-by-check as noted below: Net charge-offs: Loan-by-check risk tests $ 2,649 $ 13,737 Other loan-by-check 23,357 7,298 - --------------------------------------------------------------------------------- Total loan-by-check net charge-offs $ 26,006 $ 21,035 ================================================================================= Average loan-by-check: Loan-by-check risk tests $ 27,539 $147,561 Other loan-by-check 928,109 596,164 - --------------------------------------------------------------------------------- Total loan-by-check $955,648 $743,725 ================================================================================= Net loan losses (annualized) as a percentage of average loan-by-check: Loan-by-check risk tests 19.24% 18.62% Other loan-by-check 5.03 2.45 - -------------------------------------------------------------------------------- Total loan-by-check 5.44% 5.66% ================================================================================
(2) Real estate-mortgage includes real estate-commercial mortgage and real estate-residential mortgage. Real estate-residential mortgage charge-offs and recoveries were not significant for the periods presented. Non-Interest Income A significant portion of Signet's revenue is derived from non-interest related sources including service charges on deposit accounts, consumer loan servicing and service charge income, trust and other financial services income and other income. Signet's business strategies continued to emphasize non-interest operating income sources. Table 5 details the various components of non-interest income for the second quarter and first six months of 1997 compared with the same periods in 1996 as well as the first quarter of 1997. Non-interest income for the second quarter of 1997 was $60.1 million, down 6% from the second quarter of 1996. Several factors contributed to the decline. Service charges on deposit accounts as well as trust and other financial services income remained relatively level. Consumer loan servicing and service charge income, which totaled $11.8 million, was down 23% from last year's second 14 Table 5
Non-Interest Income and Expense - ---------------------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended ---------------------- ---------------------- June 30 March 31 June 30 ------------ ------------- ----------- (in thousands) 1997 1996 1997 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Non-interest income: Service charges on deposit accounts $ 17,250 $ 17,100 $ 17,180 $ 34,430 $ 33,331 Consumer loan servicing and service charge income 11,756 15,276 12,285 24,041 27,432 Trust and other financial services income 9,758 10,108 10,795 20,553 19,713 Trading profits 7,060 3,000 6,727 13,787 3,767 Mortgage servicing and origination 4,283 8,797 4,798 9,081 16,465 Other service charges and fees 4,749 3,916 4,786 9,535 7,798 Gain on sale of mortgage loans 204 2,606 1,677 1,881 4,182 Gain on sale of mortgage servicing 3,073 6,499 Other 5,075 (169) 5,764 10,839 1,944 - ---------------------------------------------------------------------------------------------------------------------------------- Non-interest operating income 60,135 63,707 64,012 124,147 121,131 Securities available for sale gains 10 164 103 113 756 - ---------------------------------------------------------------------------------------------------------------------------------- Total non-interest income $ 60,145 $ 63,871 $ 64,115 $124,260 $121,887 ================================================================================================================================== Non-interest expense: Salaries $ 47,668 $ 52,302 $ 47,356 $ 95,024 $101,002 Employee benefits 10,121 10,466 12,221 22,342 22,867 - ---------------------------------------------------------------------------------------------------------------------------------- Total staff expense 57,789 62,768 59,577 117,366 123,869 Supplies and equipment 10,790 9,985 10,718 21,508 19,590 Occupancy 9,104 9,520 8,992 18,096 19,714 External data processing services 9,090 8,333 8,804 17,894 15,479 Travel and communications 5,107 6,706 5,668 10,775 12,626 Restructuring charge 58,712 58,712 Public relations, sales and advertising 6,680 4,559 4,662 11,342 9,448 Professional services 5,551 3,797 3,846 9,397 7,110 Credit and collection 869 1,307 893 1,762 2,654 FDIC assessment 280 180 189 469 350 Foreclosed property - net (725) 552 874 149 (268) Other 8,933 13,804 10,607 19,540 26,554 - ---------------------------------------------------------------------------------------------------------------------------------- Total non-interest expense $172,180 $121,511 $114,830 $287,010 $237,126 ==================================================================================================================================
quarter primarily due to $3.8 million of gains associated with sales under existing securitizations. Mortgage servicing and origination income totaled $4.3 million for the second quarter of 1997 compared with $8.8 million in the second quarter of 1996. The 51% decline was a result of a decrease in the volume of mortgage loans originated due to the sale of Signet's residential mortgage loan production offices in December, 1996. The Company retained its mortgage servicing activities. The Company's mortgage servicing portfolio grew to $8.0 billion at June 30, 1997, up from $7.8 billion at March 31, 1997. Other service charges and fees totaled $4.7 million, up 21% versus the second quarter of 1996 primarily from increased ATM fees. Trading profits improved to $7.1 million for the second quarter of 1997, up from $3.0 million in the same period of 1996 due to stronger trends in rate and currency markets. The remaining portion of non-interest operating income, which included venture capital income, earnings on money recovered from the 1995 fraud loss (see notes to consolidated financial statements) and miscellaneous income from other sources, amounted to $5.1 million for the second quarter of 1997, up $5.2 million from the same period of the prior year. During 1996, charge-offs on loans held for sale on behalf of Capital One Bank (the successor to the Company's credit card operations) were charged to this category, resulting in a negative amount. Non-interest income decreased $4.0 million, or 6%, in the second quarter of 1997 compared with the first quarter of 1997. During the first quarter, Signet reported $1.5 million higher gains on sales of mortgage loans. Trust and other financial services income dropped $1.0 million from the first quarter. Also, during the first quarter of 1997, Signet recorded a modest gain on the sale of the loan-by-check risk test portfolio. 15 Table 6
Average Balance Sheet - ----------------------------------------------------------------------------------------------------------------------------------- Three Months Ended June 30 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Average Income\ Yield\ Average Income\ Yield\ (dollars in thousands) Balance Expense Rate Balance Expense Rate - ----------------------------------------------------------------------------------------------------------------------------------- Assets Earning assets (tax equivalent basis):* Interest bearing deposits with other banks $ 128,540 $ 1,800 5.54% $ 2,862 $ 43 5.94% Federal funds and resale agreements 924,454 13,089 5.60 703,429 9,543 5.37 Trading account securities 463,529 7,298 6.32 493,912 7,865 6.40 Loans held for securitization 300,000 5,992 8.03 Loans held for sale 68,813 1,011 5.81 381,530 9,579 9.93 Securities available for sale 2,421,327 45,348 7.49 2,379,317 44,315 7.45 Loans (net of unearned income): Consumer 2,406,937 65,333 10.89 2,055,518 54,725 10.71 Commercial 3,173,195 62,709 7.93 2,923,535 57,485 7.91 Real estate-construction 237,996 5,796 9.63 252,540 6,064 9.50 Real estate-commercial mortgage 205,993 6,940 13.51 348,219 8,188 9.46 Real estate-residential mortgage 214,310 4,283 7.99 234,634 4,176 7.12 - ---------------------------------------------------------------------------------------------------------------------------------- Total loans 6,238,431 145,061 9.33 5,814,446 130,638 9.04 - ---------------------------------------------------------------------------------------------------------------------------------- Total earning assets 10,245,094 $213,607 8.36% 10,075,496 $207,975 8.30% - ---------------------------------------------------------------------------------------------------------------------------------- Non-rate related assets: Cash and due from banks 406,387 514,523 Allowance for loan losses (120,768) (126,569) Premises and equipment (net) 180,649 197,471 Other assets 730,153 685,761 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $11,441,515 $11,346,682 - ---------------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Interest bearing liabilities: Deposits: Interest bearing demand $ 3,110,727 $ 27,427 3.54% $ 2,537,684 $ 18,209 2.89% Savings accounts 644,260 4,214 2.62 949,193 7,530 3.19 Savings certificates 2,198,855 26,316 4.80 2,158,040 25,395 4.73 Large denomination certificates 182,302 2,622 5.69 126,537 1,731 5.41 Foreign 55,502 774 5.52 179,726 2,415 5.32 - --------------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 6,191,646 61,353 3.97 5,951,180 55,280 3.74 Federal funds and repurchase agreements 2,080,252 24,308 4.62 2,491,809 29,777 4.73 Long-term borrowings 374,185 6,004 6.35 250,606 3,796 5.99 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 8,646,083 $ 91,665 4.25% 8,693,595 $ 88,853 4.11% - ---------------------------------------------------------------------------------------------------------------------------------- Non-interest bearing liabilities: Demand deposits 1,614,313 1,574,282 Other liabilities 244,886 231,798 Common stockholders' equity 936,233 847,007 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $11,441,515 $11,346,682 ================================================================================================================================== Net interest income/spread $121,942 4.11% $119,122 4.19% - ---------------------------------------------------------------------------------------------------------------------------------- Interest income to average earning assets 8.36% 8.30% Interest expense to average earning assets 3.59 3.55 - ---------------------------------------------------------------------------------------------------------------------------------- Net yield margin 4.77% 4.75% ==================================================================================================================================
16
- --------------------------------------------------------------------------------------- March 31 1997 - --------------------------------------------------------------------------------------- Average Income\ Yield\ (dollars in thousands) Balance Expense Rate - --------------------------------------------------------------------------------------- Assets Earning assets (tax equivalent basis):* Interest bearing deposits with other banks $ 55,596 $ 731 5.26% Federal funds and resale agreements 812,797 10,953 5.39 Trading account securities 450,428 7,080 6.37 Loans held for securitization Loans held for sale 103,956 1,587 6.11 Securities available for sale 2,505,700 46,251 7.38 Loans (net of unearned income): Consumer 2,354,234 63,725 10.98 Commercial 3,172,472 62,330 7.97 Real estate-construction 236,034 5,565 9.43 Real estate-commercial mortgage 237,069 5,117 8.75 Real estate-residential mortgage 289,850 5,590 7.71 - --------------------------------------------------------------------------------------- Total loans 6,289,659 142,327 9.18 - --------------------------------------------------------------------------------------- Total earning assets 10,218,136 $208,929 8.29% - --------------------------------------------------------------------------------------- Non-rate related assets: Cash and due from banks 403,811 Allowance for loan losses (133,705) Premises and equipment (net) 184,130 Other assets 718,355 - --------------------------------------------------------------------------------------- Total assets $11,390,727 - --------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Interest bearing liabilities: Deposits: Interest bearing demand $ 3,020,159 $ 26,569 3.57% Savings accounts 650,507 4,215 2.63 Savings certificates 2,236,645 25,821 4.68 Large denomination certificates 202,435 2,851 5.63 Foreign 80,758 1,075 5.32 - --------------------------------------------------------------------------------------- Total interest bearing deposits 6,190,504 60,531 3.97 - --------------------------------------------------------------------------------------- Federal funds and repurchase agreements 2,076,387 23,599 4.55 Long-term borrowings 400,013 5,803 5.80 - --------------------------------------------------------------------------------------- Total interest bearing liabilities 8,666,904 $ 89,933 4.21% - --------------------------------------------------------------------------------------- Non-interest bearing liabilities: Demand deposits 1,543,353 Other liabilities 252,088 Common stockholders' equity 928,382 - --------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $11,390,727 ======================================================================================= Net interest income/spread $118,996 4.08% - --------------------------------------------------------------------------------------- Interest income to average earning assets 8.29% Interest expense to average earning assets 3.57 - --------------------------------------------------------------------------------------- Net yield margin 4.72% =======================================================================================
- --------------------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Average Income\ Yield\ Average Income\ Yield\ (dollars in thousands) Balance Expense Rate Balance Expense Rate - --------------------------------------------------------------------------------------------------------------------------------- Assets Earning assets (tax equivalent basis):* Interest bearing deposits with other banks $ 92,270 $ 2,531 5.46% $ 7,747 $ 197 5.03% Federal funds and resale agreements 868,934 24,042 5.50 647,413 17,731 5.42 Trading account securities 457,014 14,378 6.34 499,976 15,987 6.43 Loans held for securitization 315,279 13,411 8.55 Loans held for sale 86,287 2,598 5.99 385,550 19,665 10.09 Securities available for sale 2,463,281 91,599 7.44 2,344,324 86,548 7.38 Loans (net of unearned income): Consumer 2,380,731 129,058 10.93 1,981,143 107,787 10.94 Commercial 3,172,836 125,039 7.95 2,907,962 113,991 7.88 Real estate-construction 237,020 11,361 9.53 248,889 12,126 9.64 Real estate-commercial mortgage 221,446 12,057 10.98 353,104 16,878 9.61 Real estate-residential mortgage 251,871 9,873 7.84 199,360 7,380 7.40 - --------------------------------------------------------------------------------------------------------------------------------- Total loans 6,263,904 287,388 9.25 5,690,458 258,162 9.12 - --------------------------------------------------------------------------------------------------------------------------------- Total earning assets 10,231,690 $422,536 8.33% 9,890,747 $411,701 8.37% - --------------------------------------------------------------------------------------------------------------------------------- Non-rate related assets: Cash and due from banks 405,106 521,782 Allowance for loan losses (127,201) (127,536) Premises and equipment (net) 182,380 196,892 Other assets 724,287 725,271 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $11,416,262 $11,207,156 - --------------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Interest bearing liabilities: Deposits: Interest bearing demand $ 3,065,693 $ 53,996 3.55% $ 2,506,128 $ 36,289 2.91% Savings accounts 647,366 8,429 2.63 1,098,800 19,025 3.48 Savings certificates 2,217,645 52,137 4.74 2,053,719 47,930 4.69 Large denomination certificates 192,313 5,473 5.66 118,865 3,256 5.42 Foreign 68,060 1,849 5.40 136,580 3,694 5.35 - --------------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 6,191,077 121,884 3.97 5,914,092 110,194 3.75 - --------------------------------------------------------------------------------------------------------------------------------- Federal funds and repurchase agreements 2,078,330 47,907 4.58 2,348,771 56,097 4.72 Long-term borrowings 387,027 11,807 6.07 251,799 7,910 6.21 - --------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 8,656,434 $ 181,598 4.23% 8,514,662 $174,201 4.11% - --------------------------------------------------------------------------------------------------------------------------------- Non-interest bearing liabilities: Demand deposits 1,579,029 1,624,270 Other liabilities 248,470 215,026 Common stockholders' equity 932,329 853,198 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $11,416,262 $ 11,207,156 ================================================================================================================================= Net interest income/spread $ 240,938 4.10% $237,500 4.26% - --------------------------------------------------------------------------------------------------------------------------------- Interest income to average earning assets 8.33% 8.37% Interest expense to average earning assets 3.58 3.54 - --------------------------------------------------------------------------------------------------------------------------------- Net yield margin 4.75% 4.83% =================================================================================================================================
* Includes the effects of taxable equivalent adjustments using the federal income tax rate and state tax rates, as applicable, reduced by the nondeductible portion of interest expense. 17 Non-Interest Expense Non-interest expense for the second quarter of 1997 totaled $172.2 million, up $50.7 million from the second quarter of 1996 due to the $58.7 million restructuring charge. Excluding the restructuring charge, non-interest expense for the second quarter of 1997 totaled $113.5 million, down $8.0 million, or 7%, from the second quarter of 1996, and down slightly from the first quarter of 1997. The restructuring charge consisted of $24.7 million for severance and other personnel related charges, $10.1 million for facilities, $8.5 million for writing off goodwill and $15.4 million for technology and other expenses. As of June 30, 1997, the remaining liability for restructuring related charges was approximately $38.9 million. Staff expense (salaries and employee benefits), the largest component of non-interest expense, totaled $57.8 million in the second quarter of 1997, an 8% decline from the second quarter of 1996. From June 30, 1996 to June 30, 1997, the number of full-time employees declined over 15% as a result of Signet selling its mortgage production offices in December 1996 along with the hiring freeze and elimination of positions implemented with ADVANCE. For the same period, the number of part-time employees declined 11%. Certain of the non-interest expense categories reflected costs associated with increased business volume. The $0.8 million increases in supplies and equipment expense as well in external data processing expense were attributable to servicing the expanded consumer loan base. Public relations, sales and advertising expense rose $2.1 million as Signet increased its consumer loan solicitation programs. This strategy was implemented to increase account growth and outstandings and has required significant out-of-pocket expenses to launch large scale but carefully planned national solicitations. The Company's solicitation strategy, which uses extensive testing, is designed to improve the efficiency of the solicitation process, thereby improving opportunities to create value by controlling credit exposure and creating higher probabilities for successful growth. The success of this strategy is evidenced by the growth in the total managed consumer loan portfolio from $1.6 billion at December 31, 1993 to $3.5 billion at June 30, 1997. Since year-end 1996, Signet's managed consumer loan portfolio has grown $106 million. The slower growth rate in 1997 is attributable to the March 1997 sale of the $76 million loan-by-check risk test portfolio. Travel and communications expense declined $1.6 million, or 24% from the second quarter last year. The decrease resulted largely from selling the mortgage origination business in December 1996. Lower operating losses along with the termination of the service level agreement with Capital One and a reduction to non-interest expense for the excess funds recovered from the 1995 fraud loss (see notes to consolidated financial statements), accounted for an improvement in other non-interest expense. Excluding the restructuring charge, non-interest expense dropped $1.4 million from the first quarter of 1997 primarily due to lower staff and foreclosed property expenses. The lower staff expenses resulted principally from higher payroll taxes in the first quarter related to incentive payments. Signet's efficiency ratio (the ratio of non-interest expense to taxable equivalent operating income) excluding the restructuring charge and foreclosed property expense was 63% for the second quarter of 1997, an improvement from 66% for the second quarter of 1996 but up slightly from the first quarter. Income Taxes Signet recorded a $3.4 million income tax benefit for the quarter and income tax expense of $13.6 million for the six months ended June 30, 1997, compared with expense of $15.5 million and $31. 6 million for the same periods of 1996. The second quarter 1997 tax benefit resulted from the restructuring charge. Financial Condition Average earning assets totaled $10.2 billion for the second quarter of 1997, as shown in Table 6--Average Balance Sheet, a 2% increase from the 1996 level for the same quarter. The portfolios experiencing the largest declines were loans held for securitization ($300 million) and loans held for sale ($313 million), while loans, interest bearing deposits with other banks, federal funds sold and resale agreements and securities available for sale increased by $424 million, $126 million, $221 million and $42 million, respectively. The securitization of student loans in December, 1996, reduced the 1997 average and therefore distorts the comparison of on-balance sheet loan balances. Including securitized assets and loans held for securitization, average managed loans grew $424 million, or 6%, from the second quarter of 1996 to the same quarter of 1997. During the 1997 first quarter, the Company sold $165 million of adjustable rate residential mortgage loans and the $76 million portfolio of loan-by-check risk test receivables. Average balances increased from the 1996 second quarter in the consumer and commercial loan categories, while all three of the real estate loan categories - construction, commercial mortgage and residential mortgage average balances declined. Consumer loans averaged $2.4 billion for the second quarter of 1997, a 17% increase from the second quarter of 1996. Refer to the Consumer Loan Growth section for a detailed discussion of this topic. Commercial loans averaged $3.2 billion for the second quarter of 1997, a 9% increase from last year, as Signet successfully grew its leasing portfolio and targeted certain specialized industries. Real estate-commercial mortgage loans averaged $206 million, down 41% from the 1996 second quarter. Real estate-commercial mortgage loans decreased partially as a result of the sale of approximately $43 million of these loans in 1996. Real estate-residential mortgage loans fell $20 million, or 9%, from the second quarter 1996 to average 18 $214 million as Signet sold approximately $27 million of adjustable rate residential mortgage loans in December 1996 and an additional $165 million in the first quarter of 1997. Trading account securities averaged $464 million for the second quarter of 1997, down 6% from the $494 million level for the same period last year. Securities available for sale for the second quarter of 1997 averaged $2.4 billion, an increase of $42 million over the second quarter of 1996 level. Interest bearing liabilities averaged $8.6 billion in the second quarter of 1997, down $48 million from the second quarter of 1996. Average deposits totaled $7.8 billion for the second quarter of 1997, up 4% from the second quarter of 1996. Core deposits averaged $7.6 billion for the 1997 second quarter, up 5% from the 1996 second quarter. Savings accounts, which fell $305 million, was the only core deposit category which experienced a decline. Until the end of June, 1996, savings accounts included deposits held on behalf of Capital One Bank as collateral for Capital One's secured card product. Approximately $462 million of the savings deposits were transferred to another financial institution in the first quarter of 1996 and the remaining $237 million were transferred to Capital One at the end of the second quarter of 1996. These transfers caused the majority of the decline in average savings accounts. Interest bearing demand deposits increased $573 million, non-interest bearing demand deposits rose $40 million and savings certificates were up $41 million. Signet is using its direct mail expertise to grow core deposits. At June 30, 1997, a total of approximately $819 million of interest bearing demand deposits had been obtained in that manner. The competition among financial institutions for these deposits and increased consumer awareness have effectively increased the relative cost of and reduced the overall benefits received from these deposits. Table 7
Managed Consumer Loan Portfolio - --------------------------------------------------------------------------------------------------------------------------------- Three Months Ended - --------------------------------------------------------------------------------------------------------------------------------- June 30 March 31 December 31 September 30 June 30 (in thousands) 1997 1997 1996 1996 1996 - --------------------------------------------------------------------------------------------------------------------------------- Average balances: Installment loans $1,166,105 $1,191,192 $1,172,210 $1,015,639 $1,035,592 Student loans 806,282 801,276 829,001 788,904 776,326 Home equity loans 203,075 184,960 171,865 147,376 122,649 Credit card 64,089 65,754 55,954 48,845 60,792 Other loans 167,386 111,052 69,445 60,968 60,159 - --------------------------------------------------------------------------------------------------------------------------------- Sub-total average consumer loan portfolio 2,406,937 2,354,234 2,298,475 2,061,732 2,055,518 - --------------------------------------------------------------------------------------------------------------------------------- Consumer loans held for sale 2,035 161,860 202,029 Student loans held for securitization 283,696 300,000 300,000 - --------------------------------------------------------------------------------------------------------------------------------- Total average on-balance sheet portfolio 2,406,937 2,356,269 2,582,171 2,523,592 2,557,547 Securitized home equity loans 386,830 400,729 414,176 429,728 451,118 Securitized student loans 377,175 389,321 21,412 Securitized credit card loans 262,057 263,889 269,324 275,000 275,000 - --------------------------------------------------------------------------------------------------------------------------------- Total securitized consumer loans 1,026,062 1,053,939 704,912 704,728 726,118 Less loans to be sold to Capital One (161,860) (202,029) - --------------------------------------------------------------------------------------------------------------------------------- Total average managed consumer loan portfolio $3,432,999 $3,410,208 $3,287,083 $3,066,460 $3,081,636 ================================================================================================================================= Period-end balances: Installment loans $1,164,452 $1,165,886 $1,212,492 $1,128,607 $ 994,243 Student loans 813,227 808,222 756,340 820,319 773,196 Home equity loans 209,259 193,155 181,879 164,805 135,064 Credit card 75,670 65,949 69,287 47,524 49,630 Other loans 208,701 141,116 80,560 59,989 64,230 - --------------------------------------------------------------------------------------------------------------------------------- Sub-total period-end consumer loan portfolio 2,471,309 2,374,328 2,300,558 2,221,244 2,016,363 - --------------------------------------------------------------------------------------------------------------------------------- Consumer loans held for sale 194,097 Student loans held for securitization 300,000 300,000 - --------------------------------------------------------------------------------------------------------------------------------- Total period-end on-balance sheet portfolio 2,471,309 2,374,328 2,300,558 2,521,244 2,510,460 Securitized home equity loans 377,494 393,141 406,776 420,446 438,368 Securitized student loans 370,705 384,002 394,691 Securitized credit card loans 252,777 263,889 263,889 275,000 275,000 - --------------------------------------------------------------------------------------------------------------------------------- Total securitized consumer loans 1,000,976 1,041,032 1,065,356 695,446 713,368 Less loans to be sold to Capital One (194,097) - --------------------------------------------------------------------------------------------------------------------------------- Total period-end managed consumer loan portfolio $3,472,285 $3,415,360 $3,365,914 $3,216,690 $3,029,731 =================================================================================================================================
19 Consumer Loan Growth Consumer loans averaged $2.4 billion for the second quarter of 1997, a 17% increase from the second quarter of 1996. The growth was achieved through a variety of products offered to carefully targeted customer segments. In 1994, Signet expanded its use of information-based strategies which significantly increased growth in the consumer loan portfolio. This technique involved generating a data base of potentially creditworthy customers for particular products and then following up with direct mail solicitations. Much of the growth was in a new product, loan-by-check, whereby customers received a direct-mail solicitation in the form of a check for a specified loan amount. To activate the loan, customers simply endorse and present the check at their local bank. Signet also is beginning to apply information-based strategies to home equity line, closed-end second mortgage, student and small business loans. Solicitations in these areas are in testing stages. These tests are designed to help Signet develop products that are both appealing to customers and economically profitable for the Company. As a result of these solicitations, from June 30, 1996 to June 30, 1997, the installment loan portfolio (primarily loan-by-check) grew $170 million and the closed-end second mortgage loan portfolio was up $154 million. In addition, the student loan portfolio (including securitized loans) increased $111 million. During the first quarter of 1997, the growth in Signet's loan-by-check portfolio was not significant as the $76 million portfolio of loan-by-check risk test receivables was sold. Growth in the second quarter was modest as the Company continues to test a variety of loan-by-check products using different credit criteria. The managed consumer loan portfolio is comprised of consumer loans, consumer loans held for securitization and securitized consumer loans. Securitized consumer loans are not assets of the Company and, therefore, are not shown on the balance sheet. Signet's managed consumer loan portfolio increased by $443 million, or 15%, from June 30, 1996 to June 30, 1997 as indicated in Table 7. Table 8
Impact of Consumer Loan Securitizations - -------------------------------------------------------------------------------------------------------------------------------- 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr (dollars in thousands) 1997 1997 1996 1996 1996 - -------------------------------------------------------------------------------------------------------------------------------- Statement of Income Net interest income $ 120,043 $ 117,156 $ 116,719 $ 118,434 $ 117,373 Provision for loan losses 13,350 16,400 29,800 19,000 13,794 Non-interest income 60,145 64,115 89,561 68,129 63,871 Non-interest expense 172,180 114,830 125,337 122,855 121,511 - -------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes $ (5,342) $ 50,041 $ 51,143 $ 44,708 $ 45,939 - -------------------------------------------------------------------------------------------------------------------------------- Adjustments for Securitizations Net interest income $ 11,986 $ 12,401 $ 11,862 $ 12,206 $ 12,484 Provision for loan losses 3,036 2,828 2,682 3,276 2,322 Non-interest income (8,037) (8,593) (17,330) (7,575) (11,750) Non-interest expense - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) to income (loss) before income taxes $ 913 $ 980 $ (8,150) $ 1,355 $ (1,588) - -------------------------------------------------------------------------------------------------------------------------------- Adjustments for Loans To Be Sold to Capital One Net interest income $ (2,333) $ (3,322) Provision for loan losses Non-interest income 2,333 3,322 Non-interest expense - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) to income (loss) before income taxes - -------------------------------------------------------------------------------------------------------------------------------- Managed Statement of Income (adjusted) Net interest income $ 132,029 $ 129,557 $ 128,581 $ 128,307 $ 126,535 Provision for loan losses 16,386 19,228 32,482 22,276 16,116 Non-interest income 52,108 55,522 72,231 62,887 55,443 Non-interest expense 172,180 114,830 125,337 122,855 121,511 - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes $ (4,429) $ 51,021 $ 42,993 $ 46,063 $ 44,351 - ---------------------------------------------------------------------------------------------------------------------------------- As reported: Average earning assets $10,245,094 $10,218,136 $10,390,925 $10,203,525 $10,075,496 Return on assets N/M 1.18% 1.15% 1.03% 1.08% Net yield margin 4.77% 4.72 4.56 4.70 4.75 On a managed basis: Average earning assets $11,271,156 $11,272,075 $11,095,837 $10,746,393 $10,599,585 Return on assets N/M 1.10% 0.92% 1.01% 1.00% Net yield margin 4.77% 4.73 4.69 4.83 4.87 Yield on managed consumer loan portfolio 10.96% 11.03% 10.87% 10.86% 10.89% ==================================================================================================================================
20 Table 9
Non-Performing Assets - ---------------------------------------------------------------------------------------------------------------------------- June 30 March 31 December 31 September 30 June 30 (dollars in thousands) 1997 1997 1996 1996 1996 - ---------------------------------------------------------------------------------------------------------------------------- Non-accrual loans: Commercial $17,245 $10,230 $ 8,850 $10,672 $ 7,552 Consumer 2,836 2,729 2,404 2,374 1,694 Real estate - construction 916 2,577 2,842 1,206 9,596 Real estate - mortgage * 2,552 11,415 14,207 14,866 15,172 - ---------------------------------------------------------------------------------------------------------------------------- Total non-accrual loans 23,549 26,951 28,303 29,118 34,014 Foreclosed properties 9,764 13,718 10,497 14,733 20,850 - ---------------------------------------------------------------------------------------------------------------------------- Total non-performing assets $33,313 $40,669 $38,800 $43,851 $54,864 ============================================================================================================================ Percentage to loans (net of unearned) and foreclosed properties 0.52% 0.65% 0.61% 0.71% 0.92% Allowance for loan losses to: Non-performing loans 508.47 449.83 483.02 441.17 371.73 Non-performing assets 359.44 298.09 352.34 292.95 230.46 ============================================================================================================================ * 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, 1997 totaled $33.3 million, or .52 % of loans and foreclosed properties. This compares favorably with $54.9 million, or .92 %, respectively, at June 30, 1996. Overall non-performing real estate assets declined $21.6 million from June 30, 1996 to June 30, 1997, including an $11.1 million decline in foreclosed properties. Foreclosed properties totaled $9.8 million at the end of the second quarter of 1997, and were equal to 29% of total non-performing assets and 74% of non-performing real estate assets. Signet sold $4.9 million of foreclosed properties during the second quarter of 1997. Accruing loans past due 90 days or more as to principal or interest payments totaled $68.9 million, $59.6 million and $70.8 million as of June 30, 1997, March 31, 1997 and June 30, 1996, respectively. The details of these past due loans are displayed in Table 10. The past due commercial and real estate loans were in the process of collection and were adequately collateralized. The improvement in loan delinquency totals from the prior year-end is primarily attributable to the sale of the loan-by-check risk test portfolio mentioned earlier. Past due student loans accounted for $28.6 million, or 41%, of all the past due loans. Of the past due student loans, more than 95% were indirectly government guaranteed and do not represent material loss exposure to Signet. Table 10
Accruing Loans Past Due 90 Days or More - -------------------------------------------------------------------------------------------------------------------------- June 30 March 31 December 31 September 30 June 30 (dollars in thousands) 1997 1997 1996 1996 1996 - -------------------------------------------------------------------------------------------------------------------------- Commercial $18,152 $10,164 $ 6,334 $ 6,969 $ 5,308 Consumer: Student loans 28,580 28,705 35,763 45,159 37,374 Credit card 1,693 1,917 2,180 1,950 3,396 Loan-by-check-risk tests 5,890 6,865 7,530 Loan-by-check other 12,235 10,803 9,272 8,321 5,666 Other consumer 1,352 2,397 2,356 2,320 2,286 - -------------------------------------------------------------------------------------------------------------------------- Total consumer 43,860 43,822 55,461 64,615 56,252 Mortgage 6,743 5,547 7,508 6,083 6,197 Construction 169 71 2,181 366 3,005 - -------------------------------------------------------------------------------------------------------------------------- Total $68,924 $59,604 $71,484 $78,033 $70,762 ==========================================================================================================================
21 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, 1997, stockholders' equity totaled $936 million, an increase of $74 million, or 9%, from the June 30, 1996 level of $862 million. Since December 31, 1996, stockholders' equity increased $12 million as net income, the issuance of common stock and net unrealized gains on securities available for sale exceeded dividends declared. During the first half of 1997, the change in net unrealized gains and losses on securities available for sale, net of tax, increased equity by a nominal amount. At June 30, 1997, the net unrealized gains, net of tax, related to securities available for sale, totaled $15 million. Dividends declared during the second quarter of 1997 were $12.7 million or $0.21 per common share. At June 30, 1997, 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. As detailed in Table 11, the Company's consolidated risk-based capital ratios at June 30, 1997 were 14.36% and 10.99% for Total Capital and Tier I Capital, respectively. Signet's leverage ratio at June 30, 1997 was 7.73%. The Company's total stockholders' equity to assets ratio improved to 7.90% at June 30, 1997 up from 7.48% at June 30, 1996. Table 11
Selected Capital Data - ---------------------------------------------------------------------------------------------------------------- June 30 December 31 - ---------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1997 1996 1996 - ---------------------------------------------------------------------------------------------------------------- Qualifying common stockholders' equity $ 920,894 $ 861,171 $ 908,982 Less goodwill and other disallowed intangibles (40,301) (55,525) (52,163) - ---------------------------------------------------------------------------------------------------------------- Total Tier I capital 880,593 805,646 856,819 Qualifying debt 170,000 63,667 211,667 Qualifying allowance for loan losses 100,110 97,863 99,793 - ---------------------------------------------------------------------------------------------------------------- Total Tier II capital 270,440 161,530 311,460 - ---------------------------------------------------------------------------------------------------------------- Total risked-based capital $1,151,033 $ 967,176 $1,168,279 ================================================================================================================ Total risk-adjusted assets $8,015,901 $7,800,477 $7,946,546 ================================================================================================================ Ratios: Tier I capital 10.99% 10.33% 10.78% Total risk-based capital 14.36 12.40 14.70 Tier I leverage 7.73 7.14 7.43 Tangible Tier I leverage 7.03 6.49 6.72 Common equity to assets 7.90 7.48 7.88 Common dividend payout ratio (year-to-date) 82.35 39.22 39.32 Book value per share $ 15.50 $ 14.48 $ 15.38 ================================================================================================================
Interest Rate Sensitivity Signet's interest rate sensitivity position is managed by the Enterprise Risk Management Committee ("ERMC") 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. ERMC routinely uses derivatives such as interest rate swaps to manage the Company's interest rate risk. At June 30, 1997, the notional value of the Company's derivative products for the purpose of managing interest rate risk were $1.2 billion of interest rate swaps and $650 million of interest rate floors. ERMC, 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 0.5% impact on rate sensitive income over the next twelve months, reflecting Signet's conservative balance sheet strategy. ERMC 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. 22 Liquidity 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 1997 maintained the Company's strong liquidity position. During the first half of 1997, Signet's average loan balances were entirely funded with core deposits. Signet's equity base, as noted earlier, also provides a stable source of funding. The parent company has not recently relied on the capital markets for funding. During the second quarter of 1996, Signet Bank established a $2.5 billion Senior and Subordinated Bank Note facility due from 30 days to 30 years from date of issue. A total of $150 million of subordinated bank notes had been issued under the facility at June 30, 1997. For the first half of 1997, cash and cash equivalents increased $421 million primarily due to a rise in federal funds sold and securities purchased under resale agreements as well as an increase in interest bearing deposits with other banks which more than offset a decline in cash and due from banks. Cash provided by operations was $13 million for this time period. Cash provided by investing activities amounted to $77 million principally due to sales and maturities of securities available for sale which more than offset an increase in loans. Cash provided by financing activities amounted to $331 million primarily due to an increase in short-term borrowings and deposits. 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings On March 19, 1996, Signet's management discovered that the Company was one of several major financial institutions that were victims of fraudulent commercial loan transactions which occurred prior to 1996. The Company had loan outstandings related to these transactions of approximately $81 million. Federal authorities informed the Company that there had been substantial recoveries of assets related to these transactions. Management recorded a $35 million commercial fraud loss in non-interest expense at December 31, 1995 and recorded the estimated probable recovery amount of $46 million in other assets as a receivable. The receivable represented an amount management believed was likely to be recovered based on facts and circumstances at the time. The amount of the recovery was based on the Company's share of known claims to the total amount held by federal authorities, less associated costs. The recovery amount was subject to change as additional assets were recovered and/or additional claims were asserted. In June 1997, Federal authorities distributed funds to the various banks victimized by the fraud. Signet's share represented principal and interest earned on the funds while held by the authorities. A portion of the funds received by Signet remain in dispute with the other financial institutions involved. Signet's share, net of the disputed amount, was applied against the receivable with the resulting excess amount of $3.6 million applied to non-interest income and as a reduction to non-interest expense. 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 is involved in proceedings in the United States District Court for the Eastern District of Virginia, and in the United States District Court for the Eastern District of Pennsylvania, in which the relief sought will determine whether the Company has any on-going duties, or liabilities, to any of the financial institutions to which the Company sold interests in the fraudulent loans. The three plaintiff 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 all claims made against it in these and any other similar proceedings. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 11 - Computation of Earnings Per Share Exhibit 27 - Financial Data Schedule (filed electronically) (b) Reports on Form 8-K: The Registrant filed a Current Report on Form 8-K dated June 3, 1997 announcing the results of a comprehensive redesign program that would enable the Registrant to achieve its strategic goal of becoming a national, customer focused, information-based financial services company. The Registrant filed a Current Report on Form 8-K dated July 21, 1997 reporting that the Registrant and First Union Corporation signed a definitive merger agreement. 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, 1997 /s/ Wallace B. Millner III ----------------------------------------- Wallace B. Millner III Vice Chairman and Chief Financial Officer (Principal Financial Officer) Date: August 8, 1997 /s/ W. H. Catlett, Jr. ----------------------------------------- W. H. Catlett, Jr. Executive Vice President and Controller (Principal Accounting Officer) 24 EX-11 2 EXHIBIT 11 SIGNET BANKING CORPORATION AND SUBSIDIARIES FORM 10-Q EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
Three Months Ended June 30 - ------------------------------------------------------------------------------------------------------------ (dollars in thousands-- except per share) 1997 1996 - ------------------------------------------------------------------------------------------------------------ Common and common equivalent: Average shares outstanding 60,307,099 59,471,286 Dilutive stock options--based on the treasury stock method using average market price 1,102,101 1,030,790 ============================================================================================================ Shares used 61,409,200 60,502,076 ============================================================================================================ Net income (loss) applicable to Common Stock $ (1,974) $ 30,481 ============================================================================================================ Per share amount $ (0.03) $ 0.50 ============================================================================================================ Assuming full dilution: Average shares outstanding 60,307,099 59,471,286 Dilutive stock options--based on the treasury stock method using the period end market price, if higher than the average market price 1,258,511 1,030,790 ============================================================================================================ Shares used 61,565,610 60,502,076 ============================================================================================================ Net income (loss) applicable to Common Stock $ (1,974) $ 30,481 ============================================================================================================ Per share amount $ (0.03) $ 0.50 ============================================================================================================
Six Months Ended June 30 - ------------------------------------------------------------------------------------------------------------ (dollars in thousands-- except per share) 1997 1996 - ------------------------------------------------------------------------------------------------------------ Common and common equivalent: Average shares outstanding 60,228,792 59,383,180 Dilutive stock options--based on the treasury stock method using average market price 1,116,907 1,041,210 - ------------------------------------------------------------------------------------------------------------ Shares used 61,345,699 60,424,390 ============================================================================================================ Net income (loss) applicable to Common Stock $ 31,076 $ 61,676 ============================================================================================================ Per share amount $ 0.51 $ 1.02 ============================================================================================================ Assuming full dilution: Average shares outstanding 60,228,792 59,383,180 Dilutive stock options--based on the treasury stock method using the period end market price, if higher than the average market price 1,195,112 1,046,186 =========================================================================================================== Shares used 61,423,904 60,429,366 =========================================================================================================== Net income (loss) applicable to Common Stock $ 31,076 $ 61,676 - ------------------------------------------------------------------------------------------------------------ Per share amount $ 0.51 $ 1.02 ============================================================================================================
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 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SIGNET BANKING CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JUN-30-1997 543,005 215,871 1,010,194 554,546 27,155 0 0 6,567,857 119,740 11,852,901 8,054,525 2,195,652 316,681 350,007 0 0 301,913 634,123 11,852,901 283,944 0 134,853 418,797 121,884 181,598 237,199 29,750 113 287,010 44,699 13,623 0 0 31,076 0.51 0.51 4.75 23,549 68,924 0 0 136,707 35,264 5,557 119,740 109,406 0 10,334
-----END PRIVACY-ENHANCED MESSAGE-----