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Signet Restructuring: A Bid to Escape Bricks and Mortar

By Amy Olmstead
Staff Reporter

Signet Banking's


announcement of a major restructuring might be the regional bank's last chance to stave off buyers hungry for a piece of its Middle Atlantic turf.

The Richmond, Va.-based bank, with branches in Virginia, Maryland and Washington, was once thought to be nuzzling with the mergers and acquisitions crowd. But now it is staking its continued independence on a plan to slash costs and consolidate certain services.

As part of the plan, Signet has let go 327 employees, or about 7.5% of its workforce. The firm also has announced a $57 million pretax charge for this quarter as part of the restructuring, which will include other cost-cutting measures. The company added that it would buy back about 5% of its common shares by the end of the year. The plan will mean $58 million in savings and an increase of $10 million in revenue by the end of 1998.

"It's their last chance at developing this franchise into a high performer, and if they're unable to do that in this restructuring, they will be more likely to be bought out," says banking analyst Vernon Plack at the Virginia firm of

Scott & Stringfellow

, which has done no underwriting for the bank. Plack believes the restructuring will take the bank from an industry underperformer to a more profitable position, which should boost stock value and ward off suitors.

As part of the plan, Signet plans to sell 39 of its branches in less populated areas, centralize and streamline operations and exploit its extensive database of customer information to market an assortment of banking services nationwide. The branch sales, while expected to reap a premium for Signet, are also expected to reduce annual operating earnings.

Signet is reforming itself from a traditional branch-based bank into a consumer-lending company in an effort to keep pace with other, stronger-performing major regional banks. In the past year, major regional banks have seen their stock prices rise an average of 40%, according to


, a market-data service. During that period, Signet gained 29%. Tuesday, Signet lost 1 to 32 1/2.

"Consumer lending, if done right, can be highly profitable, but it has above-average risk exposure," says David West, an analyst at

Davenport & Co.

, which has done no underwriting for Signet.

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Signet's bid to evade courtship runs against the major trend among regional banks. The dollar value of mergers and acquisitions in the banking and financial services industry led all other sectors in the first three months of 1997, according to

Houlihan Lokey's MergerStat

, a newsletter that tracks M&A activity.

Deals such as

Banc One's

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purchase of

First USA


First Bank System's


takeover of

U.S. Bancorp

have highlighted a plethora of banking nuptials. The trend should continue, pushed by savings from economies of scale and streamlined operations and the strength of the banking sector, says Brendan McGovern, an equity analyst at

Standard & Poor's

. Deregulation of financial services, the high stock value of many companies and competition from the largest banks are also cited as factors.

Signet has been an acquisition target because of its strong branch network and attractive information database, combined with flat earnings, says McGovern. Companies see Signet's relatively weak performance as an opportunity to reform operations and reap significant reward.

Signet is considered an underperformer because it trails national and other major regional banks on two key indicators. Its return on equity, which measures how effectively investors' money is turned into profits, is 14.1%, while the sector posts an average of 19%, according to Baseline. Its efficiency ratio, which measures expenses, was 62% in the first quarter, according to Plack of Scott & Stringfellow, who says that the better competitors have ratios in the more desirable 55% range.

Speculation of a buyout, perhaps by

First Union





, was once so strong in 1996 that in October the bank issued a statement asserting that it was not for sale. Restructuring began in that time and will be completed by the end of 1998.