After Checks-in-the Mail, Analysts Tire of Waiting for Signet to

What a difference a year has made for Signet Banking Corp.

In 1995, its plan to sell loans through the mail drew raves from analysts and consultants, who said the staid regional had found a way to use data base technology to reinvent itself.

But now, even as observers reaffirm their support for the $11.5 billion-asset bank's lending strategy, they are growing impatient for it to yield bottom-line results.

"Something has to give," said Thomas F. Theurkauf Jr., an analyst with Keefe, Bruyette & Woods Inc. in New York. "I think they either have to improve the financial performance of the company or consider a sale."

"I personally believe the company has got six months" to show earnings improvement, said Tom Brown, an analyst with Donaldson, Lufkin & Jenrette. "The shareholders are not as optimistic as I am about the information-based strategies."

Signet's experience illustrates the plight of many regional banks that want to remain independent: The imperative to produce earnings improvements sometimes conflicts with the need for investing in technologies and strategies that take time to pay off.

Few banks are attempting as sweeping a change in corporate direction as Richmond-based Signet, which operates 244 branches in Virginia, Maryland, and Washington. As T. Gaylon Layfield 3d, vice chairman and chief operating officer, said, "This is not traditional banking."

The bank captured the industry's attention last year with its aggressive plans for marketing preapproved consumer installment loans by mail. The product, called Loan-by-Check, employs the kind of data base information and sophisticated computer models the bank helped pioneer in its credit card operation, which was successfully spun off last year.

But just as Signet was expected to reap the benefits of its multimillion-dollar investment, management balked. Spooked by rising personal delinquencies and bankruptcies, the bank canceled Loan-by-Check solicitations in the second quarter.

That was enough to stall loan growth and produce the sixth consecutive quarter of flat earnings. Analysts cut their earnings estimates, and some began to talk openly about the possibility of selling the bank.

Signet says that it remains deeply committed to information-based marketing, and that the spring retrenchment was temporary. Senior management, which is in the midst of a transition, seems acutely aware that the stakes are high and that time may be running out.

"By necessity, there is a time line that you have to be disciplined about," said Mr. Layfield.

Mr. Layfield is slated to become bank president at yearend, succeeding Malcolm S. McDonald. Mr. McDonald will remain chief executive and become chairman as well, succeeding the retiring Robert M. Freeman, a former CEO.

The data bases and computer models the bank is building, testing, and refining go far beyond credit-scoring techniques now common in card, mortgage, and small-business lending.

As in credit scoring, Signet begins with raw credit bureau information. It overlays that with demographic data, such as age and income. Sometimes it incorporates so-called "psychographic" information, which might seek to gain marketing insights from whether, say, someone drives a sports car or a station wagon.

The trick, says Signet, is bringing that data together to produce reliable models that can predict how different customers will behave. Which customers are likely to default? Who is likely to pay off ahead of schedule, thereby cutting into the bank's profit? Which customers are likely to respond favorably to which product? What's the right loan rate?

"To be able to do this in a very systematic and structured way, so that you've got a continuous feed loop, is quite an accomplishment," said Liza Kirby, director of promotional services at Fair Isaac & Co., the leading supplier of credit-scoring systems.

Signet refuses to talk about specifics, saying the information and insights of its proprietary computer models are too valuable to share with competitors.

"By the time you get finished with five or six key variables - delinquencies, losses, attrition, response rates, life of the loan, price - that's a fairly complicated, multivarient equation," said Mr. Layfield. "It's all very actuarial."

Signet helped pioneer this brand of data base marketing for its credit card business in the late 1980s with such success that by the early 1990s it was under pressure to free the fast-growing and profitable business from the slower-growing core bank.

It eventually did so, creating Capital One Financial Corp. in February 1995. The company now ranks among the top 10 in outstanding balances.

Mr. Layfield said Signet began looking to apply its data base experience in credit cards to other lines of business in 1992 or 1993.

"We began to ask ourselves the question: Are there lessons learned here that we can apply to other products?" he said.

The bank saw potential for a broad range of retail and commercial products - home equity loans, debit cards, mutual funds, certificates of deposit, IRAs, and mortgages.

But it began with consumer installment loans and the Loan-by-Check program, which involves mailing a preapproved consumer loan that recipients can accept simply by endorsing and depositing the enclosed check.

By the end of 1993, the bank was sending out test mailings and building analytical models.

"If we were to create a test cell around a certain targeted customer group, with certain pricing and certain product characteristics, we would then track the results of that particular mailing over the entire life of the product," said Mr. Layfield. "We would go back - and continue going back - and test our assumptions about economic value creation, the attrition rate associated with that product, and so forth."

Signet felt confident enough to blanket the country with solicitations by the fall of 1995. The bank said it gained "fairly substantial" loan growth from mass-mailings that continued into the first quarter of 1996. Loan-by-Check now represents about 14% of the bank's loan portfolio, according to Keefe, Bruyette & Woods.

But by the spring, bankers around the country began falling prey to a troubling rise in consumer delinquencies and personal bankruptcies. Signet, worried about deteriorating economic conditions, opted to hold off on additional Loan-by-Check solicitations in the second quarter.

So precisely at the moment Signet was expected to reap the rewards of its investments, loan growth stalled and earnings hardly budged.

Second-quarter net income was $30.5 million, compared with $29.7 million for the comparable period in 1995. The efficiency ratio was a mediocre 66.2%.

While analyst Tom Brown regards the early results of Loan-by-Check as a "smashing success" - volume and credit quality are in line with expectations - he is troubled by the spring retreat.

"You don't do as large a nationwide rollout as they did back in December if you weren't confident that you had it right," he said. "And if you truly believe in the test results enough that you would go to a nationwide rollout, there is no way you pull back after the nationwide rollout is a success," said Mr. Brown.

"One of those decisions, in my opinion, was wrong," he added. "I would argue that they mismanaged it."

Mr. Brown said Signet's caution stems from a management that is not entirely comfortable with the transformation it has begun. "We have a traditional commercial bank management that is wearing the suit of a data base marketer, and it doesn't quite fit yet," he said.

It's not for lack of trying. In interviews with American Banker and other publications, high-level Signet executives repeat the phrase "information-based strategies" like a mantra. The 1995 annual report is chock-full of references to the strategy.

"They have obviously made a strategic bet" with information-based strategies, said Tom McCandless, a Natwest Securities analyst. "It permeates the company in every business line, in every aspect of management. It takes a pretty creative management to do that."

But even Mr. Layfield acknowledges that cultural changes are difficult. "I don't believe they can be successfully achieved overnight," he said. "We're still at it. We've made lots of progress, but the transformation is not complete."

Some Signet watchers see a gap between senior management and the "rocket scientists" who are building the systems. More than 100 employees - including people with degrees in quantitative statistics, mathematics, engineering, and the hard sciences - are dedicated to the project.

The team managers "live and eat and breath data base marketing, just like the First USA and Capital One people," said Mr. Brown. "The problem is at the very senior levels of management, where not only are they traditional bankers by background, but they are still operating a traditional bank."

Analysts, who agree this is a critical moment for Signet, see four realistic options for the bank. The first is continuing boldly with the information-based strategies.

"I don't think they've lost

the opportunity," said Mr. McCandless. "The attributes that made the story attractive to begin with are still there."

Mr. Theurkauf said the bank could launch a severe cost-cutting program to improve efficiency and profits. But that would probably entail cutting data base marketing expenses, and it seems an unlikely option.

Mr. Brown has suggested that the bank, following the path it took with Capital One, should spin off the new businesses. "I still believe - the company would still debate this - that there is not a lot of synergy between the information-based strategies that they are developing and their branch-based commercial and retail business," he said. "Shareholders would be better served by splitting the company into two pieces again.

The other option, which management has not entertained publicly, is an outright sale of the bank.

For now, Signet remains committed to information-based strategies. Most of the up-front systems and staff investments have already been made. The key computer models for several products have been built and tested. And now, the bank is ready to resume Loan-by-Check solicitations. By the end of the year, solicitations are expected to top one million. Other product solicitations, perhaps for home equity loans, are in the works.

"The inherent competitive advantage of an information-based strategy is very strong," said Mr. Layfield. "I really don't worry much that it won't deliver on the promise. I believe wholeheartedly that it will."

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