Signet Banking Corp. is that rare phenomenon in the banking industry - an overnight success.

Not that Richmond-based Signet hasn't been around for a while. It dates its rounding to 1922. But the success of Signet's credit card division, in just a few short years, has transformed an average-performing bank into one of the industry's brightest stars.

This was particularly evident last year, when managed assets in the card unit surged 130% to $5.1 billion. The stock price of Signet, which has $12 billion in assets, rose 54% last year, one of the industry's best performances.

In March Signet released its annual report, which for the first time, broke out performance figures for the card unit, thereby revealing its true earnings power.

With a market-to-book value of 222%, Signet trades at a higher multiple than Wachovia Corp. or Sun Trust Banks Inc., which traditionally set the standard for quality among Southeastern banks.

The man who presided over this transformation, chairman and CEO Robert M. Freeman, is clearly basking in the success of Signet's credit card operation.

He was relaxed and friendly during a recent interview at The Homestead resort in Hot Springs, Va., where the Virginia Bankers Association was. holding its annual meeting. Wearing khaki pants and a sports jacket, he sipped a Coke while detailing his company's accomplishments.

For all his evident satisfaction, Mr. Freeman, 53, is also cognizant of the challenges ahead. The chief one is to get Signet's core banking operation to perform up to the standards of its credit card unit.

The core bank returned only 0.74% on assets and 8.5% on equity last year. This can be blamed on a continuing drag from nonperforming assets and heavy investment in new technology, but still represents a mediocre record when compared with peers.

It was only credit card earnings - contributing nearly two-thirds of Signet's total that got the company's overall ROA up to 1.50% and ROE to 19.6%.

The rocket-like growth of Signet's credit card portfolio has now outstripped the funding capacity of its network of 239 branches in Virginia, Maryland and Washington.

So, in March, the company said it planned to seek a separate bank charter for the card unit, which would allow it to be capitalized apart from the banking operation.

If Signet does proceed with a full or partial spinoff of the credit card unit -- no decision has yet been made, according to Mr. Freeman -- improving the performance of the core bank becomes even more important, particularly now that Virginia is open to reciprocal national interstate banking.

Q.: Where are you now in the plan to spin off the credit card operation? FREEMAN: There have always been a couple of options in trying to get real value in the credit card. The first step we took was to Separate the numbers. The second step was to set up a separate subsidiary. That process is underway. We applied for the charter and we don't expect any problem with that.

That opens up the full range of opportunities, which means do nothing, or a partial carve-out (sell 19.9% of the stock), or you do a full spinoff. We have consistently said we'll make that decision the second half of this year.

Q.: Can you maintain the phenomenal growth of your card unit, given the saturated nature of the market?

FREEMAN: Nothing grows to the sky. We believe, however, that the pool of potential customers that is out there still remains very deep, even using the current strategy, which is a low introductory rate strategy. I think there are probably 20 institutions now playing that strategy, where there were only two or three when we first started.

But we've been doing an immense amount of testing, (and) as the testing process continues to go, we will open up additional deep pools. I think there's plenty of opportunity.

Q.: Where does the core bank stand in all this? Have you neglected it at the expense of credit cards?

FREEMAN: That's an easy conclusion to reach. But if you look at what has happened since 1991, we have solved a very serious real estate quality problem.

On the commercial side, we have changed the culture from being volume driven to being value driven, which means that instead of chasing every big deal that comes down the pike, we have very defined limits in the amount of exposure we will take at what kind of risk rating. On the retail side, we have continued to focus.

In all three of those lines of business, we have begun to use some of the information-based techniques that we used with the cards to find a competitive advantage. And I think we've made a lot of progress, particularly on the retail side.

Let's take the real estate business. The focus today is on the residential side. And if you use a lot of analytical techniques, what we have found are some specialty areas where the risk profile of that kind of business is not as high as you would think.

On the commercial side, we also believe there are applications and have used a lot of testing techniques to build the risk rating process for loans and decide, here again, where the pools are.

The retail side has the greatest application for information-based systems. We've done a lot of testing of customer sensitivity to CD rates. We built some very interesting information data bases where we know an awful lot about customers. We have targeted offers to specific customers when some of our competitors have gone through conversions and changeovers.

In the old days, you kind of had to blanket the whole market (with mailings). You hit 20% of your own customers, plus you hit 50% of everybody else's. Today, we can go right at that customer and say, 'we know that you are banking with Brand X Bank, and you're probably undergoing this and that, and we'd love to have you.'

My guess is that you'll probably never get anything as big as the credit card. But it has specific applications for installment lending, mutual funds, and insurance. Think about what we've done in the card on national solicitations.

Q.: With all this development work, when can we see improved performance from the core bank?

FREEMAN: The challenge we have put to everyone in the company is that by the end of 1995, we will have the core bank performing at what we call a "good bank" rate, which is a 15-16% ROE. That's not to say we'll have 15-16% for the year 1995, but the fourth quarter running rate should be at that level.

Once we have gotten to that level, we believe we can then leverage it on up to what we call "best bank" performance, with a 20% ROE. And that's a little bit longer term. I don't think we'll do that in a year, but maybe in a couple of years after that.

We see getting us to "good bank" as two-fold. One, it's a matter of cost control. The other is revenue enhancement. We have already done some significant reegineering that's beginning to pay off.

In small business lending, we have reduced a process that began from the very beginning of whom are you going to call on to the day the thing is paid off from 50 steps to about 10. That has a strong benefit both on the cost side, but also in customer service. And we think we can apply some of those same techniques to the commercial lending process.

Q.: Analyst Thomas K. Brown, of Donaldson, Lufkin & Jenrette, says your evolving into a "national direct-response consumer financial services company" as opposed to simply a regional bank. Do you agree?

FREEMAN: Given what I've just said, I think you've got to be drawn toward that kind of conclusion, We have built a world class, national direct-response business focused on the card.

I believe there are other products, whether they be mortgage, equity line, consumer credit, mutual funds, or insurance. I believe that if we can refine those techniques, why should we worry about what market you play in?

I'm not worried about market anymore. It's always fascinating to me that I have analysts and the press say to me, "Bob, what are you doing for your franchise? You're not.buying anything."

And my response to that is, if you want to measure me on what the bricks and mortar is, I lose. But the card is adding 200,000 to 250,000 customers a month on a national basis, and I think that's a pretty neat franchise.

Q.: Is it possible to run a national consumer business beyond the credit card business from Richmond and still have a retail operation in Virginia?

FREEMAN: I don't see there's any inconsistency. If you look at Norwest, they run a consumer business that's national.

Q.: Signet has made very few bank acquisitions in recent years. Why not?

FREEMAN: The problem is the price. Can you afford to make the acquisition and make it work? You've got to be sure the price you pay is one that adds value instead of subtracts from value.

We have probably looked at every single acquisition that you've seen in our marketplace. We got one (Pioneer Federal Savings Bank), which was a small thrift outside of Richmond, with 11 branches. So that filled in some very nice gaps for us and seemed to make sense at a reasonable price.

But we have normally been second or third or withdrawn entirely from some of the other bids simply because some of the models we're using for building value don't work.

Every institution is a little bit different, so for me to say I can't pay that doesn't mean that somebody else can't, But as far as making a major acquisition, I think it's going to be awful tough at those prices because it doesn't seem to make any sense to us.

Q.: Would you consider buying consumer finance companies as opposed to bank branches?

FREEMAN: I wouldn't rule those out. In terms of traditional brick and mortar, we will continue to participate where it makes sense. Similarly, we'd be interested in looking at other ways to enhance value in the lines where we're trying to do it. We haven't shut off any avenue of inquiry.

Q.: Can Signet itself be acquired?

FREEMAN: We believe we're very shareholder value-oriented and have built a lot of value over the last couple of years and we believe we can continue to build that value.

And why should you ever consider being a willing seller unless you can conclude that you cannot build value? We're excited about the future.

Q.: What's your company going to look like five years from now?

FREEMAN: [laughing] Different. I don't know how to answer the question, because if I look back five years, I would never have dreamed the company would look like it does today. I know that we're in a very change-oriented business. You've got to be ahead of the curve.

I think in many ways, banks are disadvantaged in terms of regulation. You're seeing nonbank competitors skimming the business. What we're trying to do is be sure we can play with those guys.

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