Signet hopes losses are in the past, recovery is near

THE BALTIMORE EVENING SUN

One on One is a weekly feature offering excerpts of interviews conducted by The Evening Sun with newsworthy business leaders. Kenneth H. Trout is president and chief executive officer of Signet Bank Maryland, a subsidiary of Signet Banking Corp. of Richmond, Va.

Q. Signet Bank lost $5.9 million in the first quarter and made only a small profit of $779,000 in 1990. Is the worst over for the bank and how are you doing to stem the losses or the reduced earnings?

A. I would say we think the worst is behind us. I would suggest to you that we have probably hit the bottom, but the recovery is not as fast as we would like to see it. I haven't seen finalized numbers, but we've probably lost in Signet Maryland another million dollars in the second quarter, so our year-to-date number [loss] is probably $6.9 [million]. The kinds of things we're doing is we're simply looking at all the efficiencies we can possibly find within the organization. That relates to expense controls. That relates to downsizing an organization where it's necessary, flattening the management so that you don't have needless layers. I think we're being very aggressive in terms of the management of the foreclosed properties, and I think that's something we're going to have to do to be effective.

Q. You became president and chief executive officer of Signet Bank Maryland in January. Can you tell me what that position involves in a bank-holding company such as Signet and also what other positions you hold in the organization?

A. As president and CEO of the bank of Maryland, I'm effectively the spokesperson for the Maryland bank, and really I'm responsible on a day-to-day basis for the running of that bank. Specifically, our holding-company organization is formed along lines of business. That is to say, we are divided at a holding company level into five lines of business, and we manage the company in that fashion as opposed to geographically. I'm a senior executive vice president in the holding company responsible for the commercial line of business, which means, in addition to being responsible for commercial business in Maryland, I'm also responsible for that function in Washington as well as Virginia. That's sort of the difference in the organizations.

Q. In the commercial business, you're talking about loans to businesses, both large and small. Obviously, real estate has gone down the drain in a lot of ways. Is commercial lending doing well?

A. Commercial lending has been soft and I think that's because so much of the commercial lending business we do in this marketplace is related to the real estate industry. This marketplace is driven by, in my opinion, two or three different things. One of them would certainly be the real estate industry. Another would be . . . the construction industry, the equipment people who are part of that industry. Certainly the government, and none of those are doing particularly well at this point in time. And the economy in general has had a tough time on the commercial line of business. I see an improvement, and have seen one, since January. We have what we call an early warning system that we use within the bank. And that warning is simply the account officers, any time we see any form of deterioration in a relationship, primarily a loan relationship, obviously, we place it on a watch list, and we look at those relationships on a monthly basis in a team fashion to try and determine the best way to manage that relationship back to health. And what I see in that watch list, when I first came up here in September, and subsequently in January, that number was a pretty hefty page. And the watch list used to take all day to go through the credits and our action plans, etc. Today that meeting is now probably down to a half an hour. So, what I've really seen is a decrease, if you will, in the commercial pipeline of upcoming problems which I take as a very positive sign.

Q. As you well know, a lot of other companies such as Sears, General Electric, Ford, are essentially going into traditional banking business, such as credit cards and certificates of deposit. Can you tell me what other businesses Signet has been trying to get into to combat this, and what will Signet do if Congress broadens the reach of banks?

A. Signet will maintain a pretty consistent strategy. Every time we look at a new business, we look at several facets of that business, and we look to see if we can develop a competitive advantage in that business and whether or not we can sustain a competitive advantage and produce the desired returns we want. Return on equity for the stockholders. If we can't do that, the fact that we're empowered to get into another business doesn't really offer us any opportunities. If we can't compete on an on-going basis and do it in a profitable fashion, we simply won't get into a new business. As to Congress, I've sort of taken a wait-and-see approach . . . Every time I read the proposals, they've changed, and I'm going to wait until I see a final bill that has some real teeth in it that somebody's going to agree on. As far as competition is concerned, I certainly agree with you. Our playing field is, in my opinion, not level today. We have a lot of competitors that are not regulated to the same degree that the banks are. . . . There's a whole host of players out there. It makes it a lot more difficult for us to compete. At the same time, I think we can still effectively compete in some areas. Now you mentioned credit card. Signet happens to have a rather premier credit card, and it's an excellent business for us, and we have developed some strategies that keep us up front and keep us in a position where we think we can compete with almost anybody. That is clearly a business [where] economies of scale are important, but more important than that, it's an information business, oddly enough, as opposed to a credit business. The more information and data you have as regards to customer buying habits and customer desires, the better you can service that kind of market.

Q. The C&S;/Sovran and NCNB merger is the latest in a series of mergers creating huge banks. Despite the relatively large size of Signet, do you think that Signet will be at a disadvantage in competing with these megabanks, and do you perhaps see a merger for Signet in the future?

A. I see the merger of C&S;/Sovran and NCNB as, in some respects, very positive. I think it will bring a new level of sophistication to our market and I view them as pretty smart competition from what I've read of the history of NCNB. In that sense, I don't think it will be a problem. I will say this, though: I think those organizations and their focus will be very different from Signet's. By their very nature and size, the kind of customers they'll pursue vs. the kinds of customers Signet will pursue will be dramatically different. They will be, in my mind, if they follow true to form, after the very large corporate clients, and that's not an area that Signet has played in for several reasons. One, it requires significant loan commitments . . . Secondly, it's a very thinly priced business, and we haven't found an effective way to really be profitable on that side of the business. I think their focus, as an example, will probably be more in the companies of $75 million and over in sales, and ours will be more in the $4 [million] to $75 million player -- the more local-oriented company, not the national kind of company. The people we want to deal with are those who want to be able to come see the president of the bank or be able to see him at a black-tie function in town, or be able to put the arm on him for a fund-raiser. And those kind of people are not going to be led to an organization [like NCNB or C&S;/Sovran] because they're never going to run into their friends from North Carolina.

Q. Talking about your focus, what is your approach to individual customers? Are you trying to court them or are you concentrating more on the businesses?

A. No, I think the retail customer for Signet Bank has sort of been our heritage, and it goes back to Union Trust as well as to the

Bank of Virginia. It's sort of been the life blood of this organization, and if you think about that whole customer base going forward from a risk perspective, it's a very attractive market. Lending to that customer base is highly diversified. No ,, one individual can present the kind of problems we're seeing today that we have with our real estate loans, because there's no one that has that kind of an impact on your balance sheet. So there's a lot of diversity that's offered to you there, and a lot of our products like student loans, where this company happens to be a market leader in that kind of a product, are geared in that direction. Mortgage banking is certainly another one. It's an excellent business. It's one where you're highly diversified. Your losses over time are nominal, and it's just plain good business.

Q. You are involved right now in a home ownership program where you're offering low-interest loans to low-income individuals. The bank also makes quite a few donations to various charities in the area. What do you think are the responsibilities of the bank toward community involvement, and do you see Signet as expanding its role in this area?

A. The answer to that is absolutely yes. I look at the community re-investment act as simply not unlike what most of Congress does, making law for something that is already a reality.

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