<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
---------------------------------------------
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 0-4554
------------------------------------------------------
Bank South Corporation
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Georgia 58-1048216
- - - - - - -----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
55 Marietta Street, Atlanta, Georgia 30303
- - - - - - -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(404) 529-4111
----------------------------------------------------
(Registrant's telephone number, including area code)
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
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Common Stock, Shares Outstanding at October 31, 1995:
- - - - - - ----- --------------------------------------
$5 par value 58,785,845 shares
Exhibit Index located on page 16.
<PAGE> 2
BANK SOUTH CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
at September 30, 1995 and December 31, 1994 1
Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 1995 and 1994 2
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1995 and 1994 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 5
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
<PAGE> 3
BANK SOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS (Thousands of dollars, except share data)
Cash and due from banks:
Interest-bearing deposits $ 26,495 $ 64,048
Non-interest bearing deposits and cash 471,606 359,473
----------- -------------
Total cash and due from banks 498,101 423,521
Federal funds sold and securities purchased
under agreements to resell 7,625 50,649
Trading account securities 3,200 75,431
Investment securities available for sale 872,873 495,175
Investment securities held to maturity (fair value $1,756,211
at September 30, 1995 and $1,875,006 at December 31, 1994) 1,750,565 1,945,856
Loans 4,190,859 3,954,490
Less: Unearned income 13,827 21,207
Allowance for loan losses 77,978 82,936
----------- -------------
Net loans 4,099,054 3,850,347
----------- -------------
Premises and equipment, net 116,257 113,557
Customers' acceptance liability 517 770
Other real estate owned, net 2,442 3,678
Other assets 303,195 287,026
----------- -------------
TOTAL ASSETS $ 7,653,829 $ 7,246,010
=========== =============
LIABILITIES
Non-interest bearing demand deposits $ 1,185,951 $ 1,203,258
Interest-bearing deposits:
NOW accounts 785,443 785,795
Money market accounts 518,747 602,429
Savings accounts 447,491 484,913
Certificates of deposit $100,000 or more 377,966 364,584
Other time deposits 1,669,805 1,591,780
----------- -------------
Total interest-bearing deposits 3,799,452 3,829,501
----------- -------------
Total deposits 4,985,403 5,032,759
Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 1,097,025 944,153
Commercial paper 58,595 49,773
Other short-term borrowings 475,000 375,998
----------- -------------
Total short-term borrowings 1,630,620 1,369,924
Bank acceptances outstanding 517 770
Long-term debt 188,528 89,413
Other liabilities 173,096 118,912
----------- -------------
TOTAL LIABILITIES 6,978,164 6,611,778
----------- -------------
SHAREHOLDERS' EQUITY 1995 1994
Preferred stock: ----------------------------
Par value $ 25 $ 25
Shares authorized 5,000,000 5,000,000
Shares issued and outstanding - -
Common stock:
Par value $ 5 $ 5
Shares authorized 100,000,000 100,000,000
Shares issued 58,926,527 58,264,227 294,633 291,321
Capital surplus 188,758 183,854
Retained earnings 200,133 167,582
Unrealized loss on investment securities
available for sale, net of tax (3,460) (8,525)
Treasury stock (155,702 shares at September 30, 1995,
and none at December 31, 1994; at cost) (4,399) -
----------- -------------
TOTAL SHAREHOLDERS' EQUITY 675,665 634,232
----------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,653,829 $ 7,246,010
=========== =============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
BANK SOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1995 1994 1995 1994
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME (In thousands, except per share data) (In thousands, except per share data)
Interest and fees on loans:
Taxable $ 89,771 $ 76,929 $ 260,674 $ 225,631
Tax-exempt 1,191 997 3,520 2,607
----------- ----------- ---------- -----------
Total interest and fees on loans 90,962 77,926 264,194 228,238
Interest and dividends on investment securities
held to maturity
Taxable 19,446 15,226 59,930 31,633
Tax-exempt 7,925 6,168 23,703 15,029
----------- ----------- ---------- -----------
Total interest and dividends on investment
securities held to maturity 27,371 21,394 83,633 46,662
Interest and dividends on investment securities
available for sale (taxable) 13,958 7,431 38,691 28,911
Trading account securities 30 2,254 991 5,263
Federal funds sold and securities purchased
under agreements to resell 575 880 4,307 3,450
Interest-bearing deposits 386 337 1,290 913
Other short-term investments 31 1,466 1,109 2,377
----------- ----------- ---------- -----------
Total interest income 133,313 111,688 394,215 315,814
----------- ----------- ---------- -----------
INTEREST EXPENSE
Interest on deposits:
NOW accounts 5,457 4,837 16,456 14,883
Money market accounts 4,638 4,518 14,273 12,351
Savings accounts 2,616 3,028 8,180 9,528
Certificates of deposit $100,000 or more 6,086 3,603 17,708 8,488
Other time deposits 25,012 17,596 70,744 48,503
----------- ----------- ---------- -----------
Total interest on deposits 43,809 33,582 127,361 93,753
Interest on short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 13,069 7,695 41,618 18,203
Other short-term borrowings 10,174 5,334 31,781 7,947
----------- ----------- ---------- -----------
Total interest on short-term borrowings 23,243 13,029 73,399 26,150
Interest on long-term debt 3,075 1,310 6,462 4,488
----------- ----------- ---------- -----------
Total interest expense 70,127 47,921 207,222 124,391
----------- ----------- ---------- -----------
NET INTEREST INCOME 63,186 63,767 186,993 191,423
Less: Provision for loan losses - 300 - 7,297
----------- ----------- ---------- -----------
Net interest income after provision for
loan losses 63,186 63,467 186,993 184,126
----------- ----------- ---------- -----------
NON-INTEREST INCOME
Trust income 2,605 2,576 7,814 7,486
Service charges and fees on deposit accounts 19,059 16,991 55,079 47,979
Electronic banking 5,698 4,659 15,995 12,656
Mortgage banking activities 960 1,026 3,054 3,014
Other service charges and fees 4,030 2,496 10,885 8,032
Institutional investment activities 2,655 578 7,470 2,733
Retail investment activities 548 362 1,449 1,234
Securities gains (losses) 532 (162) 2,706 1,689
Other income 508 1,853 3,310 5,432
----------- ----------- ---------- -----------
Total non-interest income 36,595 30,379 107,762 90,255
----------- ----------- ---------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits 34,141 35,036 104,024 97,557
Occupancy 5,418 4,965 14,840 14,792
Equipment 4,503 4,063 12,797 12,088
Other real estate owned 49 (103) (889) 256
Other expense 28,244 25,819 84,851 74,608
----------- ----------- ---------- -----------
Total non-interest expense 72,355 69,780 215,623 199,301
----------- ----------- ---------- -----------
Income before income taxes 27,426 24,066 79,132 75,080
Income tax expense 6,349 2,335 20,777 11,396
----------- ----------- ---------- -----------
NET INCOME $ 21,077 $ 21,731 $ 58,355 $ 63,684
=========== =========== ========== ===========
Earnings per common share $ 0.35 $ 0.37 $ 0.98 $ 1.10
Cash dividends declared per share 0.14 0.13 0.42 0.35
Weighted average common shares and common
share equivalents outstanding 59,657 58,765 59,382 57,670
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
BANK SOUTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
-------------- -------------
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 58,355 $ 63,684
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Provision for loan losses - 7,297
Provision for losses on other real estate owned 713 787
Depreciation and amortization expense - premises and equipment 9,384 8,517
Amortization expense - intangible and other assets 8,481 8,596
Deferred income tax expense (692) (2,266)
Net amortization of investment securities premiums and discounts 1,829 3,527
Securities gains (2,706) (1,689)
Net unrealized valuation losses (gains) on trading account securities 425 (690)
Net realized loss (gain) on sales of other assets 2,031 (1,003)
Net decrease (increase) in trading account securities 71,806 (96,349)
Net (increase) decrease in mortgage loans held for resale (57,818) 27,565
Net increase in other assets (26,721) (50,193)
Net increase (decrease) in interest payable 26,356 (1,124)
Net increase (decrease) in other liabilities 28,267 (14,253)
-------------- -------------
Total adjustments 61,355 (111,278)
-------------- -------------
Net cash provided by (used in) operating activities 119,710 (47,594)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in federal funds sold and securities purchased
under agreements to resell 43,024 11,042
Purchases of investment securities held to maturity (23,343) (1,223,336)
Purchases of investment securities available for sale (4,057,058) (2,364,094)
Proceeds from sales of investment securities available for sale 3,546,446 2,806,244
Proceeds from calls, maturities and redemptions of investment
securities held to maturity 211,382 133,177
Proceeds from calls, maturities and redemptions of investment securities
available for sale 148,432 172,552
Net increase in loans (211,260) (191,504)
Purchases of premises and equipment (16,769) (15,645)
Proceeds from sales of premises and equipment 4,496 6,707
Proceeds from sales of other real estate owned 5,414 8,340
Proceeds from recoveries on loans previously charged off 13,638 15,286
Business combinations, net of cash acquired - 7,872
-------------- -------------
Net cash used in investing activities (335,598) (633,359)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (47,356) 162,566
Net increase in short-term borrowings 260,696 529,909
Repayments of long-term debt (885) (8,354)
Proceeds from issuance of long-term debt 100,000 -
Proceeds from employee and director stock purchases 11,382 9,899
Cash dividends paid (24,672) (19,855)
Proceeds from dividend reinvestment plan 963
Purchase of treasury stock (8,528)
Other, net (1,132) 1,090
-------------- -------------
Net cash provided by financing activities 290,468 675,255
-------------- -------------
Net increase (decrease) in cash and due from banks 74,580 (5,698)
Cash and due from banks at beginning of period 423,521 401,148
-------------- -------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 498,101 $ 395,450
============== =============
SUPPLEMENTARY INFORMATION:
Income taxes paid $ 13,261 $ 28,612
Income tax refunds received 6,909 974
Interest paid 180,866 124,571
Non-cash transactions:
Loans transferred to other real estate owned 6,733 7,248
Loans to facilitate the sale of other real estate owned - 315
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
BANK SOUTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General
The financial statements in this report have not been audited. In the opinion
of management, all adjustments necessary for a fair presentation of the
financial position and results of operations for the interim periods have been
made. All such adjustments are of a normal recurring nature. These statements
should be read in conjunction with the 1994 Annual Report on Form 10-K for Bank
South Corporation (the "Registrant" or "Company"). Results of operations for
the nine months ended September 30, 1995, are not necessarily indicative of the
results of operations for the year ending December 31, 1995, or any interim
periods. Certain previously reported amounts have been reclassified to conform
to the current presentation.
Note 2 - Business Combinations
On February 17, 1995, the Registrant acquired Gwinnett Bancshares, Inc.
("Gwinnett"), parent company of Gwinnett Federal Bank, FSB. As a result of the
Gwinnett merger, each share of Gwinnett common stock issued and outstanding
immediately prior to the effective time of the Gwinnett merger was converted
into the right to receive 1.75 shares of the common stock of the Registrant.
The Registrant issued an aggregate 3,681,402 shares of the Registrant's common
stock to holders of Gwinnett common stock. As of December 31, 1994, Gwinnett
had total assets of approximately $319.1 million and total shareholders' equity
of approximately $33.2 million. For the year ended December 31, 1994, Gwinnett
reported a net loss of approximately $1.4 million. The acquisition was
accounted for using the pooling-of-interests accounting method. Accordingly,
prior periods have been restated.
On September 5, 1995, the Company announced a definitive agreement to merge
with NationsBank Corporation. Each share of the Registrant's common stock will
be exchanged for 0.44 shares of NationsBank Corporation common stock. The
merger is expected to close in January 1996, subject to shareholder and
regulatory approval, and is expected to be accounted for using the
pooling-of-interests accounting method.
Note 3 - Contingencies
Although no suit has been filed, the Company has been informed of a potential
claim for contribution to clean-up costs by a party currently incurring such
costs on a Superfund site under federal environmental laws. The Company's
subsidiary, Bank South, in a fiduciary capacity, serves as trustee of trusts
which had an interest in a partnership that previously owned and operated a
plant at the site. It is understood that such claim will be asserted against
Bank South in both its fiduciary and individual capacities. The Company
intends to defend the claim vigorously. The Company is not able to determine
what effect, if any, the claim may have on the Company's financial statements.
4
<PAGE> 7
BANK SOUTH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company reported net income of $58.4 million, or $0.98 per share, for the
first nine months of 1995 compared to $63.7 million, or $1.10 per share, for
the same period in 1994. Net income for the third quarter of 1995 was $21.1
million, or $0.35 per share, compared to $21.7 million, or $0.37 per share for
the third quarter of 1994. Contributing to the decrease in earnings in 1995
over 1994, among other factors, was a lower tax rate related to the reduction
of the federal valuation allowance under FAS 109 in 1994 and an increase in
non-interest expense due to NationsBank merger related expenses. These
increases were partially offset by a decrease in the provision for loan losses
in the first nine months of 1995 compared to the same period of 1994.
On September 5, 1995, the Company announced a definitive agreement to merge
with NationsBank Corporation. Each share of the Registrant's common stock will
be exchanged for 0.44 shares of NationsBank Corporation common stock. The
merger is expected to close in January 1996, subject to shareholder and
regulatory approval, and is expected to be accounted for using the
pooling-of-interests accounting method.
Net Interest Income
Net interest income, on a taxable equivalent basis (t.e.), was $204.3 million
for the nine months ended September 30, 1995, 1.6 percent higher than the
$201.1 million for the same period in 1994. Net interest income in the third
quarter of 1995 increased 1.9 percent over the third quarter of 1994, to $69.0
million from $67.7 million. The increase in net interest income resulted
primarily from increased consumer and commercial loan volumes. The net
interest margin, t.e., was 4.03 percent in the third quarter of 1995 compared
to 4.42 percent in the third quarter of 1994. The margin for the first nine
months of 1995 was 3.99 percent compared to 4.69 percent for the first nine
months of 1994. The decline in the margin is primarily attributable to the
addition of investments at relatively narrow spreads and a higher cost of
funds.
Total average earning assets were $6.8 billion during the first nine months of
1995, an increase of $1.1 billion, or 19.3 percent, over the same period in
1994. Total average loans were $4.1 billion for the first nine months of 1995,
an increase of 13.9 percent over the $3.6 billion of average loans for the
first nine months of 1994. Comprising approximately 76 percent of the loan
increase, commercial and installment loans increased $363.9 million, or 12.3
percent, over 1994. The remaining increase in average loans was due to
mortgage loans which increased $100.6 million, or 27.4 percent, over 1994.
Investment securities held to maturity and investment securities available for
sale averaged $2.6 billion in the first nine months of 1995, an increase of
$802.2 million, or 44.2 percent, over the same period of 1994. Average total
investments as a percentage of earning assets increased to 40.6 percent in the
first nine months of 1995, compared to 37.4 percent for the same period in
1994. These additional investment securities were added to better utilize
capital.
Average transaction account deposit balances, including demand, savings and NOW
accounts, decreased $111.5 million, or 3.7%, in the first nine months of 1995
compared to the same period in 1994. Consumer and other time deposits averaged
$1.4 billion in the first nine months of 1995, an increase of $217.4 million,
or 18.9 percent, over the same period in 1994. Total average deposits
increased 6.2 percent to $5.04 billion for the first nine months of 1995 and
average short-term borrowings increased $749.0 million in the first nine months
of 1995 over 1994 to fund the addition of investment securities.
Provision for Loan Losses
During the first nine months of 1995, no provision for loan losses was
recognized due to the continued improvement in asset quality, lower than
expected credit losses, and higher than expected recoveries. During the same
period in 1994, the provision for loan losses was $7.3 million with $300,000
recorded in the third quarter of 1994. See "Asset Quality" for further
discussion of the Allowance for Loan Losses.
5
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
COMPOSITION OF LOAN PORTFOLIO
TABLE 1
December 31,
September 30, ------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------------- ----------------- ----------------- ----------------- -----------------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $1,075,364 26% $1,048,187 27% $ 894,774 25% $ 902,228 31% $1,032,436 34%
Real estate construction 235,347 6 218,985 6 137,741 4 86,709 3 314,016 10
Commercial mortgage 592,043 14 598,376 15 579,652 17 665,126 23 513,807 17
1-4 Family residential
mortgage 759,951 18 672,515 17 574,548 16 521,489 18 546,153 18
Consumer 1,493,096 35 1,384,573 34 1,306,783 37 755,184 25 643,186 20
Lease financing 35,058 1 31,854 1 15,517 1 13,956 - 21,721 1
----------------- ----------------- ----------------- ----------------- -----------------
Total loans $4,190,859 100% $3,954,490 100% $3,509,015 100% $2,944,692 100% $3,071,319 100%
================= ================= ================= ================= =================
</TABLE>
Note: During 1992 loans were reclassified between real estate construction and
commercial mortgages.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSS ALLOCATION
TABLE 2 September 30, 1995 December 31, 1994
Amount Percent Amount Percent
--------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Allowance for loan loss balance applicable to:
Commercial, financial and
agricultural $ 7,302 9% $ 9,057 11%
Real estate construction 1,480 2 1,608 2
Commercial mortgage 5,979 8 6,470 8
1-4 Family residential mortgage 4,673 6 4,047 5
Consumer 12,101 16 12,112 14
Lease financing 125 - 111 -
Unallocated 46,318 59 49,531 60
-------------------------------------
Total $ 77,978 100% $ 82,936 100%
=====================================
</TABLE>
6
<PAGE> 9
BANK SOUTH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES Nine
TABLE 3 Months Ended Year Ended December 31,
September 30, ------------------------------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 82,936 $ 88,482 $ 78,713 $ 86,909 $ 93,267
Loans charged-off:
Commercial, financial and agricultural (2,014) (9,280) (5,498) (21,331) (57,278)
Real estate construction (1,215) (369) (453) (5,520) (6,126)
Commercial mortgage (944) (3,152) (6,609) (10,887) (11,096)
1-4 Family residential mortgage (2,779) (5,445) (6,849) (5,276) (7,057)
Consumer (11,636) (18,212) (6,425) (7,900) (8,903)
Lease financing (8) (54) (656) (511) (422)
Other - - - (267) -
-----------------------------------------------------------------------------
Total loans charged-off (18,596) (36,512) (26,490) (51,692) (90,882)
-----------------------------------------------------------------------------
Recoveries on loans previously charged-off:
Commercial, financial and agricultural 1,810 5,178 2,732 4,500 1,398
Real estate construction 178 2,215 135 134 397
Commercial mortgage 1,764 1,967 1,237 519 507
1-4 Family residential mortgage 2,567 3,210 1,900 1,043 566
Consumer 7,280 8,034 3,993 4,283 3,858
Lease financing 39 269 438 504 47
-----------------------------------------------------------------------------
Total loan recoveries 13,638 20,873 10,435 10,983 6,773
-----------------------------------------------------------------------------
Net loans charged-off (4,958) (15,639) (16,055) (40,709) (84,109)
Net increase as a result of business combinations - 2,496 5,431 - -
Provision for loan losses charged to expense - 7,597 20,393 32,513 77,751
-----------------------------------------------------------------------------
Balance at end of period $ 77,978 $ 82,936 $ 88,482 $ 78,713 $ 86,909
=============================================================================
Total net loans at end of period $4,177,032 $3,933,283 $3,473,523 $2,939,574 $3,062,813
Average loans outstanding during the period 4,069,158 3,654,236 3,013,021 3,004,525 3,335,177
Allowance for loan losses to loans
outstanding at end of period 1.87% 2.11% 2.55% 2.68% 2.84%
Net loan charge-offs to average loans
outstanding during the period (annualized) 0.16 0.43 0.53 1.35 2.52
</TABLE>
7
<PAGE> 10
BANK SOUTH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS AND LOANS PAST DUE 90 DAYS OR MORE
TABLE 4
December 31,
September 30, -----------------------------------------------
1995 1994 1993 1992 1991
------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Non-accrual loans $16,112 $ 23,562 $ 36,880 $ 78,343 $160,271
Renegotiated or restructured loans - 210 1,235 8,979 7,721
Other real estate owned 2,442 4,646 4,985 22,988 50,027
Other non-performing assets - 0 2,417 2,646 3,646
------- -------- -------- -------- --------
Total non-performing assets $18,554 $ 28,418 $ 45,517 $112,956 $221,665
======= ======== ======== ======== ========
Loans 90 days or more past due
on accrual status $ 280 $ 2,197 $ 1,846 $ 5,420 $ 13,159
Potential problem loans 90,220 124,656 141,230 241,505 430,239
Non-performing assets to total
loans, other real estate owned
and other non-performing assets 0.44% 0.72% 1.31% 3.81% 7.11%
Non performing assets and loans 90 days or more
past due on accrual status to total loans, other
real estate owned and other non-performing assets 0.45 0.78 1.36 4.00 7.54
</TABLE>
8
<PAGE> 11
BANK SOUTH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Non-Interest Income
For the nine months ended September 30, 1995, non-interest income was $107.8
million, an increase of $17.5 million, or 19.4 percent, from the same period in
1994. Non-interest income of $36.6 million in the third quarter of 1995 was
$6.2 million, or 20.5 percent, higher than the third quarter of 1994. Included
in non-interest income were gains on the sale of investment securities
available for sale of $2.7 million in the first nine months of 1995, compared
to $1.7 million for the first nine months of 1994. Gains on the sale of
investment securities available for sale were $532,000 in the third quarter of
1995, compared to a loss of $162,000 in the third quarter of 1994. Excluding
these securities gains, non-interest income increased $16.5 million, or 18.6
percent, in the first nine months of 1995 over 1994 and $5.5 million, or 18.1
percent, in the third quarter of 1995 versus 1994.
In the first nine months of 1995, total service charges and fees, the largest
component of non-interest income, totaled $85.0 million, an increase of $13.3
million, or 18.6 percent, compared to the same period in 1994. Total service
charges and fees totaled $29.7 million in the third quarter of 1995, an
increase of $4.5 million, or 18.2%, over the third quarter of 1994. The
increase in service charge income was primarily due to an increase in fees on
all deposit products, ATM, and debit card transactions.
Non-Interest Expense
Non-interest expense totaled $215.6 million for the nine months ended September
30, 1995, an increase of $16.3 million, or 8.2 percent, from the same period of
1994. Personnel costs increased $6.5 million or 6.6 percent over the same
period in 1994 due to additional locations and expanded banking hours.
Acquisition expenses increased $4.5 million and other general and
administrative expenses increased $4.6 million for the first nine months of
1995 compared to the same period in 1994, due to acquisitions and the
NationsBank merger, costs associated with expansion into mutual funds and
teleservices, and insurance premium tax. Non-interest expense totaled $72.4
million in the third quarter of 1995, an increase of $2.6 million, or 3.7
percent, over the third quarter of 1994. The primary driver of the increase
was $4.2 million in expenses related to the pending merger with NationsBank.
Excluding merger related expenses, non-interest expense declined $1.6 million
due to a decrease in both FDIC insurance expense and salaries and wage expense.
Income Taxes
Income tax expense was $20.8 million for the nine months ended September 30,
1995, or 26.3 percent of pre-tax income, compared to $11.4 million, or 15.2
percent of pre-tax income, for the same period in 1994. Income tax expense was
$6.3 million, or 23.2 percent of pre-tax income, for the third quarter of 1995
compared to $2.3 million, or 9.7 percent of pre-tax income, for the third
quarter of 1994. The 1994 rate was positively affected by the utilization of
$12.3 million and $3.1 million of the remaining Federal deferred tax valuation
allowance established at the beginning of 1993 for the nine months ended
September 30, 1994, and the third quarter of 1994 respectively. In addition,
the Company reduced the state deferred tax valuation allowance by approximately
$5.0 million, of which approximately $1,305,000 reduced goodwill, during the
first nine months of 1995 leaving an allowance of $6.1 million at September 30,
1995. Management evaluates the need for the valuation allowances on a
quarterly basis.
Asset Quality
Non-performing assets were $18.6 million at September 30, 1995, and $28.4
million at December 31, 1994. Non-performing assets as a percent of total
loans and other real estate owned was 0.44 percent and 0.72 percent at
September 30, 1995, and December 31, 1994, respectively.
9
<PAGE> 12
BANK SOUTH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Non-performing assets at September 30, 1995, included $16.1 million of
non-accrual and renegotiated loans, of which $10.0 million, or 62 percent, were
current as to both principal and interest. Non-accrual and renegotiated loans
were $23.8 million at December 31, 1994. Also included in non-performing
assets was other real estate owned, totaling $2.4 million at September 30,
1995, and $4.6 million at December 31, 1994.
Effective January 1, 1995, the Company adopted Financial Accounting Standards
Board Statement No. 114 ("FAS 114"), "Accounting by Creditors for Impairment of
a Loan" which was issued in May 1993 and amended in October 1994 by Statement
of Financial Accounting Standards Number 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." The impact of the
adoption of FAS 114 had no material effect on the Company's results of
operations and financial position.
Loans identified by management as potential problem assets (classified and
criticized loans) declined from 3.2 percent of total loans at December 31,
1994, to 2.2 percent of total loans at September 30, 1995.
Net loans charged off during the third quarter of 1995 were $1.9 million and
for the first nine months of 1995 were $5.0 million compared to $4.6 million
and $9.4 million during the comparable periods of 1994. Further detail of loan
charge-offs and recoveries is presented in Table 3, "Allowance for Loan
Losses."
The allowance for loan losses was $78.0 million at September 30, 1995, compared
to $82.9 million at December 31, 1994. The allowance for loan losses as a
percent of total loans was 1.87 percent at September 30, 1995, and 2.11 percent
at December 31, 1994. The allowance for loan losses as a percent of
non-performing loans was 484.0 percent at September 30, 1995, and 348.9 percent
at December 31, 1994. Table 2, "Allowance for Loan Loss Allocation," presents
specific reserves by loan type and the general portion of the Company's total
allowance for loan losses. In management's opinion, the allowance for loan
losses was adequate at September 30, 1995.
Contingencies
Although no suit has been filed, the Company has been informed of a potential
claim for contribution to clear-up costs by a party currently incurring such
costs on a Superfund site under federal environmental laws. The Company's
subsidiary, Bank South, acts in a fiduciary capacity, serving as trustee of a
trust which has an interest in a partnership that previously owned and operated
a plant at the site. It is understood that such claim will be asserted against
Bank South in both its fiduciary and individual capacities. At this time the
Company has information about the possible claim and intends to defend the
claim vigorously. The Company is not able to determine what effect, if any,
such a claim may have on the Company's financial statements.
Shareholders' Equity and Dividends
At September 30, 1995, shareholders' equity was at the highest level in the
Company's history at $675.7 million or 8.8 percent of total assets. At
September 30, 1995, the Company's Tier 1 capital ratio was 10.56 percent, the
total risk-based capital ratio was 12.22 percent and the leverage ratio was
7.68 percent. These ratios are in excess of regulatory requirements, as
presented in Table 5 - "Capital Adequacy." In addition, Bank South, the
Company's bank subsidiary, was considered "well capitalized" by banking
regulators.
In the second quarter of 1995, the Board of Directors approved a plan to
repurchase as many as 5.5 million shares of Bank South common stock through the
open market and in privately negotiated transactions in order to provide
additional shares for the Company's benefit plans and other general corporate
purposes. As of September 30, 1995, 155,702 shares were held as treasury stock
under this plan.
10
<PAGE> 13
BANK SOUTH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
CAPITAL ADEQUACY
TABLE 5
September 30, 1995 December 31, 1994
Amount Percent Amount Percent
----------------------- -----------------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
TIER 1 CAPITAL:
Actual $ 578,269 10.56% $ 524,547 11.00%
Minimum required 219,016 4.00 190,700 4.00
----------------------- -----------------------
Excess $ 359,253 6.56% $ 333,847 7.00%
======================= =======================
TOTAL RISK-BASED CAPITAL:
Actual $ 669,149 12.22% $ 605,701 12.70%
Minimum required 438,033 8.00 381,400 8.00
----------------------- -----------------------
Excess $ 231,116 4.22% $ 224,301 4.70%
======================= =======================
TIER 1 CAPITAL LEVERAGE RATIO:
Actual $ 578,269 7.68% $ 524,547 8.10%
Minimum required * 226,748 3.00 194,170 3.00
----------------------- -----------------------
Excess $ 351,521 4.68% $ 330,377 5.10%
======================= =======================
</TABLE>
* The regulatory requirement for leverage ratio is 3 percent to 5 percent.
This is determined by the Federal Reserve using various criteria. The
Federal Reserve has not given the Company a determination of the rate for
1995.
11
<PAGE> 14
BANK SOUTH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
In the third quarter of 1995, the Company's Board of Directors declared a 14
cent per share quarterly dividend, which was paid on October 2, 1995. For the
first nine months of 1995, 42 cents per share was declared in dividends
compared to 35 cents per share for the same period in the prior year.
Liquidity
Liquidity represents the ability to provide funding for lending and investment
activities, as well as to cover deposit withdrawals and pay debt and operating
obligations. Maintaining an adequate level of liquidity is an important
component of the Company's balance sheet management objectives.
At September 30, 1995, the Company's balance sheet continued to be liquid. The
Company's core deposits, which are typically the most stable funds, were 110
percent of loans at September 30, 1995. In addition, the Company's access to
debt markets improved during 1995 and 1994 due to upgrades in debt ratings,
continued improvements in asset quality, an increased level of capital, and
increased profitability.
Interest Rate Sensitivity and Asset Liability Management
Interest rate sensitivity refers to the responsiveness of interest-earning
assets and interest-bearing liabilities to changes in market interest rates.
To lessen the impact of rate movements, the balance sheet is structured such
that differences in repricing opportunities between assets and liabilities are
minimized.
Interest rate risk management, an important component of the overall risk
management program of the Company, includes monitoring of the balance sheet
composition and its associated sensitivity to interest rate changes. Interest
rate sensitivity is monitored on a monthly basis by simulating net interest
income under varying interest rate scenarios. The simulation model utilizes
maturity and repricing data on loans, investments, derivative financial
instruments, deposits and other interest-bearing liabilities to predict future
levels of net interest income.
The model measures net interest income, t.e., at risk as the difference between
net interest income under rising and falling rate environments and net interest
income, t.e., in an unchanged rate environment. The Company's policy is to
actively manage the balance sheet so that net interest income simulated over a
12 month period under 100, 200 and 300 basis point changes in rates does not
vary adversely from net interest income produced in an unchanged rate
environment by more than 2 percent, 5 percent and 8 percent, respectively. At
September 30, 1995, net interest income over 12 months from a 100, 200 and 300
basis point increase in interest rates would have decreased .8 percent, 2.4
percent and 4.8 percent, respectively. A measure of longer-term interest rate
risk is the market value of portfolio equity, which is the present value of
asset cash flows less the present value of liability cash flows, adjusted for
off-balance sheet activity. The sensitivity of the market value of portfolio
equity to changes in interest rates is measured in comparison to established
policy guidelines. At September 30, 1995, the Company was in compliance with
its market value of portfolio equity policies.
It is the Company's policy to utilize derivative financial instruments,
primarily interest rate swap and interest rate cap agreements, to reduce its
exposure to interest rate fluctuations. Income streams from underlying assets
and liabilities are offset with income received or paid on interest rate swaps
and caps. Consequently, the overall impact of rate movements on net interest
income for the interest rate swap and cap portfolio must be evaluated in
conjunction with the impact of rate movements on the underlying assets which
the swaps are hedging.
12
<PAGE> 15
BANK SOUTH CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Interest rate swap and cap agreements are used to modify the repricing
characteristics of interest-earning assets and interest-bearing liabilities.
These agreements generally involve the receipt of fixed-rate interest payments
in exchange for floating-rate interest payments over the life of the agreement
without an exchange of the underlying notional amount. The differential to be
paid or received is accrued as interest rates change and is recognized as an
adjustment to interest expense or interest income related to the underlying
hedged item. The related amount payable to, or receivable from, counterparties
is included in other liabilities or assets. The fair value changes in the
interest rate swap and cap agreements are recognized in accordance with the
accounting for the underlying hedged item.
Interest rate swap or cap agreements are stated in terms of a notional amount,
which represents a value used to compute the amount of interest to be received
or paid under the agreement. The Company's risk of loss relates to the ability
of the counterparties to make the interest payments required under the terms of
the agreements. Counterparties must meet rigorous credit standards and be
approved by the Company's Capital Markets Credit Committee before entering into
interest rate swap and cap agreements. Counterparties to the contract must
provide collateral sufficient to protect the other party from significant
exposure to loss.
The notional balance for interest rate swaps and caps/floors at September 30,
1995, was $2.0 billion and $1.6 billion, respectively. At December 31, 1994,
the Company had $2.1 billion in interest rate swaps and $1.5 billion in
interest rate caps/floors. The net unrealized market value loss on total
off-balance sheet derivative financial instruments at September 30, 1995, was
approximately $32.0 million, or .75 percent of the total notional balance for
total off-balance sheet derivative financial instruments compared to a $90.4
million, or 2.4 percent, net unrealized market value loss on total off-balance
sheet derivative financial instruments at December 31, 1994. The Company
terminated $713.9 million in interest rate swaps during the third quarter of
1995 resulting in a $3,000 gain. The termination of the interest rate swaps
was due to the sale of the underlying securities.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
a. The exhibits filed as part of this Report are as follows:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ ------------------------------------------------------
<S> <C>
2(a) Agreement and Plan of Merger by and between Bank South
Corporation and NationsBank Corporation, dated as of
September 4, 1995, (included as Exhibit 99.1 to the
Registrant's Form 8-K dated September 4, 1995, previously
filed with the Commission and incorporated herein by
reference).
</TABLE>
13
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K (CONTINUED)
<TABLE>
<S> <C>
3 (a) Amended and restated Articles of Incorporation, (included as Exhibit 4(a) to the
Registrant's Form S-8 No. 33-57791, previously filed with the Commission and incorporated
herein by reference).
3 (b) Amended and restated By-laws, (included as Exhibit 4(b) to the Registrant's Form S-8 No.
33-57791, previously filed with the Commission and incorporated herein by reference.)
4 (a) Bank South Corporation Rights Agreement (included as Exhibit 1 to the Form 8 Amendment to
the Form 8-A filed with the Commission on April 8, 1988, (File No. 0-4554) and
incorporated herein by reference).
10(a) Form of Change in Control Agreement with David E. Tatum (included as Exhibit 10(h) to the
Registrant's Form 10-K for the fiscal year ended December 31, 1994, previously filedwith
the Commission and incorporated herein by reference).
11 Statement Re Computation of Per Share Earnings.
27 Financial Data Schedules (for SEC use only)
</TABLE>
b. Reports on Form 8-K filed during the quarter ended September
30, 1995 - Form 8-K, dated September 4, 1995, reporting the
entrance by the Registrant into an agreement and Plan of
Merger with NationsBank Corporation, pursuant to which the
Registrant will be merged with and into NationsBank
Corporation.
14
<PAGE> 17
BANK SOUTH CORPORATION AND SUBSIDIARIES
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.
Date: November 14, 1995
-----------------------------
BANK SOUTH CORPORATION
-----------------------------
Registrant
By: /s/ Ralph E. Hutchins, Jr
-----------------------------
Ralph E. Hutchins, Jr.
Chief Financial Officer
(Principal Financial Officer)
15
<PAGE> 18
BANK SOUTH CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------ ---------------------------------------------- ----
<S> <C> <C>
11 Statement Re Computation of Per Share Earnings 17
27 Financial Data Schedules (for SEC use only) 18
</TABLE>
16
<PAGE> 1
BANK SOUTH CORPORATION
EXHIBIT 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
Primary: 1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Average Shares Outstanding 58,779 58,032 58,632 56,978
Dilutive Stock Options -
based on the treasury stock method using
the average market price for the period 878 733 750 692
-------- -------- -------- --------
Total primary shares outstanding 59,657 58,765 59,382 57,670
======== ======== ======== ========
Net Income $ 21,077 $ 21,731 $ 58,355 $ 63,684
======== ======== ======== ========
Primary earnings per share $ 0.35 $ 0.37 $ 0.98 $ 1.10
======== ======== ======== ========
Fully diluted:
Average Shares Outstanding 58,779 58,032 58,632 56,978
Dilutive Stock Options -
based on the treasury stock method using
the period-end market price, if greater
than average market price for the period 1,073 733 846 727
-------- -------- -------- --------
Total fully-dilutive shares outstanding 59,852 58,765 59,478 57,705
======== ======== ======== ========
Net Income $ 21,077 $ 21,731 $ 58,355 $ 63,684
======== ======== ======== ========
Fully diluted earnings per share * $ 0.35 $ 0.37 $ 0.98 $ 1.10
======== ======== ======== ========
</TABLE>
* Fully diluted earnings per share is less than 3% dilutive and, therefore,
was not disclosed on the Statements of Income in accordance with the
provisions of Accounting Principles Board Opinion Number 15.
17
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 471,606
<INT-BEARING-DEPOSITS> 26,495
<FED-FUNDS-SOLD> 7,625
<TRADING-ASSETS> 3,200
<INVESTMENTS-HELD-FOR-SALE> 872,873
<INVESTMENTS-CARRYING> 1,750,565
<INVESTMENTS-MARKET> 1,756,211
<LOANS> 4,177,032
<ALLOWANCE> 77,978
<TOTAL-ASSETS> 7,653,829
<DEPOSITS> 4,985,403
<SHORT-TERM> 1,630,620
<LIABILITIES-OTHER> 173,613
<LONG-TERM> 188,528
<COMMON> 294,633
0
0
<OTHER-SE> 381,032
<TOTAL-LIABILITIES-AND-EQUITY> 7,653,829
<INTEREST-LOAN> 264,194
<INTEREST-INVEST> 123,433
<INTEREST-OTHER> 6,588
<INTEREST-TOTAL> 394,215
<INTEREST-DEPOSIT> 127,361
<INTEREST-EXPENSE> 207,222
<INTEREST-INCOME-NET> 186,993
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 2,706
<EXPENSE-OTHER> 215,623
<INCOME-PRETAX> 79,132
<INCOME-PRE-EXTRAORDINARY> 79,132
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,355
<EPS-PRIMARY> .98
<EPS-DILUTED> .98
<YIELD-ACTUAL> 8.04
<LOANS-NON> 16,112
<LOANS-PAST> 280
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 90,220
<ALLOWANCE-OPEN> 82,936
<CHARGE-OFFS> 18,596
<RECOVERIES> 13,638
<ALLOWANCE-CLOSE> 77,978
<ALLOWANCE-DOMESTIC> 77,978
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 46,318
</TABLE>
