<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended:
SEPTEMBER 30, 1994
Commission file number: 1-10853
SOUTHERN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NORTH CAROLINA 56-0939887
(State of incorporation) (I.R.S. Employer Identification No.)
500 NORTH CHESTNUT STREET
LUMBERTON, NORTH CAROLINA 28358
(Address of principal executive offices) (Zip Code)
</TABLE>
(910) 671-2000
(Registrant's telephone number, including area code)
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
At November 4, 1994, 44,084,946 shares of the registrant's common stock, $5 par
value, were outstanding.
This Form 10-Q has 24 pages. The Exhibit Index is included on page 22.
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SOUTHERN NATIONAL CORPORATION
FORM 10-Q
SEPTEMBER 30, 1994
INDEX
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<CAPTION>
PAGE NO.
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Consolidated Financial Statements 3
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Analysis of Financial Condition 8
Asset/Liability Management 10
Inflation and Changing Interest Rates 14
Capital Adequacy and Resources 15
Analysis of Results of Operaitons 15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 5. Other Events -- Acquisitions 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
EXHIBIT 11
EXHIBIT 27 Included with electronically-filed document only.
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2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
<S> <C> <C>
(UNAUDITED)
ASSETS
Cash and due from depository institutions..................................................... $ 281,156 $ 283,909
Interest-bearing bank balances................................................................ 1,639 64,954
Federal funds sold and securities purchased under resale agreements or similar arrangements... 122,600 13,438
Securities available for sale................................................................. 892,638 1,194,230
Loans held for sale........................................................................... 33,387 316,544
Securities held to maturity................................................................... 1,758,673 1,356,102
Loans and leases, net of unearned income of $51,510 in 1994 and $36,945 in 1993............... 5,214,410 4,838,274
Allowance for losses....................................................................... (69,298) (69,503)
Net loans and leases..................................................................... 5,145,112 4,768,771
Premises and equipment, net................................................................... 157,231 136,228
Other assets.................................................................................. 109,854 140,294
Total assets............................................................................... $ 8,502,290 $8,274,470
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits.................................................................. $ 764,422 $ 820,177
Interest-bearing deposits..................................................................... 5,497,924 5,574,694
Total deposits............................................................................. 6,262,346 6,394,871
Short-term borrowings......................................................................... 1,352,073 756,343
Accounts payable and other liabilities........................................................ 67,765 78,715
Long-term debt................................................................................ 210,887 479,677
Total liabilities.......................................................................... 7,893,071 7,709,606
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares authorized, 770,000 issued
and outstanding in 1994 and 1993........................................................... 3,850 3,850
Common stock, $5 par, 120,000,000 shares authorized, 43,488,593 issued
and outstanding in 1994 and 42,961,214 in 1993............................................. 217,443 214,806
Paid-in capital............................................................................... 155,566 151,186
Retained earnings............................................................................. 254,778 199,383
Unearned compensation......................................................................... (3,069) (4,361)
Net unrealized depreciation on securities available for sale.................................. (19,349) --
Total shareholders' equity................................................................. 609,219 564,864
Total liabilities and shareholders' equity................................................. $ 8,502,290 $8,274,470
</TABLE>
See accompanying notes to consolidated financial statements.
3
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SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS AS INDICATED
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases.............................. $ 108,826 $ 100,766 $ 307,007 $ 301,347
Interest and dividends on securities............................... 38,533 35,066 111,977 104,252
Interest on temporary investments.................................. 1,294 400 1,902 1,930
Total interest income............................................ 148,653 136,232 420,886 407,529
INTEREST EXPENSE
Interest on deposits............................................... 49,010 48,248 138,706 148,739
Interest on short-term borrowings.................................. 14,132 4,928 30,449 12,429
Interest on long-term debt......................................... 3,669 5,178 12,208 16,803
Total interest expense........................................... 66,811 58,354 181,363 177,971
NET INTEREST INCOME.................................................. 81,842 77,878 239,523 229,558
Provision for loan and lease losses................................ 989 3,540 3,692 11,493
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES........ 80,853 74,338 235,831 218,065
NONINTEREST INCOME
Service charges on deposit accounts................................ 8,773 9,260 26,578 27,165
Nondeposit fees and commissions.................................... 8,470 7,083 23,205 22,561
Securities (losses) gains, net..................................... (48) 170 906 14,197
Other income....................................................... 2,030 3,414 10,038 9,625
Total noninterest income......................................... 19,225 19,927 60,727 73,548
NONINTEREST EXPENSE
Personnel expense.................................................. 29,850 30,349 91,043 91,937
Occupancy and equipment expense.................................... 9,264 9,351 27,019 27,860
Federal deposit insurance expense.................................. 3,505 3,667 10,970 10,328
Foreclosed property expense........................................ 182 1,767 1,271 7,669
Other expense...................................................... 14,175 15,966 42,188 48,683
Total noninterest expense........................................ 56,976 61,100 172,491 186,477
EARNINGS
Income before income taxes and cumulative effect of changes in
accounting principles............................................ 43,102 33,165 124,067 105,136
Provision for income taxes......................................... 15,089 11,436 43,123 35,539
Income before cumulative effect of changes in accounting
principles....................................................... 28,013 21,729 80,944 69,597
Less: cumulative effect of changes in accounting principles, net of
income taxes..................................................... -- -- -- 27,217
NET INCOME......................................................... 28,013 21,729 80,944 42,380
Preferred dividend requirements.................................. 1,299 1,299 3,897 3,897
Income applicable to common shares............................... $ 26,714 $ 20,430 $ 77,047 $ 38,483
PER COMMON SHARE
Net income:
Primary
Income before cumulative effect................................ $ .61 $ .49 $ 1.76 $ 1.57
Less: cumulative effect, net of income taxes................... -- -- -- .65
Net income..................................................... $ .61 $ .49 $ 1.76 $ .92
Fully diluted
Income before cumulative effect................................ $ .58 $ .47 $ 1.68 $ 1.50
Less: cumulative effect, net of income taxes................... -- -- -- .59
Net income..................................................... $ .58 $ .47 $ 1.68 $ .91
Cash dividends paid.............................................. $ .20 $ .17 $ .54 $ .47
Average shares outstanding
Primary........................................................ 43,854,243 42,103,062 43,708,933 41,967,319
Fully diluted.................................................. 48,402,479 46,651,347 48,292,039 46,528,792
</TABLE>
See accompanying notes to consolidated financial statements.
4
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SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................................ $ 80,944 $ 42,380
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses............................................................. 3,692 11,493
Depreciation of premises and equipment.......................................................... 9,753 11,963
Amortization of intangibles..................................................................... 1,311 2,160
Accretion of negative goodwill.................................................................. (835) --
Amortization of unearned compensation........................................................... 1,292 --
Discount accretion and premium amortization on securities....................................... 2,512 4,318
Gain on sales of securities, net................................................................ (906) (14,197)
Gain on sales of trading account securities, net................................................ (656) (621)
Gain on sales of loans, net..................................................................... (1,257) (4,312)
Net (gain) loss on disposals of premises and equipment.......................................... (1,244) 59
Net loss on foreclosed property and other real estate owned..................................... 310 2,305
Proceeds from sales of trading account securities, net of purchases............................. 656 621
Proceeds from sales of loans held for sale...................................................... 558,419 637,629
Purchases of loans held for sale................................................................ -- (73,729)
Origination of loans held for sale, net of principal collected.................................. (279,308) (504,588)
Decrease (increase) in:
Accrued interest receivable................................................................... 1,041 400
Other assets.................................................................................. 18,217 (1,503)
Increase in:
Accrued interest payable...................................................................... 3,259 11,357
Accounts payable and other liabilities........................................................ 844 33,339
Net cash provided by operating activities.................................................. 398,044 159,074
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities............................................ 283,059 292,519
Proceeds from maturities of available for sale securities....................................... 159,054 2,424
Proceeds from sales of held to maturity securities.............................................. -- 116,993
Proceeds from maturities of held to maturity securities......................................... 361,623 300,664
Purchases of available for sale securities...................................................... (163,396) --
Purchases of held to maturity securities........................................................ (769,623) (1,099,711)
Purchases of loans.............................................................................. -- (214)
Proceeds from sales of loans receivable and servicing rights.................................... -- 46,218
Leases made to customers........................................................................ (32,798) (30,172)
Principal collected on leases................................................................... 31,253 25,779
Loan originations, net of principal collected................................................... (375,371) (298,114)
Net cash acquired in transactions accounted for under the purchase method of accounting......... 229 6,833
Proceeds from disposals of premises and equipment............................................... 3,543 1,506
Purchases of premises and equipment............................................................. (33,431) (28,242)
Proceeds from sales of foreclosed property...................................................... 9,578 19,001
Proceeds from sales of other real estate owned.................................................. 9,259 5,663
Net cash used in investing activities...................................................... (517,021) (638,853)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits............................................................. (132,525) 96,541
Net increase in short-term borrowings........................................................... 586,766 243,991
Proceeds from long-term debt.................................................................... 704 256,368
Repayment of long-term debt..................................................................... (269,494) (197,760)
Net proceeds from common stock issued........................................................... 2,169 2,972
Cash dividends paid on common and preferred stock............................................... (25,549) (17,888)
Net cash provided by financing activities.................................................. 162,071 384,224
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................................ 43,094 (95,555)
CASH AND CASH EQUIVALENTS AT JANUARY 1.............................................................. 362,301 372,820
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30........................................................... $ 405,395 $ 277,265
</TABLE>
See accompanying notes to consolidated financial statements.
5
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SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
(UNAUDITED)
A. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of
Southern National Corporation and subsidiaries ("Southern National") as of
September 30, 1994, the results of operations for the three and nine months
ended September 30, 1994 and 1993 and cash flows for the nine months ended
September 30, 1994 and 1993.
The consolidated financial statements and notes are presented in accordance
with the instructions for Form 10-Q, and, therefore, do not necessarily
include all disclosures required under generally accepted accounting
principles. The information contained in the footnotes included in Southern
National's latest annual report on Form 10-K, as restated in the consolidated
financial statements included in Southern National's Current Report on Form
8-K dated September 26, 1994, should also be referred to in connection with
the reading of these unaudited interim consolidated financial statements.
Certain amounts for prior years have been reclassified to conform with
statement presentations for 1994. The reclassifications have no effect on
shareholders' equity or net income as previously reported.
B. NEW ACCOUNTING PRONOUNCEMENTS
In November 1992, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers'
Accounting for Postemployment Benefits." SFAS No. 112 establishes accounting
standards for employers who provide benefits to former or inactive employees
after employment but before retirement. The statement requires employers to
recognize the obligation to provide benefits if the obligation is
attributable to employees' services already rendered, employees' rights to
those benefits accumulate or vest, payment of the benefits is probable and
the amount can be reasonably estimated. SFAS No. 112 is effective for fiscal
years beginning after December 15, 1993. Southern National adopted SFAS No.
112 as of January 1, 1994 and the implementation did not have a material
impact on the consolidated financial position or consolidated results of
operations.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which was amended by SFAS No. 118, "Accouting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS
No. 114 requires that impaired loans be measured based on the present value
of expected future cash flows discounted at the loan's effective interest
rate, or as a practical expedient, at the loan's observable market price or
the fair value of the collateral if the loan is collateral-dependent.
Southern National has not yet adopted SFAS No. 114; however, the
implementation of SFAS No. 114 is not expected to have a material impact on
Southern National's consolidated financial position or consolidated results
of operations. SFAS No. 114 is effective for fiscal years beginning after
December 15, 1994.
As of January 1, 1994, Southern National adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." SFAS No. 115
addresses the accounting and reporting for investments in equity securities
that have readily determinable fair values and all investments in debt
securities. These investments are to be classified in one of three
categories: held to maturity, trading and available for sale. Securities
classified as available for sale are carried at estimated fair value with
unrealized holding gains and losses, net of tax, reported as a separate
component of shareholders' equity. Securities classified as held to maturity
are carried at amortized cost.
C. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from depository institutions,
interest-bearing bank balances, federal funds sold and securities purchased
under resale agreements or similar arrangements. Generally, both cash and
cash equivalents are considered to have maturities of three months or less.
6
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D. NON-CASH INVESTING ACTIVITIES
Transfers of loans to foreclosed property amounted to $7.0 million and $13.5
million for the nine months ended September 30, 1994 and 1993, respectively.
Transfers of securities from the held to maturity category to the available
for sale category totaled $6.0 million during the nine months ended September
30, 1994. Transfers of securities from the available for sale category to the
held to maturity category totaled $2.2 million for the nine months ended
September 30, 1994.
E. ACQUISITIONS AND PENDING MERGER
On June 1, 1994, Southern National completed its acquisition of McLean, Brady
& McLean Agency, Inc. by the issuance of 38,823 shares of Southern National
common stock and cash of $86,967. The acquisition was accounted for under the
purchase method of accounting, and therefore, the financial information
contained herein includes data relevant to the acquiree since the date of
acquisition.
On June 6, 1994, Southern National completed its acquisition of Leasing
Associates, Inc. by the issuance of 97,876 shares of Southern National common
stock. The acquisition was accounted for under the purchase method of
accounting, and therefore, the financial information contained herein
includes data relevant to the acquiree since the date of acquisition.
On November 1, 1994, Southern National completed its acquisition of Prime
Rate Premium Finance Corporation, Inc. and related interests, Agency
Technologies, Inc. and IFCO, Inc. by the issuance of 590,406 shares of
Southern National common stock. The transaction was accounted for under the
purchase method of accounting.
On August 1, 1994, Southern National and BB&T Financial Corporation ("BB&T")
jointly announced the signing of a definitive agreement to merge. The
transaction will be accounted for under the pooling-of-interests method in
which BB&T shareholders will receive 1.45 shares of the common stock of the
resulting company for each share of BB&T stock held. The merger is expected
to be completed during the first quarter of 1995. The market transaction has
an indicated total value of $2.2 billion based on July 29, 1994 closing
prices of the stock of both institutions.
F. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
The "cumulative effect of changes in accounting principles, net of income
taxes" of $27,217,000 for the nine months ended September 30, 1993 is
comprised of the impact of the adoption of SFAS 106, "Accounting for
Postretirement Benefits Other Than Pensions," and SFAS 109, "Accounting for
Income Taxes," by Southern National, Regency Bancshares Inc. ("Regency"),
Home Federal Savings Bank ("Home") and The First Savings Bank, FSB ("The
First"), as well as the effect of the adoption by The First of SFAS 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions."
Accordingly, cumulative adjustments have been reflected in the first quarter
of 1993. A summary of the components of the adjustment follows:
<TABLE>
<CAPTION>
INCREASE
(DECREASE) IN
NET INCOME
<S> <C>
(IN
THOUSANDS)
SFAS 106........................................ $ (8,463)
Less: taxes..................................... 2,897
SFAS 72......................................... (28,019)
SFAS 109........................................ 6,368
$ (27,217)
</TABLE>
The First, Regency and Home had fiscal years ending June 30. However, in
connection with the restatement of calendar year 1993, the June 30 fiscal
year-ends have been converted to a calendar year format comparable to Southern
National's presentation.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
Total assets at September 30, 1994 were $8.5 billion, a $227.8 million
increase from the balance at December 31, 1993. The increase was driven by
growth of $239.8 million in interest-earning assets. Loans and leases, excluding
loans held for sale, increased $376.1 million and securities held to maturity
increased $402.6 million offset by declines in loans held for sale of $283.2
million and securities available for sale of $301.6 million. Other
interest-earning assets, composed of federal funds sold, securities purchased
under resale agreements and similar arrangements and interest-bearing bank
balances increased $45.8 million, driven by increased federal funds rates during
the third quarter. The composition of earning assets is as follows:
COMPOSITION OF EARNING ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 DECEMBER 31, 1993
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Securities available for sale.................................................. $ 892,638 11.1% $1,194,230 15.3%
Loans held for sale............................................................ 33,387 0.4 316,544 4.1
Securities held to maturity.................................................... 1,758,673 21.9 1,356,102 17.4
Loans and leases, net of unearned income....................................... 5,214,410 65.0 4,838,274 62.2
Other assets*.................................................................. 124,239 1.6 78,392 1.0
Total earning assets........................................................... $8,023,347 100.0% $7,783,542 100.0%
Earning assets as a percent of total assets.................................... 94.4% 94.1%
</TABLE>
* Includes: (i) interest-bearing bank balances, (ii) federal funds sold and
(iii) securities purchased under resale agreements and similar arrangements.
The shift in earning assets from securities available for sale and loans
held for sale reflects the increase in interest rates during the year, the first
quarter bulk asset sale and improved loan demand. As deposit balances have
decreased, loan growth is being funded through sales of available for sale
assets and increased short-term borrowings.
Loan demand, which continues to produce positive results, generated an
annualized growth rate in portfolio loans of 10% during the first three quarters
of the year. Growth in loans occurred primarily in the commercial and mortgage
categories, which increased at annualized rates of 8% and 15%, respectively.
Consumer loans grew at an annualized rate of 7% consisting of installment loans,
home equity loans and revolving credits, which increased 9%, 7% and 24%,
respectively, on an annualized basis.
Total deposits decreased by $132.5 million from the December 31, 1993
balance because of a combination of Southern National offering less aggressive
pricing on certificates of deposits and implementing more aggressive fee
structures on transaction accounts than the acquired thrifts. Short-term
borrowings increased $595.7 million during this period to fund interest-earning
asset growth and reduce long-term debt, consisting primarily of Federal Home
Loan Bank advances, by $268.8 million. The application of Southern National's
funding strategies to borrowings assumed from the first quarter mergers was the
primary reason for this shift in amounts and classifications of other
borrowings. The composition and strategy employed in the management of
interest-bearing liabilities are further discussed in "ASSET/LIABILITY
MANAGEMENT." The following table outlines the composition of deposits and other
borrowings.
COMPOSITION OF DEPOSITS AND OTHER BORROWINGS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 DECEMBER 31, 1993
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-bearing deposits...................................................... $5,497,924 70.2% $5,574,694 73.1%
Demand deposits................................................................ 764,422 9.8 820,177 10.7
Total deposits................................................................. 6,262,346 80.0 6,394,871 83.8
Short-term borrowings.......................................................... 1,352,073 17.3 756,343 9.9
Long-term debt................................................................. 210,887 2.7 479,677 6.3
Total deposits and other borrowings............................................ $7,825,306 100.0% $7,630,891 100.0%
</TABLE>
8
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ASSET QUALITY
Risk assets, comprised of nonperforming assets ("NPA's") plus loans 90 days
or more past due and still accruing, were $28.1 million at September 30, 1994,
compared to $36.8 million at year-end 1993. At September 30, 1994, the credit
quality statistics include the full impact of the first quarter mergers.
Attempts to reduce NPA's acquired through the merger with The First have been
successful and levels of risk assets at September 30, 1994 were at its lowest
level during the year.
The allowance for losses as a percentage of loans and leases was 1.33% at
September 30, 1994 and NPA's as a percentage of loan-related assets were .52%,
compared to 1.44% and .72% at December 31, 1993. As problem assets continue to
be resolved and credit quality improves in the fourth quarter, it is expected
that the allowance as a percentage of loans and leases will continue to decline
and the ratio of NPA's to loan-related assets will further improve. The adequacy
of the current allowance is evidenced by the increase in the ratio of the
allowance to 2.87 times nonaccrual loans and leases from 2.45 times at December
31, 1993, and the other improvements in asset quality ratios.
The provision for loan and lease losses in the third quarter of 1994 was
$1.0 million and annualized net charge-offs were .12% of average loans and
leases compared to $3.5 million and .16% from the same period in 1993. The
decline in the provision was because of continued improvement in asset quality
as problem assets acquired during the first quarter mergers were resolved.
Credit-related statistics relevant to the last five calendar quarters are
presented in the accompanying table.
ASSET QUALITY ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF/FOR THE QUARTER ENDED
9-30-93 12-31-93 3-31-94 6-30-94 9-30-94
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOSSES
Beginning balance.................................................... $56,020 $ 57,697 $69,503 $69,500 $69,838
Allowance for acquired loans......................................... -- 2,750 -- -- --
Provision for loan and lease losses.................................. 3,540 19,945 1,171 1,532 989
Net charge-offs...................................................... (1,863) (10,889) (1,174) (1,194) (1,529)
Ending balance.................................................... $57,697 $ 69,503 $69,500 $69,838 $69,298
RISK ASSETS
Nonaccrual loans & leases............................................ $39,380 $ 28,372 $36,715 $33,077 $24,112
Foreclosed property.................................................. 30,132 6,356 4,927 2,652 3,221
Nonperforming assets.............................................. 69,512 34,728 41,642 35,729 27,333
Loans 90 days or more past due & still accruing...................... 2,408 2,115 553 2,551 754
Total risk assets................................................. $71,920 $ 36,843 $42,195 $38,280 $28,087
ASSET QUALITY RATIOS
Nonaccrual loans & leases as a percentage of total loans & leases.... .83% .59% .75% .65% .46%
Nonperforming assets as a percentage of:
Total assets...................................................... .88 .42 .52 .43 .32
Loans & leases plus foreclosed property........................... 1.45 .72 .85 .70 .52
Risk assets as a percentage of loans & leases plus foreclosed
property.......................................................... 1.50 .76 .86 .75 .54
Net charge-offs as a percentage of average loans & leases............ .16 .88 .10 .10 .12
Allowance for losses as a percentage of loans & leases............... 1.21 1.44 1.42 1.37 1.33
Ratio of allowance for losses to:
Net charge-offs................................................... 7.74x 1.60x 14.80x 14.62x 11.33x
Nonaccrual loans & leases......................................... 1.47 2.45 1.89 2.11 2.87
</TABLE>
All line items referring to loans and leases reflect loans and leases, net of
unearned income and loans held for sale. Applicable ratios are annualized.
9
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ASSET/LIABILITY MANAGEMENT
Asset/Liability management activities are designed to assure liquidity and,
through the management of Southern National's interest sensitivity position, to
achieve relatively stable net interest margins. It is the responsibility of the
Asset/Liability Committee ("ALCO") to set policy guidelines and to establish
long-term strategies with respect to interest rate exposure and liquidity. The
ALCO, which is composed primarily of executive management, meets regularly to
review Southern National's interest rate and liquidity risk exposures in
relation to present and prospective market and business conditions, and adopts
funding and balance sheet management strategies that are intended to assure that
the potential impact on earnings and liquidity is within conservative standards.
A prime objective in interest rate risk management is the avoidance of wide
fluctuations in net interest income through balancing the impact of changes in
interest rates on interest sensitive assets and interest sensitive liabilities.
Management uses Interest Sensitivity Simulation Analysis ("Simulation") to
measure the interest rate sensitivity of earnings. This method of analysis is
discussed in "INFLATION AND CHANGING INTEREST RATES."
Balance sheet repositioning is the most efficient and cost effective means
of managing interest rate risk and is accomplished through strategic pricing of
asset and liability accounts. The expected result of strategic pricing is the
development of appropriate maturity and repricing streams in those accounts to
produce consistent net income during adverse interest rate environments. The
ALCO monitors loan, investment and liability portfolios to ensure comprehensive
management of interest rate risk on the balance sheet. These portfolios are
analyzed for proper fixed rate and variable rate "mixes" given a specific
interest rate outlook. During 1993 and the first quarter of 1994, the total
proportion of floating rate loans increased. During the second and third
quarters of 1994, loans maturing or repricing in 30 days or less decreased by 2%
to comprise 36% of all loans outstanding.
LIQUIDITY
Liquidity represents a bank's continuing ability to meet its funding needs,
primarily deposit withdrawals, timely repayment of borrowings and other
liabilities and funding of loan commitments. In addition to its level of liquid
assets, many other factors affect a bank's ability to meet liquidity needs,
including access to additional funding sources, total capital position and
general market conditions.
Traditional sources of liquidity include proceeds from maturity of
investment securities, repayment of loans and growth in core deposits. Federal
funds purchased, repurchase agreements and other short-term borrowings
supplement these traditional sources. Management believes liquidity obtainable
from these sources will be adequate to meet current requirements.
Total cash and cash equivalents increased to $405 million at September 30,
1994 compared to $277 million last year. Net cash provided by operating
activities for the nine months increased from $159 million to $398 million. This
increase was primarily the result of a decrease in the origination of loans held
for sale. Southern National traditionally sells its fixed rate mortgage loan
production and retains adjustable rate mortgage loans in the portfolio. Because
of rising interest rates during the current year, mortgage origination volumes
have shifted from fixed rate to adjustable rate loans and mortgage refinancing
has been substantially reduced. This activity resulted in a use of funds of $279
million during the current nine months compared to $505 million during the same
period last year. Net cash flows used in investing activities decreased from
$639 million in 1993 to $517 million in 1994. The primary factor creating the
$122 million net decline was a $167 million decrease in purchases of securities.
Cash flows provided by financing activities decreased from $384 million to $162
million because of a $229 million net decrease in deposits compared to 1993, and
a net $327 million decrease in cash flows related to long-term debt. These
decreases were partially offset by a $343 million increase in cash flows from
short-term borrowings.
10
<PAGE>
The accompanying table summarizes the classification and maturity of the
securities portfolio at September 30, 1994.
SECURITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
HELD TO AVAILABLE FOR
MATURITY SALE
AMORTIZED COST FAIR VALUE
<S> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Treasury
Within one year............................................................................... $ 165,403 $ 53,023
One to five years............................................................................. 912,278 458,364
Five to ten years............................................................................. -- 88,527
After ten years............................................................................... -- --
Total.................................................................................... 1,077,681 599,914
U.S. Government agencies and corporations*
Within one year............................................................................... 5,150 4,037
One to five years............................................................................. 221,693 20,239
Five to ten years............................................................................. 372,039 132,153
After ten years............................................................................... 26,774 93,048
Total.................................................................................... 625,656 249,477
States and political subdivisions
Within one year............................................................................... 8,513 --
One to five years............................................................................. 36,169 --
Five to ten years............................................................................. 9,989 --
After ten years............................................................................... -- --
Total.................................................................................... 54,671 --
Other securities
Within one year............................................................................... 10 --
One to five years............................................................................. -- --
Five to ten years............................................................................. 655 --
After ten years............................................................................... -- --
Total.................................................................................... 665 --
Total debt securities.................................................................... 1,758,673 849,391
Equity securities............................................................................... -- 43,247
Total securities......................................................................... $1,758,673 $ 892,638
</TABLE>
* Included in U.S. Government agencies and corporations are mortgage-backed
securities totaling $584,805,000 classified as held to maturity and carried at
amortized cost and $240,342,000 classified as available for sale and carried
at estimated fair value. These securities are included in each of the
categories based upon final stated maturity dates. The original contractual
lives of these securities range from five to 30 years; however, a more
realistic average maturity would be substantially shorter.
11
<PAGE>
Estimated market values and related unrealized holding gains and losses in
the securities portfolio are illustrated in the table below.
SECURITIES -- FAIR VALUE AT SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Securities held to maturity:
U.S. Treasury.............................................................. $1,077,681 $2,124 $25,900 $1,053,905
U.S. Government agencies and corporations.................................. 40,851 24 600 40,275
States and political subdivisions.......................................... 54,671 344 714 54,301
Mortgage-backed securities................................................. 584,805 539 23,349 561,995
Other debt securities...................................................... 665 6 21 650
Total securities held to maturity.......................................... 1,758,673 3,037 50,584 1,711,126
Securities available for sale:
U.S. Treasury.............................................................. 626,346 1,481 27,913 599,914
U.S. Government agencies and corporations.................................. 9,177 70 112 9,135
Mortgage-backed securities................................................. 245,909 1,263 6,830 240,342
Equity securities.......................................................... 43,247 -- -- 43,247
Total securities available for sale........................................ 924,679 2,814 34,855 892,638
Total securities........................................................... $2,683,352 $5,851 $85,439 $2,603,764
</TABLE>
During the first nine months of 1994, management utilized strategies that
effectively added fixed rate assets and variable rate liabilities to the balance
sheet. U.S. Treasury and mortgage-backed agency securities, which were funded
through dealer repurchase agreements ("repos") and dollar repurchase agreements
("dollar rolls"), were added to the balance sheet. Repos are agreements to sell
and repurchase identical or substantially identical securities at a specified
date and price. Dollar rolls are agreements to sell and repurchase similar but
not identical securities. Repos and dollar rolls are used to obtain additional
funding in the short-term. Such agreements are attractive because the term may
be tailored to the specific funding strategies of Southern National and the
rates are more favorable than other funding sources.
DERIVATIVES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate volatility often increases to the point that balance sheet
repositioning through the use of account repricing and other on-balance sheet
strategies cannot occur rapidly enough to avoid adverse net income effects. At
those times, off-balance sheet or synthetic hedges are utilized. During the
first nine months of 1994, management used interest rate swaps, caps and floors
to supplement balance sheet repositioning. Such actions were designed to lower
the interest sensitivity of the corporation toward a neutral position.
Interest rate swaps are contractual agreements between two parties to
exchange a series of cash flows representing interest payments. A swap allows
both parties to transform the repricing characteristics of an asset or liability
from a fixed to a floating rate, a floating rate to a fixed rate, or one
floating rate to another floating rate. The underlying principal positions are
not affected. Swap terms generally range from one year to ten years depending on
the need. At September 30, 1994, interest rate swaps with a total notional value
of $614 million, with terms ranging up to seven years, were outstanding.
12
<PAGE>
The following tables set forth certain information concerning Southern
National's interest rate swaps at September 30, 1994:
INTEREST RATE SWAPS
SEPTEMBER 30, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTIONAL RECEIVE PAY FAIR
TYPE AMOUNT RATE RATE VALUE
<S> <C> <C> <C> <C>
Receive Fixed Swaps................................................................... $550,000 5.98% 4.98% $(9,103)
Pay Fixed Swaps....................................................................... 63,753 4.70 5.17 2,485
Total................................................................................. $613,753 5.85% 5.00% $(6,618)
</TABLE>
<TABLE>
<CAPTION>
RECEIVE PAY FIXED BASIS
YEAR-TO-DATE ACTIVITY FIXED SWAPS SWAPS PROTECTION TOTAL
<S> <C> <C> <C> <C>
Balance, December 31, 1993................................................ $ 150,000 $63,094 $ 400,000 $ 613,094
Additions................................................................. 550,000 9,000 -- 559,000
Maturities/Amortizations.................................................. (50,000) (8,341) (100,000) (158,341)
Terminations.............................................................. (100,000) -- (300,000) (400,000)
Balance, September 30, 1994............................................... $ 550,000 $63,753 $ -- $ 613,753
</TABLE>
<TABLE>
<CAPTION>
ONE YEAR ONE TO FIVE FIVE TO 10
MATURITY SCHEDULE OR LESS YEARS YEARS TOTAL
<S> <C> <C> <C> <C>
Receive Fixed Swaps........................................................... $ -- $ 550,000 $ -- $550,000
Pay Fixed Swaps............................................................... 2,404 38,282 23,067 63,753
Total......................................................................... $ 2,404 $ 588,282 $ 23,067 $613,753
</TABLE>
As of September 30, 1994, unamortized deferred premiums from new swap
transactions and realized deferred losses from terminated swap transactions were
$1.8 million and $234 thousand, respectively. The unamortized deferred premiums
will be recognized over the next three years and the realized deferred losses
will be recognized in the next year. The combination of active and terminated
transactions resulted in income of $520 thousand during the third quarter. For
the nine months ended September 30, 1994, these transactions resulted in income
of $187 thousand.
In addition to interest rate swaps, Southern National utilizes written
covered over-the-counter call options on specific securities in the available
for sale portfolio in order to enhance returns. During 1994, options were
written on securities totaling $456.5 million and premiums included in other
income totaled $1.5 million. There are no unexercised options outstanding at
September 30, 1994.
Southern National also utilizes purchased over-the-counter put options in
its mortgage banking activities to hedge the mortgage pipeline. During 1994,
options on $3.0 million of securities were purchased and remain outstanding at
September 30, 1994.
Although off-balance sheet derivative financial instruments do not expose
Southern National to credit risk equal to the notional amount, such agreements
generate credit risk to the extent of the fair value gain in an off-balance
sheet derivative financial instrument if the counterparty fails to perform. Such
risk is minimized based on the quality of the counterparties and the consistent
monitoring of these agreements. The counterparties to these transactions were
large commercial banks and investment banks, all of which were approved by the
ALCO. Annually, the counterparties are reviewed for creditworthiness by Southern
National's credit policy group. Southern National's credit exposure is limited
to the net difference between the calculated pay and receive amounts on each
transaction which are generally netted and paid quarterly. Other risks
associated with interest-sensitive derivatives include the impact on fixed
positions during periods of changing interest rates. Index amortizing swaps'
notional amounts and maturities change based on certain interest rate indices.
Generally, as rates fall the notional amounts decline more rapidly and as rates
increase notional amounts decline more slowly. Under unusual circumstances,
financial derivatives also increase liquidity risk, which could result in an
environment of rising interest rates in which derivatives produce negative cash
flows which would be offset by increased cash flows from variable rate loans.
Such risk is considered insignificant due to the relatively small derivative
positions held by Southern National.
13
<PAGE>
Management feels that interest rates will trend higher for the remainder of
1994. Also, management held the opinion that earnings would be at risk if the
prime rate did not change as quickly as the cost of funding. To protect against
this risk, Southern National entered into $300 million of interest rate
corridors during late 1993. Subsequently, the prime rate has proven to adjust
quicker than management estimated; therefore, the protection provided by the
corridors was no longer needed and these instruments were terminated early in
the second quarter of 1994.
As a result of Southern National's on-balance sheet repositioning and
off-balance sheet hedging, the negative impact of a gradual, historically
influenced 200 basis point rise over 12 months in interest rates is projected to
be only 2.7% of net income. Stated in terms of earnings per share, a rise of
gradual, historically influenced 200 basis points in interest rates is projected
to decrease earnings by less than one cent per share by the end of 1994.
Conversely, if interest rates were to decline 100 basis points based on a
gradual historical interest rate scenario, given Southern National's balance
sheet position at quarter-end, the impact on net income over a 12 month period
would be a increase of approximately 1.3% compared to a flat interest rate
scenario.
Management expects that an expanding economic environment and restrictive
monetary policy by the Federal Reserve Board ("FRB") during 1994 will justify
the current positioning of Southern National's interest rate sensitivity. Events
will be monitored during the course of the year to determine appropriate
adjustments to balance sheet and off-balance sheet hedges.
INFLATION AND CHANGING INTEREST RATES
The majority of assets and liabilities of financial institutions are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. Fluctuations in interest rates and the efforts of the FRB to
regulate money and credit conditions have a greater effect on a financial
institution's profitability than do the effects of higher costs for goods and
services. Through its balance sheet management function, Southern National is
positioned to respond to changing interest rates and inflationary trends.
Simulation Analysis takes into account the current contractual agreements
that Southern National has made with its customers on deposits, borrowings,
loans, investments and any commitments to enter into those transactions.
Management monitors Southern National's interest sensitivity by means of a
computer-based asset/liability model that incorporates current volumes and
rates, maturity streams, repricing opportunities and anticipated growth. The
model calculates an earnings estimate based on current portfolio balances and
rates, less any balances that are scheduled to reprice or mature. Balances and
rates that will replace the previous balances and any anticipated growth are
added. This level of detail is needed to correctly simulate the effect that
changes in interest rates and anticipated balances will have on the earnings of
Southern National. This method is subject to the assumptions that underlie the
process, but it provides a better illustration of the true earnings outlook.
The following table, "Interest Sensitivity Simulation Analysis," represents
the sensitivity position as of a point in time and the position can be modified
significantly by management within a short time period. This tabular data does
not reflect the impact of a change in the credit quality of Southern National's
assets and liabilities. To attempt to quantify the potential change in net
income, given a change in interest rates, various interest rate scenarios are
applied to the projected balances, maturities and repricing opportunities. The
resulting change in net income reflects the level of sensitivity that net income
has in relation to changing interest rates. The Instantaneous Parallel rate
shocks assume that all interest-bearing assets and liabilities move
simultaneously and instantaneously in magnitude and direction. The Gradual
Historical rate shocks assume that individual interest-bearing assets and
liabilities move gradually over a twelve-month time period in correlation to its
historical relationship with the assumed change in the Prime rate. For example,
Southern National's Money Market Account rate has historically changed only
one-third as much as the Prime rate. The following table reflects the impact on
net income of certain interest rate scenarios.
14
<PAGE>
INTEREST SENSITIVITY SIMULATION ANALYSIS
<TABLE>
<CAPTION>
INTEREST REFERENCE RATE ANNUALIZED
RATE SCENARIO MONEY PERCENTAGE
INSTANTANEOUS MARKET CHANGE IN
PARALLEL PRIME ACCOUNT NET INCOME
<S> <C> <C> <C>
+4.00% 11.75% 6.84% (48.3)%
+3.00 10.75 5.84 (36.2)
+2.00 9.75 4.84 (23.8)
+1.00 8.75 3.84 (11.6)
No change 7.75 2.84 -0-
-1.00 6.75 1.84 11.1
-2.00 5.75 0.84 21.4
-3.00 4.75 0.00 28.2
-4.00 3.75 0.00 30.0
<CAPTION>
GRADUAL
HISTORICAL
<S> <C> <C> <C>
+2.00 9.75 3.50 (2.74)
-1.00 6.75 2.51 1.32
</TABLE>
A comprehensive policy has been developed for setting parameters for the
management of interest rate risk as defined by the results of the model's
output. Management has set policy guidelines that interest sensitive assets
should remain between 50% and 150% of interest sensitive liabilities for all
periods. Management has also stated that earnings should not fluctuate more than
5% up or down given each 1% change in rates over a 12-month period. To control
that variance, and to manage the balance sheet consistently with any projected
interest rate environment, management uses a number of natural or on-balance
sheet strategies as well as off-balance sheet strategies as discussed in
"ASSET/LIABILITY MANAGEMENT."
CAPITAL ADEQUACY AND RESOURCES
The maintenance of appropriate levels of capital is a management priority.
Overall capital adequacy is monitored on an ongoing basis by management and
reviewed regularly by the Board of Directors. Southern National's principal
capital planning goals are to provide an adequate return to shareholders while
retaining a sufficient base from which to provide future growth and compliance
with all regulatory standards.
Shareholders' equity at September 30, 1994 was $609.2 million versus $564.9
million for December 31, 1993. As a percentage of assets, total shareholders'
equity was 7.2% at September 30, 1994, compared to 6.8% at December 31, 1993.
Southern National's book value per common share at September 30, 1994 was
$12.30, versus $11.42 at December 31, 1993.
Southern National's internal capital formation rate (net income less
dividends as a percentage of average equity, annualized) was 12.6% for the first
nine months of 1994. Average shareholders' equity as a percentage of average
assets was 7.2% and 7.7% for the nine months ended September 30, 1994 and the 12
months ending December 31, 1993, respectively.
Tier 1 and total risk-based capital ratios at September 30, 1994 were 12.5%
and 13.8%, respectively. The Tier 1 leverage ratio was 7.2% at the end of the
third quarter. These capital ratios measure the capital to risk-adjusted assets
and off-balance sheet items as defined by FRB guidelines. An 8% minimum of total
capital to risk-adjusted assets is required. One-half of the 8% minimum must
consist of tangible common shareholders' equity under regulatory guidelines. The
leverage ratio, established by the FRB, measures Tier 1 capital to average total
assets less goodwill and must be maintained in conjunction with the risk-based
capital standards. The regulatory minimum for the leverage ratio is 3%.
ANALYSIS OF RESULTS OF OPERATIONS
Earnings for the first nine months of 1994 and 1993 were $80.9 million and
$42.4 million, respectively. On a fully diluted per share basis, net income for
the nine months ended September 30, 1994 was $1.68, compared to $.91 for the
same period in 1993. Net income for the current quarter totaled $28.0 million
compared to $21.7 million for the third quarter of 1993. Fully diluted earnings
per share for the quarter were $.58 compared to $.47 for the same period last
year. The accompanying table presents a comparison of major income statement
items for the relevant periods.
15
<PAGE>
COMPONENTS OF NET INCOME
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS FOR THE NINE
ENDED SEPTEMBER MONTHS
30, ENDED SEPTEMBER 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net interest income............................................................ $81,842 $77,878 $239,523 $229,558
Provision for loan and lease losses............................................ 989 3,540 3,692 11,493
Noninterest income............................................................. 19,225 19,927 60,727 73,548
Noninterest expense............................................................ 56,976 61,100 172,491 186,477
Income before income taxes..................................................... 43,102 33,165 124,067 105,136
Income taxes................................................................... 15,089 11,436 43,123 35,539
Income before cumulative effect................................................ 28,013 21,729 80,944 69,597
Less: cumulative effect, net of income taxes................................... -- -- -- 27,217
Net income..................................................................... $28,013 $21,729 $ 80,944 $ 42,380
</TABLE>
As shown in the table, earnings for the first nine months of 1993 were
affected by the impact of changes in accounting principles. The adoption of SFAS
72 by The First prior to its acquisition by Southern National accounted for
$28.0 million of this net cumulative change. The remainder was attributable to
the adoption of SFAS 109 and SFAS 106 by Regency, Home and The First, as well as
by Southern National, in 1993. See Note F of "Notes to Consolidated Financial
Statements" for additional information relating to changes in accounting
principles. Other factors visible in the table contributing to the earnings
increase were net interest income, significantly lower loan loss provisions and
lower levels of noninterest expense.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was $248.8
million for the first nine months of 1994 compared to $237.5 million for the
same period in 1993, a 5% increase. Net interest income (FTE) for the current
quarter totaled $85.0 million compared to $80.8 million a year ago. The increase
in net interest income (FTE) for the quarter and nine months resulted from
growth in interest-earning assets, offset by declines in margin. Average earning
assets during the first nine months of 1994 increased $647 million, or 9%, over
1993. Average earning assets for the current quarter were also up 9% over the
third quarter of 1993. Contributing to the increased volumes was the purchase of
East Coast Savings Bank, SSB ("East Coast") in October 1993 with $271 million in
assets and $201 million in deposits. The accompanying table presents an analysis
of net interest income and related changes attributable to rate and volume
fluctuations for the nine months ended September 30, 1994 and 1993.
16
<PAGE>
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AVERAGE BALANCE YIELD/RATE INCOME/EXPENSE INCREASE CHANGE DUE TO
FULLY TAXABLE EQUIVALENT 1994 1993 1994 1993 1994 1993 (DECREASE) RATE VOLUME
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Securities(1):
U.S. Treasury, government and
other............................ $2,517,603 $2,124,804 6.11% 6.70% $115,346 $106,763 $ 8,583 $ (9,975) $18,558
States and political subdivisions... 52,012 49,944 7.73 8.54 3,015 3,198 (183) (312) 129
Total securities(5).............. 2,569,615 2,174,748 6.14 6.74 118,361 109,961 8,400 (10,287) 18,687
Other earning assets(2)............... 70,325 85,745 3.61 3.00 1,902 1,930 (28) 352 (380)
Loans and leases, net of unearned
income(1)(3)(4)(6).................. 5,102,509 4,835,085 8.10 8.37 309,921 303,621 6,300 (10,148) 16,448
Total earning assets............. 7,742,449 7,095,578 7.41 7.81 430,184 415,512 14,672 (20,083) 34,755
Non-earning assets............... 450,112 457,164
Total assets................... $8,192,561 $7,552,742
LIABILITIES AND SHAREHOLDERS' EQUITY
Total interest-bearing deposits....... $5,441,044 $5,417,814 3.40 3.66 138,706 148,739 (10,033) (10,668) 635
Short-term borrowings................. 1,030,292 477,399 3.94 3.47 30,449 12,429 18,020 1,883 16,137
Long-term debt........................ 248,351 348,080 6.55 6.44 12,208 16,803 (4,595) 302 (4,897)
Total interest-bearing
liabilities...................... 6,719,687 6,243,293 3.60 3.80 181,363 177,971 3,392 (8,483) 11,875
Demand deposits..................... 811,784 661,996
Other liabilities................... 74,368 63,366
Shareholders' equity................ 586,722 584,087
Total liabilities and shareholders'
equity........................... $8,192,561 $7,552,742
Net yield on earning assets........... 4.28% 4.46% $248,821 $237,541 $ 11,280 $(11,600) $22,880
Taxable equivalent adjustment......... $ 9,298 $ 7,983
</TABLE>
(1) Yields related to investment securities, loans and leases exempt from both
federal and state income taxes, federal income taxes only or state income
taxes only are stated on a taxable equivalent basis assuming tax rates in
effect for the periods presented.
(2) Includes federal funds sold, securities purchased under resale agreements or
similar arrangements and interest-bearing bank balances.
(3) Loan fees, which are not material for either of the periods shown, have been
included for rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans has been included as income.
(5) Includes securities available for sale based on fair value in 1994 and lower
of amoritized cost or market in 1993.
(6) Includes loans held for sale based on lower of amortized cost or market.
(7) There are no significant out-of-period adjustments.
The net yield FTE for the quarter and nine months of 1994 was 4.29% and
4.28%, compared to 4.44% and 4.46% for the same period in 1993, respectively.
Factors contributing to the declines for the quarter and the first nine months
compared to 1993, were (i) the overall interest rate environment; (ii)
prepayments on higher yielding mortgage loans which increased as consumers
refinanced at lower rates and (iii) the acquisition of thrift assets and
liabilities with historically narrower spreads. Repricing of deposits,
on-and-off balance sheet hedging and other active asset/liability management
techniques will continue
17
<PAGE>
to be utilized in 1994, as they were in 1993, to effectively manage the net
yield. The impact of the quarterly fluctuations of interest rates and
interest-sensitive assets and liabilities on net interest income are presented
in the accompanying table.
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AVERAGE BALANCE YIELD/RATE INCOME/EXPENSE INCREASE CHANGE DUE TO
FULLY TAXABLE EQUIVALENT 1994 1993 1994 1993 1994 1993 (DECREASE) RATE VOLUME
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Securities(1):
U.S. Treasury, government and other... $2,573,741 $2,231,027 6.17% 6.47% $ 39,714 $ 36,062 $ 3,652 $(1,693) $ 5,345
States and political subdivisions..... 50,381 47,667 7.45 8.52 938 1,015 (77) (133) 56
Total securities(5)................ 2,624,122 2,278,694 6.20 6.51 40,652 37,077 3,575 (1,826) 5,401
Other earning assets(2)................. 116,466 54,325 4.44 2.95 1,294 400 894 276 618
Loans and leases, net of unearned
income(1)(3)(4)(6).................... 5,188,057 4,938,070 8.47 8.23 109,843 101,635 8,208 2,969 5,239
Total earning assets............... 7,928,645 7,271,089 7.66 7.65 151,789 139,112 12,677 1,419 11,258
Non-earning assets................. 456,096 451,363
Total assets..................... $8,384,741 $7,722,452
LIABILITIES AND SHAREHOLDERS' EQUITY
Total interest-bearing deposits......... $5,486,212 $5,408,861 3.57 3.57 49,010 48,248 762 71 691
Short-term borrowings................... 1,251,607 564,289 4.52 3.49 14,132 4,928 9,204 1,784 7,420
Long-term debt.......................... 213,774 371,005 6.87 5.58 3,669 5,178 (1,509) 1,012 (2,521)
Total interest-bearing
liabilities...................... 6,951,593 6,344,155 3.84 3.68 66,811 58,354 8,457 2,867 5,590
Demand deposits.................... 760,626 709,076
Other liabilities.................. 73,654 66,930
Shareholders' equity............... 598,868 602,291
Total liabilities and shareholders'
equity........................... $8,384,741 $7,722,452
Net yield on earning assets............. 4.29% 4.44% $ 84,978 $ 80,758 $ 4,220 $(1,448) $ 5,668
Taxable equivalent adjustment........... $ 3,136 $ 2,880
</TABLE>
(1) Yields related to investment securities, loans and leases exempt from both
federal and state income taxes, federal income taxes only or state income
taxes only are stated on a taxable equivalent basis assuming tax rates in
effect for the periods presented.
(2) Includes federal funds sold, securities purchased under resale agreements or
similar arrangements and interest-bearing bank balances.
(3) Loan fees, which are not material for either of the periods shown, have been
included for rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans has been included as income.
(5) Includes securities available for sale based on fair value in 1994 and lower
of amoritized cost or market in 1993.
(6) Includes loans held for sale based on lower of amortized cost or market.
(7) There are no significant out-of-period adjustments.
Hedging strategies have been used in the past and will be utilized in the
future to reduce sensitivity to interest rate movements. See "ASSET/LIABILITY
MANAGEMENT" section for additional discussion of hedging strategies. Southern
National
18
<PAGE>
continues to evaluate new avenues of interest-based and fee-based income through
its Strategic Planning Committee and other special task force groups.
NONINTEREST INCOME
Noninterest income for the nine months ended September 30, 1994 was $60.7
million, compared to $73.5 million for the same period in 1993. Security gains
were the primary factor contributing to the decline, decreasing from $14.2
million in 1993 to $906 thousand for the first nine months of 1994. Noninterest
income declined from $19.9 million last year to $19.2 million for the current
quarter. Decreases in service charges on deposits and gains on sales of mortgage
loans contributed to the decrease in the third quarter of 1994 compared to 1993.
Based on these decreases, the percentage of total revenues, calculated as net
interest income plus noninterest income excluding securities gains, derived from
noninterest (fee-based) income for the nine months ended September 30, 1994 was
20%, down from 21% last year.
Service charges on deposit accounts were stable for the first nine months
in 1994 compared to 1993 decreasing by $587 thousand or 2%. For the quarter,
service charges were down $487 thousand compared to the prior year. Several
factors accounted for this scenario. Southern National has been very successful
in promoting the "Select Banking" program, particularly to new customers
acquired through mergers. Many service fees are waived for "Select Banking"
customers. Second, because of competitive considerations, Southern National has
decreased the percentage of deposit insurance expense passed through to
customers during the first quarter of 1994. Third, in an effort to develop
customer loyalty, in the first quarter of 1994 Southern National waived certain
service charges for customers acquired through the mergers with Regency, Home
and The First. Fourth, rising interest rates during 1994 have negatively
affected service charges on deposit accounts by increasing the earnings credit
used in service charge computations.
Nondeposit fees and commissions increased slightly in the first nine months
of 1994, to $23.2 million versus $22.6 million in 1993. The increase in fee
income was caused by an increase in trust revenue of $303 thousand and an
increase in other nondeposit fees and commissions, primarily composed of
bankcard and investment services, of $741 thousand offset by a $400 thousand
decrease in mortgage banking fees. For the quarter, nondeposit fees and
commissions increased $1.4 million over the third quarter last year primarily
from a $1.0 million increase in mortgage banking fees in the current quarter
compared to the third quarter last year.
As previously mentioned, Southern National sells its fixed rate mortgage
loan production while retaining adjustable rate loans in the portfolio. With the
rise in interest rates during 1994, mortgage originations have shifted to
adjustable rate mortgage loans and refinancings have been reduced significantly.
As a result, gains on sales of mortgage loans declined from $4.3 million for the
first nine months of 1993 to $1.3 million for 1994, a 71% decrease. For the
third quarter of 1994, these gains totaled $31 thousand, down from $1.8 million
last year.
The expanding and highly competitive environment in which financial
institutions operate has elevated the importance of developing new sources of
noninterest income. Management is placing renewed emphasis on the identification
and implementation of other fee-based initiatives which are expected to add to
earnings in future quarters. Income from Southern National Insurance Services,
Inc., a newly-formed insurance subsidiary, is anticipated to increase in the
fourth quarter.
NONINTEREST EXPENSE
Noninterest expense was $172.5 million for the first nine months of 1994,
compared to $186.5 million for the same period a year ago. Special accruals and
expenses led to an elevated level of noninterest expense in the first nine
months of 1993. These items included accelerated depreciation or retirement of
certain technology-related equipment and early buyouts of employment contracts.
Driven by decreases in foreclosed property expense, all components of
noninterest expense decreased from the third quarter of 1993 to the third
quarter of 1994.
Corporate expansion during last year had an impact on noninterest expense.
On October 7, 1993, Southern National acquired East Coast in a transaction
accounted for as a purchase. Consequently, the first nine months of 1994 reflect
the impact of the operating costs associated with this institution, whereas the
first nine months of 1993 did not include any expenses related to this
acquisition.
Total personnel expense, the largest component of noninterest expense, was
$91.0 million for the first nine months of 1994, an $894 thousand, or 1%
decrease over the same period a year ago. For the third quarter of 1994,
personnel expense totaled $29.9 million compared to $30.3 million a year ago.
Costs are down somewhat because of the realization of synergies from the
acquisitions completed in the first quarter of 1994 and vacant positions which
are not being filled in anticipation of the pending merger with BB&T Financial
Corporation.
19
<PAGE>
Occupancy and equipment expense for the nine months ended September 30,
1994 declined $841 thousand, or 3%, compared to 1993. A $1.3 million charge
related to the accelerated depreciation of technology-related equipment to
facilitate future upgrading is included in the 1993 amount and mitigates the
normal increases in this area. Comparing the quarters, occupancy and equipment
expense decreased $87 thousand. Federal deposit insurance expense increased $642
thousand, or 6%, for the nine months ended September 30, 1994 as a result of
deposit growth through acquisitions as well as internal growth.
Foreclosed property expense, including net losses on sales and write-downs,
amounted to $1.3 million during the first nine months of 1994, compared to $7.7
million in 1993. The 1993 amount included $1.8 million in losses attributable to
efforts to accelerate resolution of problem assets. Southern National continues
to aggressively resolve problem assets. Foreclosed property expense for the
current quarter totaled $182 thousand, down from $1.8 million in the third
quarter of 1993.
PROVISION FOR INCOME TAXES
Federal income taxes increased from $35.5 million for the nine months
ending September 30, 1993 to $43.1 million for the same period in 1994 due to
higher pretax income. The effective tax rate increased from 33.8% for the first
nine months of 1993 to 34.8% for the first nine months of 1994. Comparing the
third quarter of 1993 and 1994, federal income taxes increased from $11.4
million to $15.1 million because of higher pretax income. The effective tax rate
for the quarter increased from 34.5% to 35.0%.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1991, the trustee in bankruptcy for Kenyon Home Furnishings, Ltd.
("Kenyon") filed an adversary proceeding against Southern National Bank of North
Carolina ("SNBNC") in the United States Bankruptcy Court for the Middle District
of North Carolina. The trustee alleges that American Bank and Trust Company
("American"), which was acquired by SNBNC in October 1989, aided and abetted
Kenyon's officers in defrauding Kenyon's creditors and others. The trustee seeks
to recover more than $40 million in damages. The trustee also filed separate
proceedings against a number of other persons, corporations and financial
institutions seeking identical damages. In these actions, the trustee is seeking
to recover attorney's fees and treble damages. The claim addresses events and
circumstances occurring on or before October 31, 1989, the date SNBNC acquired
American. The case is in the discovery stage and SNBNC is vigorously defending
this action. Based on information presently available to Southern National,
management believes that the ultimate outcome of this matter will not have a
material impact on the consolidated financial condition or consolidated results
of operations of Southern National.
In July 1993, the trustee in bankruptcy for Florida Hotel Properties
Limited Partnership ("Florida") filed an adversary proceeding against SNBNC in
the United States Bankruptcy Court for the Western District of North Carolina.
The trustee alleges that SNBNC aided and abetted Florida's officers in
defrauding Florida through SNBNC's handling of deposit accounts from which
Florida allegedly made fraudulent transfers to third parties by check and/or
wire transfer. The trustee seeks to recover compensatory damages in excess of
$10,000, equitable subordination of any claim filed by SNBNC in the Florida
bankruptcy, treble damages plus interest and attorney's fees. The trustee also
filed separate proceedings against a number of other persons, corporations and
financial institutions seeking damages. Southern National filed a motion for
judgment on the pleadings. This motion was denied. An order for discovery has
been entered. The case is in an early procedural stage, and SNBNC is vigorously
defending this action. Based on information presently available to Southern
National, management believes that the ultimate outcome of this matter will not
have a material impact on the consolidated financial condition or consolidated
results of operations of Southern National.
In August 1993, the trustee for Southeast Hotel Properties Limited
Partnership Claims Liquidating Trust ("Southeast") filed an action against SNBNC
in the United States District Court for the Western District of North Carolina.
The trustee alleges that SNBNC aided and abetted Southeast's officers in
defrauding Southeast through SNBNC's handling of deposit accounts from which
Southeast allegedly made fraudulent transfers to third parties by check and/or
wire transfer. The trustee seeks to recover compensatory damages as established
at trial, punitive damages, exemplary damages, treble damages and attorney's
fees. The total amount of damages sought by the trustee from SNBNC, including
amounts sought by the trustee from immediate transferees of Southeast, exceeds
$7,501,000. The damages stated by the trustee do not reflect any offsets which
appear available or amounts which should be recovered by the trustee from third
parties. The trustee also filed separate proceedings against a number of other
persons, corporations and financial institutions seeking damages. Southern
National filed a motion for judgment on the pleadings. This motion was denied.
An order to discovery has been entered. The case is in an early procedural
stage, and SNBNC is vigorously defending this action. The case has been
consolidated with the Florida adversary proceeding for trial as the allegations
refer to related entities. Based on information presently available to Southern
National, management believes that the ultimate outcome of this matter will not
have a material impact on the consolidated financial condition or consolidated
results of operations of Southern National.
Southern National Bank of South Carolina ("SNBSC") as successor in interest
by merger to The First Savings Bank, FSB ("Bank") is a defendant in a lawsuit
filed in 1991 in the Court of Common Pleas, Thirteenth Judicial Circuit, State
of South Carolina against the Bank. On May 21, 1993, a jury awarded the
plaintiffs a $4.1 million judgement against the Bank consisting of $500,000 in
actual damages and $3.6 million in punitive damages for allegedly acting as a
control person and aiding and abetting a state securities law violation. The
plaintiffs, limited partners in a failed venture to construct and operate a
residential health care facility for senior citizens, alleged that the Bank, as
an escrow agent and lender for the project, knew or should have known, that its
loan commitment was insufficient and that the Bank was therefore responsible for
the losses suffered by the limited partners resulting from the actions of the
general partners.
Prior to this case going to jury, the Bank made a motion for directed
verdict which was not granted. Rule 50(b) of the South Carolina Rules of Civil
Procedure states that when a motion for directed verdict is not granted, the
Court is deemed to have submitted the action to the jury subject to a later
determination of the legal question raised in the motion. After the jury
verdict, the Bank renewed that motion in the form of a motion for judgement not
withstanding the verdict, as well as an alternative motion for a new trial. This
motion and the plaintiff's petition for legal fees, costs and interest were
argued before Circuit Judge on June 22, 1993. The Bank's motion was granted as
to plaintiff's "control person" theory of liability, but
21
<PAGE>
denied as to plaintiff's aiding and abetting violations of securities laws
theory of liability. The request for a new trial was also denied. As a result,
the judgement remains in effect, but has been appealed. It is the opinion of
Southern National's legal counsel that it is not probable that a loss in the
amount of the present jury verdict will be incurred by SNBSC. Furthermore, if
a loss ultimately is incurred following appeals, it is not probable that the
loss would exceed $750,000. Therefore, it is management's opinion, based upon
counsel's analysis of the outcome of the suit, that any future liability arising
from this suit will not have a material adverse effect on the consolidated
financial condition or consolidated results of operations of Southern National.
The nature of the business of Southern National's banking subsidiaries
ordinarily results in a certain amount of litigation. The subsidiaries of
Southern National are involved in various other claims and lawsuits, all of
which are considered incidental to the conduct of its business.
ITEM 5. OTHER EVENTS -- ACQUISITIONS
See Note E to "Notes to Consolidated Financial Statements" for all
acquisitions occurring during 1994 not previously reported.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 -- "Computation of Earnings Per Share" is included herein.
(b) Exhibit 27 -- "Financial Data Schedule" is included in the
electronically-filed document as required.
(c) Southern National filed a Form 8-K under Item 5 on August 8, 1994 to
report the planned merger of Southern National and BB&T Financial
Corporation. Southern National filed a Current Report on Form 8-K dated
September 26, 1994 to restate balances for the three years in the
period ended December 31, 1993 for the effects of the first quarter
acquisitions of The First, Regency and Home. Southern National filed a
Form 8-K under Item 5 on November 14, 1994 for the purpose of providing
financial information about Commerce Bank which could be incorporated
by reference into Southern National's Registration Statement on Form
S-4 filed on November 14, 1994 and covering the proposed merger of
Southen National and BB&T Financial Corporation.
22
<PAGE>
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.
SOUTHERN NATIONAL CORPORATION
(Registrant)
<TABLE>
<S> <C>
Date: November 14, 1994 By: /s/ L. GLENN ORR, JR.
L. GLENN ORR, JR.,
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 14, 1994 By: /s/ SHERRY A. KELLETT
SHERRY A. KELLETT,
EXECUTIVE VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
23
<PAGE>
EXHIBIT 11
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
FOR THE PERIODS AS INDICATED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Weighted average number of common shares outstanding during
the period................................................. 43,466,214 41,363,746 43,303,129 41,153,647
Add-
Dilutive effect of outstanding options (as determined by
application of treasury stock method).................... 388,029 739,316 405,804 813,672
Weighted average number of common shares, as adjusted......... 43,854,243 42,103,062 43,708,933 41,967,319
Income before cumulative effect of changes in accounting
principles................................................. $ 28,013 $ 21,729 $ 80,944 $ 69,597
Less: cumulative effect of changes in accounting
principles, net of income taxes....................... -- -- -- 27,217
Net income.................................................... 28,013 21,729 80,944 42,380
Less-
Preferred dividend requirements.......................... 1,299 1,299 3,897 3,897
Income available for common shares............................ $ 26,714 $ 20,430 $ 77,047 $ 38,483
Primary earnings per share
Income before cumulative effect of changes in accounting
principles............................................ $ .61 $ .49 $ 1.76 $ 1.57
Less: cumulative effect of changes in accounting
principles, net of income taxes..................... -- -- -- .65
Net income............................................... $ .61 $ .49 $ 1.76 $ .92
FULLY DILUTED EARNINGS PER SHARE:
Weighted average number of common shares outstanding during
the period................................................. 43,466,214 41,363,746 43,303,129 41,153,647
Add-
Shares issuable assuming conversion of convertible
preferred stock.......................................... 4,548,236 4,548,236 4,548,236 4,548,236
Dilutive effect of outstanding options (as determined by
application of treasury stock method).................... 388,029 739,365 440,674 826,909
Weighted average number of common shares, as adjusted......... 48,402,479 46,651,347 48,292,039 46,528,792
Net income.................................................... $ 28,013 $ 21,729 $ 80,944 $ 42,380
Fully diluted earnings per share
Income before cumulative effect of changes in accounting
principles............................................... $ .58 $ .47 $ 1.68 $ 1.50
Less: cumulative effect of changes in accounting
principles, net of income taxes....................... -- -- -- .59
Net income................................................. $ .58 $ .47 $ 1.68 $ .91
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 281,156
<INT-BEARING-DEPOSITS> 1,639
<FED-FUNDS-SOLD> 122,600
<TRADING-ASSETS> 33,387
<INVESTMENTS-HELD-FOR-SALE> 892,638
<INVESTMENTS-CARRYING> 1,758,673
<INVESTMENTS-MARKET> 1,711,126
<LOANS> 5,214,410
<ALLOWANCE> 69,298
<TOTAL-ASSETS> 8,502,290
<DEPOSITS> 6,262,346
<SHORT-TERM> 1,352,073
<LIABILITIES-OTHER> 67,765
<LONG-TERM> 210,887
0
3,850
<COMMON> 217,443
<OTHER-SE> 387,926
<TOTAL-LIABILITIES-AND-EQUITY> 8,502,290
<INTEREST-LOAN> 307,007
<INTEREST-INVEST> 111,977
<INTEREST-OTHER> 1,902
<INTEREST-TOTAL> 420,886
<INTEREST-DEPOSIT> 138,706
<INTEREST-EXPENSE> 181,363
<INTEREST-INCOME-NET> 239,523
<LOAN-LOSSES> 3,692
<SECURITIES-GAINS> 906
<EXPENSE-OTHER> 172,491
<INCOME-PRETAX> 124,067
<INCOME-PRE-EXTRAORDINARY> 80,944
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,944
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 4.28
<LOANS-NON> 24,112
<LOANS-PAST> 754
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 69,503
<CHARGE-OFFS> 8,318
<RECOVERIES> 4,421
<ALLOWANCE-CLOSE> 69,298
<ALLOWANCE-DOMESTIC> 69,298
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 20,392
</TABLE>
