<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:
JUNE 30, 1994
Commission file number: 0-4641
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 August 3, 1994, 43,461,158 shares of the registrant's common stock, $5 par
value, were outstanding.
This Form 10-Q has 21 pages.
<PAGE>
SOUTHERN NATIONAL CORPORATION
FORM 10-Q
JUNE 30, 1994
INDEX
<TABLE>
<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 8
Analysis of Financial Condition 8
Asset/Liability Management 10
Inflation and Changing Interest Rates 13
Capital Adequacy and Resources 14
Analysis of Results of Operations 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 5. Other Events -- Acquisitions and Planned Mergers 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBIT 11 Exhibit
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
<S> <C> <C>
ASSETS
Cash and due from depository institutions.................$266,117 $ 283,909
Interest-bearing bank balances............................ 12,760 64,954
Federal funds sold and securities purchased under resale
agreements or similar arrangements....................... -- 13,438
Securities available for sale............................. 915,010 1,194,230
Loans held for sale....................................... 45,327 316,544
Investment securities.....................................1,712,234 1,356,102
Loans and leases, net of unearned income of $47,497 in
1994 and $30,926 in 1993.................................5,098,647 4,838,274
Less -- allowance for losses.............................(69,838) (69,503)
Net loans and leases.................................5,028,809 4,768,771
Premises and equipment, net............................... 146,725 136,228
Other assets.............................................. 109,380 140,294
Total assets..........................................$8,236,362 $8,274,470
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing........................................$ 772,598 $ 748,754
Interest-bearing............................................5,456,205 5,574,694
Total deposits.........................................6,228,803 6,323,448
Short-term borrowings.....................................1,131,961 756,343
Accounts payable and other liabilities.......................65,045 150,138
Long-term debt..............................................216,686 479,677
Total liabilities......................................7,642,495 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,
43,385,610 issued and outstanding in 1994 and
42,961,214 in 1993.......................................216,928 214,806
Paid-in capital.............................................153,205 151,186
Retained earnings...........................................236,756 199,383
Unearned compensation........................................(3,487) (4,361)
Net unrealized depreciation on securities...................(13,385) --
Total shareholders' equity...............................593,867 564,864
Total liabilities and shareholders' equity............$8,236,362 $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 ENDED FOR THE SIX MONTHS
JUNE 30, ENDED JUNE 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases.............................. $ 100,852 $ 100,757 $ 198,181 $ 200,581
Interest and dividends on securities............................... 37,095 34,900 73,444 69,186
Interest on temporary investments.................................. 296 520 608 1,530
Total interest income............................................ 138,243 136,177 272,233 271,297
INTEREST EXPENSE
Interest on deposits............................................... 45,137 49,398 89,696 100,491
Interest on short-term borrowings.................................. 9,598 3,787 15,575 7,465
Interest on long-term debt......................................... 4,385 6,105 9,281 11,661
Total interest expense........................................... 59,120 59,290 114,552 119,617
NET INTEREST INCOME.................................................. 79,123 76,887 157,681 151,680
Provision for loan and lease losses................................ 1,532 4,291 2,703 7,953
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES........ 77,591 72,596 154,978 143,727
NONINTEREST INCOME
Service charges on deposit accounts................................ 9,169 9,261 17,805 17,905
Nondeposit fees and commissions.................................... 7,650 8,487 14,735 15,478
Securities gains, net.............................................. 239 9 954 14,027
Other income....................................................... 2,067 3,610 8,849 6,211
Total noninterest income......................................... 19,125 21,367 42,343 53,621
NONINTEREST EXPENSE
Personnel expense.................................................. 28,554 30,286 61,193 61,588
Occupancy and equipment expense.................................... 9,141 8,701 17,755 18,509
Federal deposit insurance expense.................................. 3,602 3,330 7,465 6,661
Foreclosed property expense........................................ 236 2,915 1,089 5,902
Other expense...................................................... 14,425 16,054 28,854 32,717
Total noninterest expense........................................ 55,958 61,286 116,356 125,377
EARNINGS
Income before income taxes......................................... 40,758 32,677 80,965 71,971
Provision for income taxes......................................... 13,874 10,049 28,034 24,103
Income before cumulative effect of changes in accounting
principles......................................................... 26,884 22,628 52,931 47,868
Less: cumulative effect of changes in accounting principles, net of
income taxes....................................................... -- -- -- 27,217
NET INCOME........................................................... 26,884 22,628 52,931 20,651
Preferred dividend requirements.................................... 1,299 1,299 2,598 2,598
Net income applicable to common shares............................. $ 25,585 $ 21,329 $ 50,333 $ 18,053
PER COMMON SHARE
Net income:
Primary
Income before cumulative effect................................ $ 0.59 $ 0.51 $ 1.15 $ 1.08
Less: cumulative effect, net of income taxes................... -- -- -- 0.65
Net income..................................................... $ 0.59 $ 0.51 $ 1.15 $ 0.43
Fully diluted
Income before cumulative effect................................ $ 0.56 $ 0.49 $ 1.10 $ 1.03
Less: cumulative effect, net of income taxes................... -- -- -- 0.60
Net income..................................................... $ 0.56 $ 0.49 $ 1.10 $ 0.43
Cash dividends paid.............................................. $ 0.17 $ 0.15 $ 0.34 $ 0.30
Average shares outstanding
Primary........................................................ 43,672,894 41,962,570 43,635,581 41,899,448
Fully diluted.................................................. 48,221,130 46,523,718 48,188,556 46,467,659
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1993
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................................ $ 52,931 $ 20,651
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses............................................................ 2,703 7,953
Depreciation of premises and equipment......................................................... 6,292 8,041
Amortization of intangibles.................................................................... 832 1,326
Accretion of negative goodwill................................................................. (556) --
Amortization of unearned compensation.......................................................... 874 --
Discount accretion and premium amortization on securities...................................... 1,832 3,109
Gain on sales of securities, net............................................................... (954) (14,046)
Gain on sales of trading account securities.................................................... (537) (449)
Gain on sales of loans, net.................................................................... (1,225) (4,511)
Net (gain) loss on disposals of premises and equipment......................................... (1,243) 59
Net loss on foreclosed property and other real estate owned.................................... 335 6,352
Proceeds from sales of trading account securities, net of purchases............................ 537 449
Proceeds from sales of loans held for sale..................................................... 508,145 355,431
Origination of loans held for sale, net of principal collected................................. (241,006) (375,792)
Decrease (increase) in:
Accrued interest receivable.................................................................. (882) 394
Other assets................................................................................. 21,060 33,250
Increase (decrease) in:
Accrued interest payable..................................................................... 220 (671)
Accounts payable and other liabilities....................................................... (76,524) 29,204
Net cash provided by operating activities................................................. 272,834 70,750
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities........................................... 282,396 8,567
Proceeds from sales of held to maturity securities............................................. -- 287,975
Maturities of available for sale securities.................................................... 144,472 50
Maturities of held to maturity securities...................................................... 257,789 268,574
Purchases of available for sale securities..................................................... (160,433) --
Purchases of held to maturity securities....................................................... (618,928) (712,575)
Proceeds from sales of loans receivable and servicing rights................................... -- 27,540
Leases made to customers....................................................................... (20,339) (19,265)
Principal collected on leases.................................................................. 19,733 17,593
Loan originations, net of principal collected.................................................. (257,034) (183,398)
Net cash acquired in transactions accounted for under the purchase method of accounting........ 229 6,833
Proceeds from disposals of premises and equipment.............................................. 3,013 1,474
Purchases of premises and equipment............................................................ (18,935) (17,408)
Proceeds from sales of foreclosed property..................................................... 8,140 15,339
Proceeds from sales of other real estate owned................................................. 8,727 4,196
Net cash used in investing activities........................................................ (351,170) (294,505)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits............................................................ (94,645) 57,316
Net increase in short-term borrowings.......................................................... 366,654 10,232
Proceeds from long-term debt................................................................... 443 179,368
Repayment of long-term debt.................................................................... (263,434) (119,585)
Net proceeds from common stock issued.......................................................... 1,455 1,822
Cash dividends paid on common and preferred stock.............................................. (15,561) (11,256)
Net cash (used in) provided by financing activities.......................................... (5,088) 117,897
NET DECREASE IN CASH AND CASH EQUIVALENTS........................................................... (83,424) (105,858)
CASH AND CASH EQUIVALENTS AT JANUARY 1.............................................................. 362,301 378,087
CASH AND CASH EQUIVALENTS AT JUNE 30................................................................ $ 278,877 $ 272,229
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1994
(UNAUDITED)
A. 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 June
30, 1994, the results of operations for the three months and six months ended
June 30, 1994 and 1993, and cash flows for the six months ended June 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 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. As of January 1, 1994, Southern National adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." SFAS 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. These investments are to be classified
in 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 stockholders' equity.
C. Cash and cash equivalents include cash and due from depository
institutions, interest-bearing bank balances and 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. Transfer of loans to other real estate owned, a non-cash investing
activity, amounted to $5,036,000 and $5,977,000 for the six months ended June
30, 1994 and 1993, respectively. Transfer of securities from the held to
maturity category to the available for sale category, a non-cash investing
activity, totaled $5,934,000 during the six months ended June 30, 1994. Transfer
of securities from the available for sale category to the held to maturity
category, a noncash investing activity, totaled $2,216,000 for the six months
ended June 30, 1994.
D. On January 28, 1994, Southern National completed its acquisition of The
First Savings Bank, FSB ("The First") by the issuance of 8,052,860 shares of
Southern National common stock, or 0.855 share of Southern National common stock
in exchange for each share of The First's common stock outstanding. Options to
purchase shares of The First's common stock were converted into options to
purchase Southern National common stock at the same rate.
On January 31, 1994, Southern National completed its acquisition of Regency
Bancshares Inc. ("Regency") by the issuance of 2,437,498 shares of Southern
National common stock, or 1.8117 shares of Southern National common stock in
exchange for each share of Regency's common stock outstanding. Options to
purchase shares of Regency's common stock were converted into options to
purchase Southern National common stock at the same rate.
On February 24, 1994, Southern National completed its acquisition of Home
Federal Savings Bank ("Home") by the issuance of 824,601 shares of Southern
National common stock, or 2.576878 shares of Southern National common stock in
exchange for each share of Home's common stock outstanding. Options to purchase
shares of Home's common stock were converted into options to purchase Southern
National common stock at the same rate.
The acquisitions above were accounted for under the pooling-of-interests
method of accounting. Accordingly, all financial information presented herein
has been restated to include the accounts of The First, Regency and Home.
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
6
<PAGE>
purchase method of accounting, and therefore, the financial information
contained herein includes data relevant to the acquiree since the date of
acquisition.
E. The "cumulative effect of changes in accounting principles, net of
income taxes," of $27,217,000 for the six month period ended June 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, Home and 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
catch-up adjustments have been reflected in the first calendar quarter of 1993.
A recap 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 the 1993 financial statements, the June 30
fiscal year-ends have been converted to a calendar year format comparable to
Southern National's presentation.
F. 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 as a pooling-of-interests in which BB&T
shareholders will receive 1.45 shares of common stock of the resulting company
for each share of BB&T common stock held. Southern National shareholders will
receive one share of common stock of the resulting company for each share of
Southern National common stock. 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. The merger, if approved, is expected to be completed by the
end of the second quarter of 1995. Selected pro forma information for the
separate and combined institutions are as follows:
<TABLE>
<CAPTION>
SOUTHERN
AS OF / FOR THE SIX MONTHS ENDED JUNE 30, 1994: BB&T NATIONAL COMBINED(1)
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Securities............................................... $ 2,680,825 $2,627,244 $ 5,308,069
Loans.................................................... 7,101,201 5,098,647 12,199,848
Total assets............................................. 10,570,538 8,236,362 18,806,900
Total deposits........................................... 8,058,865 6,228,803 14,287,668
Shareholders' equity..................................... 850,697 593,867 1,444,564
Net income............................................... 58,981 52,931 111,912
Per share results:
Primary................................................ 1.52 1.15 1.13
Fully diluted.......................................... 1.52 1.10 1.11
</TABLE>
(1) The combined selected pro forma financial information above does not reflect
the impact of any other pending acquisition or the anticipated cost savings
which will be attained through the merger.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
Total assets at June 30, 1994, were $8.2 billion, a $38.1 million decrease
from the balance at the end of 1993. A bulk sale of $109 million of loan-related
assets during the first quarter was the principal factor contributing to this
decrease. The bulk sale was part of the implementation strategy designed to
reduce the amount of problem assets assumed by Southern National upon completion
of its acquisition of The First. The assets involved in the sale included
nonperforming loans, foreclosed properties and loans which were inconsistent
with Southern National's portfolio strategy. In addition, approximately $58
million of jumbo mortgages were sold during the first quarter of 1994 in a
separate transaction. Internal growth in earning assets during the second
quarter reduced the impact of these sales.
COMPOSITION OF EARNING ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1994 DECEMBER 31, 1993
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Securities available for sale.................................................. $ 915,010 11.7% $1,194,230 15.3%
Loans held for sale............................................................ 45,327 0.6 316,544 4.1
Investment securities.......................................................... 1,712,234 22.0 1,356,102 17.4
Loans and leases, net of unearned income....................................... 5,098,647 65.5 4,838,274 62.2
Other earning assets*.......................................................... 12,760 0.2 78,392 1.0
Total earning assets........................................................... $7,783,978 100.0% $7,783,542 100.0%
Earning assets as a percent of total assets.................................... 94.5% 94.1%
</TABLE>
* Includes: (i) federal funds sold, (ii) securities purchased under resale
agreements and similar arrangements and (iii) interest-bearing bank balances.
The amortized costs and estimated fair values of securities were as
follows:
SECURITIES -- FAIR VALUE AT JUNE 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............................................................. $1,023,128 $ 4,289 $19,218 $1,008,199
U.S. Government agencies and corporations................................. 41,922 49 431 41,540
States and political subdivisions......................................... 50,052 507 647 49,912
Mortgage-backed securities................................................ 596,446 1,205 39,394 558,257
Other debt securities..................................................... 686 5 2 689
Total securities held to maturity......................................... 1,712,234 6,055 59,692 1,658,597
Securities available for sale:
Mortgage-backed securities................................................ 258,159 2,575 5,144 255,590
U.S. Treasury............................................................. 628,995 2,498 22,270 609,223
U.S. Government agencies and corporations................................. 9,205 127 43 9,289
Equity securities......................................................... 40,908 -- -- 40,908
Total securities available for sale....................................... 937,267 5,200 27,457 915,010
Total securities.......................................................... $2,649,501 $11,255 $87,149 $2,573,607
</TABLE>
The loan and lease portfolio, net of unearned income and loans held for
sale, increased $260.4 million over the level at December 31, 1993, an
annualized growth rate of 10.8%. Most of this growth occurred in consumer loans
and in municipal leases. Management expects the average loan growth rate will
remain strong through the second half of the year. The new markets in South
Carolina are anticipated to provide opportunities for growth in the commercial
loan portfolio, while the new sales/finance division is expected to lead to
increased consumer loan demand.
8
<PAGE>
Total deposits decreased by $94.6 million from the balance at December 31,
1993. During the first half, management was not particularly aggressive in
growing deposits. Rather, efforts were directed toward the lending function.
Additionally, the decline in deposits was affected by seasonality and by tax
payments due in the first half of the year. Short-term borrowings increased
$375.6 million during this period while long-term debt, primarily Federal Home
Loan Bank advances, declined $263.0 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.
The composition of, and strategy employed in the management of, interest-bearing
liabilities are further discussed in "ASSET/LIABILITY MANAGEMENT." The following
table outlines the fluctuations in and the composition of deposits.
COMPOSITION OF DEPOSITS AND OTHER BORROWINGS
<TABLE>
<CAPTION>
JUNE 30, 1994 DECEMBER 31, 1993
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-bearing deposits...................................................... $5,456,205 72.0% $5,574,694 73.7%
Demand deposits................................................................ 772,598 10.2 748,754 9.9
Total deposits................................................................. 6,228,803 82.2 6,323,448 83.6
Short-term borrowings.......................................................... 1,131,961 14.9 756,343 10.0
Long-term debt................................................................. 216,686 2.9 479,677 6.4
Total deposits and other borrowings............................................ $7,577,450 100.0% $7,559,468 100.0%
</TABLE>
ASSET QUALITY
Risk assets, comprised of nonperforming assets ("NPA's") plus loans 90 days
or more past due and still accruing, were $38.3 million at June 30, 1994,
compared to $36.8 million at year-end 1993. The restatement of prior period
credit quality data relating to Regency, Home and The First was an arithmetical
function of combining Southern National's data with that of the merged
companies. At June 30, 1994, all mergers have been completed and the credit
quality statistics are based upon the more conservative criteria utilized by
Southern National in identifying problem assets and, as a result, NPA's are
higher.
The allowance for losses as a percentage of loans and leases was 1.37% at
June 30, 1994, and NPA's as a percent of loan-related assets were .70%. As
problem assets are resolved and if credit quality improves as anticipated
throughout the year, it is expected that the allowance as a percent of loans
and leases will decline and the ratio of NPA's to loan-related assets will
improve.
The provision for loan losses in the second quarter of 1994 was $1.5
million, and net charge-offs were only .10% of average loans and leases compared
to $4.3 million and .25% for the same period in 1993. The decrease in the
provision resulted primarily from this low level of charge-offs and improved
asset quality. It is unlikely that net charge-offs will continue at such a low
level in future periods. Recoveries during the first half of the year resulted
in an unusually low net charge-off percentage. Credit-related statistics
relevant to the last five calendar quarters are presented in the accompanying
table.
9
<PAGE>
ASSET QUALITY ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF/FOR THE QUARTER ENDED
6-30-93 9-30-93 12-31-93 3-31-94 6-30-94
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOSSES
Beginning balance.................................................... $54,598 $56,020 $ 57,697 $69,503 $69,500
Allowance for acquired loans......................................... -- -- 2,750 -- --
Provision for losses................................................. 4,291 3,540 19,945 1,171 1,532
Net charge-offs...................................................... (2,869) (1,863) (10,889) (1,174) (1,194)
Ending balance.................................................... $56,020 $57,697 $ 69,503 $69,500 $69,838
RISK ASSETS
Nonaccrual loans & leases............................................ $44,188 $39,380 $ 28,372 $36,715 $33,077
Foreclosed property.................................................. 28,201 30,132 6,356 4,927 2,652
Nonperforming assets............................................ 72,389 69,512 34,728 41,642 35,729
Loans 90 days or more past due & still accruing...................... 1,270 2,408 2,115 553 2,551
Total risk assets............................................... $73,659 $71,920 $ 36,843 $42,195 $38,280
ASSET QUALITY RATIOS
Nonaccrual loans & leases as percent of total loans & leases......... 0.94% 0.83% 0.59% 0.75% 0.65%
Nonperforming assets as percent of:
Total assets...................................................... 0.95 0.88 0.42 0.52 0.43
Loans & leases plus foreclosed property........................... 1.54 1.45 0.72 0.85 0.70
Risk assets as a percent of loans & leases plus foreclosed
property.......................................................... 1.56 1.50 0.76 0.86 0.75
Net charge-offs as a percent of average loans & leases............... 0.25 0.16 0.88 0.10 0.10
Allowance for losses as a percent of loans & leases.................. 1.20 1.21 1.44 1.42 1.37
Ratio of allowance for losses to:
Net charge-offs................................................... 4.88x 7.74x 1.60x 14.80x 14.62x
Nonaccrual loans & leases......................................... 1.27 1.47 2.45 1.89 2.11
</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.
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.
Liquidity represents a bank's continuing ability to meet its funding needs,
primarily deposit withdrawals, timely repayment of borrowings and other
liabilities, and draw-downs on 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 dollar rolls supplement the
traditional sources.
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
10
<PAGE>
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. At March 31, 1994, loans maturing
or repricing in 30 days or less amounted to 38% of all loans outstanding. At
June 30, 1994, loans maturing or repricing in 30 days or less decreased by 1% to
comprise 37% of all loans outstanding. The classification and maturity of
investment securities are summarized in the accompanying table.
SECURITIES
<TABLE>
<CAPTION>
JUNE 30, 1994
HELD TO AVAILABLE FOR
MATURITY SALE
AMORTIZED COST FAIR VALUE
<S> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Treasury
Within one year............................................................................... $ 237,464 $ 56,017
One to five years............................................................................. 785,664 456,735
Five to ten years............................................................................. -- 96,471
After ten years............................................................................... -- --
Total.................................................................................... 1,023,128 609,223
U.S. Government agencies and corporations*
Within one year............................................................................... 6,157 3,013
One to five years............................................................................. 211,480 22,162
Five to ten years............................................................................. 392,503 141,634
After ten years............................................................................... 28,228 98,070
Total.................................................................................... 638,368 264,879
States and political subdivisions
Within one year............................................................................... 9,126 --
One to five years............................................................................. 35,184 --
Five to ten years............................................................................. 5,742 --
After ten years............................................................................... -- --
Total.................................................................................... 50,052 --
Other securities
Within one year............................................................................... -- --
One to five years............................................................................. 10 --
Five to ten years............................................................................. 676 --
After ten years............................................................................... -- --
Total.................................................................................... 686 --
Total debt securities.................................................................... 1,712,234 874,102
Equity securities............................................................................... -- 40,908
Total securities......................................................................... $1,712,234 $ 915,010
</TABLE>
* Included in U.S. Government agencies and corporations are mortgage-backed
securities totaling $851,435,000. 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.
During the first six 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 were added, which
were funded through repurchase agreements. Southern National entered into
indexed amortizing swaps in which the corporation receives a fixed rate and pays
a variable rate. Both of these actions lowered the interest sensitivity of the
corporation to a neutral position and increased the corporation's earnings.
11
<PAGE>
Interest rate volatility often increases to the point that balance sheet
repositioning through the use of account repricing cannot occur rapidly enough
to avoid adverse net income effects. At those times, and when customer demand
and competition are such that account repricing is not sufficient, off-balance
sheet or synthetic hedges are utilized. During the first six months of 1994,
management used interest rate swaps, caps and floors to supplement balance sheet
repositioning. 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.
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 even one
floating rate to another floating rate. The underlying principal positions are
not affected. Swap terms generally range from one year to seven years depending
on the need. At June 30, 1994, off-balance sheet derivative financial
instruments with a total notional value of $667 million, with terms ranging up
to seven years, were outstanding. The following tables set forth certain
information concerning Southern National's derivative instruments at June 30,
1994:
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS
JUNE 30, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INTEREST RATE SWAPS
NOTIONAL RECEIVE PAY FAIR
TYPE AMOUNT RATE RATE VALUE
<S> <C> <C> <C> <C>
Receive Fixed Swaps................................................................... $550,000 5.98% 4.26% $(6,776)
Pay Fixed Swaps....................................................................... 67,426 4.39 5.14 2,138
Basis Protection...................................................................... 50,000 -- -- --
Total................................................................................. $667,426 5.81% 4.35% $(4,638)
</TABLE>
<TABLE>
<CAPTION>
YEAR-TO-DATE ACTIVITY REPORT
RECEIVE PAY FIXED BASIS
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) (4,668) (50,000) (104,668)
Terminations.............................................................. (100,000) -- (300,000) (400,000)
Balance, June 30, 1994.................................................... $ 550,000 $67,426 $ 50,000 $ 667,426
</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............................................................... 3,836 39,764 23,826 67,426
Basis Protection.............................................................. 50,000 -- -- 50,000
Total......................................................................... $53,836 $ 589,764 $ 23,826 $667,426
</TABLE>
As of June 30, 1994, unamortized deferred premiums from new swap
transactions and realized deferred losses from terminated swap transactions
were $1.9 million and $1.4 million, respectively. The unamortized deferred
premiums will be recognized over the next three years and the realized
deferred losses will be recognized over the next year. The combination of
active and terminated transactions resulted in income of $237 thousand
during the second quarter. For the six months ended June 30, 1994, these
transactions resulted in expense of $331 thousand.
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,
12
<PAGE>
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 1.9% 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-half cent per share for the remaining six
months of 1994. Conversely, if interest rates were to gradually, historically
decline 100 basis points over 12 months, the impact on net income would be an
increase of approximately 1.0%, 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 presents a better simulation of the true earnings outlook
as a whole.
In reviewing the accompanying table, "Interest Sensitivity Simulation
Analysis," it is important to note that such analysis represents the sensitivity
position as of a point in time and can be changed significantly by management
within a short time period. Care should also be taken in noting that 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.
13
<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% 11.25% 6.47% (40.4)%
+3.00 10.25 5.47 (30.3)
+2.00 9.25 4.47 (20.1)
+1.00 8.25 3.47 (10.0)
No change 7.25 2.47 -0-
-1.00 6.25 1.47 10.0
-2.00 5.25 0.47 19.7
-3.00 4.25 0.00 24.3
-4.00 3.25 0.00 24.0
<CAPTION>
GRADUAL
HISTORICAL
<S> <C> <C> <C>
+2.00 9.25 3.13 (1.88)
-1.00 6.25 2.14 0.92
</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 150% and 50% 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 June 30, 1994, was $593.9 million versus $564.9
million at December 31, 1993. As a percentage of assets, total shareholders'
equity was 7.2% at June 30, 1994, compared to 6.8% at year-end 1993. Southern
National's book value per common share at June 30, 1994, was $11.98, 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 12.9% for the first
six months of 1994. Average shareholders' equity as a percentage of average
assets was 7.2% and 7.7% for the six months ended June 30, 1994 and 1993,
respectively.
Tier 1 and total risk-based capital ratios at June 30, 1994, were 12.9% and
14.1%, respectively. The Tier 1 leverage ratio was 7.2%. 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. 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.
ANALYSIS OF RESULTS OF OPERATIONS
Earnings for the first six months of 1994 and 1993 were $52.9 million and
$20.7 million, respectively. On a fully diluted per share basis, net income for
the six months ended June 30, 1994, was $1.10, compared to $.43 for the same
period in 1993. The accompanying table presents a comparison of major income
statement line items for the relevant periods.
14
<PAGE>
COMPONENTS OF NET INCOME
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net interest income............................................................ $79,123 $76,887 $157,681 $151,680
Provision for loan and lease losses............................................ 1,532 4,291 2,703 7,953
Noninterest income............................................................. 19,125 21,367 42,343 53,621
Noninterest expense............................................................ 55,958 61,286 116,356 125,377
Income before income taxes..................................................... 40,758 32,677 80,965 71,971
Income taxes................................................................... 13,874 10,049 28,034 24,103
Income before cumulative effect................................................ 26,884 22,628 52,931 47,868
Less: cumulative effect, net of income taxes................................... -- -- -- 27,217
Net income..................................................................... $26,884 $22,628 $ 52,931 $ 20,651
</TABLE>
As shown in the table, earnings for the first six months of 1993 were
impacted by the effect of changes in accounting principles. See Note E of "Notes
to Consolidated Financial Statements" for additional information on changes in
accounting principles.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was $163.8
million for the first six months of 1994 compared to $156.8 million for the same
period in 1993, a 5% increase. Average earning assets during the first six
months of 1994 were $7.6 billion, an increase of $640 million, or 9%, over 1993.
Factors impacting the changes in volume were the purchase of East Coast Savings
Bank, SSB ("East Coast") in October 1993 and internal growth. The accompanying
table presents an analysis of net interest income and related changes for the
six months ended June 30, 1994 and 1993.
15
<PAGE>
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FULLY TAXABLE EQUIVALENT AVERAGE BALANCE YIELD/RATE INCOME/EXPENSE INCREASE CHANGE DUE TO
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............................ $2,489,072 $2,071,692 6.08% 6.83% $ 75,633 $ 70,699 $ 4,934 $ (8,299) $13,233
States and political subdivisions... 52,842 51,083 7.86 8.55 2,076 2,185 (109) (182) 73
Total securities(5).............. 2,541,914 2,122,775 6.11 6.87 77,709 72,884 4,825 (8,481) 13,306
Other earning assets(2)............... 46,872 108,689 2.59 2.82 608 1,530 (922) (112) (810)
Loans and leases, net of unearned
income(1)(3)(4)(6).................. 5,059,026 4,776,359 7.91 8.46 200,078 201,986 (1,908) (13,492) 11,584
Total earning assets............. 7,647,812 7,007,823 7.28 7.89 278,395 276,400 1,995 (22,085) 24,080
Non-earning assets............... 447,070 460,065
Total assets................... $8,094,882 $7,467,888
LIABILITIES AND SHAREHOLDERS' EQUITY
Total interest-bearing deposits....... $5,418,088 $5,422,291 3.31 3.71 89,696 100,491 (10,795) (10,717) (78)
Short-term borrowings................. 917,802 433,954 3.39 3.44 15,575 7,465 8,110 (102) 8,212
Long-term debt........................ 266,034 336,618 6.98 6.93 9,281 11,661 (2,380) 81 (2,461)
Total interest-bearing
liabilities...................... 6,601,924 6,192,863 3.47 3.86 114,552 119,617 (5,065) (10,738) 5,673
Demand deposits..................... 837,786 577,051
Other liabilities................... 74,624 122,989
Shareholders' equity................ 580,548 574,985
Total liabilities and shareholders'
equity........................... $8,094,882 $7,467,888
Net yield on earning assets........... 4.28% 4.47% $163,843 $156,783 $ 7,060 $(11,347) $18,407
Taxable equivalent adjustment......... $ 6,162 $ 5,103
</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.
16
<PAGE>
The net yield FTE for the first six months of 1994 was 4.28%, compared to
4.47% for the same period in 1993 and 4.29% for the first quarter of 1994. The
factors contributing to the decline in the first six months of 1994, compared to
the same period in 1993, were (i) overall interest rate environment; (ii)
prepayments on higher yielding mortgage loans increased as consumers refinanced
at lower rates; and (iii) the acquisition of thrift assets and liabilities with
historically narrower spreads. The 1994 mergers with Regency, Home and The First
totaled more than $2.4 billion in thrift assets which had a negative impact of
approximately 30 basis points on Southern National's net yield, as originally
reported. Repricing of deposits, on-and-off balance sheet hedging and other
active asset/liability management techniques will continue to be utilized in
1994, as they were in 1993, to effectively manage the net yield.
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE THREE MONTHS ENDED JUNE 30, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FULLY TAXABLE EQUIVALENT AVERAGE BALANCE YIELD/RATE INCOME/EXPENSE INCREASE CHANGE DUE TO
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... $2,539,319 $2,156,966 6.02% 6.62% $ 38,219 $ 35,717 $ 2,502 $(3,449) $ 5,951
States and political subdivisions..... 52,760 46,038 7.89 8.96 1,041 1,031 10 (131) 141
Total securities(5)................ 2,592,079 2,203,004 6.06 6.67 39,260 36,748 2,512 (3,580) 6,092
Other earning assets(2)................. 45,293 83,865 2.61 2.48 296 520 (224) 27 (251)
Loans and leases, net of unearned
income(1)(3)(4)(6).................... 5,057,460 4,823,994 8.06 8.42 101,891 101,492 399 (4,402) 4,801
Total earning assets............... 7,694,832 7,110,863 7.35 7.81 141,447 138,760 2,687 (7,955) 10,642
Non-earning assets................. 451,019 473,174
Total assets..................... $8,145,851 $7,584,037
LIABILITIES AND SHAREHOLDERS' EQUITY
Total interest-bearing deposits......... $5,461,268 $5,435,088 3.31 3.64 45,137 49,398 (4,261) (4,498) 237
Short-term borrowings................... 1,031,499 460,474 3.72 3.29 9,598 3,787 5,811 557 5,254
Long-term debt.......................... 228,524 371,808 7.68 6.57 4,385 6,105 (1,720) 909 (2,629)
Total interest-bearing
liabilities...................... 6,721,291 6,267,370 3.52 3.78 59,120 59,290 (170) (3,032) 2,862
Demand deposits.................... 770,567 596,432
Other liabilities.................. 71,875 137,664
Shareholders' equity............... 582,118 582,571
Total liabilities and shareholders'
equity........................... $8,145,851 $7,584,037
Net yield on earning assets............. 4.28% 4.47% $ 82,327 $ 79,470 $ 2,857 $(4,923) $ 7,780
Taxable equivalent adjustment........... $ 3,204 $ 2,583
</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.
17
<PAGE>
Hedging strategies have been used in the past and will be utilized in the
future to reduce sensitivity to interest rate movements. Southern National
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 six months ended June 30, 1994, was $42.3
million, compared to $53.6 million for the same period in 1993. Securities gains
were $954 thousand in 1994, compared to $14.0 million in 1993.
Service charges on deposit accounts were essentially flat for the first six
months in 1994 and 1993, decreasing by 1%. Several factors accounted for this
scenario. First, Southern National has been very successful in promoting the
"Select Banking" program, particularly to new customers acquired through mergers
and Resolution Trust Corporation transactions. 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. 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.
Nondeposit fees and commissions decreased slightly in the first six months
of 1994 totaling $14.7 million in 1994 versus $15.5 million in 1993. This
decline was primarily caused by a $1.4 million decrease in mortgage banking
fees, while all other categories of nondeposit fees and commissions
rose slightly.
Gains on sales of mortgage loans were $1.2 million for the first six months
of 1994, compared to $2.5 million for the same period in 1993, a 51% decrease
caused by a rapid increase of interest rates during the first six months of
1994. The 1994 amount included approximately $1.1 million realized from the
sale of jumbo mortgages discussed earlier. Option income generated by the
writing of covered call options on securities available for sale was $1.4
million for the first six months of 1994. This significant contribution to
other noninterest income will be difficult to maintain in future periods;
however, other fee-based initiatives are being studied and are expected to
add to earnings in future quarters. Income from a newly-formed insurance
subsidiary is anticipated to increase as the year progresses.
The area of noninterest income continues to receive additional emphasis as
Southern National seeks to enhance its sources of fee income. The expanding and
highly competitive environment in which financial institutions operate has
elevated the importance of developing new sources of noninterest income.
NONINTEREST EXPENSE
Noninterest expense was $116.4 million for the first six months of 1994,
compared to $125.4 million for the same period a year ago. Efficiencies of scale
realized after the mergers with Regency, Home and The First in the first quarter
of 1994 favorably impacted the level of noninterest expense. In addition,
special accruals and expenses led to an elevated level of noninterest expense
in the first six months of 1993. These items included accelerated depreciation
or retirement of certain technology-related equipment and early buyouts of
employment contracts. Because of a significantly lower level of foreclosed
property in 1994 versus 1993, foreclosed property expense for the first half of
1994 was only $1.1 million compared to $5.9 million for the same period last
year.
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 six months of 1994 reflect
the impact of the operating costs associated with this institution, whereas the
first six months of 1993 did not include any expenses related to this
acquisition.
PROVISION FOR INCOME TAXES
Federal income taxes increased from $24.1 million for the six months ended
June 30, 1993, to $28.0 million for the same period in 1994 due to higher
pre-tax income. The effective tax rate increased from 33.5% for the first six
months of 1993 to 34.6% for the first six months of 1994. This increase in the
effective tax rate was due to an increase in the statutory tax rate from 34%
to 35% offset partially by an increase in tax-exempt investment income.
18
<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 results of
operations of Southern National.
Southern National Bank of South Carolina ("SNBSC") as successor in interest
by merger to The First Savings Bank ("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 First Savings Bank. On May 21, 1993, a jury awarded
the plaintiffs a $4.1 million judgment 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 judgment 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
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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 judgment remains in effect, but has been appealed. It is the opinion of the
Bank'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
position or 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 AND PLANNED MERGERS
(a) On June 1, 1994, Southern National completed its acquisition of McLean,
Brady & McLean Agency, Inc. of Lumberton, North Carolina in a
transaction accounted for as a purchase. McLean, Brady & McLean Agency,
Inc. and insurance subsidiaries acquired in The First and East Coast
mergers will combine to form Southern National Insurance Services,
Inc., allowing Southern National to offer a full line of insurance
products to its customers.
(b) On June 6, 1994, Southern National completed its acquisition of Leasing
Associates, Inc. of Anderson, South Carolina in a transaction accounted
for as a purchase. The Leasing Associates, Inc. merger with Southern
National Leasing Corp. gives Southern National Leasing a direct
presence in South Carolina.
(c) On August 1, 1994, Southern National Corporation and BB&T Financial
Corporation jointly announced the signing of a definitive agreement to
merge. See Note F of "Notes to Consolidated Financial Statements" for
additional information on the merger.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 -- "Computation of Earnings Per Share" is included herein.
(b) Southern National filed two Form 8-K/A's dated April 15, 1994 and June
6, 1994, respectively, to amend the Current Report on Form 8-K referred
to in the first quarter Form 10-Q. This Form 8-K was dated February 11,
1994, and covered the completion of the acquisition of The First
Savings Bank, FSB on January 28, 1994.
On August 8, 1994, pursuant to the merger described in Note F of "Notes
to Consolidated Financial Statements," Southern National filed a Form
8-K depicting the proposed timetable for completion of the merger and
selected financial information for the combined companies.
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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)
Date:
By: /s/ L. GLENN ORR, JR.
L. GLENN ORR, JR.,
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date:
By: /s/ SHERRY A. KELLETT
SHERRY A. KELLETT,
EXECUTIVE VICE PRESIDENT AND
CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
21
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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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Weighted average number of common shares outstanding during
the period................................................. 43,275,299 41,209,410 43,220,235 41,047,713
Add-
Dilutive effect of outstanding options (as determined by
application of treasury stock method).................... 397,595 753,160 415,346 851,735
Weighted average number of common shares, as adjusted...... 43,672,894 41,962,570 43,635,581 41,899,448
Net income.................................................... $ 26,884 $ 22,628 $ 52,931 $ 20,651
Less-
Preferred dividend requirements............................ 1,299 1,299 2,598 2,598
Net income available for common shares........................ $ 25,585 $ 21,329 $ 50,333 $ 18,053
Primary earnings per share.................................... $ 0.59 $ 0.51 $ 1.15 $ 0.43
FULLY DILUTED EARNINGS PER SHARE:
Weighted average number of common shares outstanding during
the period................................................. 43,275,299 41,209,410 43,220,235 41,047,713
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).................... 397,595 766,072 420,085 871,710
Weighted average number of common shares, as
adjusted................................................... 48,221,130 46,523,718 48,188,556 46,467,659
Net income.................................................... $ 26,884 $ 22,628 $ 52,931 $ 20,651
Fully diluted earnings per share.............................. $ 0.56 $ 0.49 $ 1.10 $ 0.43
</TABLE>
