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:
March 31, 1994
Commission file number: 0-4641
Southern National Corporation
(Exact name of registrant as specified in its charter)
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)
(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 April 30, 1994, 43,230,796 shares of the registrant's
common stock, $5 par value, were outstanding.
SOUTHERN NATIONAL CORPORATION
Form 10-Q
March 31, 1994
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Analysis of Financial Condition
Asset / Liability Management
Inflation and Changing Interest Rates
Capital Adequacy and Resources
Earnings Analysis
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Events - Acquisitions
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF CONDITION
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
<S> <C> <C>
Assets
Cash and due from depository institutions $ 288,994 $ 283,909
Interest-bearing bank balances 9,726 64,954
Federal funds sold and securities
purchased under resale agreements
or similar arrangements 57,067 13,438
Investment securities 1,627,683 1,356,102
Securities available for sale 916,058 1,194,230
Loans held for sale 118,962 316,544
Loans and leases, net of unearned income
of $33,265 in 1994 and $30,926 in 1993 4,882,245 4,838,274
Less - allowance for losses (69,500) (69,503)
Net loans and leases 4,812,745 4,768,771
Premises and equipment, net 141,812 136,228
Other assets 106,342 140,294
Total assets $ 8,079,389 8,274,470
Liabilities and Shareholders' Equity
Noninterest-bearing $ 824,383 $ 748,754
Interest-bearing 5,490,061 5,574,694
Total deposits 6,314,444 6,323,448
Short-term borrowings 870,320 756,343
Accounts payable and accured liabilities 75,319 150,138
Long-term debt 237,164 479,677
Total liabilities 7,497,247 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, 43,228,086 issued and
outstanding in 1994 and 42,961,214 in
1993 216,140 214,806
Paid-in capital 151,231 151,186
Retained earnings 210,921 195,022
Total shareholders' equity 582,142 564,864
Total liabilities and
shareholders' equity $ 8,079,389 $8,274,470
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
For the Three Months Ended March 31, 1994 and 1993
(Unaudited)
(Dollars in thousands except per share data)
1994 1993
Interest Income
Interest and fees on loans and
leases $ 97,329 $ 99,824
Interest and dividends on
securities 36,349 34,286
Interest on temporary investments 312 1,010
Total interest income 133,990 135,120
Interest Expense
Interest on deposits 44,559 51,093
Interest on short-term borrowings 5,977 3,678
Interest on long-term debt 4,896 5,556
Total interest expense 55,432 60,327
Net Interest Income 78,558 74,793
Provision for loan and lease losses 1,171 3,662
Net Interest Income After Provision
for Loan and Lease Losses 77,387 71,131
Noninterest Income
Service charges on deposit accounts 8,636 8,644
Nondeposit fees and commissions 7,085 6,991
Securities gains, net 715 14,018
Other income 6,782 2,601
Total noninterest income 23,218 32,254
Noninterest Expense
Personnel expense 32,639 31,302
Occupancy and equipment expense 8,614 9,808
Federal deposit insurance expense 3,863 3,331
Foreclosed property expense 853 2,987
Other expense 14,429 16,663
Total noninterest expense 60,398 64,091
Earnings
Income before income taxes 40,207 39,294
Provision for income taxes 14,160 14,054
Income before cumulative effect of
changes in accounting principles 26,047 25,240
Less: cumulative effect of changes
in accounting principles, net
of income taxes - 27,217
Net income 26,047 (1,977)
Preferred dividend requirements 1,299 1,299
Net income applicable to common
shares $ 24,748 $ (3,276)
Per Common Share
Net income:
Primary
Income before cumulative effect $ 0.57 $ 0.57
Less: cumulative effect, net of
income taxes - 0.65
Net income $ 0.57 $ (0.08)
Fully diluted
Income before cumulative effect $ 0.54 $ 0.57
Less: cumulative effect,
net of income taxes - 0.65
Net income $ 0.54 $ (0.08)
Average shares outstanding
Primary 43,599,661 41,836,325
Fully diluted 48,147,897 46,411,307
Cash dividends paid $ 0.17 $ 0.15
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Southern National Corporation and Subsidiaries
For the Three Months Ended March 31, 1994 and 1993
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows From Operating Activities:
Net income....................................... $ 26,047 $ (1,977)
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses.......... 1,171 3,662
Depreciation of premises and equipment....... 2,979 4,757
Amortization of intangibles.................. 882 1,606
Accretion of negative goodwill............... (277) ---
Amortization of unearned stock compensation.. 455 ---
Discount accretion and premium amortization
on securities.............................. 465 881
Security gains, net.......................... (1,008) (14,396)
Net proceeds from sales of trading account
securities................................. 293 378
Gain on sales of loans, net.................. (2,098) (1,026)
Net (gain) loss on disposals of premises
and equipment.............................. (482) 48
Net loss on foreclosed property and other
real estate................................ 352 3,464
Proceeds from sales of loans held for sale... 353,573 190,113
Origination of loans held for sale, net of
principal collected........................ (159,196) (90,277)
Decrease (increase):
Accrued interest receivable................ 3,994 2,530
Other assets............................... 19,311 25,911
Increase (decrease) in:
Accrued interest payable................... (752) 294
Other accrued liabilities.................. (71,185) 23,295
Net cash provided by operating activities 174,524 149,263
Cash Flows From Investing Activities:
Proceeds from sales of available for sale
securities...................................... 272,938 289,027
Proceeds from sales of held to maturity securities --- 6,756
Maturities of available for sale securities...... 104,705 50
Maturities of held to maturity securities........ 206,893 108,896
Purchases of available for sale securities....... (93,885) ---
Purchases of held to maturity securities......... (484,803) (619,336)
Leases made to customers......................... (8,471) (8,214)
Principal collected on leases.................... 9,813 8,819
Loan originations, net of principal collected.... (49,927) (74,039)
Procceds from sale of loans...................... --- 4,114
Proceeds from disposals of premises and equipment 2,224 1,458
Purchases of premises and equipment.............. (10,305) (7,304)
Proceeds from sales of foreclosed property....... 4,323 4,517
Proceeds from sales of other real estate owned... 8,530 1,771
Purchases of other real estate owned............. --- (200)
Net cash used in investing activities... (37,965) (283,685)
Cash Flows From Financing Activities:
Net (decrease) increase in deposits.............. (9,004) 42,117
Net increase (decrease) in short-term borrowings. 113,977 (1,508)
Proceeds from long-term debt..................... --- 77,309
Repayment of long-term debt...................... (242,513) (70,224)
Net proceeds from common stock issued............ 1,379 779
Cash dividends paid on common and preferred stock (6,912) (5,253)
Net cash provided by financing activities.... (143,073) 43,220
Net Increase (Decrease) in Cash and Cash Equivalents (6,514) (91,202)
Cash and Cash Equivalents at December 31........... 362,301 378,087
Cash and Cash Equivalents at March 31.............. $ 355,787 $ 286,885
</TABLE>
See accompanying notes to consolidated financial statements.
SOUTHERN NATIONAL CORPORATION
Form 10-Q
March 31, 1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. In the opinion of management, the accompanying unaudited 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 March 31, 1994 and December 31, 1993, the results of
operations for the three month periods ended March 31, 1994 and 1993,
and the cash flows for the three month periods ended March 31,
1994 and 1993.
The financial statements and notes are presented as permitted by
Form 10-Q; 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
financial statements.
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. At March 31, 1994,
$922.4 million of securities, with a market
value of approximately $916.1 million, were classified as
available for sale. Accordingly, shareholders' equity decreased
approximately $3.7 million after tax.
C. The provision for income taxes was allocated as follows:
<TABLE>
<CAPTION>
For Three Months Ended
March 31,
1994 1993
<S> <C> <C>
(in thousands)
Income from operations $ 14,160 $ 14,054
Cumulative effect of changes in
accounting principles -- (2,897)
Total provision for income taxes $ 14,160 $ 11,157
</TABLE>
The reasons for the difference between the provision for income
taxes attributable to operations and the
amount computed by applying the statutory federal income tax rate
to the income before income taxes were
as follows:
<TABLE>
<CAPTION>
For Three Months Ended
March 31,
1994 1993
(in thousands)
<S> <C> <C>
Federal income taxes at statutory rates
of 35% $ 14,072 $ 13,753
Tax-exempt income from securities,
loans and leases less related
nondeductible interest expense (650) (579)
Other, net 738 880
Provision for income taxes $ 14,160 $ 14,054
Effective income tax rate 35.2% 35.8%
</TABLE>
The provisions for income taxes related to securities gains for
the three months ended March 31, 1994 and
1993 were $279,000 and $5,414,000, respectively.
D. Cash and cash equivalents include cash and due from depository
institutions, interest-bearing bank balances
and federal funds sold. 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
$3,440,000 and $4,360,000 for the three month periods ended March
31, 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 and $ -0- during the three
month periods ended March 31, 1994 and
1993, respectively.
E. 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 shares 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. The acquisition was
accounted for under the pooling-of-interests
method of accounting, and, accordingly, all financial information
has been restated to include the accounts
of The First.
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. The acquisition was accounted for
under the pooling-of-interests method of
accounting, and, accordingly, all financial information has been
restated to include the accounts of
Regency.
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 acquisition was
accounted for under the pooling-of-interests
method of accounting, and, accordingly, all financial information
has been restated to include the accounts
of Home.
F. The "cumulative effect of changes in accounting principles, net of
income taxes" of $27,217,000 for the three month period ended March 31,
1993 is comprised of the impact of the adoption of SFAS 106, "Accounting
for Post-Retirement Benefits Other Than Pensions," and SFAS 109 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."
The First, Regency and Home had fiscal years ended June 30.
However, in connection with the restatement
of 1993, the June 30 fiscal year-ends have been converted to a
calendar year format comparable to
Southern National's presentation. Accordingly, cumulative catch-up
adjustments have been reflected in the
first calendar quarter of 1993. A recap follows:
Increase
(Decrease)
in Net Income
(in thousands)
SFAS 106 $ (8,463)
Less: taxes 2,897
SFAS 72 (28,019)
SFAS 109 6,368
$ (27,217)
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ANALYSIS OF FINANCIAL CONDITION
Total assets at March 31, 1994 were $8.1 billion, a $195.1 million
decrease from the balance at the end of 1993. A bulk sale of $109 million
of loan-related assets 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.
Composition of Earning Assets
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1994 December 31, 1993
<S> <C> <C> <C> <C>
Securities available for sale $ 916,058 12.0 % $ 1,194,230 15.3 %
Investment securities 1,627,683 21.4 1,356,102 17.4
Loans held for sale 118,962 1.6 316,544 4.1
Loans and leases, net of
unearned income 4,882,245 64.1 4,838,274 62.2
Other assets * 66,793 0.9 78,392 1.0
Total earning assets $ 7,611,741 100.0 % $ 7,783,542 100.0 %
Earning assets as percent of total assets 94.2% 94.1%
</TABLE>
*Includes: (i) federal funds sold, (ii) securities purchased under
resale agreements and similar arrangements and (iii) interest-bearing
bank balances.
The loan and lease portfolio, net of unearned income, increased
$44.0 million over the level at December
31, 1993, an annualized growth rate of 3.6%. Management expects that
the average loan growth rate will
increase as the year progresses. The new markets in South Carolina
provide opportunities for growth in the
commercial loan portfolio, while the new sales/finance division is
expected to lead to increased consumer loan
demand.
Total deposits remained relatively "flat" during the first quarter
of 1994, declining $9.0 million. Short-term
borrowings increased $114.0 million during this period while long-term
debt, primarily Federal Home Loan Bank
advances, declined $242.5 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."
Composition of Deposits and Other Borrowings
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1994 December 31, 1993
<S> <C> <C> <C> <C>
Interest-bearing deposits $ 5,490,061 74.0 % $ 5,574,694 73.7 %
Demand deposits 824,383 11.1 748,754 9.9
Total deposits 6,314,444 85.1 6,323,448 83.6
Short-term borrowings 870,320 11.7 756,343 10.0
Long-term debt 237,164 3.2 479,677 6.4
Total deposits and other
borrowings $ 7,421,928 100.0 % $ 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 $42.2 million at March 31, 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 merely an arithmetical function of
combining Southern National's data with that of the merged companies.
At March 31, 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 percent of loans and leases was
1.42% at March 31, 1994 and NPA's as a
percent of loan-related assets was .85%. As problem assets are
resolved and credit quality improves 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 first quarter of 1994 was
$1.2 million, and net charge-offs were only
.10% of average loans and leases. The provision is anticipated to be
higher in future quarters, since it is unlikely
that net charge-offs will continue at such a low level. Credit-related
statistics relevant to the last five calendar
quarters are presented in the accompanying table.
ASSET QUALITY ANALYSIS
(Dollars in thousands)
<TABLE>
As of / For the Quarter Ended
3-31-93 6-30-93 9-30-93 12-31-93 3-31-94
<S> <C> <C> <C> <C> <C>
Allowance For Losses
Beginning balance $ 53,840 $ 54,598 $ 56,020 $ 57,697 $ 69,503
Allowance for acquired loans -- -- -- 2,750 --
Provision for losses 3,662 4,291 3,540 19,945 1,171
Net charge-offs (2,904) (2,869) (1,863) (10,889) (1,174)
Ending balance $ 54,598 $ 56,020 $ 57,697 $ 69,503 $ 69,500
Risk Assets
Nonaccrual loans & leases $ 49,465 $ 44,188 $ 39,380 $ 28,372 $ 36,715
Foreclosed property 37,310 28,201 30,132 6,356 4,927
Nonperforming assets 86,775 72,389 69,512 34,728 41,642
Loans 90 days or more past due
& still accruing 2,150 1,270 2,408 2,115 553
Total risk assets $ 88,925 $ 73,659 $ 71,920 $ 36,843 $ 42,195
Asset Quality Ratios
Nonaccrual loans & leases as
percent of total loans & leases 1.07 % 0.94 % 0.83 % 0.59 % 0.75 %
Nonperforming assets as percent of:
Total assets 1.16 0.95 0.88 0.42 0.52
Loans & leases plus
foreclosed property 1.86 1.54 1.45 0.72 0.85
Net charge-offs as percent of
average loans & leases 0.25 0.25 0.16 0.88 0.10
Allowance for losses as
percent of loans & leases 1.18 1.20 1.21 1.44 1.42
Ratio of allowance for losses to:
Net charge-offs 4.70 x 4.88 x 7.74 x 1.60 x 14.80 x
Nonaccrual loans & leases 1.10 1.27 1.47 2.45 1.89
All line items referring to loans and leases reflect loans
and leases, net of unearned income and loans held for sale.
Applicable ratios have been annualized.
</TABLE>
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
("Simulation") Analysis to measure the interest rate
sensitivity of earnings. Discussion of this method is covered 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 by 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 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 quarter-end, loans maturing
or repricing in 30 days or less comprised 38% of all loans
outstanding.
<TABLE>
Securities March 31, 1994
Held to Available for
Maturity Sale
Amortized Market
(Dollars in thousands) Cost Value
<S> <C> <C>
U.S. Treasury
Within one year $ 244,047 $ 69,431
One to five years 722,318 456,433
Five to ten years - 92,711
After ten years - -
Total 966,365 618,575
U.S. Government agencies and corporations *
Within one year 11,027 3,058
One to five years 214,037 23,630
Five to ten years 349,915 97,853
After ten years 31,738 119,018
Total 606,717 243,559
States and political subdivisions
Within one year 9,171 -
One to five years 35,167 -
Five to ten years 10,027 -
After ten years - -
Total 54,365 -
Other securities
Within one year - -
One to five years 10 -
Five to ten years 226 -
After ten years - -
Total 236 -
Total debt securities 1,627,683 862,134
Equity securities - 53,924
Total securities $ 1,627,683 $ 916,058
</TABLE>
* Included in U.S. Government agencies and corporations are mortgage-backed
securities totaling $786,566,000. These securities are included in each
of the categories based upon final stated maturity dates. The original
contractual lives of these securities ranges from five to 30 years;
however, a more realistic average maturity would be substantially shorter.
During 1993 and the first quarter of 1994, management utilized
strategies to emphasize short-term
liabilities to increase repricing speed on that side of the balance
sheet. Southern National used dealer repurchase
agreements ("repos"), in which securities comprising a portion of the
securities portfolio are transferred to
approved correspondent banks and brokers for short-term funding
strategies. Management continued to utilize
mortgage-backed securities dollar rolls. The use of dealer repos and
dollar rolls complemented overall asset/liability strategy since most
of these agreements had overnight to monthly repricing that helped to
sensitize the liability side of the balance sheet in the falling
interest rate environment prevailing during 1993.
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 1993 and the first quarter 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 March 31, 1994, interest rate
swaps with a total notional value of $570
million, with terms ranging up to seven years, were outstanding.
<TABLE>
Securities -- Market Value at March 31, 1994
Gross Unrealized Estimated
Amortized Holding Holding Market
(Dollars in thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury $ 966,365 $ 8,708 $ 17,894 $ 957,179
U.S. Government agencies and
corporations 46,685 120 62 46,743
States and political subdivisions 54,365 914 361 54,918
Mortgage-backed securities 560,032 4,103 7,501 556,634
Other debt securities 236 - 5 231
Total securities held to maturity 1,627,683 13,845 25,823 1,615,705
Securities available for sale:
Mortgage-backed securities 232,099 4,856 2,826 234,129
U.S. Treasury 627,148 4,952 13,525 618,575
U.S. Government agencies and
corporations 9,231 226 27 9,430
Equity securities 53,924 - - 53,924
Total securities available for sale 922,402 10,034 16,378 916,058
Total securities $ 2,550,085 $ 23,879 $ 42,201 $ 2,531,763
</TABLE>
Management feels that interest rates are past their lows and 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. During late 1993, Southern National entered
into $300 million of interest rate corridors as a hedge against
this risk. 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 positive impact of a 100 basis point
decline over 12 months in interest rates is
projected to be only .1% of net income. Stated in terms of earnings
per share, a decline of 100 basis points in
interest rates is projected to increase earnings by less than one-half
cent per share by the end of 1994.
Conversely, if interest rates were to rise 200 basis points, given
Southern National's balance sheet position at
quarter-end, the impact on net income would be a decrease of .2%,
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 earnings of
Southern National. This method is subject to
the assumptions that underlie the process, but it gives a better
picture 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 changed
only one-third as much as Prime rate.
Interest Sensitivity Simulation Analysis
Interest
Rate
Scenario Reference Rate Annualized
Money Percent
Instantaneous Market Change in
Parallel Prime Account Net Income
+ 4.00 % 10.75 % 6.25 % (31.0)%
+ 3.00 9.75 5.25 (23.2)
+ 2.00 8.75 4.25 (15.4)
+ 1.00 7.75 3.25 (7.7)
No change 6.75 2.25 -0-
- 1.00 5.75 1.25 7.7
- 2.00 4.75 0.25 15.3
- 3.00 3.75 0.00 15.4
- 4.00 2.75 0.00 7.3
Gradual
Historical
+ 2.00 8.75 2.91 (0.2)
- 1.00 5.75 1.92 0.1
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 consistent 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 revised 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.
Shareholder's equity at March 31, 1994 was $582.1 million versus
$564.9 million at year-end. As a percent of
quarter-end assets, total shareholders' equity was 7.2% at March 31,
1994, compared to 6.8% at December 31,
1993. Southern National's book value per common share at March 31,
1994 was $11.75, versus $11.42 three
months earlier.
Southern National's internal capital formation rate (net income
less dividends as a percent of average
equity, annualized) was 13.2% for the first quarter of 1994. Average
shareholders' equity as a percent of average
assets was 7.2% and 7.7% for the three months ended March 31, 1994 and
1993, respectively.
Tier 1 and total risk-based capital ratios at March 31, 1994 were
12.4% and 13.7%, respectively. The Tier
1 leverage ratio was 7.1%. 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 for
the FRB measures Tier 1 capital to average total assets less goodwill
and must be maintained in conjunction with
the risk-based capital standards.
EARNINGS ANALYSIS
Earnings for the first quarter of 1994 were $26.0 million. On a
fully diluted per share basis, net income for the three months ended
March 31, 1994 was $.54. The accompanying table presents a
comparison of major income statement
line items for the relevant periods.
Components of Net Income
For the Three Months
Ended March 31,
(In thousands) 1994 1993
Net interest income $ 78,558 $ 74,793
Provision for loan and lease losses 1,171 3,662
Noninterest income 23,218 32,254
Noninterest expense 60,398 64,091
Income before income taxes 40,207 39,294
Income taxes 14,160 14,054
Income before cumulative effect 26,047 25,240
Less: cumulative effect, net of
income taxes - 27,217
Net income (loss) $ 26,047 $ (1,977)
As shown in the table, earnings for the first quarter of 1993 were
impacted by the effect 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.
Net Interest Income
Net interest income on a fully taxable equivalent ("FTE") basis
was $81.5 million for the first quarter of
1994 compared to $77.3 million for the same period in 1993, a 5%
increase. Average earning assets during the
first three months of 1994 were $7.6 billion, an increase of $695
million, or 10%, over 1993. Factors impacting
the changes in volume were the purchase acquisition 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
quarters ended March 31, 1994 and 1993.
Net Interest Income and Rate / Volume Analysis
For the Three Months Ended March 31, 1994 and 1993
<TABLE>
<CAPTION>
Average Balance Yield / Rate Income / Expense Increase Change due to
Fully Taxable Equivalent -
(Dollars in thousands) 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(5) $2,438,268 $1,986,418 6.14 % 7.04 % $ 37,407 $ 34,982 $ 2,425 $ (4,835) $ 7,260
States and political subdivisions 52,924 56,127 7.88 8.22 1,042 1,154 (112) (48) (64)
Total securities (5) 2,491,192 2,042,545 6.17 7.08 38,449 36,136 2,313 (4,883) 7,196
Other earning assets(2) 48,468 133,513 2.57 3.03 312 1,010 (698) (133) (565)
Loans and leases, net
of unearned income(1)(3)(4)(5) 5,060,605 4,728,723 7.76 8.50 98,187 100,494 (2,307) (9,088) 6,781
Total earning assets 7,600,265 6,904,781 7.21 7.97 136,948 137,640 (692) (14,104) 13,412
Non-earning assets 440,305 446,957
Total assets $8,040,570 $7,351,738
Liabilities and Shareholders' Equity
Total interest-bearing deposits $5,365,745 $5,409,494 3.32 % 3.78 % $ 44,559 $ 51,093 $ (6,534) $ (6,174) $ (360)
Short-term borrowings 802,841 407,434 2.98 3.61 5,977 3,678 2,299 (737) 3,036
Long-term debt 303,958 301,427 6.44 7.37 4,896 5,556 (660) (707) 47
Total interest-bearing liabilities 6,472,544 6,118,355 3.43 3.94 55,432 60,327 (4,895) (7,618) 2,723
Demand deposits 913,760 557,670
Other liabilities 75,305 108,314
Shareholders' equity 578,961 567,399
Total liabilities and
shareholders' equity $8,040,570 $7,351,738
Net yield on earning assets 4.29 % 4.48 % $ 81,516 $ 77,313 $ 4,203 $ (6,486) $ 10,689
Taxable equivalent adjustment $ 2,958 $ 2,520
</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 and securities purchased under resale
agreements or similar arrangements.
(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 assets which were held for sale/available for sale
(6) There are no significant out-of-period adjustments.
The net yield FTE in the first quarter of 1994 was 4.29%, compared
to 4.48% for the same period in 1993
and 4.34% for the fourth quarter of 1993. The factors contributing to
the decline in the first quarter 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; (iii) the shift in the composition of
earning assets from loans into lower yielding securities because of
(a) sluggish loan growth in the first quarter of
1994 and (b) sale of substantially all fixed rate mortgage loans
originated; and (iv) 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. 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.
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 three months ended March 31, 1994 was
$23.2 million, compared to $32.3
million for the same period in 1993. Securities gains were $715
thousand in 1994, compared to $14.0 million in
1993.
Service charges on deposit accounts totaled $8.6 million in 1994
and 1993. Several factors accounted for
this "flat" scenario. First, Southern National has been very
successful in promoting the "Select Banking"
program, particularly to new customers acquired through mergers and
RTC 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 during the first quarter of
1994. Third, to prevent runoff and develop 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 were relatively stable in 1994,
compared to 1993, totaling $7.1 million in
1994 versus $7.0 million in 1993. This steadiness occurred throughout
all major categories of nondeposit fees
and commissions.
Gains on sales of loans were $2.1 million in 1994, compared to
$1.0 million in 1993, a 104% increase. 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 $1.1 million
in the first quarter of 1994. This significant contribution to other
noninterest income will be hard 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 $60.4 million for the first quarter of
1994, compared to $64.1 million for the
same period a year ago. Special accruals and expenses led to an
elevated level of noninterest expense in the first
quarter of 1993. These items included (i) the adoption of SFAS 106,
(ii) accelerated depreciation or retirement of
certain technology-related equipment and (iii) early buyouts of
employment contracts.
Corporate expansion during the 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 three
months of 1994 reflect the impact of the operating costs associated
with this institution, whereas the first quarter
of 1993 did not include any expenses related to this acquisition.
Total personnel expense was $32.6 million for the first three
months of 1994, a $1.3 million, or 4%,
increase over the same period a year ago. Salaries accounted for $708
thousand of the increase while employee
benefits were up $629 thousand.
Occupancy and equipment expense declined $1.2 million, or 12%,
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 amount for 1993 and mitigates the normal increases in
this area. Federal deposit insurance
expense increased $532 thousand, or 16%, in 1994 as a result of
deposit growth, through acquisitions as well as
internal growth. As discussed in "Noninterest Income," Southern
National is recovering a portion of this expense
from customers through service charges.
Foreclosed property expense, including write-downs on foreclosed
property, amounted to $853 thousand in
1994, compared to $3.0 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.
Provision for Income Taxes
See Note C of "Notes to Consolidated Financial Statements" for
additional information on income taxes.
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 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.
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 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of Southern National held on
April 19, 1994, the shareholders
(i) elected ten directors, (ii) approved the Omnibus Stock Incentive
Plan, (iii) approved the Long-Term Incentive
Plan, (iv) approved the Short-Term Incentive Plan and (v) approved an
amendment to the Incentive Stock Option
Plan and the Non-Qualified Stock Option Plan.
The accompanying table provides a summary of the voting with
respect to each item.
For Against Abstain
Item 1. 32,625,839 159,652 476,619
Item 2. 24,664,627 3,179,329 805,662
Item 3. 30,437,413 2,230,753 593,943
Item 4. 30,856,726 1,888,601 605,397
Item 5. 30,518,659 2,211,232 532,218
Item 5. Other Events - Acquisitions
On January 28, 1994, Southern National completed its acquisition
of The First Savings Bank, FSB ("The
First") of Greenville, South Carolina in a transaction accounted for
as a pooling-of-interests. The First was
merged into Southern National Bank of South Carolina, thereby
improving its ranking by deposits to third in
South Carolina. At year-end 1993, The First had $2.0 billion in assets
and $1.5 billion in deposits.
On January 31, 1994, Southern National acquired Regency
Bancshares Inc. ("Regency") of Hickory,
North Carolina in a transaction accounted for as a pooling-of-
interests. At year-end 1993, Regency, a bank
holding company whose principal subsidiaries are First Savings Bank,
SSB of Hickory, North Carolina and
Davidson Savings Bank, SSB of Lexington, North Carolina, had total
consolidated assets of $263 million and
total consolidated deposits of $210 million.
On February 24, 1994, Southern National acquired Home Federal
Savings Bank of Statesville, North
Carolina in a transaction accounted for as a pooling-of-interests. At
year-end 1993, Home had total assets of $98
million and total deposits of $90 million.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - "Computation of Earnings Per Share" is included
herein.
(b) Southern National filed a Current Report on Form 8-K dated
February 11, 1994 covering the completion
of the acquisition of The First Savings Bank, FSB ("The First") on
January 28, 1994.
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: May 13, 1994 By:
L. Glenn Orr, Jr., Chairman, President
and Chief Executive Officer
Date: May 13, 1994 By:
Sherry A. Kellett, Executive
Vice President and
Controller (Principal
Accounting Officer)
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>
For the Three Months
Ended March 31,
1994 1993
<C> <C>
Primary Earnings Per Share:
Weighted average number of common shares outstanding during the period 43,164,558 40,884,600
Add-
Dilutive effect of outstanding options (as determined by application of
treasury stock method) 435,103 951,725
Weighted average number of common shares, as adjusted 43,599,661 41,836,325
Net income $ 26,047 $ (1,977)
Less-
Preferred dividend requirements 1,299 1,299
Net income available for common shares $ 24,748 $ (3,276)
Primary earnings per share $ 0.57 $ (0.08)
Fully Diluted Earnings Per Share:
Weighted average number of common shares outstanding during the period 43,164,558 40,884,600
Add
Shares issuable assuming conversion of convertible preferred stock 4,548,236 4,548,236
Dilutive effect of outstanding options (as determined by application of
treasury stock method) 435,103 978,471
Weighted average number of common shares, as adjusted 48,147,897 46,411,307
Net income $ 26,047 $ (1,977)
Fully diluted earnings per share $ 0.54 $ (0.08)
</TABLE>
