<PAGE>
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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, 1995
COMMISSION FILE NUMBER: 1-10853
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.)
200 WEST SECOND STREET
WINSTON-SALEM, NORTH CAROLINA 27101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(910)773-7200
(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 July 31, 1995, 102,885,221 shares of the registrant's common stock, $5 par
value, were outstanding.
----------------
This Form 10-Q has 21 pages. The Exhibit Index is included on Page 19.
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<PAGE>
SOUTHERN NATIONAL CORPORATION
FORM 10-Q
JUNE 30, 1995
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<C> <S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Financial Statements....................... 3
Notes to Consolidated Financial Statements.............. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Analysis of Financial Condition......................... 8
Asset/Liability Management.............................. 10
Capital Adequacy and Resources.......................... 12
Analysis of Results of Operations....................... 13
Part II. OTHER INFORMATION
Item 1. Legal Proceedings....................................... 19
Item 6. Exhibits and Reports on Form 8-K........................ 19
SIGNATURES.......................................................... 20
EXHIBIT 11 Computation of Earnings Per Share.
EXHIBIT 27 Financial Data Schedule--Included with electronically-
filed document only.
</TABLE>
2
<PAGE>
PART I. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
----------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
Cash and due from depository institutions.......... $ 667,462 637,794
Interest-bearing bank balances..................... 2,223 20,962
Federal funds sold and other short-term invest-
ments............................................. 40,700 13,021
Securities available for sale (amortized cost:
$3,599,489 at June 30, 1995, and $3,579,461 at De-
cember 31, 1994).................................. 3,614,055 3,459,698
Securities held to maturity (market value:
$1,947,770 at June 30, 1995, and $1,889,911 at De-
cember 31, 1994).................................. 1,940,477 1,965,419
Loans and leases................................... 13,765,475 13,108,102
Allowance for losses............................. (176,175) (171,734)
----------- ----------
Net loans and leases........................... 13,589,300 12,936,368
----------- ----------
Premises and equipment, net........................ 316,338 333,069
Other assets....................................... 491,697 488,732
----------- ----------
Total assets................................... $20,662,252 19,855,063
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits....................... $ 1,799,574 1,843,019
Interest-bearing deposits.......................... 12,536,982 12,471,135
----------- ----------
Total deposits................................. 14,336,556 14,314,154
Short-term borrowed funds.......................... 3,147,213 2,902,528
Accounts payable and other liabilities............. 295,868 231,149
Long-term debt..................................... 1,312,464 910,755
----------- ----------
Total liabilities.............................. 19,092,101 18,358,586
----------- ----------
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares
authorized, 751,719 issued and outstanding at June
30, 1995, 770,000 issued and outstanding at
December 31, 1994................................. 3,759 3,850
Common stock, $5 par, 300,000,000 shares
authorized, 102,709,306 issued and outstanding at
June 30, 1995, 102,215,032 issued and outstanding
at December 31, 1994.............................. 513,546 511,075
Paid-in capital.................................... 286,090 285,599
Retained earnings.................................. 764,224 775,979
Loan to employee stock ownership plan and unvested
restricted stock.................................. (6,523) (7,442)
Net unrealized appreciation (depreciation) on secu-
rities available for sale......................... 9,055 (72,584)
----------- ----------
Total shareholders' equity..................... 1,570,151 1,496,477
----------- ----------
Total liabilities and shareholders' equity..... $20,662,252 19,855,063
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS AS INDICATED
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans
and leases................. $ 309,680 244,170 603,059 477,203
Interest and dividends on
securities................. 79,684 72,649 154,286 144,687
Interest on short-term in-
vestments.................. 733 952 1,389 2,123
----------- ----------- ----------- -----------
Total interest income..... 390,097 317,771 758,734 624,013
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits........ 142,180 105,104 272,314 208,465
Interest on short-term bor-
rowed funds................ 48,194 21,782 89,253 37,007
Interest on long-term debt.. 14,761 9,619 29,384 18,615
----------- ----------- ----------- -----------
Total interest expense.... 205,135 136,505 390,951 264,087
----------- ----------- ----------- -----------
NET INTEREST INCOME........... 184,962 181,266 367,783 359,926
Provision for loan and lease
losses..................... 7,000 2,902 14,000 8,403
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PRO-
VISION FOR LOAN AND LEASE
LOSSES....................... 177,962 178,364 353,783 351,523
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Service charges on deposit
accounts................... 22,511 21,779 43,781 42,489
Nondeposit fees and commis-
sions...................... 26,445 23,316 54,334 52,476
Securities gains (losses),
net........................ -- 627 (19,845) 2,148
Gain on sale of divested de-
posits..................... 11,866 -- 11,866 --
Other income................ 5,538 7,523 12,461 14,903
----------- ----------- ----------- -----------
Total noninterest income.. 66,360 53,245 102,597 112,016
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Personnel expense........... 75,343 70,944 199,576 148,387
Occupancy and equipment ex-
pense...................... 27,729 22,299 57,284 44,013
Federal deposit insurance
expense.................... 7,975 8,178 15,980 16,599
Professional fees........... 4,027 2,365 12,172 6,508
Bank supplies expense....... 6,107 2,519 9,534 5,441
Other expense............... 38,722 38,835 94,313 72,170
----------- ----------- ----------- -----------
Total noninterest expense. 159,903 145,140 388,859 293,118
----------- ----------- ----------- -----------
EARNINGS
Income before income taxes.. 84,419 86,469 67,521 170,421
Income tax expense.......... 27,121 29,361 22,776 58,342
----------- ----------- ----------- -----------
Net income.................. 57,298 57,108 44,745 112,079
Preferred dividend re-
quirements............... 1,289 1,300 2,588 2,599
----------- ----------- ----------- -----------
Income applicable to com-
mon shares............... $ 56,009 55,808 42,157 109,480
=========== =========== =========== ===========
PER COMMON SHARE
Net income:
Primary................... $ .54 .55 .41 1.07
=========== =========== =========== ===========
Fully diluted............. $ .53 .53 .41 1.05
=========== =========== =========== ===========
Cash dividends declared..... $ .23 .20 .63 .37
=========== =========== =========== ===========
AVERAGE SHARES OUTSTANDING
Primary..................... 103,523,801 102,027,925 103,342,418 101,937,734
=========== =========== =========== ===========
Fully diluted............... 108,774,906 107,082,681 108,665,929 106,993,805
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OF RETAINED
COMMON PREFERRED COMMON PAID-IN EARNINGS
STOCK STOCK STOCK CAPITAL AND OTHER* TOTAL
----------- --------- ------- ------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1993, AS PREVIOUSLY RE-
PORTED................. 42,961,214 $3,850 214,806 151,186 195,022 564,864
Merger with BB&T Finan-
cial Corporation
("BB&T") accounted for
under the pooling-of-
interests method...... 57,862,080 -- 289,310 124,240 420,312 833,862
----------- ------ ------- ------- ------- ---------
BALANCE, DECEMBER 31,
1993, AS RESTATED...... 100,823,294 3,850 504,116 275,426 615,334 1,398,726
ADD (DEDUCT)
Net income............. -- -- -- -- 112,079 112,079
Common stock issued by
pooled companies prior
to merger............. 525,583 -- 2,627 4,563 -- 7,190
Common stock issued.... 287,697 -- 1,439 60 (41) 1,458
Common stock acquired
and retired........... (638,000) -- (3,190) (11,497) -- (14,687)
Net unrealized
depreciation on
securities available
for sale.............. -- -- -- -- (35,611) (35,611)
Mergers accounted for
under the purchase
method................ 136,699 -- 683 2,003 -- 2,686
Cash dividends declared
by merged companies... -- -- -- -- (19,419) (19,419)
Cash dividends declared
by Southern National:
Common stock........... -- -- -- -- (12,759) (12,759)
Preferred stock........ -- -- -- -- (2,599) (2,599)
Other.................. -- -- -- (44) 999 955
----------- ------ ------- ------- ------- ---------
BALANCE JUNE 30, 1994... 101,135,273 $3,850 505,675 270,511 657,983 1,438,019
=========== ====== ======= ======= ======= =========
BALANCE, DECEMBER 31,
1994, AS PREVIOUSLY
REPORTED............... 44,158,751 $3,850 220,794 164,934 242,766 632,344
Merger with BB&T
accounted for under
the pooling-of-
interests method...... 58,056,281 -- 290,281 120,665 453,187 864,133
----------- ------ ------- ------- ------- ---------
BALANCE, DECEMBER 31,
1994, AS RESTATED...... 102,215,032 3,850 511,075 285,599 695,953 1,496,477
ADD (DEDUCT)
Net income............. -- -- -- -- 44,745 44,745
Common stock issued.... 1,154,024 -- 5,770 13,319 -- 19,089
Common stock acquired
and retired........... (659,750) -- (3,299) (10,561) -- (13,860)
Net unrealized appreci-
ation on securities
available for sale.... -- -- -- -- 81,639 81,639
Cash dividends declared
by Southern National:
Common stock........... -- -- -- -- (53,948) (53,948)
Preferred stock........ -- -- -- -- (2,552) (2,552)
Preferred stock ac-
quired and retired.... -- (91) -- (2,267) -- (2,358)
Other.................. -- -- -- -- 919 919
----------- ------ ------- ------- ------- ---------
BALANCE, JUNE 30, 1995.. 102,709,306 $3,759 513,546 286,090 766,756 1,570,151
=========== ====== ======= ======= ======= =========
</TABLE>
--------
* Other includes unvested restricted stock, loan to employee stock ownership
plan and unearned compensation.
See accompanying notes to consolidated financial statements.
5
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 44,745 112,079
Adjustments to reconcile net income to net cash pro-
vided by operating activities:
Provision for loan and lease losses................... 14,000 8,403
Depreciation of premises and equipment................ 15,357 13,835
Amortization of intangibles........................... 4,801 3,836
Accretion of negative goodwill........................ (3,191) (2,916)
Amortization of unearned stock compensation........... 919 874
Discount accretion and premium amortization on secu-
rities, net.......................................... 2,038 4,037
Gain on sales of trading account securities, net...... (38) (537)
Loss (gain) on sales of securities, net............... 19,845 (2,148)
Loss (gain) on sales of loans and mortgage loan ser-
vicing rights, net................................... 126 (1,225)
Gain on disposals of premises and equipment, net...... (8,516) (1,280)
Loss on foreclosed property and other real estate,
net.................................................. 927 335
Proceeds from sales of trading account securities,
net of purchases..................................... 25,984 537
Proceeds from sales of loans held for sale............ 130,360 508,145
Purchases of loans held for sale...................... (54,260) --
Origination of loans held for sale, net of principal
collected............................................ (152,846) (241,006)
Decrease (increase):
Accrued interest receivable.......................... (38,967) (7,114)
Other assets......................................... 65,142 7,353
Increase (decrease) in:
Accrued interest payable............................. 11,512 492
Accounts payable and other liabilities............... 64,719 (78,848)
---------- ----------
Net cash provided by operating activities........... 142,657 324,852
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale.. 977,827 616,443
Maturities of securities.............................. 655,354 681,485
Purchases of securities............................... (1,687,184) (1,436,773)
Leases made to customers.............................. (22,219) (20,339)
Principal collected on leases......................... 23,378 19,733
Loan originations, net of principal collected......... (645,059) (300,477)
Purchases of loans.................................... (5,382) --
Net cash acquired in transactions accounted for under
the purchase method of accounting.................... -- 229
Proceeds from disposals of premises and equipment..... 7,632 5,859
Purchases of premises and equipment................... (35,552) (35,109)
Proceeds from sales of foreclosed property............ 5,439 15,161
Proceeds from sales of other real estate held for de-
velopment or sale.................................... 2,947 8,727
Other................................................. (8,216) (4,721)
---------- ----------
Net cash used in investing activities............... (731,035) (449,782)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits................... 22,402 (236,442)
Net increase in short-term borrowed funds............. 244,685 476,058
Net increase (decrease) in long-term debt............. 401,709 (217,513)
Net proceeds from common stock issued................. 19,089 8,648
Common stock acquired and retired..................... (13,860) (14,687)
Preferred stock acquired and retired.................. (2,358) --
Cash dividends paid on common and preferred stock..... (44,681) (34,788)
---------- ----------
Net cash provided by (used in) financing activities. 626,986 (18,724)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 38,608 (143,654)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....... 671,777 859,632
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $ 710,385 715,978
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.............................................. $ 379,439 263,595
Income taxes.......................................... 70,121 73,141
Noncash financing and investing activities:
Transfer of loans to foreclosed property.............. 4,101 13,599
Common stock issued upon conversion of debentures..... 35 --
Transfer of securities from held to maturity to
available for sale................................... -- 5,934
Transfer of securities from available for sale to
held to maturity..................................... -- 2,216
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(UNAUDITED)
A. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the consolidated balance
sheets of Southern National Corporation and subsidiaries ("Southern National"
or "SNC") as of June 30, 1995, and December 31, 1994; the consolidated
statements of income for the three months and six months ended June 30, 1995
and 1994; and the consolidated statements of cash flows for the six months
ended June 30, 1995 and 1994.
The consolidated financial statements and notes are presented in accordance
with the instructions for Form 10-Q. The information contained in the
footnotes included in Southern National's latest annual report on Form 10-K,
as restated for the mergers with BB&T Financial Corporation ("BB&T") and
Commerce Bank ("Commerce") in Southern National's current report on Form 8-K
dated June 30, 1995, should also be referred to in connection with the reading
of these unaudited interim consolidated financial statements.
Certain amounts for 1994 have been reclassified to conform with statement
presentations for 1995. The reclassifications have no effect on shareholders'
equity or net income as previously reported.
B. NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1995, Southern National adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan," which was amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures." SFAS No. 114, as
amended, requires that impaired loans be measured based on the present value
of expected future cash flows discounted at the loan's effective interest
rate, or as a practical expedient, at the loan's observable market price or
the fair value of the collateral if the loan is collateral-dependent. When the
measure of the impaired loan is less than the recorded investment in the loan,
the impairment is recorded through a valuation allowance. The bank had
previously measured the allowance for credit losses using methods similar to
those prescribed in SFAS No. 114. As a result of adopting these statements, no
additional allowance for loan losses was required as of January 1, 1995.
The total recorded investment for impaired loans at June 30, 1995, was $13.6
million, offset by a valuation allowance of $1.1 million, which resulted in a
net carrying value of $12.5 million. There were no investments in impaired
loans which did not have a related valuation allowance. The average recorded
investment in impaired loans during the first six months of 1995 totaled $13.2
million. Southern National recognizes no interest income on loans that are
impaired. Cash receipts for both principal and interest are applied directly
to principal.
As of July 1, 1995, Southern National adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." SFAS No. 122 requires that mortgage banking
enterprises recognize as separate assets the rights to service mortgage loans
for others, regardless of how those servicing rights are acquired, and that
mortgage banking enterprises assess their capitalized mortgage servicing
rights for impairment based on the fair value of those rights. It is not
anticipated that the implementation of this standard will have a material
impact on the financial condition or results of operations of Southern
National.
C. MERGERS
On August 1, 1994, Southern National and BB&T jointly announced the signing
of a definitive agreement to merge. The merger was completed on February 28,
1995, by the issuance of 1.45 shares of Southern National common stock for
each share of BB&T stock outstanding. BB&T completed an acquisition of
Commerce on January 10, 1995, by the issuance of 1.305 shares of BB&T common
stock for each share of Commerce stock outstanding. Both transactions were
accounted for as poolings-of-interests.
7
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
ANALYSIS OF FINANCIAL CONDITION
On February 28, 1995, Southern National consummated a merger with BB&T in a
transaction accounted for as a pooling-of-interests. Accordingly, all
financial information presented herein has been restated to reflect the
results of BB&T. Each outstanding share of BB&T common stock was exchanged for
1.45 shares of SNC common stock. Approximately 58.1 million shares of SNC
common stock were issued in conjunction with the merger. On January 10, 1995,
BB&T completed a merger with Commerce in a transaction also accounted for as a
pooling-of-interests. At the time of merger, Commerce had total assets of $700
million.
Total assets at June 30, 1995 were $20.7 billion, an $807.2 million increase
from the balance at December 31, 1994. The increase was generated by growth of
$652.9 million in net loans and leases, including loans held for sale, and
$129.4 million in securities. The growth in net loans reflects an annualized
growth rate of 10.1% and an annualized growth rate of 4.8% for securities.
The continued strong loan growth is being funded through increases in short-
term borrowed funds, which rose $244.7 million during the first six months of
1995, and long-term debt, which grew $401.7 million. The growth in long-term
debt was comprised primarily of Federal Home Loan Bank ("FHLB") advances.
During the first quarter, securities declined $196.6 million because of a
restructuring of the securities portfolio. This restructuring was undertaken
to conform the investment policies and portfolios of the combined companies
after merger. Mortgage-backed securities with average projected maturities of
approximately five years accounted for the majority of securities sold. The
balance was comprised of older, lower yielding U.S. Treasuries and Federal
agency securities with average maturities of three to five years. The average
combined yield at cost for securities sold was approximately 6.00%. The total
loss recognized on the sales was $19.8 million. Reinvestment of proceeds from
the restructuring was accomplished during the first and second quarters. U.S.
Treasuries and agency securities with average maturities of three years and
average yields at cost of approximately 7.00% were purchased. The reinvestment
of proceeds from this restructuring and maturities of securities resulted in
growth during the second quarter of $102.2 million in the held-to-maturity
portfolio and $223.8 million in the available- for-sale portfolio. At June 30,
1995, the portfolio had unrealized appreciation, after tax, of $9.1 million
compared to unrealized depreciation, after tax, of $27.0 million at March 31,
1995 and $72.6 million at December 31, 1994. The taxable equivalent yield on
the securities portfolio during the second quarter was 6.28%, up from 6.05% in
the first quarter of 1995 and 5.87% in the fourth quarter of 1994.
The restructuring of the securities portfolio described above resulted in a
shift in portfolio holdings. The combined balance sheets of BB&T and SNC
contained a high concentration of mortgage-related assets, comprised of whole
loans and securities acquired as a result of acquisitions of thrift
institutions during the last few years. As a result of those acquisitions, the
concentration of mortgage-related assets had become a significant factor on
the balance sheets of both organizations. The sale of mortgage-backed
securities was, in part, carried out to reduce the concentration of this type
of asset on the balance sheet of the combined organization. Mortgage-related
assets typically have longer durations than other bank assets and are
generally more sensitive to changes in interest rates. The replacement of
these securities with U.S. Treasuries and other Federal agency securities
improved the mix of assets from both credit and interest sensitivity
measurements.
The sale of securities resulted in a shortening of the average life of the
combined investment portfolios which has improved the overall interest rate
sensitivity of the balance sheet. The company has experienced a shift toward
liability sensitivity because of the previously mentioned mergers of thrift
institutions which are traditionally positioned with longer-duration assets,
funded with shorter-duration liabilities. The restructuring reduced this
funding mismatch and reduced overall interest rate sensitivity for the
combined corporation.
Total deposits increased by $22.4 million from the December 31, 1994
balance. Many financial institutions are seeing a trend of slower deposit
growth because of competition for deposits from various non-financial
institution sources. The flat deposit growth experienced by Southern National
has required management to seek
8
<PAGE>
alternate funding sources, such as short-term borrowed funds, FHLB advances
and Federal funds purchased. The use of these funding sources, which are
typically tied to the Federal funds rate and reprice more quickly than
deposits, contributed to the lower margin in the second quarter as compared to
prior quarters. As mentioned above, short-term borrowed funds increased $244.7
million during the first six months. The strategies employed in the management
of interest-bearing liabilities and interest-earning assets are further
discussed in "Asset/Liability Management."
ASSET QUALITY
Nonperforming assets were $58.3 million at June 30, 1995, compared to $59.6
million at year-end 1994. The allowance for losses as a percentage of loans
and leases was 1.28% at June 30, 1995 and nonperforming assets as a percentage
of loan-related assets were .42%, compared to 1.31% and .45%, respectively, at
December 31, 1994. These ratios were $1.42% and .61%, respectively, on June
30, 1994. The quality of the loan portfolio significantly improved during 1994
and has remained strong during the first six months of 1995. Southern National
experienced an unusually low level of net charge-offs during 1994, falling
from .31% of average loans and leases for the year ended December 31, 1993 to
.14% for the year ended December 31, 1994. First quarter 1995 net charge-offs
totaled $4.5 million, or an annualized rate of .14% of average loans and
leases, and the second quarter 1995 levels increased to $5.0 million, or .15%
of average loans and leases on an annualized basis. This level of net charge-
offs is higher than the first six months of 1994 because of substantial
recoveries which were realized during 1994. The adequacy of the current
allowance is evidenced by the increase in the ratio of the allowance for
losses to 8.76 times net charge-offs, up from 5.03 times at December 31, 1994.
Loan 90 days or more past due and still accruing interest increased
significantly during the second quarter compared to December 31, 1994. The
largest portion of the increase related to conforming the nonaccrual policies
of Southern National and BB&T subsequent to merger.
The provision for loan and lease losses in the first half of 1995 was $14.0
million compared to $8.4 million in the same period of 1994. The increase in
the provision primarily reflects higher net charge-offs during the second
quarter of 1995 compared to 1994. Asset quality statistics relevant to the
last five calendar quarters are presented in the accompanying table.
9
<PAGE>
ASSET QUALITY ANALYSIS
<TABLE>
<CAPTION>
AS OF/FOR THE QUARTER ENDED
---------------------------------------------
6/30/95 3/31/95 12/31/94 9/30/94 6/30/94
-------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOSSES
Beginning Balance.............. $174,189 171,734 172,110 173,550 174,006
Allowance for acquired loans... -- -- 1,119 -- --
Provision for losses........... 7,000 7,000 7,104 2,339 2,902
Net charge-offs................ (5,014) (4,545) (8,599) (3,779) (3,358)
-------- ------- ------- ------- -------
Ending balance............... $176,175 174,189 171,734 172,110 173,550
======== ======= ======= ======= =======
NONPERFORMING ASSETS
Nonaccrual loans & leases...... $ 48,927 48,451 47,039 43,219 55,496
Foreclosed property............ 8,759 11,239 12,153 17,963 18,577
Restructured loans............. 611 623 402 474 207
-------- ------- ------- ------- -------
Nonperforming assets......... $ 58,297 60,313 59,594 61,656 74,280
======== ======= ======= ======= =======
Loans 90 days or more past due
& still accruing.............. $ 30,335 21,653 24,224 27,134 27,667
======== ======= ======= ======= =======
ASSET QUALITY RATIOS
Nonaccrual loans & leases as a
percentage of total loans &
leases.......................... .36% .36 .36 .34 .45
Nonperforming assets as a
percentage of:
Total assets................... .28 .30 .30 .32 .39
Loans & leases plus foreclosed
property...................... .42 .45 .45 .49 .61
Net charge-offs as a percentage
of average loans & leases....... .15 .14 .27 .12 .11
Allowance for losses as a
percentage of loans & leases.... 1.28 1.30 1.31 1.36 1.42
RATIO OF ALLOWANCE FOR LOSSES TO:
Net charge-offs................ 8.76x 9.45 5.03 11.48 12.89
Nonaccrual loans & leases...... 3.60 3.60 3.65 3.98 3.13
</TABLE>
All items referring to loans and leases include loans held for sale and are
net of unearned income. 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 manage the impact of interest rate fluctuations on net interest income. It
is the responsibility of the Asset/Liability Management Committee ("ALCO") to
set policy guidelines and to establish long-term strategies with respect to
interest rate exposure and liquidity. The ALCO 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 established parameters.
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 to
measure the interest rate sensitivity of earnings.
Balance sheet repositioning is the most efficient and cost-effective means
of managing interest rate risk and is accomplished through strategic pricing
of asset and liability accounts. The expected result of strategic pricing is
the development of appropriate maturity and repricing streams in those
accounts to produce consistent net income during adverse interest rate
environments. The ALCO monitors loan, investment and liability portfolios
10
<PAGE>
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.
DERIVATIVES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate volatility often increases to the point that balance sheet
repositioning through the use of account repricing and other on-balance sheet
strategies cannot occur rapidly enough to avoid adverse net income effects. At
those times, off-balance sheet or synthetic hedges are utilized. Management
uses interest rate swaps, caps and floors to supplement balance sheet
repositioning. Such products are designed to move the interest sensitivity of
the corporation toward a neutral position.
Interest rate swaps are contractual agreements between two parties to
exchange a series of cash flows representing interest payments. A swap allows
both parties to transform the repricing characteristics of an asset or
liability from a fixed to a floating rate, a floating rate to a fixed rate, or
one floating rate to another floating rate. The underlying principal positions
are not affected. Swap terms generally range from one year to ten years
depending on the need. At June 30, 1995, interest rate swaps, caps and floors
with a total notional value of $1.4 billion, and terms of up to seven years,
were outstanding.
The following tables set forth certain information concerning Southern
National's interest rate swaps, caps and floors at June 30, 1995:
INTEREST RATE SWAPS, CAPS AND FLOORS
JUNE 30, 1995
<TABLE>
<CAPTION>
NOTIONAL RECEIVE PAY UNREALIZED
TYPE AMOUNT RATE RATE GAINS(LOSSES)
---- ---------- ----------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Receive fixed swaps........... $ 623,055 6.21% 6.22% $ 639
Pay fixed swaps............... 103,229 6.03 7.26 (976)
Caps and floors............... 700,000 -- -- (3,898)
---------- --------- --------- ----------
Total......................... $1,426,284 6.18% 6.37% $ (4,235)
========== ========= ========= ==========
<CAPTION>
RECEIVE
FIXED PAY FIXED CAPS AND
YEAR-TO-DATE ACTIVITY SWAPS SWAPS FLOORS TOTAL
--------------------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994.... $1,200,000 111,325 1,100,000 2,411,325
Additions..................... -- -- -- --
Maturities/amortizations...... (176,945) (6,659) -- (183,604)
Terminations.................. (400,000) (1,437) (400,000) (801,437)
---------- --------- --------- ----------
Balance, June 30, 1995........ $ 623,055 103,229 700,000 1,426,284
========== ========= ========= ==========
<CAPTION>
ONE YEAR ONE TO FIVE AFTER FIVE
MATURITY SCHEDULE* OR LESS YEARS YEARS TOTAL
------------------ ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
Receive fixed swaps........... $ 40,000 583,055 -- 623,055
Pay fixed swaps............... 40,000 63,229 -- 103,229
Caps and floors............... -- 650,000 50,000 700,000
---------- --------- --------- ----------
Total......................... $ 80,000 1,296,284 50,000 1,426,284
========== ========= ========= ==========
</TABLE>
--------
* Maturities are based on full contract extensions.
11
<PAGE>
As of June 30, 1995, unearned income and deferred premiums from new swap
transactions and deferred losses from terminated swap transactions were
$769,000 and $6.7 million, respectively. The unearned income and deferred
premiums will be recognized over the next seven years and the deferred losses
will be recognized in the next year . The combination of active and terminated
transactions resulted in expense of $2.6 million during the second quarter of
1995.
In addition to interest rate swaps, Southern National utilizes written
covered over-the-counter call options on specific securities in the available-
for-sale portfolio in order to enhance returns. Option fee income was $415,000
for the second quarter of 1995 and $1.6 million for the first six months of
1995. Unexercised options on securities with total par values of $43.2 million
were outstanding at June 30, 1995.
Southern National also utilizes purchased over-the-counter put options in
its mortgage banking activities to hedge the mortgage pipeline, although no
such options were outstanding as of June 30, 1995.
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.
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, 1995 was $1.6 billion versus $1.5 billion
for December 31, 1994. As a percentage of assets, total shareholders' equity
was 7.6% at June 30, 1995, up from 7.5% at December 31, 1994. Southern
National's book value per common share at June 30, 1995 was $14.59, versus
$13.92 at December 31, 1994. The increase in book value per common share
reflects the $9.1 unrealized appreciation at June 30, 1995 compared to
unrealized depreciation of $72.6 million at year end. Average shareholders'
equity as a percentage of average assets was 7.6% for the six months ended
June 30, 1995 and 1994.
Tier 1 and total risk-based capital ratios at June 30, 1995 were 11.3% and
12.6%, respectively. The leverage ratio was 7.4% at the end of the second
quarter. These capital ratios measure the capital to risk-weighted assets and
off-balance sheet items as defined by Federal Reserve Board ("FRB")
guidelines. An 8% minimum of total capital to risk-weighted assets is
required. One-half of the 8% minimum must consist of tangible common
shareholders' equity (Tier 1 capital) under regulatory guidelines. The
leverage ratio, established by the FRB, measures Tier 1 capital to average
total assets less goodwill and must be maintained in conjunction with the
risk-based capital standards. The regulatory minimum for the leverage ratio is
3%.
CAPITAL ADEQUACY RATIOS
<TABLE>
<CAPTION>
1995 1994
--------------- -----------------------
SECOND FIRST FOURTH THIRD SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average equity to average assets........ 7.61% 7.60 7.67 7.62 7.57
Equity to assets at period end.......... 7.60 7.51 7.54 7.60 7.63
Risk-based capital ratios:
Tier 1 capital........................ 11.3 11.5 12.3 12.3 12.4
Total capital......................... 12.6 12.7 13.6 13.6 13.7
Leverage ratio.......................... 7.4 7.3 7.8 7.7 7.6
</TABLE>
12
<PAGE>
ANALYSIS OF RESULTS OF OPERATIONS
Southern National realized net income for the first six months of 1995 of
$44.7 million, compared to earnings of $112.1 million during the first six
months of 1994. On a fully diluted per share basis, net income for the six
months ended June 30, 1995 was $.41, compared to earnings of $1.05 for the
same period in 1994. The decrease in earnings was caused by approximately
$104.4 million in pretax nonrecurring charges related to the merger between
Southern National and BB&T, $19.8 million in securities losses resulting from
the restructuring of the securities portfolio discussed in the "Analysis of
Financial Condition" and an $11.9 million gain on the sale of divested
branches. The net after-tax impact of the nonrecurring items and securities
losses was $72.7 million. A brief description of the nature of the
nonrecurring items is presented below:
<TABLE>
<CAPTION>
FIRST SECOND YEAR-
QUARTER QUARTER TO-DATE
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Other service charges, commissions and fees......... $ -- 470 470
Other noninterest income (premium on divested
deposits).......................................... -- (11,866) (11,866)
Securities losses................................... 19,787 -- 19,787
Personnel expense................................... 50,611 4,660 55,271
Occupancy expense................................... 3,831 135 3,966
Furniture and equipment expense..................... 3,005 3,079 6,084
Other noninterest expense........................... 25,946 6,980 32,926
Income taxes (pre-tax equivalent)................... 4,566 -- 4,566
-------- ------- -------
Total............................................... $107,746 3,458 111,204
======== ======= =======
Total--net of tax................................... $ 70,532 2,120 72,652
======== ======= =======
</TABLE>
Excluding nonrecurring items and securities losses, Southern National would
have had net income after tax for the first six months of 1995 of $117.4
million, or $1.08 per fully diluted share. Second quarter earnings, exclusive
of the nonrecurring items, represented a return on assets of 1.18% and a
return on common equity of 16.0%. Excluding nonrecurring items, fully diluted
earnings per share for the second quarter were $.55 compared to $.54 in the
first quarter.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was $383.2
million for the first six months of 1995 compared to $373.8 million for the
same period in 1994, a 2.5% increase. This increase resulted from a 7.6%
growth in average earning assets, offset by a decline in the net interest
margin from 4.30% to 4.10%. The decline in margin was caused primarily by
competitive market factors in the pricing of loans and deposits, as well as
the more frequent repricing of interest-bearing sources of funds, compared
with the repricing of earning assets. In addition, as a result of the merger,
Southern National has competitively priced loans and deposits to protect
current market positions.
13
<PAGE>
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 V. 1994
--------------------------
FULLY TAXABLE EQUIVALENT AVERAGE BALANCES YIELD / RATE INCOME / EXPENSE CHANGE DUE TO
------------------------ ---------------------- -------------- ---------------- INCREASE ---------------
1995 1994 1995 1994 1995 1994 (DECREASE) RATE VOLUME
----------- ---------- ------ ------ -------- ------- ---------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Securities (1):
U.S. Treasury,
government and other
(5).................... $ 5,248,737 5,130,525 6.07% 5.77 $158,050 146,702 $ 11,348 7,914 3,434
States and political
subdivisions........... 175,898 185,086 8.93 9.38 7,787 8,609 (822) (406) (416)
----------- ---------- ------ ------ -------- ------- -------- ------- ------
Total securities (5)... 5,424,635 5,315,611 6.16 5.89 165,837 155,311 10,526 7,508 3,018
Other earning assets
(2)..................... 47,188 132,521 5.94 3.23 1,389 2,123 (734) 1,131 (1,865)
Loans and leases, net of
unearned income
(1)(3)(4)(5)............ 13,372,850 12,071,629 9.15 8.03 606,918 480,418 126,500 71,557 54,943
----------- ---------- ------ ------ -------- ------- -------- ------- ------
Total earning assets... 18,844,673 17,519,761 8.28 7.34 774,144 637,852 136,292 80,196 56,096
----------- ----------
Non-earning assets..... 1,172,343 1,111,894
----------- ----------
Total assets.......... $20,017,016 18,631,655
=========== ==========
Liabilities and
Shareholders' Equity
Interest-bearing
deposits:
Savings deposits....... $ 3,212,847 3,548,879 2.32 2.12 36,886 37,383 (497) 3,206 (3,703)
Money market deposits.. 1,695,203 1,619,927 3.58 3.09 30,136 24,848 5,288 4,092 1,196
Time deposits.......... 7,684,996 7,347,961 5.39 4.01 205,292 146,234 59,058 52,079 6,979
----------- ---------- ------ ------ -------- ------- -------- ------- ------
Total interest-bearing
deposits.............. 12,593,046 12,516,767 4.36 3.36 272,314 208,465 63,849 59,377 4,472
Short-term borrowed
funds................... 3,044,118 2,094,308 5.91 3.56 89,253 37,007 52,246 30,953 21,293
Long-term debt.......... 908,230 644,835 6.52 5.82 29,384 18,615 10,769 2,457 8,312
----------- ---------- ------ ------ -------- ------- -------- ------- ------
Total interest-bearing
liabilities........... 16,545,394 15,255,910 4.76 3.49 390,951 264,087 126,864 92,787 34,077
----------- ---------- ------ ------ -------- ------- -------- ------- ------
Demand deposits....... 1,693,399 1,747,705
Other liabilities..... 256,402 210,933
Shareholders' equity.. 1,521,821 1,417,107
----------- ----------
Total liabilities and
shareholders' equity.. $20,017,016 18,631,655
=========== ==========
Average interest rate
spread.................. 3.52 3.85
Net yield on earning
assets.................. 4.10% 4.30 $383,193 373,765 $ 9,428 (12,591) 22,019
====== ====== ======== ======= ======== ======= ======
Taxable equivalent
adjustment.............. $ 15,410 13,839
======== =======
</TABLE>
----
(1) Yields related to 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 using statutory 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 the periods presented are included
for rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans is included as income.
(5) Includes assets held for sale or available for sale at amortized cost.
14
<PAGE>
Net interest income FTE for the second quarter of 1995 was $192.9 million,
up from $190.3 million for the first quarter of 1995 and $188.3 million for
the second quarter of 1994. The higher level of net interest income reflected
growth during the second quarter in earning assets, which increased $423.5
million from March 31, 1995 and $1.5 million from June 30, 1994. The growth
occurred principally in loans and leases. The impact of increases in earning
assets was offset by a decline in the margin during the second quarter of
eight basis points to 4.06%. This compares to a margin of 4.29% for the second
quarter of 1994. The decline in margin resulted primarily from higher costs of
funding sources, such as short-term borrowed funds, and the increased
competitive factors discussed above. The effects of the quarterly fluctuations
of interest rates and interest-sensitive assets and liabilities on net
interest income are presented in the accompanying table.
15
<PAGE>
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 V. 1994
--------------------------
AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE CHANGE DUE TO
---------------------- ------------ ---------------- INCREASE ---------------
FULLY TAXABLE EQUIVALENT 1995 1994 1995 1994 1995 1994 (DECREASE) RATE VOLUME
------------------------ ----------- ---------- ----- ----- -------- ------- ---------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Securities (1):
U.S. Treasury,
government and other
(5).................... $ 5,295,064 5,227,769 6.20% 5.66 $ 81,813 73,760 $ 8,053 7,093 960
States and political
subdivisions........... 171,520 182,689 8.86 9.35 3,788 4,258 (470) (217) (253)
----------- ---------- ---- ---- -------- ------- ------- ------- ------
Total securities (5)... 5,466,584 5,410,458 6.28 5.78 85,601 78,018 7,583 6,876 707
Other earning assets
(2)..................... 47,557 108,971 6.18 3.50 733 952 (219) 492 (711)
Loans and leases, net of
unearned income
(1)(3)(4)(5)............ 13,541,095 12,082,232 9.23 8.16 311,721 245,862 65,859 34,305 31,554
----------- ---------- ---- ---- -------- ------- ------- ------- ------
Total earning assets... 19,055,236 17,601,661 8.38 7.40 398,055 324,832 73,223 41,673 31,550
----------- ---------- -------- ------- ------- ------- ------
Non-earning assets..... 1,194,168 1,110,467
----------- ----------
Total assets.......... $20,249,404 18,712,128
=========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
deposits:
Savings deposits....... $ 3,252,569 3,392,854 2.31 2.22 18,733 18,774 (41) 751 (792)
Money market deposits.. 1,580,537 2,037,463 3.79 2.58 14,932 13,129 1,803 5,193 (3,390)
Time deposits.......... 7,772,236 7,091,964 5.60 4.14 108,515 73,201 35,314 27,763 7,551
----------- ---------- ---- ---- -------- ------- ------- ------- ------
Total interest-bearing
deposits.............. 12,605,342 12,522,281 4.52 3.37 142,180 105,104 37,076 33,707 3,369
Short-term borrowed
funds................... 3,219,920 2,232,787 6.00 3.91 48,194 21,782 26,412 14,452 11,960
Long-term debt.......... 910,946 630,600 6.50 6.12 14,761 9,619 5,142 632 4,510
----------- ---------- ---- ---- -------- ------- ------- ------- ------
Total interest-bearing
liabilities........... 16,736,208 15,385,668 4.92 3.56 205,135 136,505 68,630 48,791 19,839
----------- ---------- ---- ---- -------- ------- ------- ------- ------
Demand deposits....... 1,709,573 1,699,339
Other liabilities..... 263,716 210,438
Shareholders' equity.. 1,539,907 1,416,683
----------- ----------
Total liabilities and
shareholders' equity.. $20,249,404 18,712,128
=========== ==========
Average interest rate
spread.................. 3.46 3.84
Net yield on earning
assets.................. 4.06% 4.29 $192,920 188,327 $ 4,593 (7,118) 11,711
==== ==== ======== ======= ======= ======= ======
Taxable equivalent
adjustment.............. $ 7,958 7,061
======== =======
</TABLE>
----
(1) Yields related to 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 using statutory 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 the periods shown are included for
rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans is included as income.
(5) Includes assets held for sale or available for sale at amortized cost.
16
<PAGE>
Hedging strategies have been used in the past and will be utilized in the
future to reduce sensitivity to interest rate movements. See the
"Asset/Liability Management" section for additional discussion of hedging
strategies.
NONINTEREST INCOME
Noninterest income for the six months ended June 30, 1995 was $102.6
million, compared to $112.0 million for the same period in 1994. Securities
losses of $19.8 million were the primary factor contributing to the decline.
This decline was offset to an extent by an $11.9 million gain on the sale of
divested branches. The percentage of total revenues, calculated as net
interest income plus noninterest income excluding securities gains or losses,
derived from noninterest (fee-based) income for the six months ended June 30,
1995 was 25%, up from 23% for the second quarter of 1994.
Service charges on deposit accounts were stable for the first six months in
1995 compared to 1994, increasing by $1.3 million or 3.0%. Several factors
accounted for the lack of significant growth in service charges on deposits.
The primary factor has been the relative lack of growth in deposits from June
30, 1994 to June 30, 1995. Also, rising interest rates during 1994 and 1995
negatively affected service charges on deposit accounts by increasing the
earnings credit used in service charge computations.
Total nondeposit fees and commissions increased by $1.8 million to a level
of $54.3 million in 1995 compared with $52.5 million in the first six months
of 1994. Major sources of nondeposit fees and commissions generating the
increase were bankcard income, up $2.7 million from the prior year balance;
rental income on equipment under lease, up $876,000; credit insurance fees,
increased $469,000; and general insurance commissions, up $773,000 over the
prior year. Other significant fluctuations in noninterest income included
mortgage banking income, which decreased 36.2%, from $12.9 million for the
first half of 1994 to $8.2 million during the same period in 1995. Most of the
decrease in mortgage banking income reflects a $4.5 million decline in the net
gain on the sales of mortgage loans. Trust revenues, bankcard fees and general
insurance commissions all posted gains in the second quarter of 1995 compared
to the same period last year.
NONINTEREST EXPENSE
Noninterest expense was $388.9 million for the first six months of 1995
compared to $293.1 million for the same period a year ago. The merger-related
accruals and expenses discussed above led to an elevated level of noninterest
expense in the first six months of 1995. These items included $98.2 million of
nonrecurring charges which primarily affected personnel expense and other
noninterest expense.
Excluding nonrecurring charges, personnel expense, the largest component of
noninterest expense, decreased from $148.4 million for the first six months of
1994, to $144.3 million for the same period in 1995. This decline reflected
efficiencies accomplished as a result of the Southern National/BB&T merger.
The nonrecurring charges discussed above contributed $55.3 million to total
personnel costs during the first six months in the form of severance pay,
termination of employment contracts, early retirement packages and related
benefits.
Occupancy and equipment expense, excluding nonrecurring charges for the six
months ended June 30, 1995 increased $3.2 million, or 7.3%, compared to 1994.
On-going depreciation of property and equipment purchased in connection with
implementing the merger was a major component of the increase. $10.1 million
in nonrecurring charges relating to branch closings and the consolidation of
bank operations and systems associated with the merger significantly affected
total occupancy and equipment expense.
Federal deposit insurance expense decreased $619,000, or 3.7%, for the six
months ended June 30, 1995 as a result of flat deposit growth and elevated
1994 FDIC expense during the first six months which occurred because The First
Savings Bank, FSB, acquired in the first quarter of 1994, paid higher FDIC
insurance premiums than Southern National has historically paid because of its
supervisory risk rating.
Excluding the $32.9 million in nonrecurring charges, other noninterest
expenses decreased $1.0 million, or 1.2%, primarily because of efficiencies
resulting from the merger.
17
<PAGE>
PROVISION FOR INCOME TAXES
Federal income taxes decreased from an expense of $58.3 million for the six
months ending June 30, 1994 to $22.8 million for the same period in 1995.
Effective tax rates were 34.2% and 33.7%, respectively.
PROFITABILITY MEASURES
<TABLE>
<CAPTION>
1995 1994
--------------- -----------------------
SECOND FIRST FOURTH THIRD SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Return on average as-
sets................... 1.13% (0.26) 1.27 1.29 1.22
Return on average common
equity................. 15.32 (3.93) 17.09 17.51 16.67
Net interest margin..... 4.06 4.14 4.26 4.28 4.29
Yield to break even..... 2.12 4.35 2.05 2.00 2.16
Efficiency ratio (tax-
able equivalent)*...... 58.1 58.8 57.5 57.5 59.7
</TABLE>
--------
* Excludes gains on sale of servicing rights, securities gains (losses) and
foreclosed property expense for all periods and nonrecurring items and
merger-related expenses of $83,393 included in noninterest expense for the
first quarter of 1995 and $3,458 for the second quarter of 1995.
18
<PAGE>
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 legal proceedings, all of which are
considered incidental to the normal conduct of business. Management believes
that the liabilities arising from these proceedings will not have a materially
adverse effect on the consolidated financial position or consolidated results
of operations of Southern National.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11--"Computation of Earnings Per Share" is included herein.
(b) Exhibit 27--"Financial Data Schedule" is included in the
electronically-filed document as required.
(c) Southern National filed a Form 8-K under Item 5 on February 24, 1995
which included consolidated financial statements for BB&T and pro forma
condensed financial information relating to Southern National's merger
with BB&T. Southern National filed a Form 8-K under Item 2 on March 14,
1995 to report the completion of the merger of the bank holding
companies of BB&T and Southern National, effective February 28, 1995. A
Form 8-K/A was subsequently filed on May 15, 1995, to amend this Form
8-K in order to file BB&T Financial Corporation's 1994 audited
financial statements, as well as related pro forma statements including
Southern National and Commerce. A second amendment on Form 8-K/A dated
May 22, 1995 was filed to update the information filed on May 15, 1995.
A third amendment on Form 8-K/A was filed on August 4, 1995 to further
update the pro forma financial information included in the previous
filings. A Form 8-K was filed under Item 5 on May 24, 1995 to place the
1994 Summary Annual Report on file with the Securities and Exchange
Commission. On June 30, 1995, Southern National filed a Current Report
on Form 8-K under Item 5 to restate the December 31, 1994 Form 10-K for
the mergers with Commerce Bank and BB&T Financial Corporation. On
August 3, 1995, Southern National filed a Form 8-K under Item 5 to
report the results of operations and financial condition as of June 30,
1995.
19
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Southern National Corporation
(Registrant)
/s/ Scott E. Reed
Date: August 14, 1995 By: ___________________________________
Scott E. Reed,
Executive Vice President and
Chief Financial Officer
/s/ Sherry A. Kellett
Date: August 14, 1995 By: ___________________________________
Sherry A. Kellett,
Executive Vice President and Controller
(Principal Accounting Officer)
20
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
FOR THE PERIODS AS INDICATED
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Primary Earnings Per Share:
Weighted average number of
common shares outstanding
during the period........... 102,498,387 100,838,575 102,350,232 100,713,004
Add--
Dilutive effect of
outstanding options (as
determined by application
of treasury stock method). 1,025,414 1,189,350 992,186 1,224,730
----------- ----------- ----------- -----------
Weighted average number of
common shares, as adjusted.. 103,523,801 102,027,925 103,342,418 101,937,734
=========== =========== =========== ===========
Net income................... $ 57,298 57,108 44,745 112,079
Less--
Preferred dividend
requirements.............. 1,289 1,300 2,588 2,599
----------- ----------- ----------- -----------
Income available for common
shares...................... $ 56,009 55,808 42,157 109,480
=========== =========== =========== ===========
Primary earnings per share... $ 0.54 0.55 0.41 1.07
=========== =========== =========== ===========
Fully Diluted Earnings Per
Share:
Weighted average number of
common shares outstanding
during the period........... 102,498,387 100,847,631 102,350,232 100,713,004
Add--
Shares issuable assuming
conversion of convertible
preferred stock........... 4,525,723 4,548,236 4,536,917 4,548,236
Dilutive effect of
outstanding options (as
determined by application
of treasury stock method). 1,261,944 1,189,351 1,286,528 1,235,102
Shares assuming conversion
of convertible debentures. 488,852 497,463 492,252 497,463
----------- ----------- ----------- -----------
Weighted average number of
common shares, as adjusted.. 108,774,906 107,082,681 108,665,929 106,993,805
=========== =========== =========== ===========
Net income................... $ 57,298 57,108 44,745 112,079
Add after tax interest
expense and amortization
issue costs applicable to
convertible debentures...... 81 81 162 162
----------- ----------- ----------- -----------
Net income, as adjusted...... $ 57,379 57,189 44,907 112,241
=========== =========== =========== ===========
Fully diluted earnings per
share....................... $ 0.53 0.53 0.41 1.05
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 667,462
<INT-BEARING-DEPOSITS> 2,223
<FED-FUNDS-SOLD> 40,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,614,055
<INVESTMENTS-CARRYING> 1,940,477
<INVESTMENTS-MARKET> 1,947,770
<LOANS> 13,765,475
<ALLOWANCE> 176,175
<TOTAL-ASSETS> 20,662,252
<DEPOSITS> 14,336,556
<SHORT-TERM> 3,147,213
<LIABILITIES-OTHER> 295,868
<LONG-TERM> 1,312,464
<COMMON> 513,546
0
3,759
<OTHER-SE> 1,052,846
<TOTAL-LIABILITIES-AND-EQUITY> 20,662,252
<INTEREST-LOAN> 603,059
<INTEREST-INVEST> 154,286
<INTEREST-OTHER> 1,389
<INTEREST-TOTAL> 758,734
<INTEREST-DEPOSIT> 272,314
<INTEREST-EXPENSE> 390,951
<INTEREST-INCOME-NET> 367,783
<LOAN-LOSSES> 14,000
<SECURITIES-GAINS> (19,845)
<EXPENSE-OTHER> 388,859
<INCOME-PRETAX> 67,521
<INCOME-PRE-EXTRAORDINARY> 67,521
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,745
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 4.10
<LOANS-NON> 47,013
<LOANS-PAST> 30,335
<LOANS-TROUBLED> 611
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 171,734
<CHARGE-OFFS> 15,472
<RECOVERIES> 5,913
<ALLOWANCE-CLOSE> 176,175
<ALLOWANCE-DOMESTIC> 176,175
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 28,188
</TABLE>
