________________________________________________________________________________
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, 1995
Commission file number: 1-10853
SOUTHERN NATIONAL CORPORATION
(EXACT NAME 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)773-7500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
_____________
Indicate by check mark whether the registrant 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 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 28, 1995, 102,271,260 share of the registrant's common stock,
$5 par value were outstanding.
__________
This Form 10-Q has 26 pages. The Exhibit Index is included on Page 23 .
---- --
================================================================================
SOUTHERN NATIONAL CORPORATION
FORM 10-Q
MARCH 31, 1995
INDEX
PAGE NO.
- --------------------------------------------------------------------------------
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 11
Asset/Liability Management 13
Capital Adequacy and Resources 17
Analysis of Results of Operations 17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 5. Other Events - Acquisitions 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
EXHIBIT 11 Computation of Earnings Per Share.
EXHIBIT 27 Financial Data Schedule - Included with electronically-filed
document only.
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
March 31, December 31,
1995 1994
-------------- ---------------
ASSETS
Cash and due from depository institutions $ 669,478 $ 637,794
Interest-bearing bank balances 3,877 20,962
Federal funds sold and securities purchased under
resale agreements or similar arrangements 25,850 13,021
Securities available for sale 3,390,266 3,459,698
Securities held to maturity (market value: $1,804,913 in 1995
and $1,889,911 in 1994) 1,838,277 1,965,419
Loans and leases 13,370,959 13,108,102
Allowance for losses (174,189) (171,734)
-------------- ---------------
Net loans and leases 13,196,770 12,936,368
-------------- ---------------
Premises and equipment, net 324,224 333,069
Other assets 443,595 488,732
-------------- ---------------
Total assets $ 19,892,337 $ 19,855,063
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 1,775,492 $ 1,843,019
Interest-bearing deposits 12,744,120 12,471,135
-------------- ---------------
Total deposits 14,519,612 14,314,154
Short-term borrowings 2,690,365 2,902,528
Accounts payable and other liabilities 285,805 231,149
Long-term debt 902,047 910,755
-------------- ---------------
Total liabilities 18,397,829 18,358,586
-------------- ---------------
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares authorized, 770,000 issued and
outstanding in 1995 and 1994 3,850 3,850
Common stock, $5 par, 300,000,000 shares authorized, 102,182,679
issued and outstanding in 1995 and 102,215,032 in 1994 510,914 511,075
Paid-in capital 281,895 285,599
Retained earnings 731,828 775,979
Unearned compensation (7,023) (7,442)
Net unrealized depreciation on securities available for sale (26,956) (72,584)
-------------- ---------------
Total shareholders' equity 1,494,508 1,496,477
-------------- ---------------
Total liabilities and shareholders' equity $ 19,892,337 $ 19,855,063
============== ===============
See accompanying notes to consolidated financial statements.
3
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1994
-------------- --------------
INTEREST INCOME
Interest and fees on loans and leases $ 293,379 $ 233,033
Interest and dividends on securities 74,602 72,038
Interest on temporary investments 656 1,171
-------------- --------------
Total interest income 368,637 306,242
-------------- --------------
INTEREST EXPENSE
Interest on deposits 130,134 103,361
Interest on short-term borrowings 41,059 15,225
Interest on long-term debt 14,623 8,996
-------------- --------------
Total interest expense 185,816 127,582
-------------- --------------
NET INTEREST INCOME 182,821 178,660
Provision for loan and lease losses 7,000 5,501
-------------- --------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 175,821 173,159
-------------- --------------
NONINTEREST INCOME
Service charges on deposit accounts 20,705 20,130
Nondeposit fees and commissions 26,803 28,275
Securities (losses) gains, net (19,845) 1,521
Other income 8,574 8,845
-------------- --------------
Total noninterest income 36,237 58,771
-------------- --------------
NONINTEREST EXPENSE
Personnel expense 124,233 77,443
Occupancy and equipment expense 30,387 22,339
Federal deposit insurance expense 8,005 8,421
Foreclosed property expense 700 1,659
Other expense 65,631 38,116
--------------- --------------
Total noninterest expense 228,956 147,978
--------------- --------------
EARNINGS
Income (loss) before income taxes (16,898) 83,952
Income tax (benefit) expense (4,345) 28,981
--------------- --------------
NET INCOME (LOSS) (12,553) 54,971
Preferred dividend requirements 1,299 1,299
--------------- --------------
Income (loss) applicable to common shares $ (13,852) $ 53,672
=============== ==============
PER COMMON SHARE
Net income (loss):
Primary $ (.13) $ .53
=============== ==============
Fully diluted $ NM $ .52
=============== ==============
Cash dividends paid $ .20 $ .17
=============== ==============
AVERAGE SHARES OUTSTANDING
Primary 103,380,544 101,842,980
=============== ==============
Fully diluted 108,424,625 106,890,854
=============== ==============
NM - not meaningful.
See accompanying notes to consolidated financial statements.
4
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 1995 and 1994
(Unaudited)
(Dollars in thousands)
Shares of Retained
Common Preferred Common Paid-In Earnings
Stock Stock Stock Capital and Other* Total
------------- ---------- ---------- ---------- ----------- ------------
BALANCE, DECEMBER 31, 1993, AS PREVIOUSLY 42,961,214 $ 3,850 $ 214,806 $ 151,186 $ 195,022 $ 564,864
REPORTED
Merger with 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 -- -- -- -- 54,971 54,971
Common stock issued by pooled companies
prior to merger 272,795 -- 1,364 3,055 -- 4,419
Common stock issued 266,872 -- 1,334 89 (41) 1,382
Common stock acquired and retired (638,000) -- (3,190) (11,497) -- (14,687)
Net unrealized depreciation on securities
available for sale -- -- -- -- (12,006) (12,006)
Cash dividends declared by merged companies -- -- -- -- (9,616) (9,616)
Cash dividends declared/accrued by Southern National:
Common stock -- -- -- (41) (5,572) (5,613)
Preferred stock -- -- -- -- (1,299) (1,299)
Other -- -- -- -- 455 455
------------- --------- ----------- ----------- ------------ -------------
BALANCE, MARCH 31, 1994 100,724,961 $ 3,850 $ 503,624 $ 267,032 $ 642,226 $ 1,416,732
============= ========= =========== =========== ============ =============
BALANCE, DECEMBER 31, 1994, AS PREVIOUSLY 44,158,751 $ 3,850 $ 220,794 $ 164,934 $ 242,766 $ 632,344
REPORTED
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 loss -- -- -- -- (12,553) (12,553)
Common stock issued by pooled companies
prior to merger 521,436 -- 2,608 6,630 -- 9,238
Common stock issued 105,961 -- 530 227 -- 757
Common stock acquired and retired (659,750) -- (3,299) (10,561) -- (13,860)
Change in net unrealized depreciation on
securities available for sale -- -- -- -- 45,628 45,628
Cash dividends declared by merged companies -- -- -- -- (1,016) (1,016)
Cash dividends declared/accrued by Southern National:
Common stock -- -- -- -- (29,282) (29,282)
Preferred stock -- -- -- -- (1,299) (1,299)
Other -- -- -- -- 418 418
============ ========= =========== =========== ============ =============
BALANCE, MARCH 31, 1995 102,182,679 $ 3,850 $ 510,914 $ 281,895 $ 697,849 $ 1,494,508
============= ========= =========== =========== ============ =============
____________________
* Other includes unamortized ESOP compensation, unvested restricted stock, loan
to employee stock ownership paln and unearned compensation.
See accompanying notes to consolidated financial statements.
5
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1995 1994
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 384,961 $ 310,369
Noninterest income received 60,523 247,751
Interest paid (179,306) (127,712)
Noninterest expense paid (152,782) (196,059)
Income taxes paid (10,259) (39,161)
--------------- ---------------
Net cash provided by operating activities 103,137 195,188
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities 826,326 586,077
Proceeds from maturities of securities 468,549 396,968
Purchases of securities (1,047,313) (1,167,420)
Purchases of loans (5,382) -
Leases made to customers (10,303) (8,471)
Principal collected on leases 11,393 9,813
Loan originations, net of principal collected (268,147) 29,154
Proceeds from disposals of premises and equipment 3,017 2,259
Purchases of premises and equipment (11,413) (17,629)
Proceeds from sales of foreclosed property 2,857 9,045
Proceeds from sales of other real estate owned 625 8,530
Other (4,688) (7,637)
--------------- ---------------
Net cash used in investing activities (34,479) (159,311)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 205,458 (140,882)
Net (decrease) increase in short-term borrowings (212,163) 330,561
Net decrease in long-term debt (8,708) (246,020)
Net proceeds from common stock issued 9,995 5,801
Redemption of common stock (14,066) (14,687)
Cash dividends paid on common and preferred stock (21,746) (16,495)
--------------- ---------------
Net cash used in financing activities (41,230) (81,722)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27,428 (45,845)
CASH AND CASH EQUIVALENTS AT JANUARY 1 671,777 859,632
--------------- ---------------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 699,205 $ 813,787
=============== ===============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Common stock issued upon conversion of debentures $ 35 $ -
Loans transferred to foreclosed properties 2,603 7,322
Securities transferred from held to maturity to available for sale - 5,934
See accompanying notes to consolidated financial statements.
6
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 1995 and December 31, 1994; the
consolidated statements of income for the three months ended March 31, 1995
and 1994 and the consolidated statements of cash flows for the three months
ended March 31, 1995 and 1994.
The consolidated financial statements and notes are presented in accordance
with the instructions for Form 10-Q, and, therefore, do not necessarily
include all disclosures required under generally accepted accounting
principles. The information contained in the footnotes included in Southern
National's latest annual report on Form 10-K should also be referred to in
connection with the reading of these unaudited interim consolidated
financial statements.
Certain amounts for 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 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 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.
7
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 March 31, 1995, was
$15.2 million, offset by a valuation allowance of $2.7 million, which
resulted in a net carrying value of impaired loans 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 quarter of 1995 totaled $13.3 million. Southern National recognizes no
interest income on loans that are impaired either from accruals or cash
receipts. Cash receipts for both principal and interest are applied directly
to principal.
C. MERGERS
On August 1, 1994, Southern National and BB&T Financial Corporation ("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 Bank of Virginia Beach, Virginia
("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.
8
In consummating the merger of Southern National and BB&T, adjustments were
necessary to conform BB&T's method of accounting for postretirement
benefits other than pensions to that of Southern National. SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions",
allowed employers to recognize the transition obligation associated with
implementation at the time of adoption or on a delayed basis over the
planned participants' future service periods. When adopted in 1993, Southern
National and BB&T elected to treat the transition obligation differently.
Southern National recognized the transition obligation at the time of
adoption, while BB&T elected to recognize the transition obligation over the
planned participants' future service periods. To conform the accounting
treatment, a prior period adjustment was made at the date of merger with an
effective date of January 1, 1993, which required the recording of a
cumulative effect of changes in accounting principles, net of income taxes,
of approximately $7.0 million and a reduction in retained earnings of a like
amount. This change in accounting principle has not had a material impact on
the results of operations for subsequent periods. The following unaudited
presentation reflects key line items on an historical basis for Southern
National, BB&T and Commerce and on a proforma combined basis assuming the
merger with BB&T was effective as of and for the periods presented.
9
Southern
Southern National Historical Basis National
----------------------------
as originally reported BB&T Commerce restated
--------------------------------------------------------------------
DECEMBER 31, 1994 (Dollars in thousands, except per share data)
- -----------------
Net interest income $ 322,717 $ 385,186 $ 28,863 $ 736,766
Net income 109,644 119,882 7,011 236,872
Earnings per share
Primary 2.38 3.27 2.48 2.26
Fully diluted 2.27 3.27 2.37 2.21
Assets 8,756,140 10,394,330 700,343 19,855,063
Deposits 6,165,080 7,520,324 628,750 14,314,154
Shareholders' equity 632,344 822,644 47,865 1,496,477
10
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 March 31, 1995 were $19.9 billion, a $37.3 million increase
from the balance at December 31, 1994. The increase was provided by growth of
$260.4 million in net loans and leases, including loans held for sale, and $31.7
million in cash and due from depository institutions. The increases were offset
by declines of $196.6 million in securities and $4.3 million in other interest-
earning assets. The growth in net loans reflects an annualized growth rate of
8.2%.
The shift in earning assets from securities to loans reflects continued
strong loan growth which is being funded through sales of securities. Growth in
loans during 1994 was primarily funded through increases in short-term borrowed
funds; however, borrowed funds decreased $212.2 million during the first quarter
of 1995. The decline in securities in the first quarter included maturities of
$468.5 million and sales of $826.3 million. The sales, which resulted in
realized losses of $19.8 million, were undertaken to effect a restructuring of
the securities portfolio. This restructuring was undertaken to better position
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. Treasury 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 after-tax loss taken
on the sale was approximately $12.6 million.
Reinvestment of proceeds from the restructuring was also accomplished
during the first quarter. U.S. Treasury and non-mortgage related agency
securities that have an average maturity
11
of three years and an average yield at cost of approximately 7.00% were
purchased.
The restructuring was undertaken for two primary reasons. First, the
combined balance sheets of BB&T and SNB 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 as a major part of the portfolio
restructuring 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 difficult to manage in terms of interest rate sensitivity. The replacement
of these securities with U.S. Treasuries and other Federal agency debentures
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. The shortening of the average maturity 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 $205.5 million from the December 31, 1994
balance because of a combination of aggressive pricing promotions on
certificates of deposits and indications of an economic slowdown which has
increased confidence that the Federal Reserve will not raise short-term interest
rates in the second quarter. This increase ends a period of flat growth or
declines in levels of deposits during 1994. Increases were led by demand
deposits and personal jumbo certificates of deposit. As mentioned above, short-
term borrowings decreased $212.2 million during this period. The composition and
strategy employed in the management of interest-bearing liabilities and
interest-earning assets are further discussed in "ASSET/LIABILITY MANAGEMENT."
ASSET QUALITY
12
Nonperforming assets ("NPA's") plus foreclosed property were $60.3 million
at March 31, 1995, compared to $59.6 million at year-end 1994. The
allowance for losses as a percentage of loans and leases was 1.30% at March
31, 1995 and NPA's as a percentage of loan-related assets were .45%,
compared to 1.31% and .45%, respectively, at December 31, 1994. Those
ratios were 1.45% and .71%, respectively on March 31, 1994. The quality of
the loan and lease portfolio significantly improved during 1994 and this
quality remained strong during the first quarter 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 .14% of average loans and leases. This level of net
charge-offs is significantly higher than the first quarter 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 9.45 times net charge-offs, up from 5.03 times at December 31, 1994,
and the improvements in other asset quality ratios for the last four quarters as
reflected in the accompanying table.
The provision for loan and lease losses in the first quarter of 1995 was
$7.0 million compared to $5.5 million in the first quarter of 1994. The increase
in the provision primarily reflects higher net charge-offs during the first
quarter of 1995. Asset quarterly statistics relevant to the last five calendar
quarters are presented in the accompanying table.
ASSET QUALITY ANALYSIS
(Dollars in thousands)
As of / For the Quarter Ended
------------------------------------------------------------------------------
3/31/95 12/31/94 9/30/94 6/30/94 3/31/94
--------------- ------------- ------------- -------------- --------------
ALLOWANCE FOR LOSSES
Beginning Balance $ 171,734 $ 172,110 $ 173,550 $ 174,006 $ 169,345
Allowance for acquired loans - 1,119 - - -
Provision for losses 7,000 7,104 2,339 2,902 5,501
Net charge-offs (4,545) (8,599) (3,779) (3,358) (840)
-------------- ------------- ------------ -------------- --------------
Ending balance $ 174,189 $ 171,734 $ 172,110 $ 173,550 $ 174,006
============== ============= ============ ============== ==============
RISK ASSETS
Nonaccrual loans & leases $ 48,451 $ 47,039 $ 43,219 $ 55,496 $ 63,267
Foreclosed property 11,239 12,153 17,963 18,577 20,651
Restructured loans 623 402 474 207 1,238
-------------- ------------- ------------ -------------- --------------
Nonperforming assets 60,313 59,594 61,656 74,280 85,156
Loans 90 days or more past due
& still accruing 21,653 24,224 27,134 27,667 26,286
-------------- ------------- ------------ -------------- --------------
Total risk assets $ 81,966 $ 83,818 $ 88,790 $ 101,947 $ 111,442
============== ============= ============ ============== ==============
ASSET QUALITY RATIOS
Nonaccrual loans & leases as a
percent of total loans & leases .36 % .36 % .34 % .45 % .53 %
Nonperforming assets as a percent of:
Total assets .30 .30 .32 .39 .45
Loans & leases plus
foreclosed property .45 .45 .49 .61 .71
Net charge-offs as a percent of
average loans & leases .14 .27 .12 .11 .03
Allowance for losses as a
percent of loans & leases 1.30 1.31 1.36 1.42 1.45
Ratio of allowance for losses to:
Net charge-offs 9.45 x 5.03 x 11.48 x 12.89 x 51.08 x
Nonaccrual loans & leases 3.60 3.65 3.98 3.13 2.75
All line 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 maintain the desired
amount of liquidity and, through the management of Southern National's interest
sensitivity position, to manage the impacts of fluctuations in interest rates on
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 of
changes in interest rates on earnings and liquidity is within established
parameters.
13
A prime objective in interest rate risk management is to minimize
fluctuations in net interest income through balancing the impact of changes in
interest rates on interest sensitive assets and interest sensitive liabilities.
Management uses Interest Sensitivity Simulation Analysis ("Simulation") to
measure the interest rate sensitivity of earnings.
14
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 March 31, 1995, interest rate swaps, caps and floors with a total
notional value of $2.4 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 March 31, 1995:
INTEREST RATE SWAPS, CAPS AND FLOORS
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
NOTIONAL RECEIVE PAY UNREALIZED
TYPE AMOUNT RATE RATE LOSSES
- ---- ------------- --------------- --------------- ----------------
Receive Fixed Swaps $ 1,153,000 5.53% 6.39% $ (18,809)
Pay Fixed Swaps 107,532 6.18 7.19 (111)
Caps and Floors 1,100,000 - - (13,639)
------------- --------------- --------------- ----------------
Total $ 2,360,532 5.59% 6.46 % $ (32,559)
============= =============== =============== ================
RECEIVE PAY FIXED CAPS AND
YEAR-TO-DATE ACTIVITY FIXED SWAPS SWAPS FLOORS TOTAL
- --------------------- ------------- --------------- --------------- ----------------
Balance, December 31, 1994 $ 1,200,000 $ 111,325 $ 1,100,000 $ 2,411,325
Additions - - - -
Maturities/Amortizations (47,000) (2,356) - (49,356)
Terminations - (1,437) - (1,437)
------------------------------------------------------------------------------
Balance, March 31, 1995 $ 1,153,000 $ 107,532 $ 1,100,000 $ 2,360,532
============= =============== =============== ================
ONE YEAR ONE TO FIVE FIVE TO 10
MATURITY SCHEDULE* OR LESS YEARS YEARS TOTAL
- ------------------ ------------- --------------- ---------------- ----------------
Receive Fixed Swaps $ 100,000 $ 1,053,000 $ - $ 1,153,000
Pay Fixed Swaps 2,118 85,968 19,446 107,532
Caps and Floors 400,000 650,000 50,000 1,100,000
------------------------------------------------------------------------------
Total $ 502,118 $ 1,788,968 $ 69,446 $ 2,360,532
============= =============== =============== ================
* Maturities are based on full contract extensions.
As of March 31, 1995, unearned income and deferred premiums from new swap
transactions and deferred losses from terminated swap transactions were $909,000
and $39,000,
15
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 $4.4 million during the first 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. During the first quarter of
1994, options were written on securities totaling $340 million par and premiums
included in other income totaled $1.1 million. Option fee income was also $1.1
million for the first quarter of 1995. Unexercised options on securities
totaling $50 million par were outstanding at March 31, 1995.
Southern National also utilizes purchased over-the-counter put options in
its mortgage banking activities to hedge the mortgage pipeline. During 1995,
options to deliver $8.0 million of securities were purchased and remain
outstanding at March 31, 1995.
Although off-balance sheet derivative financial instruments do not expose
Southern National to credit risk equal to the notional amount, such agreements
generate credit risk to the extent of the fair value gain in an off-balance
sheet derivative financial instrument if the counterparty fails to perform. Such
risk is minimized based on the quality of the counterparties and the consistent
monitoring of these agreements. The counterparties to these transactions were
large commercial banks and investment banks. Annually, the counterparties are
reviewed for creditworthiness by Southern National's credit policy group.
Southern National's credit exposure is limited to the net difference between the
calculated pay and receive amounts on each transaction which are generally
netted and paid quarterly. Other risks associated with interest-sensitive
derivatives include the impact on fixed positions during periods of changing
interest rates. Index amortizing swaps' notional amounts and maturities change
based on certain interest rate indices. Generally, as rates fall the notional
amounts decline more rapidly and as rates increase notional amounts decline more
slowly. Under unusual circumstances, financial derivatives also increase
liquidity risk, which could result in an environment of rising interest rates
when derivatives produce negative cash flows which would be offset by increased
cash flows from variable rate loans. Such risk is considered insignificant due
to the relatively small derivative positions held by Southern National.
16
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 March 31, 1995 was $1.5 billion versus $1.4 billion
for March 31, 1994. As a percentage of assets, total shareholders' equity was
7.5% at March 31, 1995, unchanged from the December 31, 1994 ratio. Southern
National's book value per common share at March 31, 1995 was $13.90, versus
$13.92 at December 31, 1994. Average shareholders' equity as a percentage of
average assets was 7.6% for the three months ended March 31, 1995 and 1994.
Tier 1 and total risk-based capital ratios at March 31, 1995 were 11.5% and
12.7%, respectively. The Tier 1 leverage ratio was 7.3% at the end of the first
quarter. These capital ratios measure the capital to risk-weighted assets and
off-balance sheet items as defined by 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%.
During the first quarter of 1995, Southern National declared two dividends
to common shareholders, which resulted from a change in dividend declaration
schedule to conform Southern National's schedule with that of BB&T. The
dividends declared reflect two declarations of $.20 per share each. One of the
dividends was declared prior to the merger with BB&T. The second dividend was
declared after the merger payable to the combined shareholders of the new
company. Only one dividend of $.20 was actually paid during the first quarter.
CAPITAL ADEQUACY RATIOS
1995 1994
---------- ------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------- ----------
Average equity to average assets 7.60 % 7.67 % 7.62 % 7.57 % 7.64 %
Equity to assets at period end 7.51 7.54 7.60 7.63 7.55
Risk-based capital ratios:
Tier 1 capital 11.5 12.3 12.3 12.4 12.2
Total capital 12.7 13.6 13.6 13.7 13.5
Tier 1 leverage ratio 7.3 7.8 7.7 7.6 7.4
ANALYSIS OF RESULTS OF OPERATIONS
Southern National realized a net loss for the first three months of 1995 of
$12.6 million, compared to earnings of $55.0 million during the first quarter of
1994. On a fully diluted per share basis, the net loss for the three months
ended March 31, 1995 was $.13, compared to earnings of $.52 for the same period
in 1994. The loss resulted from approximately $88.0 million in pretax
nonrecurring charges related to the merger between Southern National and BB&T,
and $19.8 million in securities losses resulting from the restructuring of the
securities portfolio discussed in the "ANALYSIS OF FINANCIAL CONDITION." The
after-tax impact of the charges
17
and securities losses was $70.5 million. A brief description of the nature of
the $88.0 million in charges is presented below:
Personnel costs, including termination of employment contracts, severance
pay, early retirement and related benefits $50.4
Branch closings and divestitures 11.7
Consolidation of bank operations and systems 5.9
Merger and conversion costs 12.8
Other 7.2
-----
Total $88.0
=====
Costs of merging the subsidiary banks will be incurred in subsequent
quarters, including relocation expenses, costs to change signage and other
conversion expenses. However, these additional costs are expected to be offset
by gains of approximately $12 million from the sale of assets and deposits of
branches to be sold in a divestiture.
Excluding nonrecurring charges and securities losses, Southern National
would have had net income after tax for the first quarter of $58.0 million, or
$.54 per fully diluted share. First quarter earnings exclusive
of the nonrecurring charges represent a return on assets of 1.19% and a return
on common equity of 16.08%.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was $190.3
million for the first three months of 1995 compared to $185.4 million for the
same period in 1994, a 2.6% increase. The increase in net interest income (FTE)
for the quarter resulted from growth in
18
interest-earning assets, offset by declines in margin. Average earning assets
during the first quarter of 1995 increased $1.2 billion, or 6.9%, over the first
quarter of 1994.
The net yield FTE for the first quarter of 1995 was 4.14%, compared to
4.31% for the same period in 1994. The primary factors creating the smaller net
margin were (i) the overall interest rate environment in which the Federal
Reserve voted to increase short-term interest rates seven times during 1994 and
(ii) prepayments on higher yielding mortgage loans which increased during the
first two quarters of 1994 as consumers refinanced at lower rates. The impact of
the quarterly fluctuations of interest rates and interest-sensitive assets and
liabilities on net interest income are presented in the accompanying table.
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
For the Three Months Ended March 31, 1995 and 1994
(Dollars in thousands)
Average Balance Yield/Rate Income/Expense
-------------------------- --------------- --------------------
Fully Taxable Equivalent 1995 1994 1995 1994 1995 1994
----------- ----------- ---- ---- -------- --------
ASSETS
Securities(1):
U.S. Treasury, government and
other............................................... $ 5,201,895 $ 5,031,371 5.94 % 5.88 % $ 76,237 $ 72,942
States and political subdivisions................... 180,325 187,509 8.99 9.41 3,999 4,351
----------- ----------- ---- ---- -------- --------
Total securities(5)............................. 5,382,220 5,218,880 6.05 6.01 80,236 77,293
Other earning assets(2)................................ 46,815 156,333 5.68 3.04 656 1,171
Loans and leases, net of unearned
income(1)(3)(4)(6).................................. 13,202,736 12,060,904 9.07 7.89 295,197 234,556
----------- ----------- ---- ---- -------- --------
Total earning assets............................ 18,631,771 17,436,117 8.19 7.28 376,089 313,020
----------- ----------- ---- ---- -------- --------
Non-earning assets.............................. 1,150,275 1,114,543
----------- -----------
Total assets................................ $19,782,046 $18,550,660
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total interest-bearing deposits........................ $12,580,613 $12,502,507 4.20 3.35 130,134 103,361
Short-term borrowings.................................. 2,866,363 1,954,290 5.81 3.16 41,059 15,225
Long-term debt......................................... 905,484 659,225 6.55 5.53 14,623 8,996
----------- ----------- ---- ---- -------- --------
Total interest-bearing liabilities.............. 16,352,460 15,116,022 4.61 3.42 185,816 127,582
----------- ----------- ---- ---- -------- --------
Demand deposits................................. 1,677,046 1,804,612
Other liabilities............................... 249,006 212,489
Shareholders' equity............................ 1,503,534 1,417,537
----------- -----------
Total liabilities and shareholders'.............
equity....................................... $19,782,046 $18,550,660
=========== ===========
Net yield on earning assets............................ 4.14 % 4.31 % $190,273 $185,438
==== ==== ======== ========
Taxable equivalent adjustment.......................... $ 7,452 $ 6,778
======== ========
Change due to
Increase -------------------------
Fully Taxable Equivalent (Decrease) Rate Volume
---------- ---------- ----------
ASSETS
Securities(1):
U.S. Treasury, government and
other............................................... $ 3,295 $ 803 $ 2,492
States and political subdivisions................... (352) (819) (163)
---------- ---------- ----------
Total securities(5)............................. 2,943 614 2,329
Other earning assets(2)................................ (515) 623 (1,138)
Loans and leases, net of unearned
income(1)(3)(4)(6).................................. 60,641 37,147 23,494
---------- ---------- ----------
Total earning assets............................ 63,069 38,384 24,685
---------- ---------- ----------
Non-earning assets..............................
Total assets................................
LIABILITIES AND SHAREHOLDERS' EQUITY
Total interest-bearing deposits........................ 26,773 26,123 650
Short-term borrowings.................................. 25,834 16,597 9,237
Long-term debt......................................... 5,627 1,853 3,774
---------- ---------- ----------
Total interest-bearing liabilities.............. 58,234 44,573 13,661
---------- ---------- ----------
Demand deposits.................................
Other liabilities...............................
Shareholders' equity............................
Total liabilities and shareholders'.............
equity.......................................
Net yield on earning assets............................ $ 4,835 $ (6,189) $ 11,024
========== ========== ==========
Taxable equivalent adjustment..........................
(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 assuming tax rates in effect for the
periods presented.
(2) Includes federal funds sold, securities purchased under resale agreements or
similar arrangements and interest-bearing bank balances.
(3) Loan fees, which are not material for either of the periods shown, have been
included for rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans has been included as income.
(5) Based on amortized cost.
(6) Includes loans held for sale based on lower of amortized cost or market.
(7) There are no significant out-of-period adjustments.
Hedging strategies have been used in the past and will be utilized in the
future to reduce sensitivity to interest rate movements. See "Asset / Liability
Management" section for additional discussion of hedging strategies. Southern
National continues to evaluate new avenues of interest-based and fee-based
income.
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 1995 was $36.2
million, compared to $58.8 million for the same period in 1994. Security losses
of $19.8 million were the primary factor contributing to the decline. 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 three months ended March 31, 1995 was 23%, down from 24%
for the first quarter of 1994.
Service charges on deposit accounts were stable for the first three months
in 1995 compared to 1994, increasing by $575,000 or 2.9%. Several factors
accounted for the lack of significant growth in service charges on deposits. The
primary factor has been the small percentage growth in end of period deposits
from March 31, 1994 to March 31, 1995. Also, Southern National has been
promoting the "Select Banking" program, particularly to new customers acquired
through mergers. Many service fees are waived for "Select Banking" customers.
Second, because of competitive considerations, Southern National has decreased
the percentage
19
of deposit insurance expense passed through to customers. Finally, rising
interest rates during 1994 have negatively affected service charges on deposit
accounts by increasing the earnings credit used in service charge computations.
Total nondeposit fees and commissions decreased by $1.5 million to a level
of $26.8 million in 1995 compared with $28.3 million in the first quarter of
1994. The main driver for this decline was mortgage banking income, which
decreased 47.5%, from $9.2 million for the first quarter of 1994 to $4.9 million
during the current quarter. Mortgage loan servicing fees actually increased
$677,000, but there was a $5.1 million decline in net gains on sales of mortgage
loans. Trust revenues, bankcard fees and insurance commissions all posted gains
in the first quarter of 1995 compared to the same period last year.
NONINTEREST EXPENSE
Noninterest expense was $229.0 million for the first three months of 1995,
compared to $148.0 million for the same period a year ago. Special accruals and
expenses led to an elevated level of noninterest expense in the first three
months of 1995. These items included the $88.0 million of nonrecurring charges
discussed earlier which primarily affected personnel expense and other
noninterest expense.
Total personnel expense, the largest component of noninterest expense, was
$124.2 million for the first three months of 1995, compared with $77.4 million
for the same period last year. The nonrecurring charges discussed above
contributed $50.4 million to personnel costs during the first quarter in the
form of severance pay, termination of employment contracts, early retirements
and related benefits.
Occupancy and equipment expense for the three months ended March 31, 1995
increased $8.0 million, or 36%, compared to 1994. The primary component of the
increase was $6.8 million in nonrecurring charges relating to branch closings
and the consolidation of bank operations and systems associated with the merger.
20
Federal deposit insurance expense decreased $416,000, or 4.9%, for the
three months ended March 31, 1995 as a result of flat deposit growth and
elevated 1994 FDIC expense during the first quarter which resulted 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.
Other noninterest expenses increased $26.6 million, or 66.8%, primarily
because of $25.9 million in merger-related costs, including $5.9 million
expensed to consolidate bank operations and systems and $12.8 million in merger
and conversion costs.
PROVISION FOR INCOME TAXES
Federal income taxes decreased from an expense of $29.0 million for the
three months ending March 31, 1994 to a benefit of $4.3 million for the same
period in 1995. Included in the first quarter 1995 taxes is a $3.0 million
charge for the recapture of the tax bad debt reserve of a savings bank. In
conjunction with the merger of the bank subsidiaries, SNB Savings Bank, Inc.,
SSB will be merged directly or indirectly with and into Branch Banking & Trust
Company ("BB&T-NC"), the on-going North Carolina commercial bank, and will cease
to exist as a Qualified Thrift Lender. Accordingly, a liability has been
recorded on tax bad debt reserves accumulated prior to October 1, 1988, for
which no provision for income taxes has previously been made. The impact of this
accrual reduced the amount of the tax benefit that otherwise would have been
recorded in the first quarter of 1995.
21
PROFITABILITY MEASURES
1995 1994
--------- ---------------------------------------------
FIRST Fourth Third Second First
QUARTER Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
Return on average assets (.26)% 1.27% 1.29% 1.22% 1.20%
Return on average common equity (3.93) 17.09 17.51 16.67 16.20
Net interest margin 4.14 4.26 4.28 4.29 4.31
Yield to break even 4.35 2.05 2.00 2.16 2.20
Efficiency ratio (taxable equivalent)* 58.8 57.5 57.5 59.7 60.3
_____________________
* Excludes securities gains (losses) and foreclosed property expense for all
periods and nonrecurring charges and merger-related expenses of $83,393
included in noninterest expense for the first quarter of 1995.
22
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 5. Other Events - Acquisitions
---------------------------
On February 28, 1995, Southern National Corporation consummated a merger with
BB&T Financial Corporation ("BB&T") in a transaction accounted for as a
pooling-of-interests. To consummate the merger, Southern National issued 1.45
shares of its common stock for each share of BB&T common stock.
On January 10, 1995, BB&T consummated the acquisition of Commerce Bank of
Virginia Beach, Virginia ("Commerce") in a transaction also accounted for as a
pooling-of-interests. To consummate the acquisition, BB&T issued 1.305 shares of
its common stock for each share of Commerce. The financial statements,
Management's Discussion and Analysis and supplemental financial information
contained herein have been restated to include the results of Southern National,
BB&T and Commerce for all periods.
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 proforma
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.
Southern National filed a Form 8-K under Item 5 on April 21, 1995 to
report results of first quarter operations and financial condition as of
March 31, 1995.
23
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 15, 1995 By: /s/ SCOTT E. REED
---------------------- --------------------
Scott E. Reed, Executive Vice President
and Chief Financial Officer
Date: May 15, 1995 By: /s/ SHERRY A. KELLETT
---------------------- -------------------------
Sherry A. Kellett, Executive Vice
President and Controller
(Principal Accounting Officer)
24