UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended:
September 30, 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 October 31, 1995, 103,300,000 shares of the registrant's common stock,
$5 par value, were outstanding.
This Form 10-Q has 20 pages. The Exhibit Index is included on page 18.
SOUTHERN NATIONAL CORPORATION
FORM 10-Q
SEPTEMBER 30, 1995
INDEX
PAGE NO.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).......................................................................... 3
Consolidated Financial Statements.............................................................................. 3
Notes to Consolidated Financial Statements..................................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 8
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......................................................................................... 18
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 18
SIGNATURES.......................................................................................................... 19
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)
SEPTEMBER
30, DECEMBER 31,
1995 1994
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
ASSETS
Cash and due from depository institutions..................................................... $ 587,453 637,794
Interest-bearing bank balances................................................................ 2,307 20,962
Federal funds sold and other short-term investments........................................... 7,003 13,021
Securities available for sale (amortized cost: $3,470,522 at September 30, 1995, and
$3,579,461 at December 31, 1994)........................................................... 3,484,809 3,459,698
Securities held to maturity (market value: $1,896,903 at September 30, 1995, and $1,889,911 at
December 31, 1994)......................................................................... 1,894,836 1,965,419
Loans and leases.............................................................................. 14,045,637 13,108,102
Allowance for losses....................................................................... (174,069) (171,734)
Net loans and leases..................................................................... 13,871,568 12,936,368
Premises and equipment, net................................................................... 307,319 333,069
Other assets.................................................................................. 520,778 488,732
TOTAL ASSETS............................................................................. $20,676,073 19,855,063
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits.................................................................. $ 1,845,262 1,843,019
Interest-bearing deposits..................................................................... 12,589,778 12,471,135
Total deposits........................................................................... 14,435,040 14,314,154
Short-term borrowed funds..................................................................... 3,012,707 2,902,528
Accounts payable and other liabilities........................................................ 315,897 231,149
Long-term debt................................................................................ 1,305,282 910,755
TOTAL LIABILITIES........................................................................ 19,068,926 18,358,586
SHAREHOLDERS' EQUITY:
Preferred stock, $5 par, 5,000,000 shares authorized, 740,369 issued and outstanding at
September 30, 1995, 770,000 issued and outstanding at December 31, 1994.................... 3,702 3,850
Common stock, $5 par, 300,000,000 shares authorized, 103,323,683 issued and outstanding at
September 30, 1995, 102,215,032 issued and outstanding at December 31, 1994................ 516,617 511,075
Paid-in capital............................................................................... 282,191 285,599
Retained earnings............................................................................. 802,617 775,979
Loan to employee stock ownership plan and unvested restricted stock........................... (6,301) (7,442)
Net unrealized appreciation (depreciation) on securities available for sale................... 8,321 (72,584)
TOTAL SHAREHOLDERS' EQUITY............................................................... 1,607,147 1,496,477
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................................... $20,676,073 19,855,063
See accompanying notes to consolidated financial statements.
3
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS AS INDICATED
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans and leases............................... $314,326 262,679 917,385 739,882
Interest and dividends on securities................................ 79,528 72,044 233,814 216,731
Interest on short-term investments.................................. 401 2,066 1,790 4,189
Total interest income............................................ 394,255 336,789 1,152,989 960,802
INTEREST EXPENSE
Interest on deposits................................................ 142,779 113,318 415,093 321,783
Interest on short-term borrowed funds............................... 46,821 27,418 136,074 64,425
Interest on long-term debt.......................................... 20,384 9,477 49,768 28,092
Total interest expense........................................... 209,984 150,213 600,935 414,300
NET INTEREST INCOME................................................... 184,271 186,576 552,054 546,502
Provision for loan and lease losses................................. 7,000 2,339 21,000 10,742
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES......... 177,271 184,237 531,054 535,760
NONINTEREST INCOME
Service charges on deposit accounts................................. 22,381 21,262 66,162 63,751
Nondeposit fees and commissions..................................... 15,271 13,709 45,690 39,649
Trust revenue....................................................... 4,483 4,074 13,478 11,902
Gain on sale of divested deposits................................... 428 -- 12,294 --
General insurance commissions....................................... 3,479 3,727 11,757 11,202
Securities gains (losses), net...................................... 1,114 919 (18,731) 3,067
Mortgage banking income............................................. 9,019 4,919 18,581 17,779
Other income........................................................ 5,390 7,150 16,293 20,426
Total noninterest income......................................... 61,565 55,760 165,524 167,776
NONINTEREST EXPENSE
Personnel expense................................................... 73,171 73,016 272,747 221,403
Occupancy and equipment expense..................................... 25,438 22,122 82,722 66,135
Foreclosed property expense......................................... 524 1,327 2,258 4,173
Federal deposit insurance expense................................... 2,901 8,015 18,881 24,614
Other expense....................................................... 42,709 39,600 156,994 120,873
Total noninterest expense........................................ 144,743 144,080 533,602 437,198
EARNINGS
Income before income taxes.......................................... 94,093 95,917 162,976 266,338
Income tax expense.................................................. 31,613 33,766 54,933 92,108
Net income.......................................................... 62,480 62,151 108,043 174,230
Preferred dividend requirements.................................. 1,255 1,299 3,843 3,898
Income applicable to common shares............................... $ 61,225 60,852 104,200 170,332
PER COMMON SHARE
Net income:
Primary.......................................................... $ .59 .59 1.00 1.67
Fully diluted.................................................... $ .57 .58 .99 1.63
Cash dividends declared.......................................... $ .23 .20 .63 .54
AVERAGE SHARES OUTSTANDING
Primary............................................................. 104,367,957 102,571,211 103,695,276 102,152,579
Fully diluted....................................................... 109,202,178 107,617,714 108,988,647 107,237,155
See accompanying notes to consolidated financial statements.
4
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
SHARES OF EARNINGS
COMMON PREFERRED COMMON PAID-IN AND
STOCK STOCK STOCK CAPITAL OTHER* TOTAL
(DOLLARS IN THOUSANDS)
BALANCE, DECEMBER 31, 1993, AS PREVIOUSLY REPORTED... 42,961,214 $ 3,850 214,806 151,186 195,022 564,864
Merger with BB&T Financial 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......................................... -- -- -- -- 174,230 174,230
Common stock issued by pooled companies prior to
merger.......................................... 911,110 -- 4,555 9,877 -- 14,432
Common stock issued................................ 390,680 -- 1,954 256 (41) 2,169
Common stock acquired and retired.................. (645,250) -- (3,226) (11,610) -- (14,836)
Net unrealized depreciation on securities available
for sale........................................ -- -- -- -- (47,423) (47,423)
Mergers accounted for under the purchase method.... 136,700 -- 683 2,003 -- 2,686
Cash dividends declared by merged companies........ -- -- -- -- (30,500) (30,500)
Cash dividends declared by Southern National:
Common stock.................................... -- -- -- -- (21,451) (21,451)
Preferred stock................................. -- -- -- -- (3,897) (3,897)
Other.............................................. -- -- -- 2,121 1,416 3,537
BALANCE, SEPTEMBER 30, 1994.......................... 101,616,534 $ 3,850 508,082 278,073 687,668 1,477,673
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......................................... -- -- -- -- 108,043 108,043
Common stock issued................................ 2,478,754 -- 12,393 24,821 -- 37,214
Common stock acquired and retired.................. (1,436,550) -- (7,183) (25,674) -- (32,857)
Net unrealized appreciation on securities available
for sale........................................ -- -- -- -- 80,905 80,905
Cash dividends declared by Southern National:
Common stock.................................... -- -- -- -- (77,594) (77,594)
Preferred stock................................. -- -- -- -- (3,811) (3,811)
Preferred stock acquired and retired............... -- (92) -- (2,279) -- (2,371)
Preferred stock conversion......................... 66,447 (56) 332 (276) -- --
Other.............................................. -- -- -- -- 1,141 1,141
BALANCE, SEPTEMBER 30, 1995.......................... 103,323,683 $ 3,702 516,617 282,191 804,637 1,607,147
* Other includes unvested restricted stock, loan to employee stock ownership
plan and unearned compensation.
See accompanying notes to consolidated financial statements.
5
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
1995 1994
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................................... $ 108,043 174,230
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses................................................................ 21,000 10,742
Depreciation of premises and equipment............................................................. 24,289 24,672
Amortization of intangibles........................................................................ 8,740 5,535
Accretion of negative goodwill..................................................................... (4,751) (4,718)
Amortization of unearned stock compensation........................................................ 1,141 1,416
Discount accretion and premium amortization on securities, net..................................... 3,144 3,762
Gain on sales of trading account securities, net................................................... (31) (656)
Loss (gain) on sales of securities, net............................................................ 18,731 (3,067)
Loss (gain) on sales of loans and mortgage loan servicing rights, net.............................. 617 (1,257)
Gain on disposals of premises and equipment, net................................................... (6,476) (1,374)
Loss on foreclosed property and other real estate, net............................................. 1,353 310
Proceeds from sales of trading account securities, net of purchases................................ 3,398 656
Proceeds from sales of loans held for sale......................................................... 380,443 558,419
Purchases of loans held for sale................................................................... (180,180) (4,971)
Origination of loans held for sale, net of principal collected..................................... (410,614) (279,308)
Decrease (increase):
Accrued interest receivable...................................................................... (26,239) 8,221
Other assets..................................................................................... 25,479 (5,535)
Increase (decrease) in:
Accrued interest payable......................................................................... 18,961 4,151
Accounts payable and other liabilities........................................................... 96,946 7,917
Net cash provided by operating activities...................................................... 83,994 499,145
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale................................................. 1,145,702 782,751
Maturities of securities............................................................................. 844,306 1,065,191
Purchases of securities.............................................................................. (1,870,143) (1,960,626)
Leases made to customers............................................................................. (33,842) (32,798)
Principal collected on leases........................................................................ 34,401 31,253
Loan originations, net of principal collected........................................................ (806,685) (739,858)
Purchases of loans................................................................................... (5,382) (13,630)
Net cash acquired in transactions accounted for under the purchase method of accounting.............. -- 229
Proceeds from disposals of premises and equipment.................................................... 12,605 6,721
Purchases of premises and equipment.................................................................. (60,155) (54,613)
Proceeds from sales of foreclosed property........................................................... 8,107 19,006
Proceeds from sales of other real estate held for development or sale................................ 11,447 9,259
Other, net........................................................................................... (9,177) 4,509
Net cash used in investing activities.......................................................... (728,816) (882,606)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits.................................................................. 120,886 (193,398)
Net increase in short-term borrowed funds............................................................ 110,179 797,346
Net increase (decrease) in long-term debt............................................................ 394,527 (128,792)
Net proceeds from common stock issued................................................................ 37,214 16,601
Common stock acquired and retired.................................................................... (32,857) (14,836)
Preferred stock acquired and retired................................................................. (2,371) --
Cash dividends paid on common and preferred stock.................................................... (57,770) (55,729)
Net cash provided by financing activities...................................................... 569,808 421,192
Net (Decrease) Increase in Cash and Cash Equivalents................................................... (75,014) 37,731
CASH AND CASH EQUIVALENTS at beginning of period....................................................... 671,777 859,632
CASH AND CASH EQUIVALENTS at end of period............................................................. $ 596,763 897,363
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest........................................................................................... $ 582,561 409,937
Income taxes....................................................................................... 74,826 111,453
Noncash financing and investing activities:
Transfer of loans to foreclosed property........................................................... 6,438 17,522
Common stock issued upon conversion of debentures.................................................. 4,896 --
Transfer of fixed assets to other real estate owned................................................ 21,846 --
Transfer of securities from held to maturity to available for sale................................. -- 6,000
Transfer of securities from available for sale to held to maturity................................. -- 2,200
See accompanying notes to consolidated financial statements.
6
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 1995, and December 31, 1994; the
consolidated statements of income for the three months and nine months
ended September 30, 1995 and 1994; the consolidated statements of changes
in shareholders' equity for the nine months ended September 30, 1995 and
1994; and the consolidated statements of cash flows for the nine months
ended September 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 September 30, 1995, was
$17.8 million, offset by a valuation allowance of $1.5 million, which
resulted in a net carrying value of $16.3 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 nine months of 1995 totaled $14.5 million. Southern National
recognizes no interest income on loans that are impaired. Cash receipts for
both principal and interest are applied directly to principal.
In May, 1995, the Financial Accounting Standards Board issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights," which amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities." SFAS No. 122 requires
that mortgage banking enterprises recognize, as separate assets, rights to
service mortgage loans for others, however those servicing rights are
acquired. The Statement further requires mortgage banking enterprises to
assess their capitalized mortgage servicing rights for impairment based on
the fair value of those rights. Southern National elected, in the third
quarter of 1995, to adopt this statement effective as of January 1, 1995.
Accordingly, first and second quarter pretax earnings have been restated by
$1.4 million to reflect this implementation. SFAS No. 122 prohibits
retroactive application to prior years.
7
The following is a summary of capitalized mortgage servicing rights, net of
accumulated amortization and adjustments necessary to present the balances
at the lower of cost or fair value, which are included in other assets in
the Consolidated Balance Sheets:
Capitalized Mortgage
Servicing Rights
(Dollars in thousands)
December 31, 1994................... $ 3,448
Amount capitalized................ 12,759
Amortization expense.............. (1,567)
Valuation allowance............... ( 395)
September 30, 1995.................. $ 14,245
Capitalized mortgage servicing rights are being amortized on a
disaggregated loan basis using an accelerated method over the estimated
life of the servicing income. The servicing rights portfolio is analyzed
each quarter to identify possible impairment using a disaggregated
discounted cash flow methodology that is stratified by predominant risk
characteristics. These characteristics include stratification based on
interest rates in intervals of 100 basis points, year of origination, type
of loan and maturity of loan. Based upon this analysis for impairment, a
valuation allowance of $395,000 was recorded.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
OVERVIEW
During the third quarter of 1995, Southern National continued the process
of integrating operations following the second quarter merger and systems
conversion of Branch Banking & Trust Company and Southern National. SNC incurred
certain expenses, including personnel costs and occupancy and equipment costs,
which related specifically to the merger. Management does not consider these
nonrecurring charges to be indicative of continuing operations. Such costs are
further discussed in "ANALYSIS OF RESULTS OF OPERATIONS." The overall economy
remained stable, with mixed results from leading economic indicators. Consumer
spending and borrowing remained strong, while automobile sales, real income
levels and new job rates fell. Southern National experienced strong growth in
loans during the quarter and continued improvement in recurring earnings as
discussed in the following analysis.
Southern National's total assets at September 30, 1995 were $20.7 billion,
an $821.0 million increase from the balance at December 31, 1994. The primary
component of the increase was loans and leases, which grew $937.5 million during
the nine months. This increase was partially offset by declines in securities
holdings of $45.5 million and decreases in Federal funds sold and other
interest-earning assets of $24.7 million. The growth in net loans and leases
reflects an annualized growth rate of 9.6%. This growth is attributable to
record levels of consumer credit throughout the industry.
The continued strong loan growth is being funded to an extent through
increases in short-term borrowed funds, which rose $110.2 million during the
first nine months of 1995, and long-term debt, which grew $394.5 million. The
growth in long-term debt was comprised primarily of Federal Home Loan Bank
("FHLB") advances. These funding sources are being used to supplement the modest
growth in deposits.
During the first quarter of 1995, 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. 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 loss recognized on the sales was $19.8 million. Reinvestment of the
proceeds from the restructuring was accomplished during the first and second
quarters. U.S. Treasury and agency securities with average maturities of three
years and average yields at cost of approximately 7.00% were purchased. During
the third quarter, net proceeds from sales and maturities of securities were
used to fund loan growth. At September 30, 1995, securities available for sale
had unrealized appreciation, after tax, of $8.3 million compared to unrealized
appreciation, after tax, of $9.1 million at June 30, 1995 and unrealized
depreciation of $72.6 million at December 31, 1994. The taxable equivalent yield
on the securities portfolio during the third quarter was 6.23%, up from 5.74% in
the third quarter of 1994.
8
The restructuring of the securities portfolio described above resulted in a
shift in portfolio holdings. 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 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.
Total deposits increased by $120.9 million from the balance at December 31,
1994. Southern National, as well as many other financial institutions, is
experiencing a trend of slower deposit growth because of competition for
deposits from various non-financial institution sources. Also, consumer spending
continues at a rapid pace, driving saving rates toward ten-year lows. The flat
deposit growth has required management to seek alternative 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 discussed in
the "ANALYSIS OF RESULTS OF OPERATIONS." As mentioned above, short-term borrowed
funds increased $110.2 million during the first nine months of the year.
Management is also utilizing various long-term funding sources, primarily FHLB
advances, to supplement the flat growth rate in deposits. 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 $69.7 million at September 30, 1995, compared to
$59.2 million at year-end 1994. The allowance for losses as a percentage of
loans and leases was 1.24% at September 30, 1995 and nonperforming assets as a
percentage of loan-related assets were .50%, compared to 1.31% and .45%,
respectively, at December 31, 1994. These ratios were 1.36% and .48%,
respectively, on September 30, 1994. The quality of the loan portfolio
significantly improved during 1994 and has remained relatively strong during the
first nine months of 1995. However, certain asset quality measures deteriorated
during the third quarter. The increase in nonperforming assets and the
corresponding increase in net charge-offs during the quarter reflects a
reorganization of the collections function which resulted from the merger of
Southern National and BB&T. Also, Southern National's asset quality ratios have
been unusually strong compared to historical norms. Increases in net charge-offs
to a more normalized level have been expected by management as segments of the
overall economy softened during the third quarter. Loans 90 days or more past
due and still accruing interest increased slightly during the third quarter to a
balance of $26.9 million compared to a December 31, 1994 balance of $24.2
million.
9
The provision for loan and lease losses in the first nine months of 1995
was $21.0 million compared to $10.7 million in the first nine months of 1994.
The increase in the provision primarily reflects higher net charge-offs during
1995 compared to 1994. Asset quality statistics relevant to the last five
calendar quarters are presented in the accompanying table.
ASSET QUALITY ANALYSIS
9/30/95 6/30/95 3/31/95 12/31/94 9/30/94
(DOLLARS IN THOUSANDS)
ALLOWANCE FOR LOSSES
Beginning balance................................................... $176,175 174,189 171,734 172,110 173,550
Allowance for acquired loans........................................ -- -- -- 1,119 --
Provision for losses................................................ 7,000 7,000 7,000 7,104 2,339
Net charge-offs..................................................... (9,106) (5,014) (4,545) (8,599) (3,779)
Ending balance................................................... $174,069 176,175 174,189 171,734 172,110
NONPERFORMING ASSETS
Nonaccrual loans and leases......................................... $ 62,763 48,927 48,451 47,039 43,219
Foreclosed property................................................. 6,981 8,759 11,239 12,153 17,963
Nonperforming assets................................................ $ 69,744 57,686 59,690 59,192 61,182
Loans 90 days or more past due and still accruing................... $ 26,909 30,335 21,653 24,224 27,134
ASSET QUALITY RATIOS
Nonaccrual loans and leases as a percentage of total loans and
leases.............................................................. .45% .36 .36 .36 .34
Nonperforming assets as a percentage of:
Total assets........................................................ .34 .28 .30 .30 .31
Loans and leases plus foreclosed property........................... .50 .42 .45 .45 .48
Net charge-offs as a percentage of average loans and leases........... .26 .15 .14 .27 .12
Allowance for losses as a percentage of loans and leases.............. 1.24 1.28 1.30 1.31 1.36
Ratio of allowance for losses to:
Net charge-offs..................................................... 4.82x 8.76 9.45 5.03 11.48
Nonaccrual loans and leases......................................... 2.77 3.60 3.60 3.65 3.98
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 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.
10
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
need. At September 30, 1995, interest rate swaps, caps and floors with a total
notional value of $966.0 million, 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 September 30, 1995:
INTEREST RATE SWAPS, CAPS AND FLOORS
SEPTEMBER 30, 1995
NOTIONAL RECEIVE PAY UNREALIZED
TYPE AMOUNT RATE RATE GAINS (LOSSES)
(DOLLARS IN THOUSANDS)
Receive fixed swaps................................................... $ 165,000 5.82% 5.90% $ 1,157
Pay fixed swaps....................................................... 101,018 6.89 7.31 (645)
Caps and floors....................................................... 700,000 -- -- (3,015)
Total................................................................. $ 966,018 6.23% 6.44% $ (2,503)
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............................................................. 50,000 -- -- 50,000
Maturities/amortizations.............................................. (685,000) (8,870) -- (693,870)
Terminations.......................................................... (400,000) (1,437) (400,000) (801,437)
Balance, September 30, 1995........................................... $ 165,000 101,018 700,000 966,018
ONE YEAR ONE TO FIVE AFTER FIVE
MATURITY SCHEDULE* OR LESS YEARS YEARS TOTAL
Receive fixed swaps................................................... $ 40,000 125,000 -- 165,000
Pay fixed swaps....................................................... 41,550 59,468 -- 101,018
Caps and floors....................................................... -- 650,000 50,000 700,000
Total................................................................. $ 81,550 834,468 50,000 966,018
*Maturities are based on full contract extensions.
As of September 30, 1995, unearned income and deferred premiums from new
swap transactions and deferred losses from terminated swap transactions were
$629,000 and $4.6 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 $2.1 million during the third quarter of
1995 and expense of $9.1 million for the nine months ended September 30, 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
$330,000 for the third quarter of 1995 and $1.9 million for the first nine
months of 1995. Unexercised options on securities with total par values of $40.0
million were outstanding at September 30, 1995.
Southern National also utilizes purchased over-the-counter put options in
its mortgage banking activities to hedge the mortgage pipeline. During the third
quarter of 1995, options with a par value of $12.0 million were purchased and
remain outstanding.
11
CAPITAL ADEQUACY AND RESOURCES
The maintenance of appropriate levels of capital is a management priority.
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 September 30, 1995 was $1.6 billion versus $1.5
billion for December 31, 1994. As a percentage of total assets, total
shareholders' equity was 7.8% at September 30, 1995, up from 7.5% at December
31, 1994. Southern National's book value per common share at September 30, 1995
was $14.87, versus $13.92 at December 31, 1994. The increase in capital ratios
reflects earnings of $108.0 million during the year, and an $80.9 million
appreciation on securities available for sale, less dividends declared of $81.4
million. Average shareholders' equity as a percentage of average assets was 7.6%
for the nine months ended September 30, 1995 and 1994.
Tier 1 and total risk-based capital ratios at September 30, 1995 were 12.0%
and 13.3%, respectively. The leverage ratio was 7.5% at the end of the third
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 8.00% minimum of total capital to risk-weighted assets is required. One-half
of the 8.00% 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 3.00%.
CAPITAL ADEQUACY RATIOS
1995 1994
THIRD SECOND FIRST FOURTH THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER
Average equity to average assets............................................. 7.71% 7.61 7.60 7.67 7.62
Equity to assets at period end............................................... 7.77 7.60 7.51 7.54 7.60
Risk-based capital ratios:
Tier 1 capital............................................................. 12.0 11.3 11.5 12.3 12.3
Total capital.............................................................. 13.3 12.6 12.7 13.6 13.6
Leverage ratio............................................................... 7.5 7.4 7.3 7.8 7.7
12
ANALYSIS OF RESULTS OF OPERATIONS
Southern National had net income for the first nine months of 1995 totaling
$108.0 million, compared to net income of $174.2 million during the first nine
months of 1994. On a fully diluted per share basis, earnings for the nine months
ended September 30, 1995 were $.99, compared to earnings of $1.63 for the same
period in 1994. The decrease in earnings was caused by approximately $109.8
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 a $12.3 million gain on the sale of divested deposits.
The net after-tax impact of these nonrecurring items and securities losses was
$76.3 million. A brief description of the nature of the nonrecurring items is
presented below:
FIRST SECOND THIRD
QUARTER QUARTER QUARTER YEAR-TO-DATE
(Dollars in thousands)
Other service charges, commissions and fees..................................... $ -- 470 -- 470
Other noninterest income (premium on divested deposits)......................... -- (11,866) (428) (12,294)
Securities losses............................................................... 19,787 -- -- 19,787
Personnel expense............................................................... 50,611 4,660 2,902 58,173
Occupancy expense............................................................... 3,831 135 (253) 3,713
Furniture and equipment expense................................................. 3,005 3,079 513 6,597
Other noninterest expense....................................................... 25,946 6,980 3,383 36,309
Income taxes (pre-tax equivalent)............................................... 4,566 -- -- 4,566
Total......................................................................... $107,746 3,458 6,117 117,321
Total - net of tax............................................................ $ 70,532 2,120 3,679 76,331
Excluding nonrecurring items and securities losses, Southern National would
have had net income after tax for the first nine months of 1995 of $184.4
million, or $1.69 per fully diluted share. This represents a $10.1 million, or
5.8%, increase over earnings from the prior year. Third quarter earnings,
exclusive of the nonrecurring items, would have been $66.2 million, a 6.4%
increase over the prior year amount of $62.2 million. On a per share basis,
fully diluted earnings, excluding nonrecurring items, were $.61 for the third
quarter, a 5.2% increase over the prior year amount of $.58 and a 10.9% increase
over recurring earnings for the second quarter of 1995. Recurring earnings for
the third quarter provided returns on assets of 1.27% and on average common
shareholders' equity of 17.0%.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was $576.0
million for the first nine months of 1995 compared to $567.3 million for the
same period in 1994, a 1.5% increase. This increase resulted from 7.7% growth in
average earning assets to a balance of $19.0 billion, offset by a decline in the
net interest margin from 4.29% to 4.05%. 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. Increased use of nondeposit
sources of funds, such as Federal funds purchased and FHLB advances, contributed
to a 121 basis point increase in the average rate paid on interest-bearing
liabilities. Also, during the merger of BB&T and Southern National, the pricing
strategies surrounding loans and deposits were very competitive in order to
protect current market positions and retain customer relationships.
13
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
1995 V. 1994
CHANGE
AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE INCREASE DUE TO
FULLY TAXABLE EQUIVALENT 1995 1994 1995 1994 1995 1994 (DECREASE) RATE
(Dollars in thousands)
ASSETS
Securities (1):
U.S. Treasury, government and
other (5)..................... $ 5,261,508 5,146,807 6.10% 5.72 $ 239,954 220,294 $ 19,660 14,669
States and political
subdivisions.................. 172,660 180,379 8.94 9.18 11,540 12,387 (847) (326)
Total securities (5).......... 5,434,168 5,327,186 6.19 5.84 251,494 232,681 18,813 14,343
Other earning assets (2).......... 41,744 149,684 5.73 3.74 1,790 4,189 (2,399) 1,547
Loans and leases, net of unearned
income (1)(3)(4)(5)............. 13,547,895 12,190,447 9.11 8.17 923,629 744,772 178,857 91,214
Total earning assets.......... 19,023,807 17,667,317 8.27 7.43 1,176,913 981,642 195,271 107,104
Non-earning assets............ 1,193,109 1,112,612
TOTAL ASSETS................ $20,216,916 18,779,929
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits:
Savings deposits................ $ 3,231,733 3,474,104 2.28 2.16 55,200 56,223 (1,023) 3,021
Money market deposits........... 1,634,222 1,981,812 3.53 2.63 43,110 39,001 4,109 11,741
Time deposits................... 7,697,780 7,095,279 5.50 4.27 316,783 226,559 90,224 69,723
Total interest-bearing
deposits.................... 12,563,735 12,551,195 4.42 3.43 415,093 321,783 93,310 84,485
Short-term borrowed funds......... 3,097,054 2,212,688 5.87 3.89 136,074 64,425 71,649 40,135
Long-term debt.................... 1,043,602 633,412 6.38 5.93 49,768 28,092 21,676 2,257
Total interest-bearing
liabilities................. 16,704,391 15,397,295 4.81 3.60 600,935 414,300 186,635 126,877
Demand deposits............... 1,697,375 1,735,344
Other liabilities............. 270,270 218,115
Shareholders' equity.......... 1,544,880 1,429,175
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........ $20,216,916 18,779,929
Average interest rate spread...... 3.46 3.83
Net yield on earning assets....... 4.05% 4.29 $ 575,978 567,342 $ 8,636 (19,773)
Taxable equivalent adjustment..... $ 23,924 20,840
FULLY TAXABLE EQUIVALENT VOLUME
ASSETS
Securities (1):
U.S. Treasury, government and
other (5)..................... 4,991
States and political
subdivisions.................. (521 )
Total securities (5).......... 4,470
Other earning assets (2).......... (3,946)
Loans and leases, net of unearned
income (1)(3)(4)(5)............. 87,643
Total earning assets.......... 88,167
Non-earning assets............
TOTAL ASSETS................
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits:
Savings deposits................ (4,044)
Money market deposits........... (7,632)
Time deposits................... 20,501
Total interest-bearing
deposits.................... 8,825
Short-term borrowed funds......... 31,514
Long-term debt.................... 19,419
Total interest-bearing
liabilities................. 59,758
Demand deposits...............
Other liabilities.............
Shareholders' equity..........
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........
Average interest rate spread......
Net yield on earning assets....... 28,409
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 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.
Net interest income FTE for the third quarter of 1995 was $192.8 million,
down from $192.9 million for the second quarter of 1995 and $193.6 million for
the third quarter of 1994. The lower level of net interest income reflects a
significant increase in interest on long-term debt, which grew $5.6 million
compared to the second quarter and $10.9 million compared to the third quarter
of 1994. These increases were generated primarily by increases in the average
long-term debt balances.
The average yield earned on interest-earning assets increased 84 basis
points comparing the nine months ended September 30, 1995 and 1994. This
increase was primarily driven by a 94 basis point increase in the average yield
earned on loans and a 35 basis point increase in the average yield earned on
investments during this period.
14
For the third quarter of 1995, the positive impact on net interest income
of a $1.4 billion increase in average earning assets compared to the third
quarter of 1994 was offset by a decline in quarterly margin of 33 basis points
to 3.95% which compares to a margin of 4.28% for the third quarter of 1994. The
decline in margin resulted primarily from higher costs of funding sources 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.
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
1995 V. 1994
CHANGE
AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE INCREASE DUE TO
FULLY TAXABLE EQUIVALENT 1995 1994 1995 1994 1995 1994 (DECREASE) RATE
(Dollars in thousands)
ASSETS
Securities (1):
U.S. Treasury, government and
other (5)..................... $ 5,286,634 5,179,652 6.15% 5.63 $ 81,904 73,520 $ 8,384 6,840
States and political
subdivisions.................. 166,290 171,120 8.95 8.93 3,753 3,850 (97) 12
Total securities (5).......... 5,452,924 5,350,772 6.23 5.74 85,657 77,370 8,287 6,852
Other earning assets (2).......... 31,033 183,451 5.13 4.47 401 2,066 (1,665) 266
Loans and leases, net of unearned
income (1)(3)(4)(5)............. 13,889,121 12,424,214 9.05 8.44 316,711 264,354 52,357 19,798
Total earning assets.......... 19,373,078 17,958,437 8.25 7.60 402,769 343,790 58,979 26,916
Non-earning assets............ 1,236,080 1,112,841
TOTAL ASSETS................ $20,609,158 19,071,278
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits:
Savings deposits................ $ 3,268,889 3,371,086 2.22 2.22 18,314 18,840 (526) 46
Money market deposits........... 1,514,249 1,977,461 3.40 2.84 12,974 14,153 (1,179) 2,491
Time deposits................... 7,722,931 7,278,877 5.73 4.38 111,491 80,325 31,166 26,016
Total interest-bearing
deposits.................... 12,506,069 12,627,424 4.53 3.56 142,779 113,318 29,461 28,553
Short-term borrowed funds......... 3,201,200 2,445,588 5.80 4.45 46,821 27,418 19,403 9,632
Long-term debt.................... 1,309,932 610,943 6.17 6.15 20,384 9,477 10,907 30
Total interest-bearing
liabilities................. 17,017,201 15,683,955 4.90 3.80 209,984 150,213 59,771 38,215
Demand deposits............... 1,705,197 1,703,196
Other liabilities............. 297,130 231,211
Shareholders' equity.......... 1,589,630 1,452,916
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........ $20,609,158 19,071,278
Average interest rate spread...... 3.35 3.80
Net yield on earning assets....... 3.95% 4.28 $ 192,785 193,577 $ (792) (11,299)
Taxable equivalent adjustment..... $ 8,514 7,001
FULLY TAXABLE EQUIVALENT VOLUME
ASSETS
Securities (1):
U.S. Treasury, government and
other (5)..................... 1,544
States and political
subdivisions.................. (109 )
Total securities (5).......... 1,435
Other earning assets (2).......... (1,931)
Loans and leases, net of unearned
income (1)(3)(4)(5)............. 32,559
Total earning assets.......... 32,063
Non-earning assets............
TOTAL ASSETS................
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits:
Savings deposits................ (572 )
Money market deposits........... (3,670)
Time deposits................... 5,150
Total interest-bearing
deposits.................... 908
Short-term borrowed funds......... 9,771
Long-term debt.................... 10,877
Total interest-bearing
liabilities................. 21,556
Demand deposits...............
Other liabilities.............
Shareholders' equity..........
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........
Average interest rate spread......
Net yield on earning assets....... 10,507
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 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.
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" for additional discussion of hedging strategies.
15
NONINTEREST INCOME
Noninterest income for the nine months ended September 30, 1995 was $165.5
million, compared to $167.8 million for the same period in 1994. Securities
losses of $18.7 million were the primary factor contributing to the decline.
This decrease was offset to an extent by a $12.3 million gain on the sale of
divested deposits. 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 nine months ended September 30, 1995
was 25.0%, up from 23.2% for the third quarter of 1994. Noninterest income for
the three months ended September 30, 1995 was $61.6 million, up $5.8 million
from the third quarter of 1994.
Service charges on deposit accounts grew for the first nine months in 1995
compared to 1994, increasing by $2.4 million, or 3.8%. Service charges for the
third quarter of 1995 totaled $22.4 million, up $1.1 million, or 5.3% from the
prior year balance. The primary factor contributing to the relatively slow
growth in service charges on deposit accounts is the 9.6% decline in transaction
accounts from September 30, 1994 to September 30, 1995.
One of the strongest growth areas in noninterst income during the year
resulted from trust services. Comparing the nine months ended September 30, 1995
and 1994, trust income grew 13.2% to $13.5 million. For the third quarter of
1995, trust services income totaled $4.5 million, an increase of 10.0% over the
third quarter of 1994. Southern National also realized growth in general
insurance commissions, up $555,000, or 5.0%, and mortgage banking activities,
which increased 4.5%, or $802,000 for the nine months ended September 30, 1995.
As discussed in "Notes to Consolidated Financial Statements," mortgage banking
income was positively affected by the adoption of SFAS No. 122 during the
quarter. The implementation of the standard increased mortgage banking income
$2.4 million during the third quarter and $3.8 million for the year.
Other nondeposit fees and commissions increased by $6.0 million to a level
of $45.7 million in 1995 compared with $39.6 million for the first nine months
of 1994. Major sources of nondeposit fees and commissions generating the
increase were bankcard income, up $4.0 million from the prior year balance;
rental income on equipment under lease, up $1.3 million; and credit insurance
fees, up $107,000 over the prior year. Other nondeposit fees and commissions
were $15.3 million for the third quarter compared to $13.7 million for the third
quarter of the prior year.
NONINTEREST EXPENSE
Noninterest expense was $533.6 million for the first nine months of 1995
compared to $437.2 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 nine months of 1995. These items included $104.8 million of
nonrecurring charges which primarily affected personnel expense and other
noninterest expense. Noninterest expense for the third quarter was $144.7
million compared to $144.1 million in the prior year.
Excluding nonrecurring charges, personnel expense, the largest component of
noninterest expense, decreased from $221.4 million for the first nine months of
1994, to $214.6 million for the same period in 1995. This decline reflected
staff reductions and efficiencies of scale accomplished as a result of the
Southern National/BB&T merger. The nonrecurring charges discussed above
contributed $58.2 million to total personnel costs during the first nine 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
nine months ended September 30, 1995, increased $6.3 million, or 9.5%, compared
to 1994. Ongoing depreciation of property and equipment purchased in connection
with implementing the merger was a major component of the increase. The $10.3
million in nonrecurring charges relating to branch closings and the
consolidation of bank operations and systems associated with the merger had a
significant impact on the total occupancy and equipment expense.
Federal deposit insurance expense decreased $5.7 million, or 23.3%, for the
nine months ended September 30, 1995, as a result of a reduction in insurance
premiums charged by the FDIC for deposit insurance which resulted in a refund
for Southern National. Because of the recapitalization of the Bank Insurance
Fund, the FDIC reduced the rates paid by insured institutions from an average of
$.23 per $100 of estimated insured deposits to $.04. Combined with continued
flat deposit growth, this rate decrease resulted in significant savings during
the quarter.
Legislation has been proposed that would result in the payment of a
one-time assessment by financial institutions with deposits insured by the
Savings Association Insurance Fund (SAIF). Because of numerous acquisitions of
thrift institutions, approximately 41% of Southern National's deposits are
SAIF-insured. The one-time assessment rate, to be determined by the Federal
Deposit Insurance Corporation, is expected to be between $.76 and $.79 per $100
of deposits. Commercial banks with SAIF-insured deposits acquired from thrifts
will likely be allowed a reduction of 20% of the assessment base. This
16
adjustment would be available only to banks with less than 50% of their total
deposits in the SAIF at June 30, 1995. The pre-tax impact of this one-time
assessment is anticipated to be approximately $37.8 million to $39.3 million.
Southern National will record this expense when the legislation is enacted,
probably in the fourth quarter of 1995.
Excluding $36.3 million in nonrecurring charges, other noninterest expenses
decreased $2.1 million, or 1.7%, primarily because of efficiencies resulting
from the merger.
PROVISION FOR INCOME TAXES
Federal income tax expense decreased from $92.1 million for the nine months
ended September 30, 1994, to $54.9 million for the same period in 1995 because
of a decrease in taxable income. Effective tax rates were 34.6% and 33.7%,
respectively. For the third quarter, the provision for income taxes was $31.6
million, down from the prior year balance of $33.8 million. Effective tax rates
for the quarters ended September 30, 1995 and 1994 were 33.6% and 35.2%,
respectively.
PROFITABILITY MEASURES
1995 1994
THIRD SECOND FIRST FOURTH THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER
Return on average assets..................................................... 1.20% 1.15 (.25) 1.27 1.29
Return on average common equity.............................................. 16.00 15.48 (3.87) 17.09 17.51
Net interest margin.......................................................... 3.95 4.06 4.14 4.26 4.28
Yield to break even.......................................................... 1.85 2.12 4.35 2.05 2.00
Efficiency ratio (taxable equivalent)*....................................... 54.5 57.9 58.7 57.5 57.5
* Excludes gains on sale of servicing rights, securities gains (losses) and
foreclosed property expense for all periods and nonrecurring items totaling
$83,393 for the first quarter of 1995, $3,458 for the second quarter of 1995
and $6,117 for the third quarter of 1995.
17
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. On October 19, 1995, Southern National filed a Form 8-K under
Item 5 to report the results of operations and financial condition as of
September 30, 1995.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN NATIONAL CORPORATION
(Registrant)
Date: November 14, 1995 By: /s/ SCOTT E. REED
SCOTT E. REED, EXECUTIVE VICE
PRESIDENT
AND CHIEF FINANCIAL OFFICER
Date: November 14, 1995 By: /s/ SHERRY A. KELLETT
SHERRY A. KELLETT, EXECUTIVE VICE
PRESIDENT AND
CONTROLLER (PRINCIPAL ACCOUNTING
OFFICER)
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