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, 1996
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) 733-2000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (Check Mark) No__
At October 31, 1996, 109,113,999 shares of the registrant's common stock,
$5 par value, were outstanding.
This Form 10-Q has 21 pages. The Exhibit Index is included on page 19.
SOUTHERN NATIONAL CORPORATION
FORM 10-Q
SEPTEMBER 30, 1996
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..................... 9
Analysis of Financial Condition........................................................................... 9
Asset/Liability Management................................................................................ 11
Capital Adequacy and Resources............................................................................ 12
Analysis of Results of Operations......................................................................... 13
Part II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................... 19
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 19
SIGNATURES.......................................................................................................... 20
EXHIBIT 2 Agreement and Plan of Reorganization between Southern National Corporation and United Carolina Bancshares
Corporation, dated November 1, 1996, and exhibits thereto:
a) Stock Option Agreement between Southern National Corporation and United Carolina Bancshares
Corporation and b) Stock Option Agreement between United Carolina Bancshares Corporation and Southern
National Corporation.
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,
1996 1995
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
ASSETS
Cash and due from banks...................................................................... $ 656,632 $ 585,527
Interest-bearing deposits with banks......................................................... 429 1,172
Federal funds sold and securities purchased under resale agreements or similar
arrangements.............................................................................. 7,433 118,977
Securities available for sale................................................................ 5,489,878 5,201,344
Securities held to maturity (market value: $130,291 at September 30, 1996, and $159,886 at
December 31, 1995)........................................................................ 126,848 153,969
Loans held for sale.......................................................................... 178,582 245,280
Loans and leases, net of unearned income..................................................... 13,932,414 13,706,711
Allowance for loan and lease losses....................................................... (184,203) (175,588)
Loans and leases, net................................................................... 13,748,211 13,531,123
Premises and equipment, net.................................................................. 314,406 313,858
Other assets................................................................................. 574,138 485,180
TOTAL ASSETS............................................................................ $21,096,557 $ 20,636,430
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing demand deposits.......................................................... $ 2,039,356 $ 1,885,725
Savings and interest checking................................................................ 1,380,011 1,591,488
Money rate savings........................................................................... 3,204,789 3,049,810
Other time deposits.......................................................................... 8,394,256 8,157,033
Total deposits.......................................................................... 15,018,412 14,684,056
Short-term borrowed funds.................................................................... 2,095,282 2,595,416
Long-term debt............................................................................... 2,050,211 1,383,935
Accounts payable and other liabilities....................................................... 275,846 261,681
TOTAL LIABILITIES....................................................................... 19,439,751 18,925,088
SHAREHOLDERS' EQUITY:
Preferred stock, $5 par, 5,000,000 shares authorized, none issued and outstanding at
September 30, 1996, and 733,869 at December 31, 1995...................................... -- 3,669
Common stock, $5 par, 300,000,000 shares authorized, 109,112,010 issued and outstanding at
September 30, 1996, and 109,151,655 at December 31, 1995.................................. 545,560 545,758
Paid-in capital.............................................................................. 137,974 269,404
Retained earnings............................................................................ 987,979 865,658
Loan to employee stock ownership plan and unvested restricted stock.......................... (2,971) (4,314)
Net unrealized (depreciation) appreciation on securities available for sale.................. (11,736) 31,167
TOTAL SHAREHOLDERS' EQUITY.............................................................. 1,656,806 1,711,342
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................................. $21,096,557 $ 20,636,430
See accompanying notes to consolidated financial statements.
3
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS
FOR THE THREE MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans and leases............................ $320,498 $321,808 $ 957,961 $ 938,187
Interest and dividends on securities............................. 84,796 79,528 236,117 233,814
Interest on short-term investments............................... 208 401 584 1,790
Total interest income......................................... 405,502 401,737 1,194,662 1,173,791
INTEREST EXPENSE
Interest on deposits............................................. 144,489 142,779 421,847 415,093
Interest on short-term borrowed funds............................ 24,594 48,688 81,602 141,748
Interest on long-term debt....................................... 28,842 20,384 76,678 49,768
Total interest expense........................................ 197,925 211,851 580,127 606,609
NET INTEREST INCOME................................................ 207,577 189,886 614,535 567,182
Provision for loan and lease losses.............................. 13,500 7,933 38,161 23,315
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES...... 194,077 181,953 576,374 543,867
NONINTEREST INCOME
Service charges on deposit accounts.............................. 27,340 22,381 79,358 66,162
Mortgage banking activities...................................... 6,992 9,019 24,834 18,581
Trust income..................................................... 5,963 4,483 16,803 13,478
Agency insurance commissions..................................... 5,549 3,479 16,315 11,757
Other insurance commissions...................................... 2,943 2,195 8,117 8,095
Other nondeposit fees and commissions............................ 17,780 14,233 50,894 40,977
Securities gains (losses), net................................... 705 1,114 543 (18,731)
Other noninterest income......................................... 7,650 5,821 20,131 28,597
Total noninterest income...................................... 74,922 62,725 216,995 168,916
NONINTEREST EXPENSE
Personnel expense................................................ 74,599 74,300 225,297 275,693
Occupancy and equipment expense.................................. 26,750 25,621 76,965 83,243
Foreclosed property expense...................................... 214 524 1,306 2,258
Federal deposit insurance expense................................ 36,293 2,901 42,820 18,881
Other noninterest expense........................................ 49,878 43,775 144,461 159,835
Total noninterest expense..................................... 187,734 147,121 490,849 539,910
EARNINGS
Income before income taxes....................................... 81,265 97,557 302,520 172,873
Income tax expense............................................... 25,299 32,971 98,536 58,813
Net income....................................................... 55,966 64,586 203,984 114,060
Preferred dividend requirements............................... -- 1,255 610 3,843
Income applicable to common shares............................ $ 55,966 $ 63,331 $ 203,374 $ 110,217
PER COMMON SHARE
Net income:
Primary....................................................... $ .50 $ .57 $ 1.85 $ 1.01
Fully diluted................................................. $ .50 $ .56 $ 1.83 $ 1.00
Cash dividends declared....................................... $ .27 $ .23 $ .73 $ .63
AVERAGE SHARES OUTSTANDING
Primary.......................................................... 110,841,221 110,162,172 110,071,975 109,489,491
Fully diluted.................................................... 111,013,052 114,996,393 111,722,834 114,782,862
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, 1996 AND 1995
(UNAUDITED)
RETAINED
SHARES OF EARNINGS
COMMON PREFERRED COMMON PAID-IN AND
STOCK STOCK STOCK CAPITAL OTHER* TOTAL
(DOLLARS IN THOUSANDS)
BALANCE, DECEMBER 31, 1994, AS PREVIOUSLY
REPORTED...................................... 102,215,032 $ 3,850 $511,075 $285,599 $695,953 $1,496,477
Merger with Regional Acceptance Corporation
accounted for under the pooling of
interests method of accounting............. 5,794,215 -- 28,971 (9,800) 9,900 29,071
BALANCE, DECEMBER 31, 1994, AS RESTATED......... 108,009,247 3,850 540,046 275,799 705,853 1,525,548
Add (Deduct)
Net income.................................... -- -- -- -- 114,060 114,060
Common stock issued........................... 2,478,754 -- 12,393 24,821 -- 37,214
Redemption of common stock.................... (1,436,550) -- (7,183) (25,674) -- (32,857)
Net appreciation on securities available for
sale....................................... -- -- -- -- 80,905 80,905
Preferred stock cancellations and
conversions................................ 66,447 (148) 332 (2,555) -- (2,371)
Cash dividends declared:
Common stock............................... -- -- -- -- (77,593) (77,593)
Preferred stock............................ -- -- -- -- (3,811) (3,811)
Amortization of unearned stock compensation... -- -- -- -- 1,141 1,141
BALANCE, SEPTEMBER 30, 1995..................... 109,117,898 $ 3,702 $545,588 $272,391 $820,555 $1,642,236
BALANCE, DECEMBER 31, 1995, AS PREVIOUSLY
REPORTED...................................... 103,357,440 $ 3,669 $516,787 $279,204 $874,403 $1,674,063
Merger with Regional Acceptance Corporation
accounted for under the pooling of
interests method of accounting............. 5,794,215 -- 28,971 (9,800) 18,108 37,279
BALANCE, DECEMBER 31, 1995, AS RESTATED......... 109,151,655 3,669 545,758 269,404 892,511 1,711,342
Add (Deduct)
Net income.................................... -- -- -- -- 203,984 203,984
Common stock issued........................... 1,804,663 -- 9,023 36,070 -- 45,093
Redemption of common stock.................... (6,179,000) -- (30,895) (149,495) -- (180,390)
Net depreciation on securities available for
sale....................................... -- -- -- -- (42,903) (42,903)
Preferred stock cancellations and
conversions................................ 4,334,692 (3,669) 21,674 (18,005) -- --
Cash dividends declared:
Common stock............................... -- -- -- -- (81,053) (81,053)
Preferred stock............................ -- -- -- -- (610) (610)
Amortization of unearned stock compensation... -- -- -- -- 1,343 1,343
BALANCE, SEPTEMBER 30, 1996..................... 109,112,010 $ -- $545,560 $137,974 $973,272 $1,656,806
* Includes net unrealized appreciation (depreciation) on securities available
for sale, unvested restricted stock and loan to employee stock ownership plan.
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, 1996 AND 1995
(UNAUDITED)
1996 1995
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................................... $ 203,984 $ 114,060
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses................................................................ 38,161 23,315
Depreciation of premises and equipment............................................................. 29,403 24,469
Amortization of intangibles........................................................................ 5,364 8,740
Accretion of negative goodwill..................................................................... (4,678) (4,751)
Amortization of unearned stock compensation........................................................ 1,343 1,141
Discount accretion and premium amortization on securities, net..................................... 2,052 3,144
Loss (gain) on sales of trading account securities, net............................................ 2 (31)
Loss (gain) on sales of securities, net............................................................ (543) 18,731
Loss (gain) on sales of loans, net................................................................. (6,127) (3,366)
Loss (gain) on disposals of premises and equipment, net............................................ (220) (6,476)
Loss (gain) on foreclosed property and other real estate, net...................................... 2,066 1,353
Proceeds from sales of trading account securities, net of purchases................................ (2) 31
Proceeds from sales of loans held for sale......................................................... 1,107,666 380,443
Purchases of loans held for sale................................................................... (309,600) (180,180)
Origination of loans held for sale, net of principal collected..................................... (725,241) (406,631)
Decrease (increase) in:
Accrued interest receivable...................................................................... 24,115 (26,239)
Other assets..................................................................................... (112,874) 28,240
Increase (decrease) in:
Accrued interest payable......................................................................... 2,526 18,961
Accounts payable and other liabilities........................................................... 34,088 97,733
Net cash provided by operating activities...................................................... 291,485 92,687
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale................................................. 315,067 1,145,702
Proceeds from maturities of securities available for sale............................................ 1,631,600 688,757
Purchases of securities available for sale........................................................... (1,487,678) (1,826,599)
Proceeds from maturities of securities held to maturity.............................................. 29,024 155,549
Purchases of securities held to maturity............................................................. (2,034) (43,544)
Leases made to customers............................................................................. (53,082) (33,842)
Principal collected on leases........................................................................ 35,419 34,401
Loan originations, net of principal collected........................................................ (988,710) (827,178)
Purchases of loans................................................................................... (79,344) (5,382)
Proceeds from disposals of premises and equipment.................................................... 2,426 12,605
Purchases of premises and equipment.................................................................. (40,213) (61,250)
Proceeds from sales of foreclosed property........................................................... 10,730 8,107
Proceeds from sales of other real estate held for development or sale................................ 5,672 11,447
Other, net........................................................................................... -- (9,177)
Net cash used in investing activities.......................................................... (621,123) (750,404)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits............................................................................. 334,356 120,886
Net (decrease) increase in short-term borrowed funds................................................. (500,134) 125,410
Proceeds from long-term debt......................................................................... 1,236,758 1,046,358
Repayments of long-term debt......................................................................... (570,482) (651,831)
Net proceeds from common stock issued................................................................ 45,004 37,214
Redemption of common stock........................................................................... (180,390) (32,857)
Preferred stock cancellations and conversions........................................................ -- (2,371)
Cash dividends paid on common and preferred stock.................................................... (76,656) (57,770)
Net cash provided by financing activities...................................................... 288,456 585,039
Net Decrease in Cash and Cash Equivalents.............................................................. (41,182) (72,678)
CASH AND CASH EQUIVALENTS at beginning of period....................................................... 705,676 671,777
CASH AND CASH EQUIVALENTS at end of period............................................................. $ 664,494 $ 599,099
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest........................................................................................... $ 578,174 $ 587,914
Income taxes....................................................................................... 112,108 78,933
Noncash financing and investing activities:
Transfer of loans to foreclosed property........................................................... 13,200 6,438
Transfer of fixed assets to other real estate owned................................................ 8,416 21,846
Common stock issued upon conversion of debentures.................................................. -- 4,896
Restricted stock issued............................................................................ 88 --
Securitization of mortgage loans................................................................... 817,268 53,540
See accompanying notes to consolidated financial statements.
6
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(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, 1996 and December 31, 1995; the
consolidated statements of income for the three months and nine months
ended September 30, 1996 and 1995; and the consolidated statements of cash
flows for the nine months ended September 30, 1996 and 1995.
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
should be referred to in connection with the reading of these unaudited
interim consolidated financial statements.
Certain 1995 amounts have been reclassified to conform with statement
presentations for 1996. The reclassifications have no effect on
shareholders' equity or net income as previously reported. The preparation
of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B. NATURE OF OPERATIONS
Southern National is a multi-bank holding company headquartered in
Winston-Salem, North Carolina. Southern National conducts its operations in
North Carolina, South Carolina and Virginia primarily through its
commercial banking subsidiaries and, to a lesser extent, through its other
subsidiaries. The commercial banking subsidiaries, Branch Banking and Trust
Company ("BB&T"), Branch Banking and Trust Company of South Carolina
("BB&T-SC") and Branch Banking and Trust Company of Virginia ("BB&T-VA"),
provide a wide range of traditional banking services for retail and
commercial customers, including small and mid-size businesses, public
agencies and local governments, trust companies and individuals.
Substantially all of Southern National's loans are to businesses and
individuals in the Carolinas and Virginia. Subsidiaries of the commercial
banks offer lease financing to commercial businesses and municipal
governments; investment alternatives, including discount brokerage
services, annuities, mutual funds and government and municipal bonds; life
and property and casualty insurance on an agency basis; and insurance
premium financing.
C. NEW ACCOUNTING PRONOUNCEMENTS
During 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." This statement establishes accounting standards for
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and to be disposed of. The statement requires such
assets to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Any resulting impairment loss is required to be reported in
the period in which the recognition criteria are first applied and met.
Southern National adopted the provisions of the statement on January 1,
1996. The implementation did not have a material impact on the consolidated
financial position or consolidated results of operations.
In May 1995, the FASB 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. The impact of the adoption
of this statement resulted in additional mortgage banking income of $2.5
million, before taxes, or $.02 per fully diluted share, after taxes, during
the first nine months of 1995. SFAS No. 122 prohibits retroactive
application to prior years.
In October of 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes financial accounting and
reporting standards for stock-based compensation plans. The statement
defines a fair value based method of accounting for an employee stock
option or similar equity instrument and encourages the adoption of
7
that method of accounting. However, the statement also allows entities to
continue to account for such plans under Accounting Principles Board
("APB") Opinion No. 25. Entities electing to account for such plans in
accordance with APB Opinion No. 25 must make pro forma disclosures of net
income and earnings per share as if the fair value based method of
accounting defined in the statement had been applied. Southern National
adopted the statement effective January 1, 1996 and elected to continue to
account for stock-based compensation plans under the provisions of APB
Opinion No. 25. Therefore, the implementation of the statement did not have
an impact on Southern National's consolidated financial position or
consolidated results of operations. Southern National will make the
required pro forma disclosures of net income and earnings per share using
accounting methods prescribed by SFAS No. 123 in the Form 10-K for the year
ending December 31, 1996.
In June of 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." The
statement, which becomes effective for transactions occurring after
December 31, 1996, provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities based on the financial components approach that focuses on
control. Under this approach, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes all assets it does not control
and derecognizes liabilities when extinguished. The statement also provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. Management does not
anticipate that the implementation of the statement will have a material
impact on the consolidated financial position or consolidated results of
operations of Southern National.
D. MERGERS AND ACQUISITIONS
On August 22, 1996, Southern National announced plans to acquire Fidelity
Financial Bankshares Corporation ("Fidelity") of Richmond, Va. Under the
terms of the agreement, Fidelity shareholders will receive .7931 shares of
Southern National common stock for each share of Fidelity common stock
held. The deal is valued at $24.68 per Fidelity share. The exchange ratio
is fixed between Southern National stock prices of $26.50 and $31.50.
Outside this collar, the exchange ratio is variable based on Southern
National's common stock price and will fall within a range of .7137 and
.8758. The transaction will be accounted for under the purchase method of
accounting. Fidelity, with $321 million in assets, operates seven branches
in the Richmond metropolitan area through its banking subsidiary, Fidelity
Federal Savings Bank, which will merge into BB&T-VA.
On September 1, 1996, Southern National completed the acquisition of
Regional Acceptance Corporation of Greenville, N.C. ("Regional") in a stock
transaction accounted for under the pooling-of-interests method of
accounting. Accordingly, the consolidated financial statements and
supplemental financial information contained herein has been restated to
reflect Regional's financial condition and results of operations.
Regional's shareholders received .3861 shares of Southern National stock in
exchange for each share of Regional stock held. Pursuant to the
acquisition, Southern National issued approximately 5.85 million shares of
common stock. Regional will continue to operate as an independent
subsidiary of Southern National Corporation. Regional, which specializes in
indirect financing for consumer purchases of mid-model and late-model used
automobiles, operates 28 branch offices in North Carolina, South Carolina,
Tennessee and Virginia.
On September 9, 1996, Southern National announced plans to acquire
Boyle-Vaughan Associates, Inc., an independent insurance agency based in
Columbia, S.C. On October 1, 1996, Southern National announced an agreement
to acquire the William Goldsmith Agency Inc. and the C. Dan Joyner
Insurance Agency, both based in Greenville, S.C. These insurance agencies
will be accounted for as purchase transactions.
On November 4, 1996, Southern National announced plans to acquire United
Carolina Bancshares Corporation ("UCB") of Whiteville, N.C. in a stock
transaction to be accounted for as a pooling of interests. Under the terms
of the agreement, UCB shareholders will receive 1.135 shares of Southern
National common stock in exchange for each share of UCB common stock held.
The transaction, which will be structured as a tax-free exchange, is valued
at $985 million, or $40.01 per UCB common share, based on the November 1,
1996 closing price of Southern National common stock of $35.25. The
exchange ratio is subject to renegotiation if Southern National's stock
price declines 20% compared to the stock price on the agreement date or
declines 15% relative to an index of peer bank stocks. UCB, which conducts
business primarily through its commercial banking subsidiaries, has $4.4
billion in assets and operates 153 branch offices in North and South
Carolina.
8
E. SUPPLEMENTAL CASH FLOW INFORMATION
During the first quarter of 1996, Southern National redeemed all
outstanding shares of Convertible Preferred Stock. This transaction, a
noncash financing activity, resulted in the conversion of 733,869 shares of
preferred stock into 4,334,692 shares of common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report includes statements which are based on current expectations.
These statements are forward looking and actual results may differ materially
from those contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations". Factors affecting the ultimate outcomes of
these expectations include business conditions in the commercial banking
industry, overall economic conditions, competitive factors with other financial
institutions and with non-bank financial service companies, fluctuations in
interest rates and other factors.
ANALYSIS OF FINANCIAL CONDITION
Southern National's total assets at September 30, 1996 were $21.1 billion,
a $460.1 million increase from the balance at December 31, 1995. The primary
components of the increase were securities, which increased $261.4 million, and
loans and leases, which grew $159.0 million. These increases were offset by
declines in other earning assets of $112.3 million.
Growth in loans was affected by securitizations. During 1996 and
1995, Southern National has transferred $1.2 billion in mortgage loans from
the mortgage portfolio to the securities portfolio. During the third quarter
of 1996, Southern National securitized $307.1 million of loans. This is designed
to provide Southern National with additional liquidity and flexibility in
managing mortgage loan assets. The resulting mortgage-backed securities are
being used to replace lower-yielding U.S. Treasuries in the securities
portfolio as they mature, thereby improving margin. Management intends to
hold the mortgage-backed securities in the available for sale portfolio for
the foreseeable future. Annualized loan growth, excluding the impact of these
securitizations, was 9.1% comparing end of period loans at September 30, 1996
and December 31, 1995. Average loans, excluding the impact of $974.8 million
of securitized loans, increased at an annualized rate of 7.4% comparing the
quarters ended September 30, 1996 and 1995. Growth in average loans has been
healthy in all categories comparing the quarterly averages for the third
quarters of 1996 and 1995. Mortgage loans, excluding the impact of the loan
securitizations, grew at a rate of 5.5%, average commercial loans increased
8.3% over the same time frame and average consumer loans grew at a rate of
8.2%. The trends in lending have been improving since the completion
of the merger of equals and momentum has particularly increased in recent
quarters.
At September 30, 1996, securities available for sale had unrealized
depreciation, after tax, of $11.7 million compared to unrealized appreciation,
after tax, of $31.2 million at December 31, 1995. The taxable equivalent yield
on the securities portfolio during the third quarter was 6.74%, up from 6.32%
for the fourth quarter of 1995 and up from 6.23% for the third quarter of the
prior year. During the fourth quarter of 1995, Southern National began to
restructure the balance sheet by changing the mix of investments held. The
primary result of this strategy has been a reduction of holdings in U.S.
Treasuries, as such investments have been replaced with securitized mortgage
loans from Southern National's mortgage loan portfolio. The change in mix was
undertaken to improve the overall investment yield of the securities portfolio,
as reflected in these improved quarterly yields.
On the liability side of the balance sheet, long-term debt rose $666.3
million compared to December 31, 1995, primarily as a result of the issuance of
$225.0 million of senior bank notes and $250.0 million of subordinated notes
during 1996. This growth was offset by a $500.1 million reduction in short-term
borrowed funds compared to year end 1995.
Total deposits increased by $334.4 million from the balance at December 31,
1995. Southern National, as well as many other financial institutions, has been
experiencing a trend of slower deposit growth because of competition for
deposits from various non-financial institution sources. However, through an
increased emphasis on demand deposits, which composed 46% of the increase in
total deposits, Southern National has experienced stronger growth during 1996.
Noninterest-bearing demand deposits increased $153.6 million, or 8.1%, during
the first nine months of 1996. Slower deposit growth during 1995 caused
management to rely more heavily on nondeposit funding sources, such as Federal
Home Loan Bank advances and Federal funds purchased. The improved deposit growth
during 1996 also contributed to the reduction in short-term borrowed funds. Less
reliance on short-term borrowed funds should provide more stability for the net
interest margin.
9
ASSET QUALITY
Nonperforming assets were $78.9 million at September 30, 1996, compared to
$79.9 million at December 31, 1995. The allowance for losses as a percentage of
loans and leases was 1.31% compared to 1.26% nine months earlier, and
nonperforming assets as a percentage of loan-related assets were .56% at
September 30, 1996 compared to .57% at December 31, 1995. Loans 90 days or more
past due and still accruing interest totaled $28.2 million compared to a prior
year-end balance of $29.1 million. Southern National has experienced higher
levels of net charge-offs during 1996, particularly in the credit card category
of consumer loans. This trend is consistent with other institutions; however,
Southern National's credit card portfolio is small compared to our peers and the
trend is not expected to have a significant impact on overall credit quality.
Southern National's asset quality indicators remain at or above historic rates
and management does not anticipate a material change in asset quality levels
during the remainder of 1996.
The provision for loan and lease losses for the first nine months of 1996
was $38.2 million compared to $23.3 million in the first nine months of 1995.
The increase in the provision reflects higher net charge-offs during 1996 and
continued growth in loans.
Regional, Southern National's nonstandard automobile finance subsidiary,
affects Southern National's credit quality through higher net charge-offs and
nonperforming assets. This results from the cyclical nature of Regional's
business and rapid growth of the subsidiary through expansion. The higher
charge-offs are not expected to have a significant effect on Southern National's
overall credit quality.
Asset quality statistics relevant to the last five calendar quarters are
presented in the accompanying table.
ASSET QUALITY ANALYSIS
9/30/96 6/30/96 3/31/96 12/31/95 9/30/95
(DOLLARS IN THOUSANDS)
ALLOWANCE FOR LOAN & LEASE LOSSES
Beginning balance.............................................. $181,269 $178,885 $175,588 $177,149 $178,929
Provision for loan and lease losses............................ 13,500 13,261 11,400 11,317 7,933
Net charge-offs................................................ (10,566) (10,877) (8,103) (12,878) (9,713)
Ending balance.............................................. $184,203 $181,269 $178,885 $175,588 $177,149
RISK ASSETS
Nonaccrual loans and leases.................................... $ 63,088 $ 68,014 $ 69,473 $ 66,198 $ 65,807
Foreclosed real estate......................................... 7,166 4,926 4,938 6,868 6,981
Other foreclosed property...................................... 8,609 7,426 6,336 6,784 5,914
Nonperforming assets........................................ $ 78,863 $ 80,366 $ 80,747 $ 79,850 $ 78,702
Loans 90 days or more past due and still accruing.............. $ 28,222 $ 18,025 $ 28,249 $ 29,094 $ 26,909
ASSET QUALITY RATIOS
Nonaccrual loans and leases as a percentage of total loans and
leases......................................................... .45% .48% .49% .47% .46%
Nonperforming assets as a percentage of:
Total assets................................................... .37 .39 .40 .39 .38
Loans and leases plus foreclosed property...................... .56 .57 .57 .57 .55
Net charge-offs as a percentage of average loans and leases...... .30 .31 .23 .36 .27
Allowance for loan and lease losses as a percentage of loans and
leases......................................................... 1.31 1.28 1.26 1.26 1.25
Ratio of allowance for loan and lease losses to:
Net charge-offs................................................ 4.38X 4.19x 5.49x 3.44x 4.60x
Nonaccrual loans and leases.................................... 2.92 2.67 2.57 2.65 2.69
All items referring to loans and leases include loans held for sale and are
net of unearned income. Applicable ratios are annualized.
10
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 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.
Management has established parameters for asset/liability management which
prescribe a maximum impact on net interest income of 3% for a 150 basis point
change over nine months, for the most likely interest rate scenario, and a
maximum of 6% for a 300 basis point change over 12 months. It is management's
on-going objective to effectively manage the impact of changes in interest rates
and minimize the resulting effect on earnings. At September 30, 1996,
fluctuations in interest rate scenarios of this magnitude would not have a
significant impact on Southern National's earnings.
Future strategies for managing the balance sheet include maintaining an
equity to asset ratio of 7.0% to 8.0%. The current equity ratio, at 7.9%, allows
Southern National flexibility in making decisions affecting equity because
current balances are at the top of the target range. Southern National recently
announced plans to repurchase shares of its common stock for reissue in
connection with the proposed acquisition of Fidelity. Repurchase of the shares
should allow Southern National to manage its capital position more effectively.
Management also intends to continue to eliminate low margin assets on the
balance sheet. The securitizations, referred to earlier, have improved
securities yields by moving $1.2 billion in mortgage loans to the securities
portfolio where they have been used to replace lower yielding U.S. Treasuries
as these investments have matured. This strategy will continue into the
foreseeable future. Management is also considering non-certificate core funding
strategies, as certificate accounts are not always the most cost-effective
source of funding.
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.
These financial instruments are designed to move the interest sensitivity of
Southern National 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, 1996, interest rate swaps and floors with a total
notional value of $1.1 billion, and terms of up to seven years, were
outstanding.
11
The following tables set forth certain information concerning Southern
National's interest rate swaps and floors at September 30, 1996:
INTEREST RATE SWAPS AND FLOORS
SEPTEMBER 30, 1996
NOTIONAL RECEIVE PAY UNREALIZED
TYPE AMOUNT RATE RATE GAINS (LOSSES)
(DOLLARS IN THOUSANDS)
Receive fixed swaps.................................................. $ 485,000 6.60% 5.51% $ 2,306
Pay fixed swaps...................................................... 304,610 5.56 5.47 35
Basis swaps.......................................................... 250,000 5.69 5.51 (1,718)
Floors............................................................... 105,000 -- -- 284
Total................................................................ $ 1,144,610 6.08% 5.50% $ 907
RECEIVE PAY FIXED BASIS SWAPS
YEAR-TO-DATE ACTIVITY FIXED SWAPS SWAPS AND FLOORS TOTAL
Balance, December 31, 1995........................................... $ 140,000 $ 353,413 $ 250,000 $ 743,413
Additions............................................................ 450,000 -- 105,000 555,000
Maturities/amortizations............................................. (105,000) (48,803) -- (153,803)
Terminations......................................................... -- -- -- --
Balance, September 30, 1996.......................................... $ 485,000 $ 304,610 $ 355,000 $1,144,610
ONE YEAR ONE TO FIVE AFTER FIVE
MATURITY SCHEDULE* OR LESS YEARS YEARS TOTAL
Receive fixed swaps.................................................. $ 35,000 $ 200,000 $ 250,000 $ 485,000
Pay fixed swaps...................................................... 15,604 284,620 4,386 304,610
Basis swaps.......................................................... -- 250,000 -- 250,000
Floors............................................................... -- 105,000 -- 105,000
Total................................................................ $ 50,604 $ 839,620 $ 254,386 $1,144,610
*Maturities are based on full contract extensions.
CAPITAL ADEQUACY AND RESOURCES
The maintenance of appropriate levels of capital is a management priority.
Capital adequacy is monitored on an on-going 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.
Total shareholders' equity was $1.7 billion at September 30, 1996 and
December 31, 1995. As a percentage of total assets, total shareholders' equity
was 7.9% at September 30, 1996, down from 8.3% at December 31, 1995. Southern
National's book value per common share at September 30, 1996 was $15.18, versus
$15.04 at December 31, 1995. Average shareholders' equity as a percentage of
average assets was 7.9% for the quarter ended September 30, 1996 and 8.2% for
the three months ended December 31, 1995.
Tier 1 and total risk-based capital ratios at September 30, 1996 were 11.3%
and 14.3%, respectively. The leverage ratio was 7.9% at the end of the third
quarter. The comparable ratios at the end of 1995 were 13.2%, 14.4% and 7.9%,
respectively. 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%.
The declines in certain capital ratios reflect the impact of a common stock
repurchase plan which was undertaken to facilitate the conversion of all of
Southern National's preferred stock outstanding. The preferred stock was
redeemed on
12
March 29, 1996, at the price of $104.05 per share. Each share of preferred stock
was convertible into 5.9068 shares of common stock.
CAPITAL ADEQUACY RATIOS
1996 1995
THIRD SECOND FIRST FOURTH THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER
Average equity to average assets............................................. 7.93% 8.00% 8.20% 8.17% 7.83%
Equity to assets at period end............................................... 7.85 7.81 7.88 8.29 7.89
Risk-based capital ratios:
Tier 1 capital............................................................. 11.3 11.9 12.3 13.2 12.1
Total capital.............................................................. 14.3 15.0 13.5 14.4 13.4
Leverage ratio............................................................... 7.9 7.9 7.7 7.9 7.7
ANALYSIS OF RESULTS OF OPERATIONS
Southern National had net income for the first nine months of 1996 totaling
$204.0 million, compared to $114.1 million during the first nine months of 1995.
On a fully diluted per share basis, earnings for the nine months ended September
30, 1996 were $1.83, compared to $1.00 for the same period in 1995. For the
third quarter, net income totaled $56.0 million, or $.50 per fully diluted
share. This represents a 13.3% decrease from third quarter 1995 net income of
$64.6 million, or $.56 per fully diluted share.
The 1996 earnings reflect the impact of a one-time assessment levied by the
Federal Deposit Insurance Corporation ("FDIC") totaling approximately $33
million on a pre-tax basis. The purpose of the assessment was to recapitalize
the Savings Association Insurance Fund ("SAIF") and was levied on all
institutions with SAIF-insured deposits. Southern National was significantly
affected by the assessment because of its past thrift acquisitions.
Excluding the impact of this assessment, Southern National earned $225.3
million for the first nine months of 1996, or $2.02 per fully diluted share. The
significant increase from the prior year earnings resulted from $76.3 million in
after-tax nonrecurring charges and securities losses related to the merger
between Southern National and BB&T Financial Corporation ("BB&T FC") which were
recorded in the first nine months of 1995. Excluding nonrecurring items from the
prior year and the impact of the assessment recorded in the third quarter of
1996, Southern National's net income would have increased 18.3%, or $34.9
million. For the third quarter, net income totaled $77.2 million on a recurring
basis compared to $68.3 million recorded for the third quarter of 1995, an
increase of $9.0 million, or 13.2%. On a fully diluted per share basis,
recurring net income for the quarter was $.70, a 18.6% increase over the $.59
earned on a recurring basis in the third quarter of 1995.
Southern National's growth in recurring earnings resulted from three
factors. First, net interest margin improved from 4.13% for the first nine
months of 1995 to 4.43% for the first nine months of 1996. Second, following the
merger of Southern National and BB&T FC, management targeted a growth rate in
noninterest income of 20%. The 22.7% growth in recurring noninterest income for
the nine months ended September 30, 1996 compared to the same period in 1995
exceeds this goal and demonstrates progress in achieving the revenue
enhancements which were expected to be a strength of the combined bank. Third,
Southern National has controlled noninterest expenses following the merger as
shown by the improvement in the efficiency ratio to 53.3% from 56.4% for the
nine months ended September 30, 1996 and 1995, respectively.
Southern National's market area continues to grow at a healthy, sustainable
rate. The core business has shown positive trends each of the six quarters since
the Southern National / BB&T FC merger. Southern National's operations were
somewhat affected by Hurricane Fran during the quarter. The hurricane caused
significant damage to portions of BB&T's market area, as well as damaging
certain banking offices and interrupting business in those offices. Management
does not believe, however, that the hurricane caused any material impact on
Southern National's consolidated financial condition or consolidated results of
operations.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was $639.4
million for the first nine months of 1996 compared to $591.1 million for the
same period in 1995, a 8.2% increase. For the nine months ended September 30,
1996 and
13
1995, average interest-earning assets increased $107.4 million, or .6%, to $19.3
billion, while average interest-bearing liabilities decreased by $120.0 million.
As mentioned previously, Southern National also experienced substantial positive
development in the net interest margin. The 30 basis point increase in margin
was primarily rate driven, rather than volume driven. The increase was caused
primarily by a 43 basis point increase in yields from securities, combined with
a 53 basis point decrease in rates paid on savings, interest checking and MRS
sweeps, a 64 basis point decline in rates paid on short-term borrowed funds and
a 52 basis point decrease in rates paid on long-term debt. These fluctuations
reflect the restructuring of the securities portfolio, as well as other
categories of the balance sheet, which has slowed growth in total assets, thus
reducing Southern National's dependence on costly nondeposit funding sources.
The improvement in margin also reflects a change in management focus from
pricing strategies to quality strategies. Loans and deposits were very
competitively priced following the merger of Southern National and BB&T FC to
protect current market positions and retain customer relationships.
The net interest margin was 4.42% for the third quarter, down from 4.49%
for the second quarter of 1996. The reduction for the current quarter reflects
the impact of prepayment penalties associated with changing the funding strategy
for the recently-acquired Regional. Southern National paid off Regional's
existing borrowings because Southern National has greater access to more
cost-effective funding sources than were being utilized by Regional. Management
anticipates improved net interest margins for Regional because of the changes
made in funding.
The following table demonstrates fluctuations in net interest income and
the related yields, and details the portions of these changes caused by changes
in rates versus changes in volumes.
14
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
CHANGE
AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE INCREASE DUE TO
FULLY TAXABLE EQUIVALENT 1996 1995 1996 1995 1996 1995 (DECREASE) RATE
(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury, government
and other (5).............. $ 4,943,840 $ 5,261,508 6.54% 6.08% $ 242,473 $ 239,945 $ 2,528 $ 17,474
States and political
subdivisions............... 152,762 172,660 9.04 8.92 10,356 11,540 (1,184) 160
Total securities (5)....... 5,096,602 5,434,168 6.61 6.18 252,829 251,485 1,344 17,634
Other earning assets (2)....... 14,443 41,744 5.71 5.76 617 1,799 (1,182) (16)
Loans and leases, net of
unearned income (1)(3)(4)(5). 14,145,508 13,673,281 9.12 9.23 966,078 944,431 21,647 (11,577)
Total Earnings assets...... 19,256,553 19,149,193 8.45 8.36 1,219,524 1,197,715 21,809 6,041
Non-earning assets......... 1,163,799 1,195,379
TOTAL ASSETS............. $20,420,352 $20,344,572
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings, interest-checking and
MRS sweeps................. $ 3,141,071 $ 3,231,733 1.75 2.28 41,045 55,200 (14,155) (12,695)
Money market deposits........ 1,398,939 1,634,222 3.55 3.53 37,211 43,110 (5,899) 357
Time deposits................ 8,323,308 7,697,780 5.51 5.50 343,591 316,783 26,808 696
Total interest-bearing
deposits................. 12,863,318 12,563,735 4.38 4.42 421,847 415,093 6,754 (11,642)
Short-term borrowed funds...... 2,055,123 3,188,018 5.30 5.94 81,602 141,748 (60,146) (13,898)
Long-term debt................. 1,756,915 1,043,602 5.86 6.38 76,678 49,768 26,910 (4,592)
Total interest-bearing
liabilities.............. 16,675,356 16,795,355 4.65 4.83 580,127 606,609 (26,482) (30,132)
Demand deposits............ 1,833,456 1,697,375
Other liabilities.......... 268,845 274,959
Shareholders' equity....... 1,642,695 1,576,883
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY..... $20,420,352 $20,344,572
Average interest rate spread... 3.80 3.53
Net yield on earning assets.... 4.43% 4.13% $ 639,397 $ 591,106 $ 48,291 $ 36,173
Taxable equivalent adjustment.. $ 24,862 $ 23,924
FULLY TAXABLE EQUIVALENT VOLUME
ASSETS
Securities (1):
U.S. Treasury, government
and other (5).............. $(14,946)
States and political
subdivisions............... (1,344)
Total securities (5)....... (16,290)
Other earning assets (2)....... (1,166)
Loans and leases, net of
unearned income (1)(3)(4)(5). 33,224
Total Earnings assets...... 15,768
Non-earning assets.........
TOTAL ASSETS.............
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings, interest-checking and
MRS sweeps................. (1,460)
Money market deposits........ (6,256)
Time deposits................ 26,112
Total interest-bearing
deposits................. 18,396
Short-term borrowed funds...... (46,248)
Long-term debt................. 31,502
Total interest-bearing
liabilities.............. 3,650
Demand deposits............
Other liabilities..........
Shareholders' equity.......
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.....
Average interest rate spread...
Net yield on earning assets.... $ 12,118
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.
(5) Includes assets which were held for sale or available for sale at amortized
cost.
15
Net interest income FTE for the third quarter of 1996 was $215.9 million,
up from $198.4 million for the third quarter of 1995. The higher level of net
interest income reflects a significant increase in the net interest margin, from
4.04% to 4.42% comparing the third quarters. The average yield earned on earning
assets increased 11 basis points. However, the rates paid on interest-bearing
liabilities declined by 26 basis points, with reductions in rates paid on
deposits, short-term borrowed funds and long-term debt.
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.
NONINTEREST INCOME
Noninterest income for the nine months ended September 30, 1996 was $217.0
million, compared to $168.9 million for the same period in 1995. Securities
losses of $19.8 million recorded in the first quarter of 1995 were a major
contributing factor to the increase in noninterest income. These securities
losses resulted from a restructuring of the securities portfolio done in
connection with the merger of Southern National and BB&T FC. However, Southern
National also experienced positive development in core noninterest income.
Service charges on deposits, mortgage banking activities, general and other
insurance commissions and trust income all showed strong gains during the
period. 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, 1996
was 26.0%, up from 24.9% for the first nine months of 1995. Management
anticipates continued growth in noninterest income, with an ultimate target
ratio of noninterest income to total revenues of 30%.
Service charges on deposits grew for the first nine months in 1996 compared
to 1995, increasing by $13.2 million, or 19.9%. The primary factor contributing
to the significant growth in service charges on deposits was increased fees
during 1996. For the third quarter, service charges increased $5.0 million, or
22.2%, over the same quarter last year. The greatest increases involved
commercial account analysis income and overdraft charges. Looking forward,
management anticipates new fees on automated teller machines ("ATMs") to provide
an additional $6 million in fee income on an annual basis with very little
related expense. As part of Southern National's emphasis on alternative delivery
systems, management anticipates the addition of 75 new ATMs in existing branches
and an additional 200 ATMs in non-branch locations.
Trust income grew $3.3 million, or 24.7%, for the nine months ended
September 30,1996 compared to the same period in 1995. For the third quarter of
1996, trust services income totaled $6.0 million, an increase of $1.5 million
over the third quarter of 1995.
Southern National also realized substantial growth in agency insurance
commissions, up $4.6 million, or 38.8%, compared to the first nine months of
1995. The growth in agency insurance commissions resulted primarily from
unusually large contingency commissions and earnings from sales of life
insurance contracts. Comparing the third quarters of 1996 and 1995, agency
insurance commissions grew at a rate of 59.5%. With the announced acquisitions
of Boyle-Vaughan Associates, Inc., William Goldsmith Agency Inc. and the C. Dan
Joyner Insurance Agency, all in South Carolina, Southern National has assembled
the largest independent agency system in the Carolinas. Management anticipates
continued growth in agency insurance commissions and will continue to pursue
acquisitions of quality independent agencies.
Mortgage banking activities increased 33.7%, or $6.3 million, for the nine
months ended September 30, 1996 compared to the same period in 1995. For the
third quarter of 1996, mortgage banking activities decreased $2.0 million, or
22.5%. The increase in the year-to-date balances resulted from increased net
gains on higher volumes of sales of mortgage loans and higher fees during the
first nine months of 1996. The reduction in the quarter reflects larger losses
from loan sales recorded for the three months ended September 30, 1996.
Other nondeposit fees and commissions increased by $9.9 million to a level
of $50.9 million in 1996 compared with $41.0 million for the first nine months
of 1995. The primary component generating the increase in nondeposit fees and
commissions was investment services, which increased $5.7 million. For the third
quarter of 1996, other nondeposit fees and commissions increased $3.5 million
compared to the prior year, also driven by investment services.
Other income decreased $8.5 million for the first nine months of 1996
because of a premium totaling $12.3 million relating to a divestiture of
deposits recorded in 1995. This divestiture was necessary in order to comply
with anti-trust laws following the merger of Southern National and BB&T FC. For
the third quarter, other income increased $1.8 million compared with the third
quarter of 1995.
16
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
CHANGE
AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE INCREASE DUE TO
FULLY TAXABLE EQUIVALENT 1996 1995 1996 1995 1996 1995 (DECREASE) RATE
(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury, government and
other (5).................. $ 5,210,191 $ 5,286,634 6.69% 6.20% $ 87,080 $ 81,904 $ 5,176 $ 6,385
States and political
subdivisions............... 143,615 166,290 8.88 9.03 3,189 3,753 (564) (55)
Total securities (5)....... 5,353,806 5,452,924 6.74 6.23 90,269 85,657 4,612 6,330
Other earning assets (2)....... 14,983 31,033 5.79 5.13 218 401 (183) 46
Loans and leases, net of
unearned income
(1)(3)(4)(5)................. 14,145,593 14,020,701 9.10 9.17 323,363 324,193 (830) (2,819)
Total earning assets....... 19,514,382 19,504,658 8.45 8.34 413,850 410,251 3,599 3,557
Non-earning assets......... 1,188,691 1,240,632
TOTAL ASSETS............. $20,703,073 $20,745,290
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits:
Savings, interest-checking
and MRS sweeps............. $ 3,105,541 $ 3,268,889 1.62 2.22 12,630 18,314 (5,684) (4,773)
Money market deposits........ 1,437,753 1,514,249 3.63 3.40 13,132 12,974 158 833
Time deposits................ 8,596,251 7,722,931 5.49 5.73 118,727 111,491 7,236 (4,669)
Total interest-bearing
deposits................. 13,139,545 12,506,069 4.37 4.53 144,489 142,779 1,710 (8,609)
Short-term borrowed funds...... 1,823,310 3,297,130 5.37 5.86 24,594 48,688 (24,094) (3,870)
Long-term debt................. 1,977,109 1,309,932 5.80 6.17 28,842 20,384 8,458 (1,288)
Total interest-bearing
liabilities.............. 16,939,964 17,113,131 4.65 4.91 197,925 211,851 (13,926) (13,767)
Demand deposits............ 1,853,529 1,705,197
Other liabilities.......... 266,860 303,285
Shareholders' equity....... 1,642,720 1,623,677
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY..... $20,703,073 $20,745,290
Average interest rate spread... 3.80 3.43
Net yield on earning assets.... 4.42% 4.04% $215,925 $198,400 $ 17,525 $ 17,324
Taxable equivalent
adjustment................... $ 8,348 $ 8,514
FULLY TAXABLE EQUIVALENT VOLUME
ASSETS
Securities (1):
U.S. Treasury, government and
other (5).................. $ (1,209)
States and political
subdivisions............... (509)
Total securities (5)....... (1,718)
Other earning assets (2)....... (229)
Loans and leases, net of
unearned income
(1)(3)(4)(5)................. 1,989
Total earning assets....... 42
Non-earning assets.........
TOTAL ASSETS.............
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits:
Savings, interest-checking
and MRS sweeps............. (911)
Money market deposits........ (675)
Time deposits................ 11,905
Total interest-bearing
deposits................. 10,319
Short-term borrowed funds...... (20,224)
Long-term debt................. 9,746
Total interest-bearing
liabilities.............. (159)
Demand deposits............
Other liabilities..........
Shareholders' equity.......
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.....
Average interest rate spread...
Net yield on earning assets.... $ 201
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.
NONINTEREST EXPENSE
Noninterest expense was $490.8 million for the first nine months of 1996
compared to $539.9 million for the same period a year ago. Merger-related
accruals and expenses led to an elevated level of noninterest expense in the
first nine months of 1995. These items included $104.8 million of pretax
nonrecurring charges which primarily affected personnel expense, occupancy and
equipment expense and other noninterest expense.
Excluding nonrecurring charges, personnel expense, the largest component of
noninterest expense, increased from $217.5 million for the first nine months of
1995 to $225.3 million for the same period in 1996. This modest increase of 3.6%
reflects efficiencies of scale accomplished as a result of the Southern
National/BB&T FC merger. The only component of
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personnel expense currently increasing is incentive compensation because of
increased sales and higher productivity in many areas. The nonrecurring charges
discussed above contributed $58.2 million to total personnel costs during the
first nine months of 1995 in the form of severance pay, termination of
employment contracts, early retirement packages and related benefits. For the
third quarter of 1996, personnel expense totaled $74.6 million, a increase of
$3.2 million from the $71.4 million recorded in the third quarter of 1995 on a
recurring basis. This increase reflects additional incentive compensation, as
discussed above.
Occupancy and equipment expense, excluding nonrecurring charges, for the
nine months ended September 30, 1996 increased $4.0 million, or 5.5%, compared
to 1995. On-going depreciation of property and equipment purchased in connection
with implementing the merger is 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 in the prior
year. For the third quarter of 1996, occupancy and equipment expense totaled
$26.8 million, up slightly from the $25.9 million incurred on a recurring basis
in the prior year.
Federal deposit insurance expense increased $23.9 million, or 126.8%, for
the nine months ended September 30, 1996, compared to the same period in the
prior year, as a result of the recording of a one-time assessment by the FDIC on
SAIF-insured deposits, as discussed above. During 1995 and 1996, significant
legislation was passed affecting deposit insurance premiums. During the third
quarter of 1995, the FDIC reduced the rates paid from $.23 per $100 to $.04 on
deposits insured by the Bank Insurance Fund ("BIF"). Effective January 1, 1996,
insurance premiums charged on BIF-insured deposits were eliminated because of
the recapitalization of the BIF. Southern National continued to pay insurance
premiums on SAIF-insured deposits during 1996 through the third quarter, when
the one-time assessment was levied. The assessment recapitalized the SAIF, and,
therefore, future insurance premiums on SAIF-insured deposits were eliminated.
Effective January 1, 1997, Southern National will pay $.0644 per $100 of
SAIF-insured deposits and $.0129 per $100 of BIF-insured deposits to service the
Financing Corporation ("FICO") bonds. Southern National anticipates a reduction
in FDIC-related expense in the fourth quarter of 1996 of $3.0 million and an
annual cost savings of approximately $8.8 million. The one-time SAIF assessment
eliminates a cost disadvantage Southern National had with some competitors who
did not have SAIF-insured deposits. Southern National incurred Federal deposit
insurance expense of $36.3 million during the third quarter of 1996, up from
$2.9 million recorded in the prior year. The increase reflects the SAIF
assessment, which totaled approximately $33 million, before tax, and was
recorded during the third quarter.
Excluding $36.3 million in nonrecurring charges which were recorded in the
first nine months of last year, other noninterest expenses increased $20.9
million, or 16.9%. This increase was driven by increases in advertising, up $2.7
million and loan and lease expenses, up $5.3 million. The increased advertising
costs are related to a marketing program to increase BB&T's brand identity.
While it is difficult to measure the impact of advertising costs, and any
program takes time to be effective, studies have noted an increase in BB&T's
brand identity and in the "switch preference" of customers of competitors.
Additional loan and lease expenses resulted from a home equity loan incentive
program. For the third quarter, other expenses totaled $49.9 million, up from
the $40.4 million recorded in the third quarter of 1995 on a recurring basis.
This increase reflects higher levels of advertising and promotional expenditures
made during the third quarter of 1996.
Southern National's efficiency ratio, excluding the impact of the SAIF
assessment, improved to 53.3% for the first nine months of 1996 compared to
56.4%, excluding nonrecurring charges, for the same period in 1995.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $98.5 million for the first
nine months of 1996 compared to $58.8 million recorded in the first nine months
of 1995. Excluding the impact of the nonrecurring charges recorded in 1995, the
income tax provision for the prior year totaled $95.2 million. Comparing the
recurring balances, the provision for income taxes increased $15.0 million, or
15.8%, because of higher pretax income. Effective tax rates were 32.9% and 33.3%
for the nine months ended September 30, 1996 and 1995, respectively. For the
third quarter of 1996, the provision for income taxes totaled $37.0 million,
excluding the impact of the assessment, up $1.6 million, or 4.6%, compared to
the third quarter 1995 balance. The effective tax rates for the three months
ended September 30, 1996 and 1995 were 32.4% and 34.2%, respectively.
PROFITABILITY MEASURES
1996 1995
THIRD SECOND FIRST FOURTH THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER
Return on average assets..................................................... 1.08% 1.50% 1.43% 1.39% 1.24%
Return on average common equity.............................................. 13.55 18.77 17.99 17.50 16.19
Net interest margin.......................................................... 4.42 4.49 4.38 4.17 4.04
Efficiency ratio (taxable equivalent)*....................................... 53.3 53.0 53.8 51.8 54.0
* Excludes securities gains (losses), foreclosed property expense and
nonrecurring items for all periods.
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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 2 -- Agreement and Plan of Reorganization between Southern
National Corporation and United Carolina Bancshares
Corporation, dated November 1, 1996 and exhibits thereto:
a) Stock Option Agreement between Southern National
Corporation and United Carolina Bancshares Corporation and
b) Stock Option Agreement between United Carolina
Bancshares Corporation and Southern National Corporation.
Exhibit 11 -- "Computation of Earnings Per Share" is included herein.
Exhibit 27 -- "Financial Data Schedule" is included in the
electronically-filed document as required.
(b) Southern National filed a Form 8-K under Item 5 on April 15, 1996 to
report the results of operations and financial condition as of March 31, 1996.
Southern National filed a Form 8-K under Item 5 on May 3, 1996 to report plans
to acquire Regional Acceptance Corporation of Greenville, N.C. Southern National
filed a Form 8-K under Item 5 on July 12, 1996 to report the results of
operations and financial condition as of June 30, 1996. Southern National filed
a Form 8-K under Item 5 on August 27, 1996 to report plans to acquire Fidelity
Financial Bankshares Corporation of Richmond, Va. Southern National filed a Form
8-K under Item 5 on September 3, 1996 to report that the acquisition of Regional
Acceptance Corporation had been completed through the issuance of 5.85 million
shares of common stock. Southern National filed a Form 8-K under Item 5 on
October 11, 1996 to report the results of operations and financial condition as
of September 30, 1996. Southern National filed a Form 8-K under Item 5 on
October 11, 1996 to report plans to purchase a number of common shares equal to
the amount issued in the Fidelity Financial Bankshares Corporation transaction.
Southern National also reported that the transaction would be accounted for as a
purchase, instead of a pooling of interests, which was originally planned.
Southern National filed an 8-K under Item 5 on November 4, 1996 to report plans
to acquire United Carolina Bancshares Corporation of Whiteville, N.C.
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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, 1996 By: /s/ SCOTT E. REED
SCOTT E. REED, SENIOR EXECUTIVE VICE
PRESIDENT
AND CHIEF FINANCIAL OFFICER
Date: November 14, 1996 By: /s/ SHERRY A. KELLETT
SHERRY A. KELLETT, EXECUTIVE VICE
PRESIDENT AND
CONTROLLER (PRINCIPAL ACCOUNTING
OFFICER)
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