UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended:
MARCH 31, 1997
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 x No
At April 30, 1997, 109,160,998 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
MARCH 31, 1997
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
Market Risk Management.................................................................................... 11
Capital Adequacy and Resources............................................................................ 13
Analysis of Results of Operations......................................................................... 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders....................................................... 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)
MARCH 31, DECEMBER 31,
1997 1996
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
ASSETS
Cash and due from banks...................................................................... $ 552,111 $ 638,748
Interest-bearing deposits with banks......................................................... 8,327 1,046
Federal funds sold and securities purchased under resale agreements or similiar
arrangements.............................................................................. 21,022 19,940
Securities available for sale................................................................ 5,222,841 5,136,789
Securities held to maturity (market value: $125,072 at March 31, 1997, and $128,410 at
December 31, 1996)........................................................................ 122,182 124,718
Loans held for sale.......................................................................... 264,625 219,469
Loans and leases, net of unearned income..................................................... 15,084,615 14,364,595
Allowance for loan and lease losses....................................................... (193,987) (183,932)
Loans and leases, net................................................................... 14,890,628 14,180,663
Premises and equipment, net.................................................................. 328,862 319,082
Other assets................................................................................. 641,597 606,107
TOTAL ASSETS............................................................................ $22,052,195 $ 21,246,562
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing demand deposits.......................................................... $ 2,009,401 $ 1,990,415
Savings and interest checking................................................................ 1,430,386 1,376,260
Money rate savings........................................................................... 3,722,006 3,372,018
Other time deposits.......................................................................... 8,394,303 8,215,221
Total deposits.......................................................................... 15,556,096 14,953,914
Short-term borrowed funds.................................................................... 2,183,091 2,263,303
Long-term debt............................................................................... 2,273,288 2,051,767
Accounts payable and other liabilities....................................................... 286,283 248,409
TOTAL LIABILITIES....................................................................... 20,298,758 19,517,393
SHAREHOLDERS' EQUITY:
Preferred stock, $5 par, 5,000,000 shares authorized, none issued and outstanding............ -- --
Common stock, $5 par, 300,000,000 shares authorized, 109,138,628 issued and outstanding at
March 31, 1997, and 109,297,489 at December 31, 1996...................................... 545,693 546,487
Additional paid-in capital................................................................... 122,274 134,758
Retained earnings............................................................................ 1,091,507 1,038,067
Loan to employee stock ownership plan and unvested restricted stock.......................... (1,935) (1,952)
Net unrealized (depreciation) appreciation on securities available for sale, net of tax of
$1,979 at March 31, 1997 and $8,247 at December 31, 1996.................................. (4,102) 11,809
TOTAL SHAREHOLDERS' EQUITY.............................................................. 1,753,437 1,729,169
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................................. $22,052,195 $ 21,246,562
The accompanying notes are an integral part of these consolidated financial
statements.
3
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
1997 1996
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans and leases......................................................... $332,269 $316,560
Interest and dividends on securities.......................................................... 83,292 74,941
Interest on short-term investments............................................................ 258 232
Total interest income...................................................................... 415,819 391,733
INTEREST EXPENSE
Interest on deposits.......................................................................... 140,950 140,488
Interest on short-term borrowed funds......................................................... 26,971 29,536
Interest on long-term debt.................................................................... 30,099 22,074
Total interest expense..................................................................... 198,020 192,098
NET INTEREST INCOME............................................................................. 217,799 199,635
Provision for loan and lease losses........................................................... 17,000 11,400
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES................................... 200,799 188,235
NONINTEREST INCOME
Service charges on deposit accounts........................................................... 30,600 25,214
Mortgage banking income....................................................................... 10,486 9,300
Trust income.................................................................................. 5,344 4,674
Agency insurance commissions.................................................................. 9,900 6,189
Other insurance commissions................................................................... 3,059 2,608
Other nondeposit fees and commissions......................................................... 18,720 15,623
Securities gains (losses), net................................................................ 811 (8)
Other noninterest income...................................................................... 6,593 5,389
Total noninterest income................................................................... 85,513 68,989
NONINTEREST EXPENSE
Personnel expense............................................................................. 81,058 74,911
Occupancy and equipment expense............................................................... 26,776 25,124
Foreclosed property expense................................................................... 573 744
Federal deposit insurance expense............................................................. 1,135 3,355
Other noninterest expense..................................................................... 51,500 45,510
Total noninterest expense.................................................................. 161,042 149,644
EARNINGS
Income before income taxes.................................................................... 125,270 107,580
Provision for income taxes.................................................................... 42,202 35,729
Net income.................................................................................... 83,068 71,851
Preferred dividend requirements............................................................ -- 610
Income applicable to common shares......................................................... $ 83,068 $ 71,241
PER COMMON SHARE
Net income:
Primary.................................................................................... $ .74 $ .66
Fully diluted.............................................................................. $ .74 $ .64
Cash dividends declared.................................................................... $ .27 $ .23
AVERAGE SHARES OUTSTANDING
Primary....................................................................................... 111,554,075 108,334,659
Fully diluted................................................................................. 111,554,075 112,109,898
The accompanying notes are an integral part of these consolidated financial
statements.
4
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
SHARES OF ADDITIONAL RETAINED
COMMON PREFERRED COMMON PAID-IN EARNINGS
STOCK STOCK STOCK CAPITAL AND OTHER* TOTAL
(DOLLARS IN THOUSANDS)
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.................................. -- -- -- -- 71,851 71,851
Common stock issued......................... 623,388 -- 3,117 11,364 -- 14,481
Redemption of common stock.................. (4,972,000) -- (24,860) (113,980) -- (138,840)
Net unrealized depreciation on securities
available for sale....................... -- -- -- -- (32,255) (32,255)
Preferred stock cancellations and
conversions.............................. 4,334,692 (3,669) 21,674 (18,005) -- --
Cash dividends declared by
Southern National:
Common stock............................. -- -- -- -- (23,781) (23,781)
Preferred stock.......................... -- -- -- -- (610) (610)
Other....................................... -- -- -- -- 413 413
BALANCE, MARCH 31, 1996....................... 109,137,735 $ -- $ 545,689 $ 148,783 $ 908,129 $1,602,601
BALANCE, DECEMBER 31, 1996.................... 109,297,489 $ -- $546,487 $ 134,758 $1,047,924 $1,729,169
Add (Deduct)
Net income.................................. -- -- -- -- 83,068 83,068
Common stock issued......................... 286,995 -- 1,435 2,894 -- 4,329
Redemption of common stock.................. (2,086,500) -- (10,432) (71,848) -- (82,280)
Net unrealized depreciation on securities
available for sale....................... -- -- -- -- (15,911) (15,911)
Merger with Fidelity Financial accounted for
under the purchase method................ 1,640,644 -- 8,203 56,470 -- 64,673
Cash dividends declared by
Southern National:
Common stock............................. -- -- -- -- (29,628) (29,628)
Other....................................... -- -- -- -- 17 17
BALANCE, MARCH 31, 1997....................... 109,138,628 $ -- $545,693 $ 122,274 $1,085,470 $1,753,437
* Other includes net unrealized appreciation (depreciation) on securities
available for sale, unvested restricted stock and a loan to the employee stock
ownership plan.
The accompanying notes are an integral part of these consolidated financial
statements.
5
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
1997 1996
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................................... $ 83,068 $ 71,851
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses........................................................... 17,000 11,400
Depreciation of premises and equipment........................................................ 10,247 9,506
Amortization of intangibles and mortgage servicing rights..................................... 4,405 3,230
Accretion of negative goodwill................................................................ (1,559) (1,559)
Amortization of unearned stock compensation................................................... 17 413
Discount accretion and premium amortization on securities, net................................ (116) 1,491
Loss (gain) on sales of securities, net....................................................... (811) 8
Loss (gain) on sales of loans and mortgage loan servicing rights, net......................... (2,956) (723)
Loss (gain) on disposals of premises and equipment, net....................................... 191 (246)
Loss (gain) on foreclosed property and other real estate, net................................. 774 1,062
Proceeds from sales of loans held for sale.................................................... 294,784 310,656
Purchases of loans held for sale.............................................................. (90,575) (107,809)
Origination of loans held for sale, net of principal collected................................ (243,151) (308,337)
Decrease (increase) in:
Accrued interest receivable................................................................. 10,906 23,753
Other assets................................................................................ (4,518) (6,704)
Increase (decrease) in:
Accrued interest payable.................................................................... 4,323 (2,370)
Accounts payable and other liabilities...................................................... 46,906 42,306
Net cash provided by operating activities................................................. 128,935 47,928
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale............................................ 350,248 23,718
Proceeds from maturities of securities available for sale....................................... 476,153 829,396
Purchases of securities available for sale...................................................... (907,893) (398,474)
Proceeds from maturities of securities held to maturity......................................... 7,309 12,378
Purchases of securities held to maturity........................................................ (4,823) (1,050)
Leases made to customers........................................................................ (14,093) (12,841)
Principal collected on leases................................................................... 14,096 12,565
Loan originations, net of principal collected................................................... (419,825) (152,328)
Purchases of loans.............................................................................. (43,325) (9,184)
Net cash acquired in transactions accounted for under the purchase method....................... 12,005 --
Purchases and originations of mortgage servicing rights......................................... (4,266) (5,370)
Proceeds from disposals of premises and equipment............................................... 113 1,100
Purchases of premises and equipment............................................................. (16,763) (17,551)
Proceeds from sales of foreclosed property...................................................... 3,136 3,384
Proceeds from sales of other real estate held for development or sale........................... 688 2,421
Net cash (used in) provided by investing activities....................................... (547,240) 288,164
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits........................................................................ 349,279 479,257
Net decrease in short-term borrowed funds....................................................... (92,638) (918,436)
Proceeds from long-term debt.................................................................... 700,670 426,657
Repayments of long-term debt.................................................................... (509,799) (207,246)
Net proceeds from common stock issued........................................................... 4,329 13,890
Redemption of common stock...................................................................... (82,280) (138,840)
Cash dividends paid on common and preferred stock............................................... (29,530) (24,391)
Net cash provided by (used in) financing activities....................................... 340,031 (369,109)
Net Decrease in Cash and Cash Equivalents......................................................... (78,274) (33,017)
CASH AND CASH EQUIVALENTS at beginning of period.................................................. 659,734 705,676
CASH AND CASH EQUIVALENTS at end of period........................................................ $ 581,460 $ 672,659
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest...................................................................................... $ 194,310 $ 194,450
Income taxes.................................................................................. 2,095 366
Noncash financing and investing activities:
Transfer of loans to foreclosed property...................................................... 4,591 2,291
Transfer of fixed assets to other real estate owned........................................... 834 2,495
The accompanying notes are an integral part of these consolidated financial
statements.
6
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(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" or the "Corporation") as of March 31, 1997 and December
31, 1996; the consolidated statements of income for the three months ended
March 31, 1997 and 1996; the consolidated statements of changes in
shareholders' equity for the three months ended March 31, 1997 and 1996;
and the consolidated statements of cash flows for the three months ended
March 31, 1997 and 1996.
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 1996 amounts have been reclassified to conform with statement
presentations for 1997. 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. This report contains certain forward-looking statements with
respect to the financial condition, results of operations and business of
Southern National. These forward-looking statements involve certain risks
and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements
include, among others, the following possibilities: (1) competitive
pressure in the banking industry increases significantly; (2) changes in
the interest rate environment reduce margins; (3) general economic
conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit
quality; (4) changes occur in the regulatory environment; (5) changes occur
in business conditions and inflation; (6) expected cost savings associated
with pending mergers cannot be fully realized; (7) deposit attrition,
customer loss or revenue loss following pending mergers is greater than
expected; (8) required operational divestitures associated with pending
mergers are greater than expected; and (9) changes occur in the securities
markets.
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
In June of 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." The statement, which became 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. In
December of 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125," which
7
amends SFAS No. 125 by deferring the effective date of certain provisions
of the statement by one year. Southern National adopted SFAS No. 125, as
amended by SFAS No. 127, on January 1, 1997. The implementation of the
statement and the related amendment did not have a material impact on the
consolidated financial position or consolidated results of operations of
Southern National.
In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
This statement establishes standards for computing and presenting earnings
per share ("EPS") and simplifies the standards for computing earnings per
share previously found in Accounting Principles Board ("APB") Opinion No.
15, "Earnings per Share," and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation
of basic EPS and requires dual presentation of basic and diluted EPS for
all entities with complex capital structures. The statement is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods, and requires restatements of all prior periods
presented. Management does not believe that the implementation of the
statement will have a material impact on the consolidated financial
position or consolidated results of operations of Southern National.
In February of 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which establishes standards for
disclosing information about an entity's capital structure by continuing
and amending existing standards. The statement is effective for financial
statements for periods ending after December 15, 1997. Management has
determined that Southern National is currently is compliance with the
disclosure requirements of SFAS No. 129, and, therefore, the implementation
of the statement will not affect the capital structure disclosures made by
Southern National.
D. MERGERS AND ACQUISITIONS
On November 4, 1996, Southern National announced plans to acquire United
Carolina Bancshares Corporation ("UCB") of Whiteville, North Carolina 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, subject
to adjustment under certain conditions, of Southern National common stock
in exchange for each share of UCB common stock held. The merger, which is
subject to regulatory approval, is expected to be completed on July 1,
1997. It is currently anticipated that SNC will incur approximately $60
million in nonrecurring merger-related costs associated with executing the
merger with UCB. Management also expects to achieve cost savings of
approximately $65 million given the efficiencies available from an
in-market merger. To complete the merger, SNC must divest of approximately
$521 million in deposits to remain in compliance with anti-trust
regulations.
On January 23, 1997, an agreement was reached to purchase Refloat, Inc. of
Mount Airy, North Carolina, and its principal subsidiary, Sheffield
Financial Corp., a financial company that specializes in loans to small
commercial lawn care businesses across the country. The acquisition will be
accounted for as a purchase.
On February 4, 1997, Southern National announced plans to acquire Phillips
Factors Corporation, which purchases and manages accounts receivable
primarily in the furniture, textiles, home furnishings-related and
temporary staffing industries. The acquisition of Phillips Factors, located
in High Point, North Carolina, will be accounted for as a purchase.
On March 1, 1997, Southern National completed the acquisition of Fidelity
Financial Bankshares Corporation of Richmond, Virginia ("Fidelity
Financial"). Under the terms of the agreement, Fidelity Financial's
shareholders received .7137 shares of Southern National common stock in
exchange for each share of Fidelity Financial stock held. The transaction
was accounted for as a purchase and, therefore, the financial information
contained herein includes data relevant to Fidelity Financial since the
date of acquisition.
On May 1, 1997, Southern National announced plans to acquire Craigie
Incorporated ("Craigie"), an investment banking firm located in Richmond,
Virginia. Craigie specializes in the origination, trading and distribution
of fixed-income securities and equity products in both the public and
private capital markets. Craigie also has a public finance department that
provides investment banking services, financial advisory services and
municipal bond financing to a variety of regional tax-exempt issuers. The
merger, which will be accounted for as a purchase, is expected to be
completed during the third quarter of 1997.
On May 6, 1997, Southern National announced plans to acquire Virginia First
Financial Corporation of Petersburg, Virginia, ("VFFC") in a transaction
valued at $148.4 million based on SNC's closing stock price on May 5, 1997.
VFFC shareholders will receive .60 shares of SNC's common stock for each
share of VFFC stock held. Each shareholder will
8
receive 30% of this value in cash and 70% in common stock. The merger,
which will be accounted for as a purchase, is expected to be completed by
the end of 1997.
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
ANALYSIS OF FINANCIAL CONDITION
Southern National's total assets at March 31, 1997 were $22.1 billion, a
$805.6 million increase from the balance at December 31, 1996. The primary
components of the increase were loans and leases, which grew $720.0 million,
securities available for sale, which increased $86.1 million, and other assets,
which were up $35.5 million compared to year end 1996. These increases were
offset by declines in cash and due from banks of $86.6 million.
The pace of loan growth accelerated in the first quarter. Actual growth was
affected by securitizations of loans during 1995 and 1996. Including all
securitizations during 1996 and 1995, Southern National has moved $1.2 billion
in mortgage loans from the mortgage portfolio to the securities portfolio. These
securitizations were designed to provide Southern National with additional
liquidity and flexibility in managing mortgage loan assets. Annualized loan
growth, excluding the impact of these securitizations, was 19.7% comparing end
of period loans at March 31, 1997 and December 31, 1996. Average loans,
excluding the impact of the securitizations, increased 11.8% comparing the
quarters ended March 31, 1997 and 1996. Growth in average loans has been healthy
in all categories. Comparing the quarterly averages for the first quarters of
1997 and 1996, mortgage loans, excluding the impact of the loan securitizations,
grew at a rate of 4.0%. Average commercial loans increased 17.9% over the same
time frame and average consumer loans grew at a rate of 11.5%. The trends in
lending have been particularly strong in the last two quarters.
Management attributes the growth in loans to the successful execution of
the BB&T Sales Management System, which was applied to the commercial lending
function during 1996. The BB&T Sales Management System involves extensive
monitoring procedures and incentives for employees to pursue a healthy volume of
high-quality, profitable business.
At March 31, 1997, securities available for sale, which totaled $5.2
billion, had unrealized depreciation, after tax, of $4.1 million compared to
unrealized appreciation, after tax, of $11.8 million at December 31, 1996. The
taxable equivalent yield on the securities portfolio during the first quarter
was 6.88%, down slightly from 6.91% for the fourth quarter of 1996 and up from
6.54% for the first quarter of the prior year. During the fourth quarter of
1995, Southern National began to reshape 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.
The increase in other assets is composed primarily of goodwill recorded
through the purchase of Fidelity Financial on March 1, 1997. At the end of the
quarter, Southern National reflected goodwill from this merger of $37.7 million.
On the liability side of the balance sheet, deposits increased $602.2
million, or 4.0%, from the year-end 1996 balance, long-term debt rose $221.5
million and short-term borrowed funds decreased $80.2 million.
Total deposits increased to $15.6 billion, up 4.0% from the balance at
December 31, 1996. The strongest increases were derived from money rate savings,
up $350.0 million, or 10.4%, for the first quarter. The substantial growth in
money rate savings reflects the special promotion of a money market account
which is more flexible than traditional money rate savings accounts and less
costly to Southern National than certificate accounts.
Slower deposit growth in recent years, combined with the availability of
cost-effective alternative funding sources, caused management to rely more
heavily on nondeposit funding sources, such as Federal Home Loan Bank ("FHLB")
advances and Federal funds purchased. Management is currently focusing on
nontraditional funding sources, as well as core deposits, which are more
cost-effective than certificates of deposit.
The growth in long-term debt resulted from increased borrowings from the
FHLB. These FHLB advances composed 68.9% of total long-term debt at March 31,
1997. Such borrowings are heavily utilized because they are the most cost-
9
effective long-term funding source and provide Southern National with the
flexibility to structure the debt to manage interest rate risk and liquidity as
needed.
The decrease in short-term borrowed funds reflects management's efforts to
reduce reliance on the more costly types of borrowings, such as Federal funds
purchased and securities sold under agreements to repurchase.
ASSET QUALITY
Nonperforming assets were $81.0 million at March 31, 1997, compared to
$80.2 million at December 31, 1996. The allowance for losses as a percentage of
loans and leases was 1.26% at both March 31, 1997 and December 31, 1996, and
nonperforming assets as a percentage of loan-related assets were .53% at March
31, 1997 compared to .55% at December 31, 1996. Loans 90 days or more past due
and still accruing interest totaled $28.0 million compared to a prior year-end
balance of $32.1 million. Net charge-offs as a percentage of average loans and
leases increased from .23% in the first quarter of 1996 to .29% in the first
quarter of 1997. However, the first quarter balance is down significantly from
fourth quarter 1996 net charge-offs of .44%. The overall increases in net
charge-offs are driven by higher charge-offs in consumer lending. Management
considers the current charge-off level to be within reasonable norms from an
historical perspective.
The provision for loan and lease losses for the first three months of 1997
was $17.0 million compared to $11.4 million in the first three months of 1996.
The increase in the provision reflects higher net charge-offs incurred during
recent quarters and accelerating growth in loans.
Regional Acceptance Corporation ("Regional Acceptance"), Southern
National's nonstandard automobile finance subsidiary, also experienced
higher-than-expected net charge-offs in recent quarters. These higher net
charge-offs are indicative of the current nature of the used automobile
financing industry. Management believes that there are long-term benefits to be
realized from the acquisition of Regional Acceptance and that asset quality will
improve during the remainder of 1997. The current level of net charge-offs is
not expected to have a material impact on Southern National's consolidated
financial condition or consolidated results of operations.
Asset quality statistics relevant to the last five calendar quarters are
presented in the accompanying table.
ASSET QUALITY ANALYSIS
3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
(DOLLARS IN THOUSANDS)
ALLOWANCE FOR LOAN & LEASE LOSSES
Beginning balance.............................................. $183,932 $184,203 $181,269 $178,885 $175,588
Allowance for acquired loans................................... 3,811 -- -- -- --
Provision for loan and lease losses............................ 17,000 15,500 13,500 13,261 11,400
Net charge-offs................................................ (10,756) (15,771) (10,566) (10,877) (8,103)
Ending balance.............................................. $193,987 $183,932 $184,203 $181,269 $178,885
RISK ASSETS
Nonaccrual loans and leases.................................... $ 57,681 $ 59,717 $ 58,238 $ 63,703 $ 65,799
Foreclosed real estate......................................... 9,938 9,023 7,166 4,926 4,938
Other foreclosed property...................................... 13,418 11,429 8,609 7,426 6,336
Nonperforming assets........................................ $ 81,037 $ 80,169 $ 74,013 $ 76,055 $ 77,073
Loans 90 days or more past due
and still accruing.......................................... $ 27,999 $ 32,052 $ 28,222 $ 18,025 $ 28,249
ASSET QUALITY RATIOS
Nonaccrual loans and leases as a percentage of total loans
and leases..................................................... .38% .41% .41% .45% .46%
Nonperforming assets as a percentage of:
Total assets................................................... .37 .38 .35 .37 .38
Loans and leases plus foreclosed property...................... .53 .55 .52 .54 .54
Net charge-offs as a percentage of average loans and leases...... .29 .44 .30 .31 .23
Allowance for loan and lease losses as a percentage of loans and
leases......................................................... 1.26 1.26 1.31 1.28 1.26
Ratio of allowance for loan and lease losses to:
Net charge-offs................................................ 4.45X 2.93x 4.38x 4.14x 5.49x
Nonaccrual loans and leases.................................... 3.36 3.08 3.16 2.85 2.72
10
All items referring to loans and leases include loans held for sale and are
net of unearned income. Applicable ratios are annualized.
MARKET RISK MANAGEMENT
The effective management of market risk is essential to achieving the
Corporation's objectives. As a financial institution, Southern National's
primary market risk exposure is interest rate risk. 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
balance sheet repositioning as an efficient and cost-effective means of managing
interest rate risk. This 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
Asset/Liability Management Committee ("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.
Asset/liability management activities are designed to achieve relatively
stable net interest margins and assure liquidity by coordinating the volumes,
maturities or repricings and interest rate sensitivities of earning assets,
deposits and borrowed funds. It is the responsibility of the ALCO to determine
and achieve the most appropriate size and mix of earning assets and
interest-bearing liabilities, as well as ensure an adequate level of liquidity
and capital, while achieving desired growth in earnings and total assets. The
ALCO also sets policy guidelines and establishes 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 ensure that
the potential impact on earnings and liquidity of fluctuations in interest rates
is within conservative standards.
The majority of assets and liabilities of financial institutions are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. Fluctuations in interest rates and the efforts of the Board of
Governors of the Federal Reserve ("FRB") to regulate money and credit conditions
have a greater effect on a financial institution's profitability than do the
effects of higher costs for goods and services. Through its balance sheet
management function, Southern National is positioned to respond to changing
interest rates and inflationary trends.
Management uses Interest Sensitivity Simulation Analysis ("Simulation") to
measure the interest rate sensitivity of earnings. Simulation Analysis takes
into account the current contractual agreements that Southern National has made
with its customers on deposits, borrowings, loans, investments and any
commitments to enter into those transactions. Management monitors Southern
National's interest sensitivity by means of a computer-based asset/liability
model that incorporates current volumes and rates, maturity streams, repricing
opportunities and anticipated growth. The model calculates an earnings estimate
based on current portfolio balances and rates, less any balances that are
scheduled to reprice or mature. Balances and rates that will replace the
previous balances and any anticipated growth are added. This level of detail is
needed to correctly simulate the effect that changes in interest rates and
anticipated balances will have on the earnings of Southern National. This method
is subject to the assumptions that underlie the process, but it provides a
better illustration of true earnings potential than other analyses such as
static or dynamic gap.
The asset/liability management process involves various analyses.
Management determines the most likely outlook for the economy and interest rates
by analyzing environmental factors including regulatory changes, monetary and
fiscal policies and the overall state of the economy. Southern National's
current and prospective liquidity position, current balance sheet volumes and
projected growth, accessibility of funds for short-term needs and capital
maintenance are all considered, given the current environmental situation.
Management proceeds by analyzing interest rate sensitivity, risk-based capital
requirements and results from past strategies to develop a strategy to meet
performance goals.
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 six months from the most likely interest rate scenario, and a
maximum of 6% for a 300 basis point change over 12 months. It is management's
ongoing objective to effectively manage the impact of changes in interest rates
and minimize the resulting effect on earnings as evidenced by the preceding
table. At March 31, 1997, the sensitivity of Southern National's net interest
income to changes in interest rates was very low, as a 150 basis point increase
in interest rates would reduce net interest income by less than one half of 1%.
11
DERIVATIVES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Southern National utilizes a variety of derivative financial instruments to
manage various financial risks. These instruments include financial forward and
futures contracts, options written and purchased, interest rate caps and floors
and interest rate swaps. Management accounts for these financial instruments as
hedges when the following conditions are met: (1) the specific assets,
liabilities, firm commitments or anticipated transactions (or an identifiable
group of essentially similar items) to be hedged expose Southern National to
interest rate risk or price risk; (2) the financial instrument reduces that
exposure; (3) the financial instrument is designated as a hedge at inception;
and (4) at the inception of the hedge and throughout the hedge period, there is
a high correlation of changes in the fair value or the net interest income
associated with the financial instrument and the hedged items.
Derivatives contracts are written in amounts referred to as notional
amounts. Notional amounts do not represent amounts to be exchanged between
parties and are not a measure of financial risks, but only provide the basis for
calculating payments between the counterparties. On March 31, 1997, Southern
National had outstanding interest rate swaps and floors with notional amounts
totaling $1.2 billion. The estimated fair value of open contracts used for risk
management purposes at March 31, 1997 reflected pretax net unrealized losses of
$1.7 million.
Southern National uses these derivatives as synthetic instruments to hedge
specified assets or groups of assets, liabilities or groups of liabilities,
forward commitments and anticipated transactions. Southern National's
derivatives are primarily used to hedge variable rate commercial loans,
adjustable rate mortgage loans, retail certificates of deposit and fixed rate
notes.
The net interest payable or receivable on interest rate swaps and floors
that are designated as hedges is accrued and recognized as an adjustment to the
interest income or expense of the related asset or liability. For interest rate
forwards, futures and options qualifying as a hedge, gains and losses are
deferred and are recognized in income as an adjustment of yield. Gains and
losses from early terminations of derivatives are deferred and amortized as
yield adjustments over the shorter of the remaining term of the hedged asset or
liability or the remaining term of the derivative instrument. Upon disposition
or settlement of the asset or liability being hedged, deferral accounting is
discontinued and any gains or losses are recognized in income. Derivative
financial instruments that fail to qualify as a hedge are carried at fair value
with gains and losses recognized in current earnings.
A derivative is a financial instrument that derives its cash flows, and
therefore its value, by reference to an underlying instrument, index or
reference rate. Credit risk arises when amounts receivable from a counterparty
exceed those payable. The risk of loss with any counterparty is limited to a
small fraction of the notional amount. Southern National deals only with
national market makers with strong credit ratings in its derivatives activities.
Southern National further controls the risk of loss by subjecting counterparties
to credit reviews and approvals similar to those used in making loans and other
extensions of credit. All of the derivatives contracts to which Southern
National is a party settle monthly, quarterly or semiannually. Accordingly, the
amount of off-balance sheet credit exposure to which Southern National is
exposed at any time is immaterial. Further, Southern National has netting
agreements with the dealers with which it does business. Because of these
netting agreements, Southern National had a minimal amount of off-balance sheet
credit exposure at March 31, 1997.
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments" requires, among other things, certain
quantitative and qualitative disclosures with regard to the amounts, nature and
terms of derivative financial instruments. The following tables set forth
certain information concerning Southern National's interest rate swaps and
floors at March 31, 1997:
12
INTEREST RATE SWAPS AND FLOORS
MARCH 31, 1997
NOTIONAL RECEIVE PAY NET UNREALIZED
TYPE AMOUNT RATE RATE GAINS (LOSSES)
(DOLLARS IN THOUSANDS)
Receive fixed swaps.................................................... $ 487,000 6.59% 5.48% $ (1,449)
Pay fixed swaps........................................................ 298,150 5.55 5.45 527
Basis swaps............................................................ 300,000 5.55 5.73 (871)
Floors................................................................. 105,000 -- -- 110
Total.................................................................. $1,190,150 6.02% 5.54% $ (1,683)
BASIS
RECEIVE SWAPS
FIXED PAY FIXED AND
YEAR-TO-DATE ACTIVITY SWAPS SWAPS FLOORS TOTAL
Balance, December 31, 1996............................................. $ 487,000 $ 304,099 $355,000 $1,146,099
Additions.............................................................. -- -- 50,000 50,000
Maturities/amortizations............................................... -- (5,949) -- (5,949)
Terminations........................................................... -- -- -- --
Balance, March 31, 1997................................................ $ 487,000 $ 298,150 $405,000 $1,190,150
AFTER
ONE YEAR ONE TO FIVE FIVE
MATURITY SCHEDULE* OR LESS YEARS YEARS TOTAL
Receive fixed swaps.................................................... $ 35,000 $ 202,000 $250,000 $ 487,000
Pay fixed swaps........................................................ 162,190 131,761 4,199 298,150
Basis swaps............................................................ 50,000 250,000 -- 300,000
Floors................................................................. -- 105,000 -- 105,000
Total.................................................................. $ 247,190 $ 688,761 $254,199 $1,190,150
* 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 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.
Total shareholders' equity was $1.8 billion at March 31, 1997 and $1.7
billion at December 31, 1996. As a percentage of total assets, total
shareholders' equity was 8.0% at March 31, 1997, down from 8.1% at December 31,
1996. Southern National's book value per common share at March 31, 1997 was
$16.07, versus $15.82 at December 31, 1996. Average shareholders' equity as a
percentage of average assets was 8.2% for the quarter ended March 31, 1997 and
8.1% for the three months ended December 31, 1996.
Tier 1 and total risk-based capital ratios at March 31, 1997 were 10.7% and
13.6%, respectively. The leverage ratio was 7.8% at the end of the first
quarter. The comparable ratios at the end of 1996 were 11.7%, 14.7% and 8.0%,
respectively. These capital ratios measure the capital to risk-weighted assets
and off-balance sheet items as defined by 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%.
13
CAPITAL ADEQUACY RATIOS
1997 1996
FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER
Average equity to average assets............................................. 8.23% 8.13% 7.93% 8.00% 8.20%
Equity to assets at period end............................................... 7.95 8.14 7.85 7.81 7.88
Risk-based capital ratios:
Tier 1 capital............................................................. 10.7 11.7 11.3 11.9 12.3
Total capital.............................................................. 13.6 14.7 14.3 15.0 13.5
Leverage ratio............................................................... 7.8 8.0 7.9 7.9 7.7
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 8.0%, 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 in connection with the
proposed acquisition of UCB. Approximately 2.8 million shares are likely to be
repurchased before the merger date. The actual number repurchased will not
exceed the maximum allowable under pooling-of-interests accounting criteria.
Repurchase of the shares should allow Southern National to manage its capital
position more effectively and enhance future earnings per share. Management also
intends to continue to eliminate low margin assets on the balance sheet.
ANALYSIS OF RESULTS OF OPERATIONS
Southern National recorded net income for the first three months of 1997
totaling $83.1 million, compared to $71.9 million during the first three months
of 1996. On a fully diluted per share basis, earnings for the three months ended
March 31, 1997 were $.74, compared to $.64 for the same period in 1996. The net
income and the net income per share amounts increased at a rate of 15.6%.
Southern National's earnings produced a return on average assets of 1.58% and a
return on average equity of 19.16% compared to prior year ratios of 1.43% and
17.48%, respectively.
Southern National's growth in earnings resulted from three factors. First,
the net interest margin improved from 4.38% for the first three months of 1996
to 4.56% for the first three months of 1997. The mortgage loan securitizations
discussed above and efforts to replace lower-yielding securities as they
matured, as well as the use of more cost-effective funding sources, supported
the increase. Second, the 24.0% growth in noninterest income for the three
months ended March 31, 1997 compared to the same period in 1996 exceeded
management's goals and demonstrates the successful execution of the BB&T Sales
Management System. Management has emphasized the percentage of customer
households with five or more services as an objective indicator of the success
of the BB&T Sales Management System. When the system was implemented, 8% of
customer households had five or more services. By the end of 1996, this
percentage had increased to 18%, leading management to target 25% for the end of
1997. At March 31, 1997, the percentage had increased to 22% compared to an
industry average of 10%. Third, Southern National has controlled noninterest
expenses following the 1995 merger of Southern National and BB&T Financial
Corporation as shown by the improvement in the efficiency ratio to 51.3% from
53.8% for the three months ended March 31, 1997 and 1996, respectively.
Southern National's market area continues to grow at a healthy, sustainable
rate. The core business has shown positive trends each of the eight quarters
since the Southern National/BB&T Financial Corporation merger.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was $227.8
million for the first three months of 1997 compared to $207.7 million for the
same period in 1996, a 9.7% increase. For the three months ended March 31, 1997
and 1996, average interest-earning assets increased $1.1 billion, or 5.7%, to
$20.1 billion, while average interest-bearing liabilities also increased by $1.1
billion. As mentioned previously, Southern National also experienced substantial
improvement in the net interest margin. The 18 basis point increase in margin
was almost equally driven by increases in rates and increases in volumes. By
asset category, the increase was caused by a 34 basis point increase in yields
from securities, combined with a 12 basis point decrease in rates paid on
deposits, a 24 basis point decline in rates paid on short-term borrowed funds
and a 24 basis point decrease in rates paid on long-term debt. These
fluctuations reflect the replacement of lower-yielding investments as they
matured and the active management of the securities portfolio, as well as an
overall focus to manage the balance sheet to maximize profits.
14
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.
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE INCREASE
FULLY TAXABLE EQUIVALENT 1997 1996 1997 1996 1997 1996 (DECREASE)
(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury, government and
other (5)................... $ 5,026,545 $ 4,796,925 6.82% 6.41% $ 85,764 $ 76,885 $ 8,879
States and political
subdivisions................ 137,763 161,018 8.79 9.20 3,028 3,705 (677)
Total securities (5)........ 5,164,308 4,957,943 6.88 6.54 88,792 80,590 8,202
Other earning assets (2)........ 19,900 17,560 5.52 5.59 271 244 27
Loans and leases, net of
unearned income
(1)(3)(4)(5).................. 14,903,144 14,021,351 9.14 9.15 336,770 318,967 17,803
Total earning assets........ 20,087,352 18,996,854 8.55 8.46 425,833 399,801 26,032
Non-earning assets.......... 1,268,841 1,157,345
TOTAL ASSETS.............. $21,356,193 $20,154,199
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits:
Savings, interest-checking and
MRS sweeps.................. $ 1,436,775 $ 1,582,383 1.92 2.09 6,804 8,225 (1,421)
Money rate savings............ 3,489,001 2,954,813 2.64 2.57 22,738 18,873 3,865
Time deposits................. 8,264,007 8,169,118 5.47 5.58 111,408 113,390 (1,982)
Total interest-bearing
deposits.................. 13,189,783 12,706,314 4.33 4.45 140,950 140,488 462
Short-term borrowed funds....... 2,137,125 2,215,462 5.12 5.36 26,971 29,536 (2,565)
Long-term debt.................. 2,160,263 1,511,577 5.63 5.87 30,099 22,074 8,025
Total interest-bearing
liabilities............... 17,487,171 16,433,353 4.59 4.70 198,020 192,098 5,922
Demand deposits............. 1,839,994 1,798,323
Other liabilities........... 270,762 269,109
Shareholders' equity........ 1,758,266 1,653,414
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $21,356,193 $20,154,199
Average interest rate spread.... 3.96 3.76
Net yield on earning assets..... 4.56% 4.38% $ 227,813 $ 207,703 $ 20,110
Taxable equivalent adjustment... $ 10,014 $ 8,068
CHANGE DUE TO
FULLY TAXABLE EQUIVALENT RATE VOLUME
ASSETS
Securities (1):
U.S. Treasury, government and
other (5)................... $ 5,118 $ 3,761
States and political
subdivisions................ (163) (514)
Total securities (5)........ 4,955 3,247
Other earning assets (2)........ (3) 30
Loans and leases, net of
unearned income
(1)(3)(4)(5).................. 523 17,280
Total earning assets........ 5,475 20,557
Non-earning assets..........
TOTAL ASSETS..............
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits:
Savings, interest-checking and
MRS sweeps.................. (697) (724)
Money rate savings............ 558 3,307
Time deposits................. (2,359) 377
Total interest-bearing
deposits.................. (2,498) 2,960
Short-term borrowed funds....... (1,316) (1,249)
Long-term debt.................. (867) 8,892
Total interest-bearing
liabilities............... (4,681) 10,603
Demand deposits.............
Other liabilities...........
Shareholders' equity........
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY..........
Average interest rate spread....
Net yield on earning assets..... $10,156 $ 9,954
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 held for sale or available for sale at amortized cost.
15
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 1997 was $85.5
million, compared to $69.0 million for the same period in 1996. Southern
National experienced positive development in all areas of 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 three months ended March 31, 1997 was
27.1%, up from 24.9% for the first three months of 1996. 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 three months in 1997
compared to 1996, increasing by $5.4 million, or 21.4%. The primary factor
contributing to the significant growth in service charges on deposits was
increased fees on deposit services that were effective January 1, 1997 and
February 1, 1997. The largest components of the growth within service charges on
deposits included commercial account analysis income and overdraft charges.
Trust income grew $670,000, or 14.3%, for the three months ended March 31,
1997 compared to the same period in 1996.
Southern National also realized substantial growth in agency insurance
commissions, up $3.7 million, or 60.0%, compared to the first three months of
1996. The growth in agency insurance commissions resulted from increases in
property and casualty insurance commissions and insurance fees and charges.
Also, Southern National completed the mergers of Boyle-Vaughan Associates, Inc.,
the William Goldsmith Agency Inc. and the C. Dan Joyner Insurance Agency, all in
South Carolina, during the fourth quarter of 1996. These acquisitions were
accounted for under the purchase method. With these acquisitions, 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 12.8%, or $1.2 million, for the three
months ended March 31, 1997 compared to the same period in 1996. The increase
resulted from higher mortgage loan servicing fees during the first three months
of 1997.
Other nondeposit fees and commissions increased by $3.1 million to a level
of $18.7 million in 1997 compared with $15.6 million for the first three months
of 1996. The primary components generating the increase in nondeposit fees and
commissions were ATM and Point-of-Sale fees, which increased $1.3 million and
bankcard income, which increased $1.5 million.
Other income increased $1.2 million, or 22.3%, for the first three months
of 1997 because of income on life insurance products held. Southern National
purchased $55 million in such products during the second half of 1996.
NONINTEREST EXPENSE
Noninterest expense was $161.0 million for the first three months of 1997
compared to $149.6 million for the same period a year ago. The 7.6% increase
resulted from increases in personnel expenses and other noninterest expenses,
offset by savings from Federal deposit insurance premiums.
Personnel expense, the largest component of noninterest expense, increased
$6.1 million, or 8.2%, compared to the first quarter of 1996. The increase was
caused by annual compensation adjustments for exempt employees, up $3.2 million,
and performance incentive programs, which increased $2.3 million.
Occupancy and equipment expense for the three months ended March 31, 1997,
increased $1.7 million, or 6.6%, compared to 1996. Southern National incurred
increased rent expense for data processing and other equipment, up $800,000, and
additional costs associated with the maintenance of ATMs, up $500,000.
Federal deposit insurance expense decreased $2.2 million, or 66.2%, for the
three months ended March 31, 1997, compared to the same period in the prior
year. During 1995 and 1996, Congress passed legislation affecting deposit
insurance premiums. Effective January 1, 1996, insurance premiums charged on
FDIC-insured deposits were eliminated because of the recapitalization of the
Bank Insurance Fund ("BIF"). Southern National continued to pay insurance
premiums on Savings Association Insurance Fund ("SAIF") -insured deposits during
1996 through the third quarter, when a one-time SAIF assessment was levied on
all banks with SAIF-insured deposits. Southern National's assessment totaled
approximately $33 million before taxes. The assessment served to recapitalize
the SAIF, and, therefore, eliminated insurance premiums on SAIF-insured
deposits. Effective January 1, 1997, Southern National began paying $.0648 per
$100 of SAIF-insured deposits and $.0130
16
per $100 of BIF-insured deposits to service the Financing Corporation ("FICO")
bonds. These payments totaled $1.1 million during the first quarter of 1997.
Other noninterest expenses increased $5.4 million, or 12.7%. This increase
was driven by increases in advertising, public relations and other marketing
expense, up $1.3 million, loan and lease expenses, up $1.4 million and
professional services, which increased $3.0 million. The increased advertising
costs are related to a marketing program to increase awareness of 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 primarily from bankcard and merchant
interchange expenses. The increases in professional services expense are related
to the use of outside consulting firms to analyze strategies to maximize
noninterest income and to assist in the Year 2000 project.
Southern National's efficiency ratio improved to 51.3% for the first three
months of 1997 compared to 53.8% for the same period in 1996.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $42.2 million for the first
three months of 1997 compared to $35.7 million recorded in the first three
months of 1996. The provision increased $6.5 million, or 18.1%, because of
higher pretax income. Effective tax rates were 33.7% and 33.2% for the three
months ended March 31, 1997 and 1996, respectively.
PROFITABILITY MEASURES
1997 1996
FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER
Return on average assets..................................................... 1.58% 1.51% 1.08% 1.50% 1.43%
Return on average common equity.............................................. 19.16 18.54 13.55 18.77 17.99
Net interest margin.......................................................... 4.56 4.52 4.42 4.49 4.38
Efficiency ratio (taxable equivalent)*....................................... 51.3 54.0 53.3 53.0 53.8
* Excludes securities gains (losses), foreclosed property expense and
nonrecurring items.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Southern National Corporation held its annual meeting of the shareholders
on April 22, 1997 to consider and vote upon the following matters:
(1) To approve an Agreement and Plan of Reorganization by and between
Southern National and United Carolina Bancshares Corporation, a related Plan of
Merger and the issuance of up to approximately 27.9 million shares of Southern
National common stock pursuant to which UCB will merge with and into Southern
National. Of shares represented by proxy, votes in favor were 70,301,263; votes
opposed were 274,236 and abstentions were 191,869.
(2) To elect eight directors of Southern National for three-year terms
expiring in 2000. Of shares represented by proxy, votes in favor were
83,661,518; votes opposed were 1,219,838 and abstentions were 787,870.
(3) To approve an amendment to Article I of Southern National's Articles of
Incorporation to change SNC's name to "BB&T Corporation." Of shares represented
by proxy, votes in favor were 82,322,442; votes opposed were 2,481,785 and
abstentions were 474,196.
(4) To approve an amendment to Article III, Section 2 of SNC's Bylaws to
increase the maximum number of directors of SNC from 25 to 30. Of shares
represented by proxy, votes in favor were 78,071,850; votes opposed were
6,366,708 and abstentions were 839,682.
(5) To approve an amendment to the Southern National Corporation
Non-Employee Directors' Deferred Compensation and Stock Option Plan to increase
the number of shares of SNC Common Stock issuable under such plan from 400,000
shares to 900,000 shares. Of shares represented by proxy, votes in favor were
74,930,425; votes opposed were 8,936,384 and abstentions were 1,419,320.
(6) To ratify the reappointment of Arthur Andersen LLP as SNC's auditors
for 1997. Of shares represented by proxy, votes in favor were 84,468,115; votes
opposed were 377,658 and abstentions were 432,265.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 January 14, 1997, to
report the results of operations and financial condition as of December 31,
1996. Southern National filed a Form 8-K under Item 5 on April 11, 1997, to
report the results of operations and financial condition as of March 31, 1997.
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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)
May 14, 1997 By: /s/ SCOTT E. REED
SCOTT E. REED, SENIOR EXECUTIVE VICE
PRESIDENT
AND CHIEF FINANCIAL OFFICER
May 14, 1997 By: /s/ SHERRY A. KELLETTRRRRRRR
SHERRY A. KELLETT, EXECUTIVE VICE
PRESIDENT AND
CONTROLLER (PRINCIPAL ACCOUNTING
OFFICER)
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