0000928385-95-000301.txt : 19950815 0000928385-95-000301.hdr.sgml : 19950815 ACCESSION NUMBER: 0000928385-95-000301 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN NATIONAL CORP /NC/ CENTRAL INDEX KEY: 0000092230 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 560939887 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10853 FILM NUMBER: 95562772 BUSINESS ADDRESS: STREET 1: 500 N CHESTNUT ST CITY: LUMBERTON STATE: NC ZIP: 28358 BUSINESS PHONE: 9196712000 MAIL ADDRESS: STREET 1: 500 NORTH CHESTNUT STREET CITY: LUMBERTON STATE: NC ZIP: 28358 10-Q 1 FORM 10-Q ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ---------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1995 COMMISSION FILE NUMBER: 1-10853 SOUTHERN NATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NORTH CAROLINA 56-0939887 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 200 WEST SECOND STREET WINSTON-SALEM, NORTH CAROLINA 27101 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (910)773-7200 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ At July 31, 1995, 102,885,221 shares of the registrant's common stock, $5 par value, were outstanding. ---------------- This Form 10-Q has 21 pages. The Exhibit Index is included on Page 19. ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- SOUTHERN NATIONAL CORPORATION FORM 10-Q JUNE 30, 1995 INDEX
PAGE NO. -------- Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Financial Statements....................... 3 Notes to Consolidated Financial Statements.............. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analysis of Financial Condition......................... 8 Asset/Liability Management.............................. 10 Capital Adequacy and Resources.......................... 12 Analysis of Results of Operations....................... 13 Part II. OTHER INFORMATION Item 1. Legal Proceedings....................................... 19 Item 6. Exhibits and Reports on Form 8-K........................ 19 SIGNATURES.......................................................... 20 EXHIBIT 11 Computation of Earnings Per Share. EXHIBIT 27 Financial Data Schedule--Included with electronically- filed document only.
2 PART I. FINANCIAL STATEMENTS ITEM 1. FINANCIAL STATEMENTS SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 1995 1994 ----------- ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Cash and due from depository institutions.......... $ 667,462 637,794 Interest-bearing bank balances..................... 2,223 20,962 Federal funds sold and other short-term invest- ments............................................. 40,700 13,021 Securities available for sale (amortized cost: $3,599,489 at June 30, 1995, and $3,579,461 at De- cember 31, 1994).................................. 3,614,055 3,459,698 Securities held to maturity (market value: $1,947,770 at June 30, 1995, and $1,889,911 at De- cember 31, 1994).................................. 1,940,477 1,965,419 Loans and leases................................... 13,765,475 13,108,102 Allowance for losses............................. (176,175) (171,734) ----------- ---------- Net loans and leases........................... 13,589,300 12,936,368 ----------- ---------- Premises and equipment, net........................ 316,338 333,069 Other assets....................................... 491,697 488,732 ----------- ---------- Total assets................................... $20,662,252 19,855,063 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits....................... $ 1,799,574 1,843,019 Interest-bearing deposits.......................... 12,536,982 12,471,135 ----------- ---------- Total deposits................................. 14,336,556 14,314,154 Short-term borrowed funds.......................... 3,147,213 2,902,528 Accounts payable and other liabilities............. 295,868 231,149 Long-term debt..................................... 1,312,464 910,755 ----------- ---------- Total liabilities.............................. 19,092,101 18,358,586 ----------- ---------- Shareholders' equity: Preferred stock, $5 par, 5,000,000 shares authorized, 751,719 issued and outstanding at June 30, 1995, 770,000 issued and outstanding at December 31, 1994................................. 3,759 3,850 Common stock, $5 par, 300,000,000 shares authorized, 102,709,306 issued and outstanding at June 30, 1995, 102,215,032 issued and outstanding at December 31, 1994.............................. 513,546 511,075 Paid-in capital.................................... 286,090 285,599 Retained earnings.................................. 764,224 775,979 Loan to employee stock ownership plan and unvested restricted stock.................................. (6,523) (7,442) Net unrealized appreciation (depreciation) on secu- rities available for sale......................... 9,055 (72,584) ----------- ---------- Total shareholders' equity..................... 1,570,151 1,496,477 ----------- ---------- Total liabilities and shareholders' equity..... $20,662,252 19,855,063 =========== ==========
See accompanying notes to consolidated financial statements. 3 SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS AS INDICATED (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ------------------------ 1995 1994 1995 1994 ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INTEREST INCOME Interest and fees on loans and leases................. $ 309,680 244,170 603,059 477,203 Interest and dividends on securities................. 79,684 72,649 154,286 144,687 Interest on short-term in- vestments.................. 733 952 1,389 2,123 ----------- ----------- ----------- ----------- Total interest income..... 390,097 317,771 758,734 624,013 ----------- ----------- ----------- ----------- INTEREST EXPENSE Interest on deposits........ 142,180 105,104 272,314 208,465 Interest on short-term bor- rowed funds................ 48,194 21,782 89,253 37,007 Interest on long-term debt.. 14,761 9,619 29,384 18,615 ----------- ----------- ----------- ----------- Total interest expense.... 205,135 136,505 390,951 264,087 ----------- ----------- ----------- ----------- NET INTEREST INCOME........... 184,962 181,266 367,783 359,926 Provision for loan and lease losses..................... 7,000 2,902 14,000 8,403 ----------- ----------- ----------- ----------- NET INTEREST INCOME AFTER PRO- VISION FOR LOAN AND LEASE LOSSES....................... 177,962 178,364 353,783 351,523 ----------- ----------- ----------- ----------- NONINTEREST EXPENSE Service charges on deposit accounts................... 22,511 21,779 43,781 42,489 Nondeposit fees and commis- sions...................... 26,445 23,316 54,334 52,476 Securities gains (losses), net........................ -- 627 (19,845) 2,148 Gain on sale of divested de- posits..................... 11,866 -- 11,866 -- Other income................ 5,538 7,523 12,461 14,903 ----------- ----------- ----------- ----------- Total noninterest income.. 66,360 53,245 102,597 112,016 ----------- ----------- ----------- ----------- NONINTEREST EXPENSE Personnel expense........... 75,343 70,944 199,576 148,387 Occupancy and equipment ex- pense...................... 27,729 22,299 57,284 44,013 Federal deposit insurance expense.................... 7,975 8,178 15,980 16,599 Professional fees........... 4,027 2,365 12,172 6,508 Bank supplies expense....... 6,107 2,519 9,534 5,441 Other expense............... 38,722 38,835 94,313 72,170 ----------- ----------- ----------- ----------- Total noninterest expense. 159,903 145,140 388,859 293,118 ----------- ----------- ----------- ----------- EARNINGS Income before income taxes.. 84,419 86,469 67,521 170,421 Income tax expense.......... 27,121 29,361 22,776 58,342 ----------- ----------- ----------- ----------- Net income.................. 57,298 57,108 44,745 112,079 Preferred dividend re- quirements............... 1,289 1,300 2,588 2,599 ----------- ----------- ----------- ----------- Income applicable to com- mon shares............... $ 56,009 55,808 42,157 109,480 =========== =========== =========== =========== PER COMMON SHARE Net income: Primary................... $ .54 .55 .41 1.07 =========== =========== =========== =========== Fully diluted............. $ .53 .53 .41 1.05 =========== =========== =========== =========== Cash dividends declared..... $ .23 .20 .63 .37 =========== =========== =========== =========== AVERAGE SHARES OUTSTANDING Primary..................... 103,523,801 102,027,925 103,342,418 101,937,734 =========== =========== =========== =========== Fully diluted............... 108,774,906 107,082,681 108,665,929 106,993,805 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 4 SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED)
SHARES OF RETAINED COMMON PREFERRED COMMON PAID-IN EARNINGS STOCK STOCK STOCK CAPITAL AND OTHER* TOTAL ----------- --------- ------- ------- ---------- --------- (DOLLARS IN THOUSANDS) BALANCE, DECEMBER 31, 1993, AS PREVIOUSLY RE- PORTED................. 42,961,214 $3,850 214,806 151,186 195,022 564,864 Merger with BB&T Finan- cial Corporation ("BB&T") accounted for under the pooling-of- interests method...... 57,862,080 -- 289,310 124,240 420,312 833,862 ----------- ------ ------- ------- ------- --------- BALANCE, DECEMBER 31, 1993, AS RESTATED...... 100,823,294 3,850 504,116 275,426 615,334 1,398,726 ADD (DEDUCT) Net income............. -- -- -- -- 112,079 112,079 Common stock issued by pooled companies prior to merger............. 525,583 -- 2,627 4,563 -- 7,190 Common stock issued.... 287,697 -- 1,439 60 (41) 1,458 Common stock acquired and retired........... (638,000) -- (3,190) (11,497) -- (14,687) Net unrealized depreciation on securities available for sale.............. -- -- -- -- (35,611) (35,611) Mergers accounted for under the purchase method................ 136,699 -- 683 2,003 -- 2,686 Cash dividends declared by merged companies... -- -- -- -- (19,419) (19,419) Cash dividends declared by Southern National: Common stock........... -- -- -- -- (12,759) (12,759) Preferred stock........ -- -- -- -- (2,599) (2,599) Other.................. -- -- -- (44) 999 955 ----------- ------ ------- ------- ------- --------- BALANCE JUNE 30, 1994... 101,135,273 $3,850 505,675 270,511 657,983 1,438,019 =========== ====== ======= ======= ======= ========= BALANCE, DECEMBER 31, 1994, AS PREVIOUSLY REPORTED............... 44,158,751 $3,850 220,794 164,934 242,766 632,344 Merger with BB&T accounted for under the pooling-of- interests method...... 58,056,281 -- 290,281 120,665 453,187 864,133 ----------- ------ ------- ------- ------- --------- BALANCE, DECEMBER 31, 1994, AS RESTATED...... 102,215,032 3,850 511,075 285,599 695,953 1,496,477 ADD (DEDUCT) Net income............. -- -- -- -- 44,745 44,745 Common stock issued.... 1,154,024 -- 5,770 13,319 -- 19,089 Common stock acquired and retired........... (659,750) -- (3,299) (10,561) -- (13,860) Net unrealized appreci- ation on securities available for sale.... -- -- -- -- 81,639 81,639 Cash dividends declared by Southern National: Common stock........... -- -- -- -- (53,948) (53,948) Preferred stock........ -- -- -- -- (2,552) (2,552) Preferred stock ac- quired and retired.... -- (91) -- (2,267) -- (2,358) Other.................. -- -- -- -- 919 919 ----------- ------ ------- ------- ------- --------- BALANCE, JUNE 30, 1995.. 102,709,306 $3,759 513,546 286,090 766,756 1,570,151 =========== ====== ======= ======= ======= =========
-------- * Other includes unvested restricted stock, loan to employee stock ownership plan and unearned compensation. See accompanying notes to consolidated financial statements. 5 SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
1995 1994 ---------- ---------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................ $ 44,745 112,079 Adjustments to reconcile net income to net cash pro- vided by operating activities: Provision for loan and lease losses................... 14,000 8,403 Depreciation of premises and equipment................ 15,357 13,835 Amortization of intangibles........................... 4,801 3,836 Accretion of negative goodwill........................ (3,191) (2,916) Amortization of unearned stock compensation........... 919 874 Discount accretion and premium amortization on secu- rities, net.......................................... 2,038 4,037 Gain on sales of trading account securities, net...... (38) (537) Loss (gain) on sales of securities, net............... 19,845 (2,148) Loss (gain) on sales of loans and mortgage loan ser- vicing rights, net................................... 126 (1,225) Gain on disposals of premises and equipment, net...... (8,516) (1,280) Loss on foreclosed property and other real estate, net.................................................. 927 335 Proceeds from sales of trading account securities, net of purchases..................................... 25,984 537 Proceeds from sales of loans held for sale............ 130,360 508,145 Purchases of loans held for sale...................... (54,260) -- Origination of loans held for sale, net of principal collected............................................ (152,846) (241,006) Decrease (increase): Accrued interest receivable.......................... (38,967) (7,114) Other assets......................................... 65,142 7,353 Increase (decrease) in: Accrued interest payable............................. 11,512 492 Accounts payable and other liabilities............... 64,719 (78,848) ---------- ---------- Net cash provided by operating activities........... 142,657 324,852 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale.. 977,827 616,443 Maturities of securities.............................. 655,354 681,485 Purchases of securities............................... (1,687,184) (1,436,773) Leases made to customers.............................. (22,219) (20,339) Principal collected on leases......................... 23,378 19,733 Loan originations, net of principal collected......... (645,059) (300,477) Purchases of loans.................................... (5,382) -- Net cash acquired in transactions accounted for under the purchase method of accounting.................... -- 229 Proceeds from disposals of premises and equipment..... 7,632 5,859 Purchases of premises and equipment................... (35,552) (35,109) Proceeds from sales of foreclosed property............ 5,439 15,161 Proceeds from sales of other real estate held for de- velopment or sale.................................... 2,947 8,727 Other................................................. (8,216) (4,721) ---------- ---------- Net cash used in investing activities............... (731,035) (449,782) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits................... 22,402 (236,442) Net increase in short-term borrowed funds............. 244,685 476,058 Net increase (decrease) in long-term debt............. 401,709 (217,513) Net proceeds from common stock issued................. 19,089 8,648 Common stock acquired and retired..................... (13,860) (14,687) Preferred stock acquired and retired.................. (2,358) -- Cash dividends paid on common and preferred stock..... (44,681) (34,788) ---------- ---------- Net cash provided by (used in) financing activities. 626,986 (18,724) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 38,608 (143,654) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....... 671,777 859,632 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $ 710,385 715,978 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest.............................................. $ 379,439 263,595 Income taxes.......................................... 70,121 73,141 Noncash financing and investing activities: Transfer of loans to foreclosed property.............. 4,101 13,599 Common stock issued upon conversion of debentures..... 35 -- Transfer of securities from held to maturity to available for sale................................... -- 5,934 Transfer of securities from available for sale to held to maturity..................................... -- 2,216
See accompanying notes to consolidated financial statements. 6 SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED) A. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated balance sheets of Southern National Corporation and subsidiaries ("Southern National" or "SNC") as of June 30, 1995, and December 31, 1994; the consolidated statements of income for the three months and six months ended June 30, 1995 and 1994; and the consolidated statements of cash flows for the six months ended June 30, 1995 and 1994. The consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The information contained in the footnotes included in Southern National's latest annual report on Form 10-K, as restated for the mergers with BB&T Financial Corporation ("BB&T") and Commerce Bank ("Commerce") in Southern National's current report on Form 8-K dated June 30, 1995, should also be referred to in connection with the reading of these unaudited interim consolidated financial statements. Certain amounts for 1994 have been reclassified to conform with statement presentations for 1995. The reclassifications have no effect on shareholders' equity or net income as previously reported. B. NEW ACCOUNTING PRONOUNCEMENTS As of January 1, 1995, Southern National adopted Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," which was amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS No. 114, as amended, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral-dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. The bank had previously measured the allowance for credit losses using methods similar to those prescribed in SFAS No. 114. As a result of adopting these statements, no additional allowance for loan losses was required as of January 1, 1995. The total recorded investment for impaired loans at June 30, 1995, was $13.6 million, offset by a valuation allowance of $1.1 million, which resulted in a net carrying value of $12.5 million. There were no investments in impaired loans which did not have a related valuation allowance. The average recorded investment in impaired loans during the first six months of 1995 totaled $13.2 million. Southern National recognizes no interest income on loans that are impaired. Cash receipts for both principal and interest are applied directly to principal. As of July 1, 1995, Southern National adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires that mortgage banking enterprises recognize as separate assets the rights to service mortgage loans for others, regardless of how those servicing rights are acquired, and that mortgage banking enterprises assess their capitalized mortgage servicing rights for impairment based on the fair value of those rights. It is not anticipated that the implementation of this standard will have a material impact on the financial condition or results of operations of Southern National. C. MERGERS On August 1, 1994, Southern National and BB&T jointly announced the signing of a definitive agreement to merge. The merger was completed on February 28, 1995, by the issuance of 1.45 shares of Southern National common stock for each share of BB&T stock outstanding. BB&T completed an acquisition of Commerce on January 10, 1995, by the issuance of 1.305 shares of BB&T common stock for each share of Commerce stock outstanding. Both transactions were accounted for as poolings-of-interests. 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ANALYSIS OF FINANCIAL CONDITION On February 28, 1995, Southern National consummated a merger with BB&T in a transaction accounted for as a pooling-of-interests. Accordingly, all financial information presented herein has been restated to reflect the results of BB&T. Each outstanding share of BB&T common stock was exchanged for 1.45 shares of SNC common stock. Approximately 58.1 million shares of SNC common stock were issued in conjunction with the merger. On January 10, 1995, BB&T completed a merger with Commerce in a transaction also accounted for as a pooling-of-interests. At the time of merger, Commerce had total assets of $700 million. Total assets at June 30, 1995 were $20.7 billion, an $807.2 million increase from the balance at December 31, 1994. The increase was generated by growth of $652.9 million in net loans and leases, including loans held for sale, and $129.4 million in securities. The growth in net loans reflects an annualized growth rate of 10.1% and an annualized growth rate of 4.8% for securities. The continued strong loan growth is being funded through increases in short- term borrowed funds, which rose $244.7 million during the first six months of 1995, and long-term debt, which grew $401.7 million. The growth in long-term debt was comprised primarily of Federal Home Loan Bank ("FHLB") advances. During the first quarter, securities declined $196.6 million because of a restructuring of the securities portfolio. This restructuring was undertaken to conform the investment policies and portfolios of the combined companies after merger. Mortgage-backed securities with average projected maturities of approximately five years accounted for the majority of securities sold. The balance was comprised of older, lower yielding U.S. Treasuries and Federal agency securities with average maturities of three to five years. The average combined yield at cost for securities sold was approximately 6.00%. The total loss recognized on the sales was $19.8 million. Reinvestment of proceeds from the restructuring was accomplished during the first and second quarters. U.S. Treasuries and agency securities with average maturities of three years and average yields at cost of approximately 7.00% were purchased. The reinvestment of proceeds from this restructuring and maturities of securities resulted in growth during the second quarter of $102.2 million in the held-to-maturity portfolio and $223.8 million in the available- for-sale portfolio. At June 30, 1995, the portfolio had unrealized appreciation, after tax, of $9.1 million compared to unrealized depreciation, after tax, of $27.0 million at March 31, 1995 and $72.6 million at December 31, 1994. The taxable equivalent yield on the securities portfolio during the second quarter was 6.28%, up from 6.05% in the first quarter of 1995 and 5.87% in the fourth quarter of 1994. The restructuring of the securities portfolio described above resulted in a shift in portfolio holdings. The combined balance sheets of BB&T and SNC contained a high concentration of mortgage-related assets, comprised of whole loans and securities acquired as a result of acquisitions of thrift institutions during the last few years. As a result of those acquisitions, the concentration of mortgage-related assets had become a significant factor on the balance sheets of both organizations. The sale of mortgage-backed securities was, in part, carried out to reduce the concentration of this type of asset on the balance sheet of the combined organization. Mortgage-related assets typically have longer durations than other bank assets and are generally more sensitive to changes in interest rates. The replacement of these securities with U.S. Treasuries and other Federal agency securities improved the mix of assets from both credit and interest sensitivity measurements. The sale of securities resulted in a shortening of the average life of the combined investment portfolios which has improved the overall interest rate sensitivity of the balance sheet. The company has experienced a shift toward liability sensitivity because of the previously mentioned mergers of thrift institutions which are traditionally positioned with longer-duration assets, funded with shorter-duration liabilities. The restructuring reduced this funding mismatch and reduced overall interest rate sensitivity for the combined corporation. Total deposits increased by $22.4 million from the December 31, 1994 balance. Many financial institutions are seeing a trend of slower deposit growth because of competition for deposits from various non-financial institution sources. The flat deposit growth experienced by Southern National has required management to seek 8 alternate funding sources, such as short-term borrowed funds, FHLB advances and Federal funds purchased. The use of these funding sources, which are typically tied to the Federal funds rate and reprice more quickly than deposits, contributed to the lower margin in the second quarter as compared to prior quarters. As mentioned above, short-term borrowed funds increased $244.7 million during the first six months. The strategies employed in the management of interest-bearing liabilities and interest-earning assets are further discussed in "Asset/Liability Management." ASSET QUALITY Nonperforming assets were $58.3 million at June 30, 1995, compared to $59.6 million at year-end 1994. The allowance for losses as a percentage of loans and leases was 1.28% at June 30, 1995 and nonperforming assets as a percentage of loan-related assets were .42%, compared to 1.31% and .45%, respectively, at December 31, 1994. These ratios were $1.42% and .61%, respectively, on June 30, 1994. The quality of the loan portfolio significantly improved during 1994 and has remained strong during the first six months of 1995. Southern National experienced an unusually low level of net charge-offs during 1994, falling from .31% of average loans and leases for the year ended December 31, 1993 to .14% for the year ended December 31, 1994. First quarter 1995 net charge-offs totaled $4.5 million, or an annualized rate of .14% of average loans and leases, and the second quarter 1995 levels increased to $5.0 million, or .15% of average loans and leases on an annualized basis. This level of net charge- offs is higher than the first six months of 1994 because of substantial recoveries which were realized during 1994. The adequacy of the current allowance is evidenced by the increase in the ratio of the allowance for losses to 8.76 times net charge-offs, up from 5.03 times at December 31, 1994. Loan 90 days or more past due and still accruing interest increased significantly during the second quarter compared to December 31, 1994. The largest portion of the increase related to conforming the nonaccrual policies of Southern National and BB&T subsequent to merger. The provision for loan and lease losses in the first half of 1995 was $14.0 million compared to $8.4 million in the same period of 1994. The increase in the provision primarily reflects higher net charge-offs during the second quarter of 1995 compared to 1994. Asset quality statistics relevant to the last five calendar quarters are presented in the accompanying table. 9 ASSET QUALITY ANALYSIS
AS OF/FOR THE QUARTER ENDED --------------------------------------------- 6/30/95 3/31/95 12/31/94 9/30/94 6/30/94 -------- ------- -------- ------- ------- (DOLLARS IN THOUSANDS) ALLOWANCE FOR LOSSES Beginning Balance.............. $174,189 171,734 172,110 173,550 174,006 Allowance for acquired loans... -- -- 1,119 -- -- Provision for losses........... 7,000 7,000 7,104 2,339 2,902 Net charge-offs................ (5,014) (4,545) (8,599) (3,779) (3,358) -------- ------- ------- ------- ------- Ending balance............... $176,175 174,189 171,734 172,110 173,550 ======== ======= ======= ======= ======= NONPERFORMING ASSETS Nonaccrual loans & leases...... $ 48,927 48,451 47,039 43,219 55,496 Foreclosed property............ 8,759 11,239 12,153 17,963 18,577 Restructured loans............. 611 623 402 474 207 -------- ------- ------- ------- ------- Nonperforming assets......... $ 58,297 60,313 59,594 61,656 74,280 ======== ======= ======= ======= ======= Loans 90 days or more past due & still accruing.............. $ 30,335 21,653 24,224 27,134 27,667 ======== ======= ======= ======= ======= ASSET QUALITY RATIOS Nonaccrual loans & leases as a percentage of total loans & leases.......................... .36% .36 .36 .34 .45 Nonperforming assets as a percentage of: Total assets................... .28 .30 .30 .32 .39 Loans & leases plus foreclosed property...................... .42 .45 .45 .49 .61 Net charge-offs as a percentage of average loans & leases....... .15 .14 .27 .12 .11 Allowance for losses as a percentage of loans & leases.... 1.28 1.30 1.31 1.36 1.42 RATIO OF ALLOWANCE FOR LOSSES TO: Net charge-offs................ 8.76x 9.45 5.03 11.48 12.89 Nonaccrual loans & leases...... 3.60 3.60 3.65 3.98 3.13
All items referring to loans and leases include loans held for sale and are net of unearned income. Applicable ratios are annualized. ASSET/LIABILITY MANAGEMENT Asset/liability management activities are designed to assure liquidity and, through the management of Southern National's interest sensitivity position, to manage the impact of interest rate fluctuations on net interest income. It is the responsibility of the Asset/Liability Management Committee ("ALCO") to set policy guidelines and to establish long-term strategies with respect to interest rate exposure and liquidity. The ALCO meets regularly to review Southern National's interest rate and liquidity risk exposures in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to assure that the potential impact on earnings and liquidity is within established parameters. A prime objective in interest rate risk management is the avoidance of wide fluctuations in net interest income through balancing the impact of changes in interest rates on interest-sensitive assets and interest-sensitive liabilities. Management uses Interest Sensitivity Simulation Analysis to measure the interest rate sensitivity of earnings. Balance sheet repositioning is the most efficient and cost-effective means of managing interest rate risk and is accomplished through strategic pricing of asset and liability accounts. The expected result of strategic pricing is the development of appropriate maturity and repricing streams in those accounts to produce consistent net income during adverse interest rate environments. The ALCO monitors loan, investment and liability portfolios 10 to ensure comprehensive management of interest rate risk on the balance sheet. These portfolios are analyzed for proper fixed-rate and variable-rate "mixes" given a specific interest rate outlook. DERIVATIVES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Interest rate volatility often increases to the point that balance sheet repositioning through the use of account repricing and other on-balance sheet strategies cannot occur rapidly enough to avoid adverse net income effects. At those times, off-balance sheet or synthetic hedges are utilized. Management uses interest rate swaps, caps and floors to supplement balance sheet repositioning. Such products are designed to move the interest sensitivity of the corporation toward a neutral position. Interest rate swaps are contractual agreements between two parties to exchange a series of cash flows representing interest payments. A swap allows both parties to transform the repricing characteristics of an asset or liability from a fixed to a floating rate, a floating rate to a fixed rate, or one floating rate to another floating rate. The underlying principal positions are not affected. Swap terms generally range from one year to ten years depending on the need. At June 30, 1995, interest rate swaps, caps and floors with a total notional value of $1.4 billion, and terms of up to seven years, were outstanding. The following tables set forth certain information concerning Southern National's interest rate swaps, caps and floors at June 30, 1995: INTEREST RATE SWAPS, CAPS AND FLOORS JUNE 30, 1995
NOTIONAL RECEIVE PAY UNREALIZED TYPE AMOUNT RATE RATE GAINS(LOSSES) ---- ---------- ----------- ---------- ------------- (DOLLARS IN THOUSANDS) Receive fixed swaps........... $ 623,055 6.21% 6.22% $ 639 Pay fixed swaps............... 103,229 6.03 7.26 (976) Caps and floors............... 700,000 -- -- (3,898) ---------- --------- --------- ---------- Total......................... $1,426,284 6.18% 6.37% $ (4,235) ========== ========= ========= ========== RECEIVE FIXED PAY FIXED CAPS AND YEAR-TO-DATE ACTIVITY SWAPS SWAPS FLOORS TOTAL --------------------- ---------- ----------- ---------- ------------- Balance, December 31, 1994.... $1,200,000 111,325 1,100,000 2,411,325 Additions..................... -- -- -- -- Maturities/amortizations...... (176,945) (6,659) -- (183,604) Terminations.................. (400,000) (1,437) (400,000) (801,437) ---------- --------- --------- ---------- Balance, June 30, 1995........ $ 623,055 103,229 700,000 1,426,284 ========== ========= ========= ========== ONE YEAR ONE TO FIVE AFTER FIVE MATURITY SCHEDULE* OR LESS YEARS YEARS TOTAL ------------------ ---------- ----------- ---------- ------------- Receive fixed swaps........... $ 40,000 583,055 -- 623,055 Pay fixed swaps............... 40,000 63,229 -- 103,229 Caps and floors............... -- 650,000 50,000 700,000 ---------- --------- --------- ---------- Total......................... $ 80,000 1,296,284 50,000 1,426,284 ========== ========= ========= ==========
-------- * Maturities are based on full contract extensions. 11 As of June 30, 1995, unearned income and deferred premiums from new swap transactions and deferred losses from terminated swap transactions were $769,000 and $6.7 million, respectively. The unearned income and deferred premiums will be recognized over the next seven years and the deferred losses will be recognized in the next year . The combination of active and terminated transactions resulted in expense of $2.6 million during the second quarter of 1995. In addition to interest rate swaps, Southern National utilizes written covered over-the-counter call options on specific securities in the available- for-sale portfolio in order to enhance returns. Option fee income was $415,000 for the second quarter of 1995 and $1.6 million for the first six months of 1995. Unexercised options on securities with total par values of $43.2 million were outstanding at June 30, 1995. Southern National also utilizes purchased over-the-counter put options in its mortgage banking activities to hedge the mortgage pipeline, although no such options were outstanding as of June 30, 1995. CAPITAL ADEQUACY AND RESOURCES The maintenance of appropriate levels of capital is a management priority. Overall capital adequacy is monitored on an ongoing basis by management. Southern National's principal capital planning goals are to provide an adequate return to shareholders while retaining a sufficient base from which to provide future growth and compliance with all regulatory standards. Shareholders' equity at June 30, 1995 was $1.6 billion versus $1.5 billion for December 31, 1994. As a percentage of assets, total shareholders' equity was 7.6% at June 30, 1995, up from 7.5% at December 31, 1994. Southern National's book value per common share at June 30, 1995 was $14.59, versus $13.92 at December 31, 1994. The increase in book value per common share reflects the $9.1 unrealized appreciation at June 30, 1995 compared to unrealized depreciation of $72.6 million at year end. Average shareholders' equity as a percentage of average assets was 7.6% for the six months ended June 30, 1995 and 1994. Tier 1 and total risk-based capital ratios at June 30, 1995 were 11.3% and 12.6%, respectively. The leverage ratio was 7.4% at the end of the second quarter. These capital ratios measure the capital to risk-weighted assets and off-balance sheet items as defined by Federal Reserve Board ("FRB") guidelines. An 8% minimum of total capital to risk-weighted assets is required. One-half of the 8% minimum must consist of tangible common shareholders' equity (Tier 1 capital) under regulatory guidelines. The leverage ratio, established by the FRB, measures Tier 1 capital to average total assets less goodwill and must be maintained in conjunction with the risk-based capital standards. The regulatory minimum for the leverage ratio is 3%. CAPITAL ADEQUACY RATIOS
1995 1994 --------------- ----------------------- SECOND FIRST FOURTH THIRD SECOND QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- ------- Average equity to average assets........ 7.61% 7.60 7.67 7.62 7.57 Equity to assets at period end.......... 7.60 7.51 7.54 7.60 7.63 Risk-based capital ratios: Tier 1 capital........................ 11.3 11.5 12.3 12.3 12.4 Total capital......................... 12.6 12.7 13.6 13.6 13.7 Leverage ratio.......................... 7.4 7.3 7.8 7.7 7.6
12 ANALYSIS OF RESULTS OF OPERATIONS Southern National realized net income for the first six months of 1995 of $44.7 million, compared to earnings of $112.1 million during the first six months of 1994. On a fully diluted per share basis, net income for the six months ended June 30, 1995 was $.41, compared to earnings of $1.05 for the same period in 1994. The decrease in earnings was caused by approximately $104.4 million in pretax nonrecurring charges related to the merger between Southern National and BB&T, $19.8 million in securities losses resulting from the restructuring of the securities portfolio discussed in the "Analysis of Financial Condition" and an $11.9 million gain on the sale of divested branches. The net after-tax impact of the nonrecurring items and securities losses was $72.7 million. A brief description of the nature of the nonrecurring items is presented below:
FIRST SECOND YEAR- QUARTER QUARTER TO-DATE -------- ------- ------- (DOLLARS IN THOUSANDS) Other service charges, commissions and fees......... $ -- 470 470 Other noninterest income (premium on divested deposits).......................................... -- (11,866) (11,866) Securities losses................................... 19,787 -- 19,787 Personnel expense................................... 50,611 4,660 55,271 Occupancy expense................................... 3,831 135 3,966 Furniture and equipment expense..................... 3,005 3,079 6,084 Other noninterest expense........................... 25,946 6,980 32,926 Income taxes (pre-tax equivalent)................... 4,566 -- 4,566 -------- ------- ------- Total............................................... $107,746 3,458 111,204 ======== ======= ======= Total--net of tax................................... $ 70,532 2,120 72,652 ======== ======= =======
Excluding nonrecurring items and securities losses, Southern National would have had net income after tax for the first six months of 1995 of $117.4 million, or $1.08 per fully diluted share. Second quarter earnings, exclusive of the nonrecurring items, represented a return on assets of 1.18% and a return on common equity of 16.0%. Excluding nonrecurring items, fully diluted earnings per share for the second quarter were $.55 compared to $.54 in the first quarter. NET INTEREST INCOME Net interest income on a fully taxable equivalent ("FTE") basis was $383.2 million for the first six months of 1995 compared to $373.8 million for the same period in 1994, a 2.5% increase. This increase resulted from a 7.6% growth in average earning assets, offset by a decline in the net interest margin from 4.30% to 4.10%. The decline in margin was caused primarily by competitive market factors in the pricing of loans and deposits, as well as the more frequent repricing of interest-bearing sources of funds, compared with the repricing of earning assets. In addition, as a result of the merger, Southern National has competitively priced loans and deposits to protect current market positions. 13 NET INTEREST INCOME AND RATE/VOLUME ANALYSIS FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
1995 V. 1994 -------------------------- FULLY TAXABLE EQUIVALENT AVERAGE BALANCES YIELD / RATE INCOME / EXPENSE CHANGE DUE TO ------------------------ ---------------------- -------------- ---------------- INCREASE --------------- 1995 1994 1995 1994 1995 1994 (DECREASE) RATE VOLUME ----------- ---------- ------ ------ -------- ------- ---------- ------- ------ (DOLLARS IN THOUSANDS) Assets Securities (1): U.S. Treasury, government and other (5).................... $ 5,248,737 5,130,525 6.07% 5.77 $158,050 146,702 $ 11,348 7,914 3,434 States and political subdivisions........... 175,898 185,086 8.93 9.38 7,787 8,609 (822) (406) (416) ----------- ---------- ------ ------ -------- ------- -------- ------- ------ Total securities (5)... 5,424,635 5,315,611 6.16 5.89 165,837 155,311 10,526 7,508 3,018 Other earning assets (2)..................... 47,188 132,521 5.94 3.23 1,389 2,123 (734) 1,131 (1,865) Loans and leases, net of unearned income (1)(3)(4)(5)............ 13,372,850 12,071,629 9.15 8.03 606,918 480,418 126,500 71,557 54,943 ----------- ---------- ------ ------ -------- ------- -------- ------- ------ Total earning assets... 18,844,673 17,519,761 8.28 7.34 774,144 637,852 136,292 80,196 56,096 ----------- ---------- Non-earning assets..... 1,172,343 1,111,894 ----------- ---------- Total assets.......... $20,017,016 18,631,655 =========== ========== Liabilities and Shareholders' Equity Interest-bearing deposits: Savings deposits....... $ 3,212,847 3,548,879 2.32 2.12 36,886 37,383 (497) 3,206 (3,703) Money market deposits.. 1,695,203 1,619,927 3.58 3.09 30,136 24,848 5,288 4,092 1,196 Time deposits.......... 7,684,996 7,347,961 5.39 4.01 205,292 146,234 59,058 52,079 6,979 ----------- ---------- ------ ------ -------- ------- -------- ------- ------ Total interest-bearing deposits.............. 12,593,046 12,516,767 4.36 3.36 272,314 208,465 63,849 59,377 4,472 Short-term borrowed funds................... 3,044,118 2,094,308 5.91 3.56 89,253 37,007 52,246 30,953 21,293 Long-term debt.......... 908,230 644,835 6.52 5.82 29,384 18,615 10,769 2,457 8,312 ----------- ---------- ------ ------ -------- ------- -------- ------- ------ Total interest-bearing liabilities........... 16,545,394 15,255,910 4.76 3.49 390,951 264,087 126,864 92,787 34,077 ----------- ---------- ------ ------ -------- ------- -------- ------- ------ Demand deposits....... 1,693,399 1,747,705 Other liabilities..... 256,402 210,933 Shareholders' equity.. 1,521,821 1,417,107 ----------- ---------- Total liabilities and shareholders' equity.. $20,017,016 18,631,655 =========== ========== Average interest rate spread.................. 3.52 3.85 Net yield on earning assets.................. 4.10% 4.30 $383,193 373,765 $ 9,428 (12,591) 22,019 ====== ====== ======== ======= ======== ======= ====== Taxable equivalent adjustment.............. $ 15,410 13,839 ======== =======
---- (1) Yields related to securities, loans and leases exempt from both federal and state income taxes, federal income taxes only or state income taxes only are stated on a taxable equivalent basis using statutory tax rates in effect for the periods presented. (2) Includes federal funds sold and securities purchased under resale agreements or similar arrangements. (3) Loan fees, which are not material for the periods presented are included for rate calculation purposes. (4) Nonaccrual loans have been included in the average balances. Only the interest collected on such loans is included as income. (5) Includes assets held for sale or available for sale at amortized cost. 14 Net interest income FTE for the second quarter of 1995 was $192.9 million, up from $190.3 million for the first quarter of 1995 and $188.3 million for the second quarter of 1994. The higher level of net interest income reflected growth during the second quarter in earning assets, which increased $423.5 million from March 31, 1995 and $1.5 million from June 30, 1994. The growth occurred principally in loans and leases. The impact of increases in earning assets was offset by a decline in the margin during the second quarter of eight basis points to 4.06%. This compares to a margin of 4.29% for the second quarter of 1994. The decline in margin resulted primarily from higher costs of funding sources, such as short-term borrowed funds, and the increased competitive factors discussed above. The effects of the quarterly fluctuations of interest rates and interest-sensitive assets and liabilities on net interest income are presented in the accompanying table. 15 NET INTEREST INCOME AND RATE/VOLUME ANALYSIS FOR THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
1995 V. 1994 -------------------------- AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE CHANGE DUE TO ---------------------- ------------ ---------------- INCREASE --------------- FULLY TAXABLE EQUIVALENT 1995 1994 1995 1994 1995 1994 (DECREASE) RATE VOLUME ------------------------ ----------- ---------- ----- ----- -------- ------- ---------- ------- ------ (DOLLARS IN THOUSANDS) ASSETS Securities (1): U.S. Treasury, government and other (5).................... $ 5,295,064 5,227,769 6.20% 5.66 $ 81,813 73,760 $ 8,053 7,093 960 States and political subdivisions........... 171,520 182,689 8.86 9.35 3,788 4,258 (470) (217) (253) ----------- ---------- ---- ---- -------- ------- ------- ------- ------ Total securities (5)... 5,466,584 5,410,458 6.28 5.78 85,601 78,018 7,583 6,876 707 Other earning assets (2)..................... 47,557 108,971 6.18 3.50 733 952 (219) 492 (711) Loans and leases, net of unearned income (1)(3)(4)(5)............ 13,541,095 12,082,232 9.23 8.16 311,721 245,862 65,859 34,305 31,554 ----------- ---------- ---- ---- -------- ------- ------- ------- ------ Total earning assets... 19,055,236 17,601,661 8.38 7.40 398,055 324,832 73,223 41,673 31,550 ----------- ---------- -------- ------- ------- ------- ------ Non-earning assets..... 1,194,168 1,110,467 ----------- ---------- Total assets.......... $20,249,404 18,712,128 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits: Savings deposits....... $ 3,252,569 3,392,854 2.31 2.22 18,733 18,774 (41) 751 (792) Money market deposits.. 1,580,537 2,037,463 3.79 2.58 14,932 13,129 1,803 5,193 (3,390) Time deposits.......... 7,772,236 7,091,964 5.60 4.14 108,515 73,201 35,314 27,763 7,551 ----------- ---------- ---- ---- -------- ------- ------- ------- ------ Total interest-bearing deposits.............. 12,605,342 12,522,281 4.52 3.37 142,180 105,104 37,076 33,707 3,369 Short-term borrowed funds................... 3,219,920 2,232,787 6.00 3.91 48,194 21,782 26,412 14,452 11,960 Long-term debt.......... 910,946 630,600 6.50 6.12 14,761 9,619 5,142 632 4,510 ----------- ---------- ---- ---- -------- ------- ------- ------- ------ Total interest-bearing liabilities........... 16,736,208 15,385,668 4.92 3.56 205,135 136,505 68,630 48,791 19,839 ----------- ---------- ---- ---- -------- ------- ------- ------- ------ Demand deposits....... 1,709,573 1,699,339 Other liabilities..... 263,716 210,438 Shareholders' equity.. 1,539,907 1,416,683 ----------- ---------- Total liabilities and shareholders' equity.. $20,249,404 18,712,128 =========== ========== Average interest rate spread.................. 3.46 3.84 Net yield on earning assets.................. 4.06% 4.29 $192,920 188,327 $ 4,593 (7,118) 11,711 ==== ==== ======== ======= ======= ======= ====== Taxable equivalent adjustment.............. $ 7,958 7,061 ======== =======
---- (1) Yields related to securities, loans and leases exempt from both federal and state income taxes, federal income taxes only or state income taxes only are stated on a taxable equivalent basis using statutory tax rates in effect for the periods presented. (2) Includes federal funds sold and securities purchased under resale agreements or similar arrangements. (3) Loan fees, which are not material for the periods shown are included for rate calculation purposes. (4) Nonaccrual loans have been included in the average balances. Only the interest collected on such loans is included as income. (5) Includes assets held for sale or available for sale at amortized cost. 16 Hedging strategies have been used in the past and will be utilized in the future to reduce sensitivity to interest rate movements. See the "Asset/Liability Management" section for additional discussion of hedging strategies. NONINTEREST INCOME Noninterest income for the six months ended June 30, 1995 was $102.6 million, compared to $112.0 million for the same period in 1994. Securities losses of $19.8 million were the primary factor contributing to the decline. This decline was offset to an extent by an $11.9 million gain on the sale of divested branches. The percentage of total revenues, calculated as net interest income plus noninterest income excluding securities gains or losses, derived from noninterest (fee-based) income for the six months ended June 30, 1995 was 25%, up from 23% for the second quarter of 1994. Service charges on deposit accounts were stable for the first six months in 1995 compared to 1994, increasing by $1.3 million or 3.0%. Several factors accounted for the lack of significant growth in service charges on deposits. The primary factor has been the relative lack of growth in deposits from June 30, 1994 to June 30, 1995. Also, rising interest rates during 1994 and 1995 negatively affected service charges on deposit accounts by increasing the earnings credit used in service charge computations. Total nondeposit fees and commissions increased by $1.8 million to a level of $54.3 million in 1995 compared with $52.5 million in the first six months of 1994. Major sources of nondeposit fees and commissions generating the increase were bankcard income, up $2.7 million from the prior year balance; rental income on equipment under lease, up $876,000; credit insurance fees, increased $469,000; and general insurance commissions, up $773,000 over the prior year. Other significant fluctuations in noninterest income included mortgage banking income, which decreased 36.2%, from $12.9 million for the first half of 1994 to $8.2 million during the same period in 1995. Most of the decrease in mortgage banking income reflects a $4.5 million decline in the net gain on the sales of mortgage loans. Trust revenues, bankcard fees and general insurance commissions all posted gains in the second quarter of 1995 compared to the same period last year. NONINTEREST EXPENSE Noninterest expense was $388.9 million for the first six months of 1995 compared to $293.1 million for the same period a year ago. The merger-related accruals and expenses discussed above led to an elevated level of noninterest expense in the first six months of 1995. These items included $98.2 million of nonrecurring charges which primarily affected personnel expense and other noninterest expense. Excluding nonrecurring charges, personnel expense, the largest component of noninterest expense, decreased from $148.4 million for the first six months of 1994, to $144.3 million for the same period in 1995. This decline reflected efficiencies accomplished as a result of the Southern National/BB&T merger. The nonrecurring charges discussed above contributed $55.3 million to total personnel costs during the first six months in the form of severance pay, termination of employment contracts, early retirement packages and related benefits. Occupancy and equipment expense, excluding nonrecurring charges for the six months ended June 30, 1995 increased $3.2 million, or 7.3%, compared to 1994. On-going depreciation of property and equipment purchased in connection with implementing the merger was a major component of the increase. $10.1 million in nonrecurring charges relating to branch closings and the consolidation of bank operations and systems associated with the merger significantly affected total occupancy and equipment expense. Federal deposit insurance expense decreased $619,000, or 3.7%, for the six months ended June 30, 1995 as a result of flat deposit growth and elevated 1994 FDIC expense during the first six months which occurred because The First Savings Bank, FSB, acquired in the first quarter of 1994, paid higher FDIC insurance premiums than Southern National has historically paid because of its supervisory risk rating. Excluding the $32.9 million in nonrecurring charges, other noninterest expenses decreased $1.0 million, or 1.2%, primarily because of efficiencies resulting from the merger. 17 PROVISION FOR INCOME TAXES Federal income taxes decreased from an expense of $58.3 million for the six months ending June 30, 1994 to $22.8 million for the same period in 1995. Effective tax rates were 34.2% and 33.7%, respectively. PROFITABILITY MEASURES
1995 1994 --------------- ----------------------- SECOND FIRST FOURTH THIRD SECOND QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- ------- Return on average as- sets................... 1.13% (0.26) 1.27 1.29 1.22 Return on average common equity................. 15.32 (3.93) 17.09 17.51 16.67 Net interest margin..... 4.06 4.14 4.26 4.28 4.29 Yield to break even..... 2.12 4.35 2.05 2.00 2.16 Efficiency ratio (tax- able equivalent)*...... 58.1 58.8 57.5 57.5 59.7
-------- * Excludes gains on sale of servicing rights, securities gains (losses) and foreclosed property expense for all periods and nonrecurring items and merger-related expenses of $83,393 included in noninterest expense for the first quarter of 1995 and $3,458 for the second quarter of 1995. 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The nature of the business of Southern National's banking subsidiaries ordinarily results in a certain amount of litigation. The subsidiaries of Southern National are involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that the liabilities arising from these proceedings will not have a materially adverse effect on the consolidated financial position or consolidated results of operations of Southern National. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 11--"Computation of Earnings Per Share" is included herein. (b) Exhibit 27--"Financial Data Schedule" is included in the electronically-filed document as required. (c) Southern National filed a Form 8-K under Item 5 on February 24, 1995 which included consolidated financial statements for BB&T and pro forma condensed financial information relating to Southern National's merger with BB&T. Southern National filed a Form 8-K under Item 2 on March 14, 1995 to report the completion of the merger of the bank holding companies of BB&T and Southern National, effective February 28, 1995. A Form 8-K/A was subsequently filed on May 15, 1995, to amend this Form 8-K in order to file BB&T Financial Corporation's 1994 audited financial statements, as well as related pro forma statements including Southern National and Commerce. A second amendment on Form 8-K/A dated May 22, 1995 was filed to update the information filed on May 15, 1995. A third amendment on Form 8-K/A was filed on August 4, 1995 to further update the pro forma financial information included in the previous filings. A Form 8-K was filed under Item 5 on May 24, 1995 to place the 1994 Summary Annual Report on file with the Securities and Exchange Commission. On June 30, 1995, Southern National filed a Current Report on Form 8-K under Item 5 to restate the December 31, 1994 Form 10-K for the mergers with Commerce Bank and BB&T Financial Corporation. On August 3, 1995, Southern National filed a Form 8-K under Item 5 to report the results of operations and financial condition as of June 30, 1995. 19 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. Southern National Corporation (Registrant) /s/ Scott E. Reed Date: August 14, 1995 By: ___________________________________ Scott E. Reed, Executive Vice President and Chief Financial Officer /s/ Sherry A. Kellett Date: August 14, 1995 By: ___________________________________ Sherry A. Kellett, Executive Vice President and Controller (Principal Accounting Officer) 20 EX-11 2 EXHIBIT 11 EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES FOR THE PERIODS AS INDICATED
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------------- ----------------------- 1995 1994 1995 1994 ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Primary Earnings Per Share: Weighted average number of common shares outstanding during the period........... 102,498,387 100,838,575 102,350,232 100,713,004 Add-- Dilutive effect of outstanding options (as determined by application of treasury stock method). 1,025,414 1,189,350 992,186 1,224,730 ----------- ----------- ----------- ----------- Weighted average number of common shares, as adjusted.. 103,523,801 102,027,925 103,342,418 101,937,734 =========== =========== =========== =========== Net income................... $ 57,298 57,108 44,745 112,079 Less-- Preferred dividend requirements.............. 1,289 1,300 2,588 2,599 ----------- ----------- ----------- ----------- Income available for common shares...................... $ 56,009 55,808 42,157 109,480 =========== =========== =========== =========== Primary earnings per share... $ 0.54 0.55 0.41 1.07 =========== =========== =========== =========== Fully Diluted Earnings Per Share: Weighted average number of common shares outstanding during the period........... 102,498,387 100,847,631 102,350,232 100,713,004 Add-- Shares issuable assuming conversion of convertible preferred stock........... 4,525,723 4,548,236 4,536,917 4,548,236 Dilutive effect of outstanding options (as determined by application of treasury stock method). 1,261,944 1,189,351 1,286,528 1,235,102 Shares assuming conversion of convertible debentures. 488,852 497,463 492,252 497,463 ----------- ----------- ----------- ----------- Weighted average number of common shares, as adjusted.. 108,774,906 107,082,681 108,665,929 106,993,805 =========== =========== =========== =========== Net income................... $ 57,298 57,108 44,745 112,079 Add after tax interest expense and amortization issue costs applicable to convertible debentures...... 81 81 162 162 ----------- ----------- ----------- ----------- Net income, as adjusted...... $ 57,379 57,189 44,907 112,241 =========== =========== =========== =========== Fully diluted earnings per share....................... $ 0.53 0.53 0.41 1.05 =========== =========== =========== ===========
EX-27 3 ARTICLE 9 FINANCIAL DATA SCHEDULE
9 1,000 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 667,462 2,223 40,700 0 3,614,055 1,940,477 1,947,770 13,765,475 176,175 20,662,252 14,336,556 3,147,213 295,868 1,312,464 513,546 0 3,759 1,052,846 20,662,252 603,059 154,286 1,389 758,734 272,314 390,951 367,783 14,000 (19,845) 388,859 67,521 67,521 0 0 44,745 0.41 0.41 4.10 47,013 30,335 611 0 171,734 15,472 5,913 176,175 176,175 0 28,188