-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, pDoYHo8y4pRdc25XQgoGB+BWOPFHmJBnl5du5BktkmdhAojXDLKAWxnMO/HIbJvH Q1Sppe7HGxJGStJbqAua7w== 0000950168-94-000197.txt : 19940517 0000950168-94-000197.hdr.sgml : 19940517 ACCESSION NUMBER: 0000950168-94-000197 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN NATIONAL CORP /NC/ CENTRAL INDEX KEY: 0000092230 STANDARD INDUSTRIAL CLASSIFICATION: 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: 94528904 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 SOUTHERN NATIONAL 10-Q 89622.1 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, 1994 Commission file number: 0-4641 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.) 500 North Chestnut Street Lumberton, North Carolina 28358 (Address of principal executive offices) (Zip Code) (910) 671-2000 (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, 1994, 43,230,796 shares of the registrant's common stock, $5 par value, were outstanding. SOUTHERN NATIONAL CORPORATION Form 10-Q March 31, 1994 INDEX Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Financial Statements Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analysis of Financial Condition Asset / Liability Management Inflation and Changing Interest Rates Capital Adequacy and Resources Earnings Analysis Part II. OTHER INFORMATION Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Events - Acquisitions Item 6. Exhibits and Reports on Form 8-K SIGNATURES EXHIBIT Part I. FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED STATEMENTS OF CONDITION SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES (Unaudited) (Dollars in thousands)
March 31, December 31, 1994 1993 Assets Cash and due from depository institutions $ 288,994 $ 283,909 Interest-bearing bank balances 9,726 64,954 Federal funds sold and securities purchased under resale agreements or similar arrangements 57,067 13,438 Investment securities 1,627,683 1,356,102 Securities available for sale 916,058 1,194,230 Loans held for sale 118,962 316,544 Loans and leases, net of unearned income of $33,265 in 1994 and $30,926 in 1993 4,882,245 4,838,274 Less - allowance for losses (69,500) (69,503) Net loans and leases 4,812,745 4,768,771 Premises and equipment, net 141,812 136,228 Other assets 106,342 140,294 Total assets $ 8,079,389 8,274,470 Liabilities and Shareholders' Equity Noninterest-bearing $ 824,383 $ 748,754 Interest-bearing 5,490,061 5,574,694 Total deposits 6,314,444 6,323,448 Short-term borrowings 870,320 756,343 Accounts payable and accured liabilities 75,319 150,138 Long-term debt 237,164 479,677 Total liabilities 7,497,247 7,709,606 Shareholders' equity: Preferred stock, $5 par, 5,000,000 shares authorized, 770,000 issued and outstanding in 1994 and 1993 3,850 3,850 Common stock, $5 par, 120,000,000 shares authorized, 43,228,086 issued and outstanding in 1994 and 42,961,214 in 1993 216,140 214,806 Paid-in capital 151,231 151,186 Retained earnings 210,921 195,022 Total shareholders' equity 582,142 564,864 Total liabilities and shareholders' equity $ 8,079,389 $8,274,470
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES For the Three Months Ended March 31, 1994 and 1993 (Unaudited) (Dollars in thousands except per share data) 1994 1993 Interest Income Interest and fees on loans and leases $ 97,329 $ 99,824 Interest and dividends on securities 36,349 34,286 Interest on temporary investments 312 1,010 Total interest income 133,990 135,120 Interest Expense Interest on deposits 44,559 51,093 Interest on short-term borrowings 5,977 3,678 Interest on long-term debt 4,896 5,556 Total interest expense 55,432 60,327 Net Interest Income 78,558 74,793 Provision for loan and lease losses 1,171 3,662 Net Interest Income After Provision for Loan and Lease Losses 77,387 71,131 Noninterest Income Service charges on deposit accounts 8,636 8,644 Nondeposit fees and commissions 7,085 6,991 Securities gains, net 715 14,018 Other income 6,782 2,601 Total noninterest income 23,218 32,254 Noninterest Expense Personnel expense 32,639 31,302 Occupancy and equipment expense 8,614 9,808 Federal deposit insurance expense 3,863 3,331 Foreclosed property expense 853 2,987 Other expense 14,429 16,663 Total noninterest expense 60,398 64,091 Earnings Income before income taxes 40,207 39,294 Provision for income taxes 14,160 14,054 Income before cumulative effect of changes in accounting principles 26,047 25,240 Less: cumulative effect of changes in accounting principles, net of income taxes - 27,217 Net income 26,047 (1,977) Preferred dividend requirements 1,299 1,299 Net income applicable to common shares $ 24,748 $ (3,276) Per Common Share Net income: Primary Income before cumulative effect $ 0.57 $ 0.57 Less: cumulative effect, net of income taxes - 0.65 Net income $ 0.57 $ (0.08) Fully diluted Income before cumulative effect $ 0.54 $ 0.57 Less: cumulative effect, net of income taxes - 0.65 Net income $ 0.54 $ (0.08) Average shares outstanding Primary 43,599,661 41,836,325 Fully diluted 48,147,897 46,411,307 Cash dividends paid $ 0.17 $ 0.15 See accompanying notes to consolidated financial statements. Consolidated Statements of Cash Flows Southern National Corporation and Subsidiaries For the Three Months Ended March 31, 1994 and 1993 (Unaudited) (Dollars in thousands)
1994 1993 Increase (Decrease) in Cash and Cash Equivalents Cash Flows From Operating Activities: Net income....................................... $ 26,047 $ (1,977) Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses.......... 1,171 3,662 Depreciation of premises and equipment....... 2,979 4,757 Amortization of intangibles.................. 882 1,606 Accretion of negative goodwill............... (277) --- Amortization of unearned stock compensation.. 455 --- Discount accretion and premium amortization on securities.............................. 465 881 Security gains, net.......................... (1,008) (14,396) Net proceeds from sales of trading account securities................................. 293 378 Gain on sales of loans, net.................. (2,098) (1,026) Net (gain) loss on disposals of premises and equipment.............................. (482) 48 Net loss on foreclosed property and other real estate................................ 352 3,464 Proceeds from sales of loans held for sale... 353,573 190,113 Origination of loans held for sale, net of principal collected........................ (159,196) (90,277) Decrease (increase): Accrued interest receivable................ 3,994 2,530 Other assets............................... 19,311 25,911 Increase (decrease) in: Accrued interest payable................... (752) 294 Other accrued liabilities.................. (71,185) 23,295 Net cash provided by operating activities 174,524 149,263 Cash Flows From Investing Activities: Proceeds from sales of available for sale securities...................................... 272,938 289,027 Proceeds from sales of held to maturity securities --- 6,756 Maturities of available for sale securities...... 104,705 50 Maturities of held to maturity securities........ 206,893 108,896 Purchases of available for sale securities....... (93,885) --- Purchases of held to maturity securities......... (484,803) (619,336) Leases made to customers......................... (8,471) (8,214) Principal collected on leases.................... 9,813 8,819 Loan originations, net of principal collected.... (49,927) (74,039) Procceds from sale of loans...................... --- 4,114 Proceeds from disposals of premises and equipment 2,224 1,458 Purchases of premises and equipment.............. (10,305) (7,304) Proceeds from sales of foreclosed property....... 4,323 4,517 Proceeds from sales of other real estate owned... 8,530 1,771 Purchases of other real estate owned............. --- (200) Net cash used in investing activities... (37,965) (283,685) Cash Flows From Financing Activities: Net (decrease) increase in deposits.............. (9,004) 42,117 Net increase (decrease) in short-term borrowings. 113,977 (1,508) Proceeds from long-term debt..................... --- 77,309 Repayment of long-term debt...................... (242,513) (70,224) Net proceeds from common stock issued............ 1,379 779 Cash dividends paid on common and preferred stock (6,912) (5,253) Net cash provided by financing activities.... (143,073) 43,220 Net Increase (Decrease) in Cash and Cash Equivalents (6,514) (91,202) Cash and Cash Equivalents at December 31........... 362,301 378,087 Cash and Cash Equivalents at March 31.............. $ 355,787 $ 286,885
See accompanying notes to consolidated financial statements. SOUTHERN NATIONAL CORPORATION Form 10-Q March 31, 1994 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of Southern National Corporation and subsidiaries ("Southern National") as of March 31, 1994 and December 31, 1993, the results of operations for the three month periods ended March 31, 1994 and 1993, and the cash flows for the three month periods ended March 31, 1994 and 1993. The financial statements and notes are presented as permitted by Form 10-Q; the information contained in the footnotes included in Southern National's latest annual report on Form 10-K should also be referred to in connection with the reading of these unaudited interim financial statements. B. As of January 1, 1994, Southern National adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. These investments are to be classified in three categories: held to maturity, trading and available for sale. At March 31, 1994, $922.4 million of securities, with a market value of approximately $916.1 million, were classified as available for sale. Accordingly, shareholders' equity decreased approximately $3.7 million after tax. C. The provision for income taxes was allocated as follows:
For Three Months Ended March 31, 1994 1993 (in thousands) Income from operations $ 14,160 $ 14,054 Cumulative effect of changes in accounting principles -- (2,897) Total provision for income taxes $ 14,160 $ 11,157
The reasons for the difference between the provision for income taxes attributable to operations and the amount computed by applying the statutory federal income tax rate to the income before income taxes were as follows:
For Three Months Ended March 31, 1994 1993 (in thousands) Federal income taxes at statutory rates of 35% $ 14,072 $ 13,753 Tax-exempt income from securities, loans and leases less related nondeductible interest expense (650) (579) Other, net 738 880 Provision for income taxes $ 14,160 $ 14,054 Effective income tax rate 35.2% 35.8%
The provisions for income taxes related to securities gains for the three months ended March 31, 1994 and 1993 were $279,000 and $5,414,000, respectively. D. Cash and cash equivalents include cash and due from depository institutions, interest-bearing bank balances and federal funds sold. Generally, both cash and cash equivalents are considered to have maturities of three months or less. Transfer of loans to other real estate owned, a non-cash investing activity, amounted to $3,440,000 and $4,360,000 for the three month periods ended March 31, 1994 and 1993, respectively. Transfer of securities from the held to maturity category to the available for sale category, a non-cash investing activity, totaled $5,934,000 and $ -0- during the three month periods ended March 31, 1994 and 1993, respectively. E. On January 28, 1994, Southern National completed its acquisition of The First Savings Bank, FSB ("The First") by the issuance of 8,052,860 shares of Southern National common stock, or 0.855 shares of Southern National common stock in exchange for each share of The First's common stock outstanding. Options to purchase shares of The First's common stock were converted into options to purchase Southern National common stock at the same rate. The acquisition was accounted for under the pooling-of-interests method of accounting, and, accordingly, all financial information has been restated to include the accounts of The First. On January 31, 1994, Southern National completed its acquisition of Regency Bancshares Inc. ("Regency") by the issuance of 2,437,498 shares of Southern National common stock, or 1.8117 shares of Southern National common stock in exchange for each share of Regency's common stock outstanding. Options to purchase shares of Regency's common stock were converted into options to purchase Southern National common stock at the same rate. The acquisition was accounted for under the pooling-of-interests method of accounting, and, accordingly, all financial information has been restated to include the accounts of Regency. On February 24, 1994, Southern National completed its acquisition of Home Federal Savings Bank ("Home") by the issuance of 824,601 shares of Southern National common stock, or 2.576878 shares of Southern National common stock in exchange for each share of Home's common stock outstanding. Options to purchase shares of Home's common stock were converted into options to purchase Southern National common stock at the same rate. The acquisition was accounted for under the pooling-of-interests method of accounting, and, accordingly, all financial information has been restated to include the accounts of Home. F. The "cumulative effect of changes in accounting principles, net of income taxes" of $27,217,000 for the three month period ended March 31, 1993 is comprised of the impact of the adoption of SFAS 106, "Accounting for Post-Retirement Benefits Other Than Pensions," and SFAS 109 by Southern National, Regency, Home and The First, as well as the effect of the adoption by The First of SFAS 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions." The First, Regency and Home had fiscal years ended June 30. However, in connection with the restatement of 1993, the June 30 fiscal year-ends have been converted to a calendar year format comparable to Southern National's presentation. Accordingly, cumulative catch-up adjustments have been reflected in the first calendar quarter of 1993. A recap follows: Increase (Decrease) in Net Income (in thousands) SFAS 106 $ (8,463) Less: taxes 2,897 SFAS 72 (28,019) SFAS 109 6,368 $ (27,217) Part I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ANALYSIS OF FINANCIAL CONDITION Total assets at March 31, 1994 were $8.1 billion, a $195.1 million decrease from the balance at the end of 1993. A bulk sale of $109 million of loan-related assets was the principal factor contributing to this decrease. The bulk sale was part of the implementation strategy designed to reduce the amount of problem assets assumed by Southern National upon completion of its acquisition of The First. The assets involved in the sale included nonperforming loans, foreclosed properties and loans which were inconsistent with Southern National's portfolio strategy. In addition, approximately $58 million of jumbo mortgages were sold during the first quarter of 1994 in a separate transaction. Composition of Earning Assets
(Dollars in thousands) March 31, 1994 December 31, 1993 Securities available for sale $ 916,058 12.0 % $ 1,194,230 15.3 % Investment securities 1,627,683 21.4 1,356,102 17.4 Loans held for sale 118,962 1.6 316,544 4.1 Loans and leases, net of unearned income 4,882,245 64.1 4,838,274 62.2 Other assets * 66,793 0.9 78,392 1.0 Total earning assets $ 7,611,741 100.0 % $ 7,783,542 100.0 % Earning assets as percent of total assets 94.2% 94.1%
*Includes: (i) federal funds sold, (ii) securities purchased under resale agreements and similar arrangements and (iii) interest-bearing bank balances. The loan and lease portfolio, net of unearned income, increased $44.0 million over the level at December 31, 1993, an annualized growth rate of 3.6%. Management expects that the average loan growth rate will increase as the year progresses. The new markets in South Carolina provide opportunities for growth in the commercial loan portfolio, while the new sales/finance division is expected to lead to increased consumer loan demand. Total deposits remained relatively "flat" during the first quarter of 1994, declining $9.0 million. Short-term borrowings increased $114.0 million during this period while long-term debt, primarily Federal Home Loan Bank advances, declined $242.5 million. The application of Southern National's funding strategies to borrowings assumed from the first quarter mergers was the primary reason for this shift in amounts and classifications. The composition of, and strategy employed in the management of, interest- bearing liabilities are further discussed in "ASSET / LIABILITY MANAGEMENT." Composition of Deposits and Other Borrowings
(Dollars in thousands) March 31, 1994 December 31, 1993 Interest-bearing deposits $ 5,490,061 74.0 % $ 5,574,694 73.7 % Demand deposits 824,383 11.1 748,754 9.9 Total deposits 6,314,444 85.1 6,323,448 83.6 Short-term borrowings 870,320 11.7 756,343 10.0 Long-term debt 237,164 3.2 479,677 6.4 Total deposits and other borrowings $ 7,421,928 100.0 % $ 7,559,468 100.0 %
Asset Quality Risk assets, comprised of nonperforming assets ("NPA's") plus loans 90 days or more past due and still accruing, were $42.2 million at March 31, 1994, compared to $36.8 million at year-end 1993. The restatement of prior period credit quality data relating to Regency, Home and The First was merely an arithmetical function of combining Southern National's data with that of the merged companies. At March 31, 1994, all mergers have been completed and the credit quality statistics are based upon the more conservative criteria utilized by Southern National in identifying problem assets and, as a result, NPA's are higher. The allowance for losses as a percent of loans and leases was 1.42% at March 31, 1994 and NPA's as a percent of loan-related assets was .85%. As problem assets are resolved and credit quality improves throughout the year, it is expected that the allowance as a percent of loans and leases will decline and the ratio of NPA's to loan-related assets will improve. The provision for loan losses in the first quarter of 1994 was $1.2 million, and net charge-offs were only .10% of average loans and leases. The provision is anticipated to be higher in future quarters, since it is unlikely that net charge-offs will continue at such a low level. Credit-related statistics relevant to the last five calendar quarters are presented in the accompanying table. ASSET QUALITY ANALYSIS (Dollars in thousands) As of / For the Quarter Ended 3-31-93 6-30-93 9-30-93 12-31-93 3-31-94 Allowance For Losses Beginning balance $ 53,840 $ 54,598 $ 56,020 $ 57,697 $ 69,503 Allowance for acquired loans -- -- -- 2,750 -- Provision for losses 3,662 4,291 3,540 19,945 1,171 Net charge-offs (2,904) (2,869) (1,863) (10,889) (1,174) Ending balance $ 54,598 $ 56,020 $ 57,697 $ 69,503 $ 69,500 Risk Assets Nonaccrual loans & leases $ 49,465 $ 44,188 $ 39,380 $ 28,372 $ 36,715 Foreclosed property 37,310 28,201 30,132 6,356 4,927 Nonperforming assets 86,775 72,389 69,512 34,728 41,642 Loans 90 days or more past due & still accruing 2,150 1,270 2,408 2,115 553 Total risk assets $ 88,925 $ 73,659 $ 71,920 $ 36,843 $ 42,195 Asset Quality Ratios Nonaccrual loans & leases as percent of total loans & leases 1.07 % 0.94 % 0.83 % 0.59 % 0.75 % Nonperforming assets as percent of: Total assets 1.16 0.95 0.88 0.42 0.52 Loans & leases plus foreclosed property 1.86 1.54 1.45 0.72 0.85 Net charge-offs as percent of average loans & leases 0.25 0.25 0.16 0.88 0.10 Allowance for losses as percent of loans & leases 1.18 1.20 1.21 1.44 1.42 Ratio of allowance for losses to: Net charge-offs 4.70 x 4.88 x 7.74 x 1.60 x 14.80 x Nonaccrual loans & leases 1.10 1.27 1.47 2.45 1.89 All line items referring to loans and leases reflect loans and leases, net of unearned income and loans held for sale. Applicable ratios have been 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 achieve relatively stable net interest margins. It is the responsibility of the Asset/Liability Committee ("ALCO") to set policy guidelines and to establish long-term strategies with respect to interest rate exposure and liquidity. The ALCO, which is composed primarily of executive management, meets regularly to review Southern National's interest rate and liquidity risk exposures in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to assure that the potential impact on earnings and liquidity is within conservative standards. Liquidity represents a bank's continuing ability to meet its funding needs, primarily deposit withdrawals, timely repayment of borrowings and other liabilities, and draw-downs on loan commitments. In addition to its level of liquid assets, many other factors affect a bank's ability to meet liquidity needs, including access to additional funding sources, total capital position and general market conditions. Traditional sources of liquidity include proceeds from maturity of investment securities, repayment of loans and growth in core deposits. Federal funds purchased, repurchase agreements and dollar rolls supplement the traditional sources. 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 ("Simulation") Analysis to measure the interest rate sensitivity of earnings. Discussion of this method is covered in "INFLATION AND CHANGING INTEREST RATES." Balance sheet repositioning is the most efficient and cost effective means of managing interest rate risk and is accomplished by strategic pricing of asset and liability accounts. The expected result of strategic pricing is the development of appropriate maturity and repricing streams in those accounts to produce consistent net income during adverse interest rate environments. The ALCO monitors loan, investment and liability portfolios to ensure comprehensive management of rate risk on the balance sheet. These portfolios are analyzed for proper fixed rate and variable rate "mixes" given a specific interest rate outlook. During 1993 and the first quarter of 1994, the total proportion of floating rate loans increased. At quarter-end, loans maturing or repricing in 30 days or less comprised 38% of all loans outstanding. Securities March 31, 1994 Held to Available for Maturity Sale Amortized Market (Dollars in thousands) Cost Value U.S. Treasury Within one year $ 244,047 $ 69,431 One to five years 722,318 456,433 Five to ten years - 92,711 After ten years - - Total 966,365 618,575 U.S. Government agencies and corporations * Within one year 11,027 3,058 One to five years 214,037 23,630 Five to ten years 349,915 97,853 After ten years 31,738 119,018 Total 606,717 243,559 States and political subdivisions Within one year 9,171 - One to five years 35,167 - Five to ten years 10,027 - After ten years - - Total 54,365 - Other securities Within one year - - One to five years 10 - Five to ten years 226 - After ten years - - Total 236 - Total debt securities 1,627,683 862,134 Equity securities - 53,924 Total securities $ 1,627,683 $ 916,058
* Included in U.S. Government agencies and corporations are mortgage-backed securities totaling $786,566,000. These securities are included in each of the categories based upon final stated maturity dates. The original contractual lives of these securities ranges from five to 30 years; however, a more realistic average maturity would be substantially shorter. During 1993 and the first quarter of 1994, management utilized strategies to emphasize short-term liabilities to increase repricing speed on that side of the balance sheet. Southern National used dealer repurchase agreements ("repos"), in which securities comprising a portion of the securities portfolio are transferred to approved correspondent banks and brokers for short-term funding strategies. Management continued to utilize mortgage-backed securities dollar rolls. The use of dealer repos and dollar rolls complemented overall asset/liability strategy since most of these agreements had overnight to monthly repricing that helped to sensitize the liability side of the balance sheet in the falling interest rate environment prevailing during 1993. Interest rate volatility often increases to the point that balance sheet repositioning through the use of account repricing cannot occur rapidly enough to avoid adverse net income effects. At those times, and when customer demand and competition are such that account repricing is not sufficient, off-balance sheet or synthetic hedges are utilized. During 1993 and the first quarter of 1994, management used interest rate swaps, caps and floors to supplement balance sheet repositioning. The counterparties to these transactions were large commercial banks and investment banks, all of which were approved by the ALCO. Annually, the counterparties are reviewed for creditworthiness by Southern National's credit policy group. 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 even one floating rate to another floating rate. The underlying principal positions are not affected. Swap terms generally range from one year to seven years depending on the need. At March 31, 1994, interest rate swaps with a total notional value of $570 million, with terms ranging up to seven years, were outstanding. Securities -- Market Value at March 31, 1994 Gross Unrealized Estimated Amortized Holding Holding Market (Dollars in thousands) Cost Gains Losses Value Securities held to maturity: U.S. Treasury $ 966,365 $ 8,708 $ 17,894 $ 957,179 U.S. Government agencies and corporations 46,685 120 62 46,743 States and political subdivisions 54,365 914 361 54,918 Mortgage-backed securities 560,032 4,103 7,501 556,634 Other debt securities 236 - 5 231 Total securities held to maturity 1,627,683 13,845 25,823 1,615,705 Securities available for sale: Mortgage-backed securities 232,099 4,856 2,826 234,129 U.S. Treasury 627,148 4,952 13,525 618,575 U.S. Government agencies and corporations 9,231 226 27 9,430 Equity securities 53,924 - - 53,924 Total securities available for sale 922,402 10,034 16,378 916,058 Total securities $ 2,550,085 $ 23,879 $ 42,201 $ 2,531,763
Management feels that interest rates are past their lows and will trend higher for the remainder of 1994. Also, management held the opinion that earnings would be at risk if the prime rate did not change as quickly as the cost of funding. During late 1993, Southern National entered into $300 million of interest rate corridors as a hedge against this risk. Subsequently, the prime rate has proven to adjust quicker than management estimated; therefore, the protection provided by the corridors was no longer needed and these instruments were terminated early in the second quarter of 1994. As a result of Southern National's on-balance sheet repositioning and off- balance sheet hedging, the positive impact of a 100 basis point decline over 12 months in interest rates is projected to be only .1% of net income. Stated in terms of earnings per share, a decline of 100 basis points in interest rates is projected to increase earnings by less than one-half cent per share by the end of 1994. Conversely, if interest rates were to rise 200 basis points, given Southern National's balance sheet position at quarter-end, the impact on net income would be a decrease of .2%, compared to a flat interest rate scenario. Management expects that an expanding economic environment and restrictive monetary policy by the Federal Reserve Board ("FRB") during 1994 will justify the current positioning of Southern National's interest rate sensitivity. Events will be monitored during the course of the year to determine appropriate adjustments to balance sheet and off-balance sheet hedges. INFLATION AND CHANGING INTEREST RATES 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 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. 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 earnings of Southern National. This method is subject to the assumptions that underlie the process, but it gives a better picture of the true earnings outlook as a whole. In reviewing the accompanying table -- "Interest Sensitivity Simulation Analysis," it is important to note that such analysis represents the sensitivity position as of a point in time and can be changed significantly by management within a short time period. Care should also be taken in noting that this tabular data does not reflect the impact of a change in the credit quality of Southern National's assets and liabilities. To attempt to quantify the potential change in net income, given a change in interest rates, various interest rate scenarios are applied to the projected balances, maturities and repricing opportunities. The resulting change in net income reflects the level of sensitivity that net income has in relation to changing interest rates. The Instantaneous Parallel rate shocks assume that all interest-bearing assets and liabilities move simultaneously and instantaneously in magnitude and direction. The Gradual Historical rate shocks assume that individual interest-bearing assets and liabilities move gradually over a twelve-month time period in correlation to its historical relationship with the assumed change in the Prime rate. For example, Southern National's Money Market Account rate has changed only one-third as much as Prime rate. Interest Sensitivity Simulation Analysis Interest Rate Scenario Reference Rate Annualized Money Percent Instantaneous Market Change in Parallel Prime Account Net Income + 4.00 % 10.75 % 6.25 % (31.0)% + 3.00 9.75 5.25 (23.2) + 2.00 8.75 4.25 (15.4) + 1.00 7.75 3.25 (7.7) No change 6.75 2.25 -0- - 1.00 5.75 1.25 7.7 - 2.00 4.75 0.25 15.3 - 3.00 3.75 0.00 15.4 - 4.00 2.75 0.00 7.3 Gradual Historical + 2.00 8.75 2.91 (0.2) - 1.00 5.75 1.92 0.1 A comprehensive policy has been developed for setting parameters for the management of interest rate risk as defined by the results of the model's output. Management has set policy guidelines that interest sensitive assets should remain between 150% and 50% of interest sensitive liabilities for all periods. Management has also stated that earnings should not fluctuate more than 5% up or down given each 1% change in rates over a 12- month period. To control that variance, and to manage the balance sheet consistent with any projected interest rate environment, management uses a number of natural or on-balance sheet strategies as well as off-balance sheet strategies as discussed in "ASSET/LIABILITY MANAGEMENT." 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 and revised regularly by the Board of Directors. 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. Shareholder's equity at March 31, 1994 was $582.1 million versus $564.9 million at year-end. As a percent of quarter-end assets, total shareholders' equity was 7.2% at March 31, 1994, compared to 6.8% at December 31, 1993. Southern National's book value per common share at March 31, 1994 was $11.75, versus $11.42 three months earlier. Southern National's internal capital formation rate (net income less dividends as a percent of average equity, annualized) was 13.2% for the first quarter of 1994. Average shareholders' equity as a percent of average assets was 7.2% and 7.7% for the three months ended March 31, 1994 and 1993, respectively. Tier 1 and total risk-based capital ratios at March 31, 1994 were 12.4% and 13.7%, respectively. The Tier 1 leverage ratio was 7.1%. These capital ratios measure the capital to risk-adjusted assets and off-balance sheet items as defined by FRB guidelines. An 8% minimum of total capital to risk-adjusted assets is required. One-half of the 8% minimum must consist of tangible common shareholders' equity. The leverage ratio, established for the FRB measures Tier 1 capital to average total assets less goodwill and must be maintained in conjunction with the risk-based capital standards. EARNINGS ANALYSIS Earnings for the first quarter of 1994 were $26.0 million. On a fully diluted per share basis, net income for the three months ended March 31, 1994 was $.54. The accompanying table presents a comparison of major income statement line items for the relevant periods. Components of Net Income For the Three Months Ended March 31, (In thousands) 1994 1993 Net interest income $ 78,558 $ 74,793 Provision for loan and lease losses 1,171 3,662 Noninterest income 23,218 32,254 Noninterest expense 60,398 64,091 Income before income taxes 40,207 39,294 Income taxes 14,160 14,054 Income before cumulative effect 26,047 25,240 Less: cumulative effect, net of income taxes - 27,217 Net income (loss) $ 26,047 $ (1,977) As shown in the table, earnings for the first quarter of 1993 were impacted by the effect of changes in accounting principles. The adoption of SFAS 72, by The First prior to its acquisition by Southern National, accounted for $28.0 million of this net cumulative change. The remainder was attributable to the adoption of SFAS 109 and SFAS 106 by Regency, Home and The First, as well as by Southern National, in 1993. Net Interest Income Net interest income on a fully taxable equivalent ("FTE") basis was $81.5 million for the first quarter of 1994 compared to $77.3 million for the same period in 1993, a 5% increase. Average earning assets during the first three months of 1994 were $7.6 billion, an increase of $695 million, or 10%, over 1993. Factors impacting the changes in volume were the purchase acquisition of East Coast Savings Bank, SSB ("East Coast") in October 1993 and internal growth. The accompanying table presents an analysis of net interest income and related changes for the quarters ended March 31, 1994 and 1993. Net Interest Income and Rate / Volume Analysis For the Three Months Ended March 31, 1994 and 1993
Average Balance Yield / Rate Income / Expense Increase Change due to Fully Taxable Equivalent - (Dollars in thousands) 1994 1993 1994 1993 1994 1993 (Decrease) Rate Volume Assets Securities(1): U.S. Treasury, Government and other(5) $2,438,268 $1,986,418 6.14 % 7.04 % $ 37,407 $ 34,982 $ 2,425 $ (4,835) $ 7,260 States and political subdivisions 52,924 56,127 7.88 8.22 1,042 1,154 (112) (48) (64) Total securities (5) 2,491,192 2,042,545 6.17 7.08 38,449 36,136 2,313 (4,883) 7,196 Other earning assets(2) 48,468 133,513 2.57 3.03 312 1,010 (698) (133) (565) Loans and leases, net of unearned income(1)(3)(4)(5) 5,060,605 4,728,723 7.76 8.50 98,187 100,494 (2,307) (9,088) 6,781 Total earning assets 7,600,265 6,904,781 7.21 7.97 136,948 137,640 (692) (14,104) 13,412 Non-earning assets 440,305 446,957 Total assets $8,040,570 $7,351,738 Liabilities and Shareholders' Equity Total interest-bearing deposits $5,365,745 $5,409,494 3.32 % 3.78 % $ 44,559 $ 51,093 $ (6,534) $ (6,174) $ (360) Short-term borrowings 802,841 407,434 2.98 3.61 5,977 3,678 2,299 (737) 3,036 Long-term debt 303,958 301,427 6.44 7.37 4,896 5,556 (660) (707) 47 Total interest-bearing liabilities 6,472,544 6,118,355 3.43 3.94 55,432 60,327 (4,895) (7,618) 2,723 Demand deposits 913,760 557,670 Other liabilities 75,305 108,314 Shareholders' equity 578,961 567,399 Total liabilities and shareholders' equity $8,040,570 $7,351,738 Net yield on earning assets 4.29 % 4.48 % $ 81,516 $ 77,313 $ 4,203 $ (6,486) $ 10,689 Taxable equivalent adjustment $ 2,958 $ 2,520
(1) Yields related to investment securities, loans and leases exempt from both federal and state income taxes, federal income taxes only or state income taxes only are stated on a taxable equivalent basis assuming tax rates in effect for the periods presented. (2) Includes federal funds sold and securities purchased under resale agreements or similar arrangements. (3) Loan fees, which are not material for either of the periods shown, have been included for rate calculation purposes. (4) Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income. (5) Includes assets which were held for sale/available for sale (6) There are no significant out-of-period adjustments. The net yield FTE in the first quarter of 1994 was 4.29%, compared to 4.48% for the same period in 1993 and 4.34% for the fourth quarter of 1993. The factors contributing to the decline in the first quarter of 1994, compared to the same period in 1993, were (i) overall interest rate environment; (ii) prepayments on higher yielding mortgage loans increased as consumers refinanced at lower rates; (iii) the shift in the composition of earning assets from loans into lower yielding securities because of (a) sluggish loan growth in the first quarter of 1994 and (b) sale of substantially all fixed rate mortgage loans originated; and (iv) the acquisition of thrift assets and liabilities with historically narrower spreads. The 1994 mergers with Regency, Home and The First totaled more than $2.4 billion in thrift assets which had a negative impact of approximately 30 basis points on Southern National's net yield. Repricing of deposits, on-and-off balance sheet hedging and other active asset/liability management techniques will continue to be utilized in 1994, as they were in 1993, to effectively manage the net yield. Hedging strategies have been used in the past and will be utilized in the future to reduce sensitivity to interest rate movements. Southern National continues to evaluate new avenues of interest-based and fee-based income through its Strategic Planning Committee and other special task force groups. Noninterest Income Noninterest income for the three months ended March 31, 1994 was $23.2 million, compared to $32.3 million for the same period in 1993. Securities gains were $715 thousand in 1994, compared to $14.0 million in 1993. Service charges on deposit accounts totaled $8.6 million in 1994 and 1993. Several factors accounted for this "flat" scenario. First, Southern National has been very successful in promoting the "Select Banking" program, particularly to new customers acquired through mergers and RTC transactions. Many service fees are waived for "Select Banking" customers. Second, because of competitive considerations, Southern National has decreased the percentage of deposit insurance expense passed through to customers during the first quarter of 1994. Third, to prevent runoff and develop loyalty, in the first quarter of 1994 Southern National waived certain service charges for customers acquired through the mergers with Regency, Home and The First. Nondeposit fees and commissions were relatively stable in 1994, compared to 1993, totaling $7.1 million in 1994 versus $7.0 million in 1993. This steadiness occurred throughout all major categories of nondeposit fees and commissions. Gains on sales of loans were $2.1 million in 1994, compared to $1.0 million in 1993, a 104% increase. The 1994 amount included approximately $1.1 million realized from the sale of jumbo mortgages discussed earlier. Option income generated by the writing of covered call options on securities available for sale was $1.1 million in the first quarter of 1994. This significant contribution to other noninterest income will be hard to maintain in future periods; however, other fee-based initiatives are being studied and are expected to add to earnings in future quarters. Income from a newly-formed insurance subsidiary is anticipated to increase as the year progresses. The area of noninterest income continues to receive additional emphasis as Southern National seeks to enhance its sources of fee income. The expanding and highly competitive environment in which financial institutions operate has elevated the importance of developing new sources of noninterest income. Noninterest Expense Noninterest expense was $60.4 million for the first quarter of 1994, compared to $64.1 million for the same period a year ago. Special accruals and expenses led to an elevated level of noninterest expense in the first quarter of 1993. These items included (i) the adoption of SFAS 106, (ii) accelerated depreciation or retirement of certain technology-related equipment and (iii) early buyouts of employment contracts. Corporate expansion during the last year had an impact on noninterest expense. On October 7, 1993 Southern National acquired East Coast in a transaction accounted for as a purchase. Consequently, the first three months of 1994 reflect the impact of the operating costs associated with this institution, whereas the first quarter of 1993 did not include any expenses related to this acquisition. Total personnel expense was $32.6 million for the first three months of 1994, a $1.3 million, or 4%, increase over the same period a year ago. Salaries accounted for $708 thousand of the increase while employee benefits were up $629 thousand. Occupancy and equipment expense declined $1.2 million, or 12%, compared to 1993. A $1.3 million charge related to the accelerated depreciation of technology-related equipment to facilitate future upgrading is included in the amount for 1993 and mitigates the normal increases in this area. Federal deposit insurance expense increased $532 thousand, or 16%, in 1994 as a result of deposit growth, through acquisitions as well as internal growth. As discussed in "Noninterest Income," Southern National is recovering a portion of this expense from customers through service charges. Foreclosed property expense, including write-downs on foreclosed property, amounted to $853 thousand in 1994, compared to $3.0 million in 1993. The 1993 amount included $1.8 million in losses attributable to efforts to accelerate resolution of problem assets. Southern National continues to aggressively resolve problem assets. Provision for Income Taxes See Note C of "Notes to Consolidated Financial Statements" for additional information on income taxes. PART II. OTHER INFORMATION Item 1. Legal Proceedings In June 1991, the trustee in bankruptcy for Kenyon Home Furnishings, Ltd. ("Kenyon") filed an adversary proceeding against SNBNC in the United States Bankruptcy Court for the Middle District of North Carolina. The trustee alleges that American Bank and Trust Company ("American"), which was acquired by SNBNC in October 1989, aided and abetted Kenyon's officers in defrauding Kenyon's creditors and others. The trustee seeks to recover more than $40 million in damages. The trustee also filed separate proceedings against a number of other persons, corporations and financial institutions seeking identical damages. In these actions, the trustee is seeking to recover attorney's fees and treble damages. The claim addresses events and circumstances occurring on or before October 31, 1989, the date SNBNC acquired American. The case is in the discovery stage and SNBNC is vigorously defending this action. Based on information presently available to Southern National, management believes that the ultimate outcome of this matter will not have a material impact on the consolidated financial condition or consolidated results of operations of Southern National. In July 1993, the trustee in bankruptcy for Florida Hotel Properties Limited Partnership ("Florida") filed an adversary proceeding against SNBNC in the United States Bankruptcy Court for the Western District of North Carolina. The trustee alleges that SNBNC aided and abetted Florida's officers in defrauding Florida through SNBNC's handling of deposit accounts from which Florida allegedly made fraudulent transfers to third parties by check and/or wire transfer. The trustee seeks to recover compensatory damages in excess of $10,000, equitable subordination of any claim filed by SNBNC in the Florida bankruptcy, treble damages plus interest and attorney's fees. The trustee also filed separate proceedings against a number of other persons, corporations and financial institutions seeking damages. Southern National filed a motion for judgment on the pleadings. This motion was denied. An order for discovery has been entered. The case is in an early procedural stage, and SNBNC is vigorously defending this action. Based on information presently available to Southern National, management believes that the ultimate outcome of this matter will not have a material impact on the consolidated financial condition or consolidated results of operations of Southern National. In August 1993, the trustee for Southeast Hotel Properties Limited Partnership Claims Liquidating Trust ("Southeast") filed an action against SNBNC in the United States District Court for the Western District of North Carolina. The trustee alleges that SNBNC aided and abetted Southeast's officers in defrauding Southeast through SNBNC's handling of deposit accounts from which Southeast allegedly made fraudulent transfers to third parties by check and/or wire transfer. The trustee seeks to recover compensatory damages as established at trial, punitive damages, exemplary damages, treble damages and attorney's fees. The total amount of damages sought by the trustee from SNBNC, including amounts sought by the trustee from immediate transferees of Southeast, exceeds $7,501,000. The damages stated by the trustee do not reflect any offsets which appear available or amounts which should be recovered by the trustee from third parties. The trustee also filed separate proceedings against a number of other persons, corporations and financial institutions seeking damages. Southern National filed a motion for judgment on the pleadings. This motion was denied. An order to discovery has been entered. The case is in an early procedural stage, and SNBNC is vigorously defending this action. The case has been consolidated with the Florida adversary proceeding for trial as the allegations refer to related entities. Based on information presently available to Southern National, management believes that the ultimate outcome of this matter will not have a material impact on the consolidated financial condition or results of operations of Southern National. 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 other claims and lawsuits, all of which are considered incidental to the conduct of its business. Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Shareholders of Southern National held on April 19, 1994, the shareholders (i) elected ten directors, (ii) approved the Omnibus Stock Incentive Plan, (iii) approved the Long-Term Incentive Plan, (iv) approved the Short-Term Incentive Plan and (v) approved an amendment to the Incentive Stock Option Plan and the Non-Qualified Stock Option Plan. The accompanying table provides a summary of the voting with respect to each item. For Against Abstain Item 1. 32,625,839 159,652 476,619 Item 2. 24,664,627 3,179,329 805,662 Item 3. 30,437,413 2,230,753 593,943 Item 4. 30,856,726 1,888,601 605,397 Item 5. 30,518,659 2,211,232 532,218 Item 5. Other Events - Acquisitions On January 28, 1994, Southern National completed its acquisition of The First Savings Bank, FSB ("The First") of Greenville, South Carolina in a transaction accounted for as a pooling-of-interests. The First was merged into Southern National Bank of South Carolina, thereby improving its ranking by deposits to third in South Carolina. At year-end 1993, The First had $2.0 billion in assets and $1.5 billion in deposits. On January 31, 1994, Southern National acquired Regency Bancshares Inc. ("Regency") of Hickory, North Carolina in a transaction accounted for as a pooling-of- interests. At year-end 1993, Regency, a bank holding company whose principal subsidiaries are First Savings Bank, SSB of Hickory, North Carolina and Davidson Savings Bank, SSB of Lexington, North Carolina, had total consolidated assets of $263 million and total consolidated deposits of $210 million. On February 24, 1994, Southern National acquired Home Federal Savings Bank of Statesville, North Carolina in a transaction accounted for as a pooling-of-interests. At year-end 1993, Home had total assets of $98 million and total deposits of $90 million. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 11 - "Computation of Earnings Per Share" is included herein. (b) Southern National filed a Current Report on Form 8-K dated February 11, 1994 covering the completion of the acquisition of The First Savings Bank, FSB ("The First") on January 28, 1994. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTHERN NATIONAL CORPORATION (Registrant) Date: May 13, 1994 By: L. Glenn Orr, Jr., Chairman, President and Chief Executive Officer Date: May 13, 1994 By: Sherry A. Kellett, Executive Vice President and Controller (Principal Accounting Officer) EX-11 2 EXHIBIT 11 Exhibit 11 SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES Computation of Earnings Per Share For the Periods as Indicated (Dollars in thousands, except per share data) For the Three Months Ended March 31, 1994 1993 Primary Earnings Per Share: Weighted average number of common shares outstanding during the period 43,164,558 40,884,600 Add- Dilutive effect of outstanding options (as determined by application of treasury stock method) 435,103 951,725 Weighted average number of common shares, as adjusted 43,599,661 41,836,325 Net income $ 26,047 $ (1,977) Less- Preferred dividend requirements 1,299 1,299 Net income available for common shares $ 24,748 $ (3,276) Primary earnings per share $ 0.57 $ (0.08) Fully Diluted Earnings Per Share: Weighted average number of common shares outstanding during the period 43,164,558 40,884,600 Add Shares issuable assuming conversion of convertible preferred stock 4,548,236 4,548,236 Dilutive effect of outstanding options (as determined by application of treasury stock method) 435,103 978,471 Weighted average number of common shares, as adjusted 48,147,897 46,411,307 Net income $ 26,047 $ (1,977) Fully diluted earnings per share $ 0.54 $ (0.08)
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