-----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, knbfeDzkJtZIfhXg+WXHALa46Q2XZRFLMsO9c3VullST22UFgghH6s+I5dItyMCl E9rDVHDz6/063DDdURHr4Q== 0000950168-94-000373.txt : 19941116 0000950168-94-000373.hdr.sgml : 19941116 ACCESSION NUMBER: 0000950168-94-000373 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NONE 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: 94559779 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 CORPORATION 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: SEPTEMBER 30, 1994 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.) 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 November 4, 1994, 44,084,946 shares of the registrant's common stock, $5 par value, were outstanding. This Form 10-Q has 24 pages. The Exhibit Index is included on page 22. SOUTHERN NATIONAL CORPORATION FORM 10-Q SEPTEMBER 30, 1994 INDEX
PAGE NO. Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 3 Consolidated Financial Statements 3 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analysis of Financial Condition 8 Asset/Liability Management 10 Inflation and Changing Interest Rates 14 Capital Adequacy and Resources 15 Analysis of Results of Operaitons 15 Part II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 5. Other Events -- Acquisitions 22 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23 EXHIBIT 11 EXHIBIT 27 Included with electronically-filed document only.
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31, 1994 1993 (UNAUDITED) ASSETS Cash and due from depository institutions..................................................... $ 281,156 $ 283,909 Interest-bearing bank balances................................................................ 1,639 64,954 Federal funds sold and securities purchased under resale agreements or similar arrangements... 122,600 13,438 Securities available for sale................................................................. 892,638 1,194,230 Loans held for sale........................................................................... 33,387 316,544 Securities held to maturity................................................................... 1,758,673 1,356,102 Loans and leases, net of unearned income of $51,510 in 1994 and $36,945 in 1993............... 5,214,410 4,838,274 Allowance for losses....................................................................... (69,298) (69,503) Net loans and leases..................................................................... 5,145,112 4,768,771 Premises and equipment, net................................................................... 157,231 136,228 Other assets.................................................................................. 109,854 140,294 Total assets............................................................................... $ 8,502,290 $8,274,470 LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits.................................................................. $ 764,422 $ 820,177 Interest-bearing deposits..................................................................... 5,497,924 5,574,694 Total deposits............................................................................. 6,262,346 6,394,871 Short-term borrowings......................................................................... 1,352,073 756,343 Accounts payable and other liabilities........................................................ 67,765 78,715 Long-term debt................................................................................ 210,887 479,677 Total liabilities.......................................................................... 7,893,071 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, 43,488,593 issued and outstanding in 1994 and 42,961,214 in 1993............................................. 217,443 214,806 Paid-in capital............................................................................... 155,566 151,186 Retained earnings............................................................................. 254,778 199,383 Unearned compensation......................................................................... (3,069) (4,361) Net unrealized depreciation on securities available for sale.................................. (19,349) -- Total shareholders' equity................................................................. 609,219 564,864 Total liabilities and shareholders' equity................................................. $ 8,502,290 $8,274,470
See accompanying notes to consolidated financial statements. 3 SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS AS INDICATED (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1994 1993 1994 1993 INTEREST INCOME Interest and fees on loans and leases.............................. $ 108,826 $ 100,766 $ 307,007 $ 301,347 Interest and dividends on securities............................... 38,533 35,066 111,977 104,252 Interest on temporary investments.................................. 1,294 400 1,902 1,930 Total interest income............................................ 148,653 136,232 420,886 407,529 INTEREST EXPENSE Interest on deposits............................................... 49,010 48,248 138,706 148,739 Interest on short-term borrowings.................................. 14,132 4,928 30,449 12,429 Interest on long-term debt......................................... 3,669 5,178 12,208 16,803 Total interest expense........................................... 66,811 58,354 181,363 177,971 NET INTEREST INCOME.................................................. 81,842 77,878 239,523 229,558 Provision for loan and lease losses................................ 989 3,540 3,692 11,493 NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES........ 80,853 74,338 235,831 218,065 NONINTEREST INCOME Service charges on deposit accounts................................ 8,773 9,260 26,578 27,165 Nondeposit fees and commissions.................................... 8,470 7,083 23,205 22,561 Securities (losses) gains, net..................................... (48) 170 906 14,197 Other income....................................................... 2,030 3,414 10,038 9,625 Total noninterest income......................................... 19,225 19,927 60,727 73,548 NONINTEREST EXPENSE Personnel expense.................................................. 29,850 30,349 91,043 91,937 Occupancy and equipment expense.................................... 9,264 9,351 27,019 27,860 Federal deposit insurance expense.................................. 3,505 3,667 10,970 10,328 Foreclosed property expense........................................ 182 1,767 1,271 7,669 Other expense...................................................... 14,175 15,966 42,188 48,683 Total noninterest expense........................................ 56,976 61,100 172,491 186,477 EARNINGS Income before income taxes and cumulative effect of changes in accounting principles............................................ 43,102 33,165 124,067 105,136 Provision for income taxes......................................... 15,089 11,436 43,123 35,539 Income before cumulative effect of changes in accounting principles....................................................... 28,013 21,729 80,944 69,597 Less: cumulative effect of changes in accounting principles, net of income taxes..................................................... -- -- -- 27,217 NET INCOME......................................................... 28,013 21,729 80,944 42,380 Preferred dividend requirements.................................. 1,299 1,299 3,897 3,897 Income applicable to common shares............................... $ 26,714 $ 20,430 $ 77,047 $ 38,483 PER COMMON SHARE Net income: Primary Income before cumulative effect................................ $ .61 $ .49 $ 1.76 $ 1.57 Less: cumulative effect, net of income taxes................... -- -- -- .65 Net income..................................................... $ .61 $ .49 $ 1.76 $ .92 Fully diluted Income before cumulative effect................................ $ .58 $ .47 $ 1.68 $ 1.50 Less: cumulative effect, net of income taxes................... -- -- -- .59 Net income..................................................... $ .58 $ .47 $ 1.68 $ .91 Cash dividends paid.............................................. $ .20 $ .17 $ .54 $ .47 Average shares outstanding Primary........................................................ 43,854,243 42,103,062 43,708,933 41,967,319 Fully diluted.................................................. 48,402,479 46,651,347 48,292,039 46,528,792
See accompanying notes to consolidated financial statements. 4 SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 (UNAUDITED) (DOLLARS IN THOUSANDS)
1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................................................ $ 80,944 $ 42,380 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses............................................................. 3,692 11,493 Depreciation of premises and equipment.......................................................... 9,753 11,963 Amortization of intangibles..................................................................... 1,311 2,160 Accretion of negative goodwill.................................................................. (835) -- Amortization of unearned compensation........................................................... 1,292 -- Discount accretion and premium amortization on securities....................................... 2,512 4,318 Gain on sales of securities, net................................................................ (906) (14,197) Gain on sales of trading account securities, net................................................ (656) (621) Gain on sales of loans, net..................................................................... (1,257) (4,312) Net (gain) loss on disposals of premises and equipment.......................................... (1,244) 59 Net loss on foreclosed property and other real estate owned..................................... 310 2,305 Proceeds from sales of trading account securities, net of purchases............................. 656 621 Proceeds from sales of loans held for sale...................................................... 558,419 637,629 Purchases of loans held for sale................................................................ -- (73,729) Origination of loans held for sale, net of principal collected.................................. (279,308) (504,588) Decrease (increase) in: Accrued interest receivable................................................................... 1,041 400 Other assets.................................................................................. 18,217 (1,503) Increase in: Accrued interest payable...................................................................... 3,259 11,357 Accounts payable and other liabilities........................................................ 844 33,339 Net cash provided by operating activities.................................................. 398,044 159,074 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of available for sale securities............................................ 283,059 292,519 Proceeds from maturities of available for sale securities....................................... 159,054 2,424 Proceeds from sales of held to maturity securities.............................................. -- 116,993 Proceeds from maturities of held to maturity securities......................................... 361,623 300,664 Purchases of available for sale securities...................................................... (163,396) -- Purchases of held to maturity securities........................................................ (769,623) (1,099,711) Purchases of loans.............................................................................. -- (214) Proceeds from sales of loans receivable and servicing rights.................................... -- 46,218 Leases made to customers........................................................................ (32,798) (30,172) Principal collected on leases................................................................... 31,253 25,779 Loan originations, net of principal collected................................................... (375,371) (298,114) Net cash acquired in transactions accounted for under the purchase method of accounting......... 229 6,833 Proceeds from disposals of premises and equipment............................................... 3,543 1,506 Purchases of premises and equipment............................................................. (33,431) (28,242) Proceeds from sales of foreclosed property...................................................... 9,578 19,001 Proceeds from sales of other real estate owned.................................................. 9,259 5,663 Net cash used in investing activities...................................................... (517,021) (638,853) CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits............................................................. (132,525) 96,541 Net increase in short-term borrowings........................................................... 586,766 243,991 Proceeds from long-term debt.................................................................... 704 256,368 Repayment of long-term debt..................................................................... (269,494) (197,760) Net proceeds from common stock issued........................................................... 2,169 2,972 Cash dividends paid on common and preferred stock............................................... (25,549) (17,888) Net cash provided by financing activities.................................................. 162,071 384,224 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................................ 43,094 (95,555) CASH AND CASH EQUIVALENTS AT JANUARY 1.............................................................. 362,301 372,820 CASH AND CASH EQUIVALENTS AT SEPTEMBER 30........................................................... $ 405,395 $ 277,265
See accompanying notes to consolidated financial statements. 5 SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1994 (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 financial position of Southern National Corporation and subsidiaries ("Southern National") as of September 30, 1994, the results of operations for the three and nine months ended September 30, 1994 and 1993 and cash flows for the nine months ended September 30, 1994 and 1993. The consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q, and, therefore, do not necessarily include all disclosures required under generally accepted accounting principles. The information contained in the footnotes included in Southern National's latest annual report on Form 10-K, as restated in the consolidated financial statements included in Southern National's Current Report on Form 8-K dated September 26, 1994, should also be referred to in connection with the reading of these unaudited interim consolidated financial statements. Certain amounts for prior years have been reclassified to conform with statement presentations for 1994. The reclassifications have no effect on shareholders' equity or net income as previously reported. B. NEW ACCOUNTING PRONOUNCEMENTS In November 1992, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits." SFAS No. 112 establishes accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. The statement requires employers to recognize the obligation to provide benefits if the obligation is attributable to employees' services already rendered, employees' rights to those benefits accumulate or vest, payment of the benefits is probable and the amount can be reasonably estimated. SFAS No. 112 is effective for fiscal years beginning after December 15, 1993. Southern National adopted SFAS No. 112 as of January 1, 1994 and the implementation did not have a material impact on the consolidated financial position or consolidated results of operations. In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which was amended by SFAS No. 118, "Accouting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS No. 114 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. Southern National has not yet adopted SFAS No. 114; however, the implementation of SFAS No. 114 is not expected to have a material impact on Southern National's consolidated financial position or consolidated results of operations. SFAS No. 114 is effective for fiscal years beginning after December 15, 1994. As of January 1, 1994, Southern National adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and all investments in debt securities. These investments are to be classified in one of three categories: held to maturity, trading and available for sale. Securities classified as available for sale are carried at estimated fair value with unrealized holding gains and losses, net of tax, reported as a separate component of shareholders' equity. Securities classified as held to maturity are carried at amortized cost. C. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and due from depository institutions, interest-bearing bank balances, federal funds sold and securities purchased under resale agreements or similar arrangements. Generally, both cash and cash equivalents are considered to have maturities of three months or less. 6 D. NON-CASH INVESTING ACTIVITIES Transfers of loans to foreclosed property amounted to $7.0 million and $13.5 million for the nine months ended September 30, 1994 and 1993, respectively. Transfers of securities from the held to maturity category to the available for sale category totaled $6.0 million during the nine months ended September 30, 1994. Transfers of securities from the available for sale category to the held to maturity category totaled $2.2 million for the nine months ended September 30, 1994. E. ACQUISITIONS AND PENDING MERGER On June 1, 1994, Southern National completed its acquisition of McLean, Brady & McLean Agency, Inc. by the issuance of 38,823 shares of Southern National common stock and cash of $86,967. The acquisition was accounted for under the purchase method of accounting, and therefore, the financial information contained herein includes data relevant to the acquiree since the date of acquisition. On June 6, 1994, Southern National completed its acquisition of Leasing Associates, Inc. by the issuance of 97,876 shares of Southern National common stock. The acquisition was accounted for under the purchase method of accounting, and therefore, the financial information contained herein includes data relevant to the acquiree since the date of acquisition. On November 1, 1994, Southern National completed its acquisition of Prime Rate Premium Finance Corporation, Inc. and related interests, Agency Technologies, Inc. and IFCO, Inc. by the issuance of 590,406 shares of Southern National common stock. The transaction was accounted for under the purchase method of accounting. On August 1, 1994, Southern National and BB&T Financial Corporation ("BB&T") jointly announced the signing of a definitive agreement to merge. The transaction will be accounted for under the pooling-of-interests method in which BB&T shareholders will receive 1.45 shares of the common stock of the resulting company for each share of BB&T stock held. The merger is expected to be completed during the first quarter of 1995. The market transaction has an indicated total value of $2.2 billion based on July 29, 1994 closing prices of the stock of both institutions. F. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES The "cumulative effect of changes in accounting principles, net of income taxes" of $27,217,000 for the nine months ended September 30, 1993 is comprised of the impact of the adoption of SFAS 106, "Accounting for Postretirement Benefits Other Than Pensions," and SFAS 109, "Accounting for Income Taxes," by Southern National, Regency Bancshares Inc. ("Regency"), Home Federal Savings Bank ("Home") and The First Savings Bank, FSB ("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." Accordingly, cumulative adjustments have been reflected in the first quarter of 1993. A summary of the components of the adjustment 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)
The First, Regency and Home had fiscal years ending June 30. However, in connection with the restatement of calendar year 1993, the June 30 fiscal year-ends have been converted to a calendar year format comparable to Southern National's presentation. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF FINANCIAL CONDITION Total assets at September 30, 1994 were $8.5 billion, a $227.8 million increase from the balance at December 31, 1993. The increase was driven by growth of $239.8 million in interest-earning assets. Loans and leases, excluding loans held for sale, increased $376.1 million and securities held to maturity increased $402.6 million offset by declines in loans held for sale of $283.2 million and securities available for sale of $301.6 million. Other interest-earning assets, composed of federal funds sold, securities purchased under resale agreements and similar arrangements and interest-bearing bank balances increased $45.8 million, driven by increased federal funds rates during the third quarter. The composition of earning assets is as follows: COMPOSITION OF EARNING ASSETS
SEPTEMBER 30, 1994 DECEMBER 31, 1993 (DOLLARS IN THOUSANDS) Securities available for sale.................................................. $ 892,638 11.1% $1,194,230 15.3% Loans held for sale............................................................ 33,387 0.4 316,544 4.1 Securities held to maturity.................................................... 1,758,673 21.9 1,356,102 17.4 Loans and leases, net of unearned income....................................... 5,214,410 65.0 4,838,274 62.2 Other assets*.................................................................. 124,239 1.6 78,392 1.0 Total earning assets........................................................... $8,023,347 100.0% $7,783,542 100.0% Earning assets as a percent of total assets.................................... 94.4% 94.1%
* Includes: (i) interest-bearing bank balances, (ii) federal funds sold and (iii) securities purchased under resale agreements and similar arrangements. The shift in earning assets from securities available for sale and loans held for sale reflects the increase in interest rates during the year, the first quarter bulk asset sale and improved loan demand. As deposit balances have decreased, loan growth is being funded through sales of available for sale assets and increased short-term borrowings. Loan demand, which continues to produce positive results, generated an annualized growth rate in portfolio loans of 10% during the first three quarters of the year. Growth in loans occurred primarily in the commercial and mortgage categories, which increased at annualized rates of 8% and 15%, respectively. Consumer loans grew at an annualized rate of 7% consisting of installment loans, home equity loans and revolving credits, which increased 9%, 7% and 24%, respectively, on an annualized basis. Total deposits decreased by $132.5 million from the December 31, 1993 balance because of a combination of Southern National offering less aggressive pricing on certificates of deposits and implementing more aggressive fee structures on transaction accounts than the acquired thrifts. Short-term borrowings increased $595.7 million during this period to fund interest-earning asset growth and reduce long-term debt, consisting primarily of Federal Home Loan Bank advances, by $268.8 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 of other borrowings. The composition and strategy employed in the management of interest-bearing liabilities are further discussed in "ASSET/LIABILITY MANAGEMENT." The following table outlines the composition of deposits and other borrowings. COMPOSITION OF DEPOSITS AND OTHER BORROWINGS
SEPTEMBER 30, 1994 DECEMBER 31, 1993 (DOLLARS IN THOUSANDS) Interest-bearing deposits...................................................... $5,497,924 70.2% $5,574,694 73.1% Demand deposits................................................................ 764,422 9.8 820,177 10.7 Total deposits................................................................. 6,262,346 80.0 6,394,871 83.8 Short-term borrowings.......................................................... 1,352,073 17.3 756,343 9.9 Long-term debt................................................................. 210,887 2.7 479,677 6.3 Total deposits and other borrowings............................................ $7,825,306 100.0% $7,630,891 100.0%
8 ASSET QUALITY Risk assets, comprised of nonperforming assets ("NPA's") plus loans 90 days or more past due and still accruing, were $28.1 million at September 30, 1994, compared to $36.8 million at year-end 1993. At September 30, 1994, the credit quality statistics include the full impact of the first quarter mergers. Attempts to reduce NPA's acquired through the merger with The First have been successful and levels of risk assets at September 30, 1994 were at its lowest level during the year. The allowance for losses as a percentage of loans and leases was 1.33% at September 30, 1994 and NPA's as a percentage of loan-related assets were .52%, compared to 1.44% and .72% at December 31, 1993. As problem assets continue to be resolved and credit quality improves in the fourth quarter, it is expected that the allowance as a percentage of loans and leases will continue to decline and the ratio of NPA's to loan-related assets will further improve. The adequacy of the current allowance is evidenced by the increase in the ratio of the allowance to 2.87 times nonaccrual loans and leases from 2.45 times at December 31, 1993, and the other improvements in asset quality ratios. The provision for loan and lease losses in the third quarter of 1994 was $1.0 million and annualized net charge-offs were .12% of average loans and leases compared to $3.5 million and .16% from the same period in 1993. The decline in the provision was because of continued improvement in asset quality as problem assets acquired during the first quarter mergers were resolved. 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 9-30-93 12-31-93 3-31-94 6-30-94 9-30-94 ALLOWANCE FOR LOSSES Beginning balance.................................................... $56,020 $ 57,697 $69,503 $69,500 $69,838 Allowance for acquired loans......................................... -- 2,750 -- -- -- Provision for loan and lease losses.................................. 3,540 19,945 1,171 1,532 989 Net charge-offs...................................................... (1,863) (10,889) (1,174) (1,194) (1,529) Ending balance.................................................... $57,697 $ 69,503 $69,500 $69,838 $69,298 RISK ASSETS Nonaccrual loans & leases............................................ $39,380 $ 28,372 $36,715 $33,077 $24,112 Foreclosed property.................................................. 30,132 6,356 4,927 2,652 3,221 Nonperforming assets.............................................. 69,512 34,728 41,642 35,729 27,333 Loans 90 days or more past due & still accruing...................... 2,408 2,115 553 2,551 754 Total risk assets................................................. $71,920 $ 36,843 $42,195 $38,280 $28,087 ASSET QUALITY RATIOS Nonaccrual loans & leases as a percentage of total loans & leases.... .83% .59% .75% .65% .46% Nonperforming assets as a percentage of: Total assets...................................................... .88 .42 .52 .43 .32 Loans & leases plus foreclosed property........................... 1.45 .72 .85 .70 .52 Risk assets as a percentage of loans & leases plus foreclosed property.......................................................... 1.50 .76 .86 .75 .54 Net charge-offs as a percentage of average loans & leases............ .16 .88 .10 .10 .12 Allowance for losses as a percentage of loans & leases............... 1.21 1.44 1.42 1.37 1.33 Ratio of allowance for losses to: Net charge-offs................................................... 7.74x 1.60x 14.80x 14.62x 11.33x Nonaccrual loans & leases......................................... 1.47 2.45 1.89 2.11 2.87
All line items referring to loans and leases reflect loans and leases, net of unearned income and loans held for sale. Applicable ratios are annualized. 9 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. 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 ("Simulation") to measure the interest rate sensitivity of earnings. This method of analysis is discussed 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 through strategic pricing of asset and liability accounts. The expected result of strategic pricing is the development of appropriate maturity and repricing streams in those accounts to produce consistent net income during adverse interest rate environments. The ALCO monitors loan, investment and liability portfolios to ensure comprehensive management of interest rate risk on the balance sheet. These portfolios are analyzed for proper fixed rate and variable rate "mixes" given a specific interest rate outlook. During 1993 and the first quarter of 1994, the total proportion of floating rate loans increased. During the second and third quarters of 1994, loans maturing or repricing in 30 days or less decreased by 2% to comprise 36% of all loans outstanding. LIQUIDITY Liquidity represents a bank's continuing ability to meet its funding needs, primarily deposit withdrawals, timely repayment of borrowings and other liabilities and funding of 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 other short-term borrowings supplement these traditional sources. Management believes liquidity obtainable from these sources will be adequate to meet current requirements. Total cash and cash equivalents increased to $405 million at September 30, 1994 compared to $277 million last year. Net cash provided by operating activities for the nine months increased from $159 million to $398 million. This increase was primarily the result of a decrease in the origination of loans held for sale. Southern National traditionally sells its fixed rate mortgage loan production and retains adjustable rate mortgage loans in the portfolio. Because of rising interest rates during the current year, mortgage origination volumes have shifted from fixed rate to adjustable rate loans and mortgage refinancing has been substantially reduced. This activity resulted in a use of funds of $279 million during the current nine months compared to $505 million during the same period last year. Net cash flows used in investing activities decreased from $639 million in 1993 to $517 million in 1994. The primary factor creating the $122 million net decline was a $167 million decrease in purchases of securities. Cash flows provided by financing activities decreased from $384 million to $162 million because of a $229 million net decrease in deposits compared to 1993, and a net $327 million decrease in cash flows related to long-term debt. These decreases were partially offset by a $343 million increase in cash flows from short-term borrowings. 10 The accompanying table summarizes the classification and maturity of the securities portfolio at September 30, 1994. SECURITIES
SEPTEMBER 30, 1994 HELD TO AVAILABLE FOR MATURITY SALE AMORTIZED COST FAIR VALUE (DOLLARS IN THOUSANDS) U.S. Treasury Within one year............................................................................... $ 165,403 $ 53,023 One to five years............................................................................. 912,278 458,364 Five to ten years............................................................................. -- 88,527 After ten years............................................................................... -- -- Total.................................................................................... 1,077,681 599,914 U.S. Government agencies and corporations* Within one year............................................................................... 5,150 4,037 One to five years............................................................................. 221,693 20,239 Five to ten years............................................................................. 372,039 132,153 After ten years............................................................................... 26,774 93,048 Total.................................................................................... 625,656 249,477 States and political subdivisions Within one year............................................................................... 8,513 -- One to five years............................................................................. 36,169 -- Five to ten years............................................................................. 9,989 -- After ten years............................................................................... -- -- Total.................................................................................... 54,671 -- Other securities Within one year............................................................................... 10 -- One to five years............................................................................. -- -- Five to ten years............................................................................. 655 -- After ten years............................................................................... -- -- Total.................................................................................... 665 -- Total debt securities.................................................................... 1,758,673 849,391 Equity securities............................................................................... -- 43,247 Total securities......................................................................... $1,758,673 $ 892,638
* Included in U.S. Government agencies and corporations are mortgage-backed securities totaling $584,805,000 classified as held to maturity and carried at amortized cost and $240,342,000 classified as available for sale and carried at estimated fair value. These securities are included in each of the categories based upon final stated maturity dates. The original contractual lives of these securities range from five to 30 years; however, a more realistic average maturity would be substantially shorter. 11 Estimated market values and related unrealized holding gains and losses in the securities portfolio are illustrated in the table below. SECURITIES -- FAIR VALUE AT SEPTEMBER 30, 1994
GROSS UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE (DOLLARS IN THOUSANDS) Securities held to maturity: U.S. Treasury.............................................................. $1,077,681 $2,124 $25,900 $1,053,905 U.S. Government agencies and corporations.................................. 40,851 24 600 40,275 States and political subdivisions.......................................... 54,671 344 714 54,301 Mortgage-backed securities................................................. 584,805 539 23,349 561,995 Other debt securities...................................................... 665 6 21 650 Total securities held to maturity.......................................... 1,758,673 3,037 50,584 1,711,126 Securities available for sale: U.S. Treasury.............................................................. 626,346 1,481 27,913 599,914 U.S. Government agencies and corporations.................................. 9,177 70 112 9,135 Mortgage-backed securities................................................. 245,909 1,263 6,830 240,342 Equity securities.......................................................... 43,247 -- -- 43,247 Total securities available for sale........................................ 924,679 2,814 34,855 892,638 Total securities........................................................... $2,683,352 $5,851 $85,439 $2,603,764
During the first nine months of 1994, management utilized strategies that effectively added fixed rate assets and variable rate liabilities to the balance sheet. U.S. Treasury and mortgage-backed agency securities, which were funded through dealer repurchase agreements ("repos") and dollar repurchase agreements ("dollar rolls"), were added to the balance sheet. Repos are agreements to sell and repurchase identical or substantially identical securities at a specified date and price. Dollar rolls are agreements to sell and repurchase similar but not identical securities. Repos and dollar rolls are used to obtain additional funding in the short-term. Such agreements are attractive because the term may be tailored to the specific funding strategies of Southern National and the rates are more favorable than other funding sources. 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. During the first nine months of 1994, management used interest rate swaps, caps and floors to supplement balance sheet repositioning. Such actions were designed to lower 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 September 30, 1994, interest rate swaps with a total notional value of $614 million, with terms ranging up to seven years, were outstanding. 12 The following tables set forth certain information concerning Southern National's interest rate swaps at September 30, 1994: INTEREST RATE SWAPS SEPTEMBER 30, 1994 (DOLLARS IN THOUSANDS)
NOTIONAL RECEIVE PAY FAIR TYPE AMOUNT RATE RATE VALUE Receive Fixed Swaps................................................................... $550,000 5.98% 4.98% $(9,103) Pay Fixed Swaps....................................................................... 63,753 4.70 5.17 2,485 Total................................................................................. $613,753 5.85% 5.00% $(6,618)
RECEIVE PAY FIXED BASIS YEAR-TO-DATE ACTIVITY FIXED SWAPS SWAPS PROTECTION TOTAL Balance, December 31, 1993................................................ $ 150,000 $63,094 $ 400,000 $ 613,094 Additions................................................................. 550,000 9,000 -- 559,000 Maturities/Amortizations.................................................. (50,000) (8,341) (100,000) (158,341) Terminations.............................................................. (100,000) -- (300,000) (400,000) Balance, September 30, 1994............................................... $ 550,000 $63,753 $ -- $ 613,753
ONE YEAR ONE TO FIVE FIVE TO 10 MATURITY SCHEDULE OR LESS YEARS YEARS TOTAL Receive Fixed Swaps........................................................... $ -- $ 550,000 $ -- $550,000 Pay Fixed Swaps............................................................... 2,404 38,282 23,067 63,753 Total......................................................................... $ 2,404 $ 588,282 $ 23,067 $613,753
As of September 30, 1994, unamortized deferred premiums from new swap transactions and realized deferred losses from terminated swap transactions were $1.8 million and $234 thousand, respectively. The unamortized deferred premiums will be recognized over the next three years and the realized deferred losses will be recognized in the next year. The combination of active and terminated transactions resulted in income of $520 thousand during the third quarter. For the nine months ended September 30, 1994, these transactions resulted in income of $187 thousand. 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. During 1994, options were written on securities totaling $456.5 million and premiums included in other income totaled $1.5 million. There are no unexercised options outstanding at September 30, 1994. Southern National also utilizes purchased over-the-counter put options in its mortgage banking activities to hedge the mortgage pipeline. During 1994, options on $3.0 million of securities were purchased and remain outstanding at September 30, 1994. Although off-balance sheet derivative financial instruments do not expose Southern National to credit risk equal to the notional amount, such agreements generate credit risk to the extent of the fair value gain in an off-balance sheet derivative financial instrument if the counterparty fails to perform. Such risk is minimized based on the quality of the counterparties and the consistent monitoring of these agreements. 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. Southern National's credit exposure is limited to the net difference between the calculated pay and receive amounts on each transaction which are generally netted and paid quarterly. Other risks associated with interest-sensitive derivatives include the impact on fixed positions during periods of changing interest rates. Index amortizing swaps' notional amounts and maturities change based on certain interest rate indices. Generally, as rates fall the notional amounts decline more rapidly and as rates increase notional amounts decline more slowly. Under unusual circumstances, financial derivatives also increase liquidity risk, which could result in an environment of rising interest rates in which derivatives produce negative cash flows which would be offset by increased cash flows from variable rate loans. Such risk is considered insignificant due to the relatively small derivative positions held by Southern National. 13 Management feels that interest rates 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. To protect against this risk, Southern National entered into $300 million of interest rate corridors during late 1993. 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 negative impact of a gradual, historically influenced 200 basis point rise over 12 months in interest rates is projected to be only 2.7% of net income. Stated in terms of earnings per share, a rise of gradual, historically influenced 200 basis points in interest rates is projected to decrease earnings by less than one cent per share by the end of 1994. Conversely, if interest rates were to decline 100 basis points based on a gradual historical interest rate scenario, given Southern National's balance sheet position at quarter-end, the impact on net income over a 12 month period would be a increase of approximately 1.3% 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 the earnings of Southern National. This method is subject to the assumptions that underlie the process, but it provides a better illustration of the true earnings outlook. The following table, "Interest Sensitivity Simulation Analysis," represents the sensitivity position as of a point in time and the position can be modified significantly by management within a short time period. 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 historically changed only one-third as much as the Prime rate. The following table reflects the impact on net income of certain interest rate scenarios. 14 INTEREST SENSITIVITY SIMULATION ANALYSIS
INTEREST REFERENCE RATE ANNUALIZED RATE SCENARIO MONEY PERCENTAGE INSTANTANEOUS MARKET CHANGE IN PARALLEL PRIME ACCOUNT NET INCOME +4.00% 11.75% 6.84% (48.3)% +3.00 10.75 5.84 (36.2) +2.00 9.75 4.84 (23.8) +1.00 8.75 3.84 (11.6) No change 7.75 2.84 -0- -1.00 6.75 1.84 11.1 -2.00 5.75 0.84 21.4 -3.00 4.75 0.00 28.2 -4.00 3.75 0.00 30.0 GRADUAL HISTORICAL +2.00 9.75 3.50 (2.74) -1.00 6.75 2.51 1.32
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 50% and 150% 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 consistently 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 reviewed 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. Shareholders' equity at September 30, 1994 was $609.2 million versus $564.9 million for December 31, 1993. As a percentage of assets, total shareholders' equity was 7.2% at September 30, 1994, compared to 6.8% at December 31, 1993. Southern National's book value per common share at September 30, 1994 was $12.30, versus $11.42 at December 31, 1993. Southern National's internal capital formation rate (net income less dividends as a percentage of average equity, annualized) was 12.6% for the first nine months of 1994. Average shareholders' equity as a percentage of average assets was 7.2% and 7.7% for the nine months ended September 30, 1994 and the 12 months ending December 31, 1993, respectively. Tier 1 and total risk-based capital ratios at September 30, 1994 were 12.5% and 13.8%, respectively. The Tier 1 leverage ratio was 7.2% at the end of the third quarter. 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 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%. ANALYSIS OF RESULTS OF OPERATIONS Earnings for the first nine months of 1994 and 1993 were $80.9 million and $42.4 million, respectively. On a fully diluted per share basis, net income for the nine months ended September 30, 1994 was $1.68, compared to $.91 for the same period in 1993. Net income for the current quarter totaled $28.0 million compared to $21.7 million for the third quarter of 1993. Fully diluted earnings per share for the quarter were $.58 compared to $.47 for the same period last year. The accompanying table presents a comparison of major income statement items for the relevant periods. 15 COMPONENTS OF NET INCOME
FOR THE THREE MONTHS FOR THE NINE ENDED SEPTEMBER MONTHS 30, ENDED SEPTEMBER 30, 1994 1993 1994 1993 (DOLLARS IN THOUSANDS) Net interest income............................................................ $81,842 $77,878 $239,523 $229,558 Provision for loan and lease losses............................................ 989 3,540 3,692 11,493 Noninterest income............................................................. 19,225 19,927 60,727 73,548 Noninterest expense............................................................ 56,976 61,100 172,491 186,477 Income before income taxes..................................................... 43,102 33,165 124,067 105,136 Income taxes................................................................... 15,089 11,436 43,123 35,539 Income before cumulative effect................................................ 28,013 21,729 80,944 69,597 Less: cumulative effect, net of income taxes................................... -- -- -- 27,217 Net income..................................................................... $28,013 $21,729 $ 80,944 $ 42,380
As shown in the table, earnings for the first nine months of 1993 were affected by the impact 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. See Note F of "Notes to Consolidated Financial Statements" for additional information relating to changes in accounting principles. Other factors visible in the table contributing to the earnings increase were net interest income, significantly lower loan loss provisions and lower levels of noninterest expense. NET INTEREST INCOME Net interest income on a fully taxable equivalent ("FTE") basis was $248.8 million for the first nine months of 1994 compared to $237.5 million for the same period in 1993, a 5% increase. Net interest income (FTE) for the current quarter totaled $85.0 million compared to $80.8 million a year ago. The increase in net interest income (FTE) for the quarter and nine months resulted from growth in interest-earning assets, offset by declines in margin. Average earning assets during the first nine months of 1994 increased $647 million, or 9%, over 1993. Average earning assets for the current quarter were also up 9% over the third quarter of 1993. Contributing to the increased volumes was the purchase of East Coast Savings Bank, SSB ("East Coast") in October 1993 with $271 million in assets and $201 million in deposits. The accompanying table presents an analysis of net interest income and related changes attributable to rate and volume fluctuations for the nine months ended September 30, 1994 and 1993. 16 NET INTEREST INCOME AND RATE/VOLUME ANALYSIS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 (DOLLARS IN THOUSANDS)
AVERAGE BALANCE YIELD/RATE INCOME/EXPENSE INCREASE CHANGE DUE TO FULLY TAXABLE EQUIVALENT 1994 1993 1994 1993 1994 1993 (DECREASE) RATE VOLUME ASSETS Securities(1): U.S. Treasury, government and other............................ $2,517,603 $2,124,804 6.11% 6.70% $115,346 $106,763 $ 8,583 $ (9,975) $18,558 States and political subdivisions... 52,012 49,944 7.73 8.54 3,015 3,198 (183) (312) 129 Total securities(5).............. 2,569,615 2,174,748 6.14 6.74 118,361 109,961 8,400 (10,287) 18,687 Other earning assets(2)............... 70,325 85,745 3.61 3.00 1,902 1,930 (28) 352 (380) Loans and leases, net of unearned income(1)(3)(4)(6).................. 5,102,509 4,835,085 8.10 8.37 309,921 303,621 6,300 (10,148) 16,448 Total earning assets............. 7,742,449 7,095,578 7.41 7.81 430,184 415,512 14,672 (20,083) 34,755 Non-earning assets............... 450,112 457,164 Total assets................... $8,192,561 $7,552,742 LIABILITIES AND SHAREHOLDERS' EQUITY Total interest-bearing deposits....... $5,441,044 $5,417,814 3.40 3.66 138,706 148,739 (10,033) (10,668) 635 Short-term borrowings................. 1,030,292 477,399 3.94 3.47 30,449 12,429 18,020 1,883 16,137 Long-term debt........................ 248,351 348,080 6.55 6.44 12,208 16,803 (4,595) 302 (4,897) Total interest-bearing liabilities...................... 6,719,687 6,243,293 3.60 3.80 181,363 177,971 3,392 (8,483) 11,875 Demand deposits..................... 811,784 661,996 Other liabilities................... 74,368 63,366 Shareholders' equity................ 586,722 584,087 Total liabilities and shareholders' equity........................... $8,192,561 $7,552,742 Net yield on earning assets........... 4.28% 4.46% $248,821 $237,541 $ 11,280 $(11,600) $22,880 Taxable equivalent adjustment......... $ 9,298 $ 7,983
(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, securities purchased under resale agreements or similar arrangements and interest-bearing bank balances. (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 securities available for sale based on fair value in 1994 and lower of amoritized cost or market in 1993. (6) Includes loans held for sale based on lower of amortized cost or market. (7) There are no significant out-of-period adjustments. The net yield FTE for the quarter and nine months of 1994 was 4.29% and 4.28%, compared to 4.44% and 4.46% for the same period in 1993, respectively. Factors contributing to the declines for the quarter and the first nine months compared to 1993, were (i) the overall interest rate environment; (ii) prepayments on higher yielding mortgage loans which increased as consumers refinanced at lower rates and (iii) the acquisition of thrift assets and liabilities with historically narrower spreads. Repricing of deposits, on-and-off balance sheet hedging and other active asset/liability management techniques will continue 17 to be utilized in 1994, as they were in 1993, to effectively manage the net yield. The impact of the quarterly fluctuations of interest rates and interest-sensitive assets and liabilities on net interest income are presented in the accompanying table. NET INTEREST INCOME AND RATE/VOLUME ANALYSIS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 (DOLLARS IN THOUSANDS)
AVERAGE BALANCE YIELD/RATE INCOME/EXPENSE INCREASE CHANGE DUE TO FULLY TAXABLE EQUIVALENT 1994 1993 1994 1993 1994 1993 (DECREASE) RATE VOLUME ASSETS Securities(1): U.S. Treasury, government and other... $2,573,741 $2,231,027 6.17% 6.47% $ 39,714 $ 36,062 $ 3,652 $(1,693) $ 5,345 States and political subdivisions..... 50,381 47,667 7.45 8.52 938 1,015 (77) (133) 56 Total securities(5)................ 2,624,122 2,278,694 6.20 6.51 40,652 37,077 3,575 (1,826) 5,401 Other earning assets(2)................. 116,466 54,325 4.44 2.95 1,294 400 894 276 618 Loans and leases, net of unearned income(1)(3)(4)(6).................... 5,188,057 4,938,070 8.47 8.23 109,843 101,635 8,208 2,969 5,239 Total earning assets............... 7,928,645 7,271,089 7.66 7.65 151,789 139,112 12,677 1,419 11,258 Non-earning assets................. 456,096 451,363 Total assets..................... $8,384,741 $7,722,452 LIABILITIES AND SHAREHOLDERS' EQUITY Total interest-bearing deposits......... $5,486,212 $5,408,861 3.57 3.57 49,010 48,248 762 71 691 Short-term borrowings................... 1,251,607 564,289 4.52 3.49 14,132 4,928 9,204 1,784 7,420 Long-term debt.......................... 213,774 371,005 6.87 5.58 3,669 5,178 (1,509) 1,012 (2,521) Total interest-bearing liabilities...................... 6,951,593 6,344,155 3.84 3.68 66,811 58,354 8,457 2,867 5,590 Demand deposits.................... 760,626 709,076 Other liabilities.................. 73,654 66,930 Shareholders' equity............... 598,868 602,291 Total liabilities and shareholders' equity........................... $8,384,741 $7,722,452 Net yield on earning assets............. 4.29% 4.44% $ 84,978 $ 80,758 $ 4,220 $(1,448) $ 5,668 Taxable equivalent adjustment........... $ 3,136 $ 2,880
(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, securities purchased under resale agreements or similar arrangements and interest-bearing bank balances. (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 securities available for sale based on fair value in 1994 and lower of amoritized cost or market in 1993. (6) Includes loans held for sale based on lower of amortized cost or market. (7) There are no significant out-of-period adjustments. Hedging strategies have been used in the past and will be utilized in the future to reduce sensitivity to interest rate movements. See "ASSET/LIABILITY MANAGEMENT" section for additional discussion of hedging strategies. Southern National 18 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 nine months ended September 30, 1994 was $60.7 million, compared to $73.5 million for the same period in 1993. Security gains were the primary factor contributing to the decline, decreasing from $14.2 million in 1993 to $906 thousand for the first nine months of 1994. Noninterest income declined from $19.9 million last year to $19.2 million for the current quarter. Decreases in service charges on deposits and gains on sales of mortgage loans contributed to the decrease in the third quarter of 1994 compared to 1993. Based on these decreases, the percentage of total revenues, calculated as net interest income plus noninterest income excluding securities gains, derived from noninterest (fee-based) income for the nine months ended September 30, 1994 was 20%, down from 21% last year. Service charges on deposit accounts were stable for the first nine months in 1994 compared to 1993 decreasing by $587 thousand or 2%. For the quarter, service charges were down $487 thousand compared to the prior year. Several factors accounted for this scenario. Southern National has been very successful in promoting the "Select Banking" program, particularly to new customers acquired through mergers. 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, in an effort to develop customer 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. Fourth, rising interest rates during 1994 have negatively affected service charges on deposit accounts by increasing the earnings credit used in service charge computations. Nondeposit fees and commissions increased slightly in the first nine months of 1994, to $23.2 million versus $22.6 million in 1993. The increase in fee income was caused by an increase in trust revenue of $303 thousand and an increase in other nondeposit fees and commissions, primarily composed of bankcard and investment services, of $741 thousand offset by a $400 thousand decrease in mortgage banking fees. For the quarter, nondeposit fees and commissions increased $1.4 million over the third quarter last year primarily from a $1.0 million increase in mortgage banking fees in the current quarter compared to the third quarter last year. As previously mentioned, Southern National sells its fixed rate mortgage loan production while retaining adjustable rate loans in the portfolio. With the rise in interest rates during 1994, mortgage originations have shifted to adjustable rate mortgage loans and refinancings have been reduced significantly. As a result, gains on sales of mortgage loans declined from $4.3 million for the first nine months of 1993 to $1.3 million for 1994, a 71% decrease. For the third quarter of 1994, these gains totaled $31 thousand, down from $1.8 million last year. The expanding and highly competitive environment in which financial institutions operate has elevated the importance of developing new sources of noninterest income. Management is placing renewed emphasis on the identification and implementation of other fee-based initiatives which are expected to add to earnings in future quarters. Income from Southern National Insurance Services, Inc., a newly-formed insurance subsidiary, is anticipated to increase in the fourth quarter. NONINTEREST EXPENSE Noninterest expense was $172.5 million for the first nine months of 1994, compared to $186.5 million for the same period a year ago. Special accruals and expenses led to an elevated level of noninterest expense in the first nine months of 1993. These items included accelerated depreciation or retirement of certain technology-related equipment and early buyouts of employment contracts. Driven by decreases in foreclosed property expense, all components of noninterest expense decreased from the third quarter of 1993 to the third quarter of 1994. Corporate expansion during 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 nine months of 1994 reflect the impact of the operating costs associated with this institution, whereas the first nine months of 1993 did not include any expenses related to this acquisition. Total personnel expense, the largest component of noninterest expense, was $91.0 million for the first nine months of 1994, an $894 thousand, or 1% decrease over the same period a year ago. For the third quarter of 1994, personnel expense totaled $29.9 million compared to $30.3 million a year ago. Costs are down somewhat because of the realization of synergies from the acquisitions completed in the first quarter of 1994 and vacant positions which are not being filled in anticipation of the pending merger with BB&T Financial Corporation. 19 Occupancy and equipment expense for the nine months ended September 30, 1994 declined $841 thousand, or 3%, 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 1993 amount and mitigates the normal increases in this area. Comparing the quarters, occupancy and equipment expense decreased $87 thousand. Federal deposit insurance expense increased $642 thousand, or 6%, for the nine months ended September 30, 1994 as a result of deposit growth through acquisitions as well as internal growth. Foreclosed property expense, including net losses on sales and write-downs, amounted to $1.3 million during the first nine months of 1994, compared to $7.7 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. Foreclosed property expense for the current quarter totaled $182 thousand, down from $1.8 million in the third quarter of 1993. PROVISION FOR INCOME TAXES Federal income taxes increased from $35.5 million for the nine months ending September 30, 1993 to $43.1 million for the same period in 1994 due to higher pretax income. The effective tax rate increased from 33.8% for the first nine months of 1993 to 34.8% for the first nine months of 1994. Comparing the third quarter of 1993 and 1994, federal income taxes increased from $11.4 million to $15.1 million because of higher pretax income. The effective tax rate for the quarter increased from 34.5% to 35.0%. 20 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 Southern National Bank of North Carolina ("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 consolidated results of operations of Southern National. Southern National Bank of South Carolina ("SNBSC") as successor in interest by merger to The First Savings Bank, FSB ("Bank") is a defendant in a lawsuit filed in 1991 in the Court of Common Pleas, Thirteenth Judicial Circuit, State of South Carolina against the Bank. On May 21, 1993, a jury awarded the plaintiffs a $4.1 million judgement against the Bank consisting of $500,000 in actual damages and $3.6 million in punitive damages for allegedly acting as a control person and aiding and abetting a state securities law violation. The plaintiffs, limited partners in a failed venture to construct and operate a residential health care facility for senior citizens, alleged that the Bank, as an escrow agent and lender for the project, knew or should have known, that its loan commitment was insufficient and that the Bank was therefore responsible for the losses suffered by the limited partners resulting from the actions of the general partners. Prior to this case going to jury, the Bank made a motion for directed verdict which was not granted. Rule 50(b) of the South Carolina Rules of Civil Procedure states that when a motion for directed verdict is not granted, the Court is deemed to have submitted the action to the jury subject to a later determination of the legal question raised in the motion. After the jury verdict, the Bank renewed that motion in the form of a motion for judgement not withstanding the verdict, as well as an alternative motion for a new trial. This motion and the plaintiff's petition for legal fees, costs and interest were argued before Circuit Judge on June 22, 1993. The Bank's motion was granted as to plaintiff's "control person" theory of liability, but 21 denied as to plaintiff's aiding and abetting violations of securities laws theory of liability. The request for a new trial was also denied. As a result, the judgement remains in effect, but has been appealed. It is the opinion of Southern National's legal counsel that it is not probable that a loss in the amount of the present jury verdict will be incurred by SNBSC. Furthermore, if a loss ultimately is incurred following appeals, it is not probable that the loss would exceed $750,000. Therefore, it is management's opinion, based upon counsel's analysis of the outcome of the suit, that any future liability arising from this suit will not have a material adverse effect on the consolidated financial condition or consolidated 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 5. OTHER EVENTS -- ACQUISITIONS See Note E to "Notes to Consolidated Financial Statements" for all acquisitions occurring during 1994 not previously reported. 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 August 8, 1994 to report the planned merger of Southern National and BB&T Financial Corporation. Southern National filed a Current Report on Form 8-K dated September 26, 1994 to restate balances for the three years in the period ended December 31, 1993 for the effects of the first quarter acquisitions of The First, Regency and Home. Southern National filed a Form 8-K under Item 5 on November 14, 1994 for the purpose of providing financial information about Commerce Bank which could be incorporated by reference into Southern National's Registration Statement on Form S-4 filed on November 14, 1994 and covering the proposed merger of Southen National and BB&T Financial Corporation. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTHERN NATIONAL CORPORATION (Registrant) Date: November 14, 1994 By: /s/ L. GLENN ORR, JR. L. GLENN ORR, JR., CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: November 14, 1994 By: /s/ SHERRY A. KELLETT SHERRY A. KELLETT, EXECUTIVE VICE PRESIDENT AND CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
23 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 FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1994 1993 1994 1993 PRIMARY EARNINGS PER SHARE: Weighted average number of common shares outstanding during the period................................................. 43,466,214 41,363,746 43,303,129 41,153,647 Add- Dilutive effect of outstanding options (as determined by application of treasury stock method).................... 388,029 739,316 405,804 813,672 Weighted average number of common shares, as adjusted......... 43,854,243 42,103,062 43,708,933 41,967,319 Income before cumulative effect of changes in accounting principles................................................. $ 28,013 $ 21,729 $ 80,944 $ 69,597 Less: cumulative effect of changes in accounting principles, net of income taxes....................... -- -- -- 27,217 Net income.................................................... 28,013 21,729 80,944 42,380 Less- Preferred dividend requirements.......................... 1,299 1,299 3,897 3,897 Income available for common shares............................ $ 26,714 $ 20,430 $ 77,047 $ 38,483 Primary earnings per share Income before cumulative effect of changes in accounting principles............................................ $ .61 $ .49 $ 1.76 $ 1.57 Less: cumulative effect of changes in accounting principles, net of income taxes..................... -- -- -- .65 Net income............................................... $ .61 $ .49 $ 1.76 $ .92 FULLY DILUTED EARNINGS PER SHARE: Weighted average number of common shares outstanding during the period................................................. 43,466,214 41,363,746 43,303,129 41,153,647 Add- Shares issuable assuming conversion of convertible preferred stock.......................................... 4,548,236 4,548,236 4,548,236 4,548,236 Dilutive effect of outstanding options (as determined by application of treasury stock method).................... 388,029 739,365 440,674 826,909 Weighted average number of common shares, as adjusted......... 48,402,479 46,651,347 48,292,039 46,528,792 Net income.................................................... $ 28,013 $ 21,729 $ 80,944 $ 42,380 Fully diluted earnings per share Income before cumulative effect of changes in accounting principles............................................... $ .58 $ .47 $ 1.68 $ 1.50 Less: cumulative effect of changes in accounting principles, net of income taxes....................... -- -- -- .59 Net income................................................. $ .58 $ .47 $ 1.68 $ .91
EX-27 3 ARTICLE 9 FDS FOR 10 - Q
9 1,000 9-MOS DEC-31-1994 JAN-01-1994 SEP-30-1994 281,156 1,639 122,600 33,387 892,638 1,758,673 1,711,126 5,214,410 69,298 8,502,290 6,262,346 1,352,073 67,765 210,887 0 3,850 217,443 387,926 8,502,290 307,007 111,977 1,902 420,886 138,706 181,363 239,523 3,692 906 172,491 124,067 80,944 0 0 80,944 1.76 1.68 4.28 24,112 754 0 0 69,503 8,318 4,421 69,298 69,298 0 20,392
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