01—Abstract
Summary
Summary of the 10-K filed March 31, 1994. Cited figures are marked; the original filing is the authoritative source.
Southern National Corporation (SNC), a North Carolina multi-bank holding company headquartered in Lumberton, NC, reported strong 1993 results.
Net income rose 52% to $72.0 milliona, and fully diluted EPS climbed 46% to $2.03. Return on average assets was 1.35% and return on average common equity was 17.32%, both above management's minimum goals of 1% and 15%. Total assets grew 18% to $5.9 billion, deposits rose 10% to $4.5 billion, and shareholders' equity reached $503 million.
Part of the earnings growth came from a $13.6 millionb securities gain and a 52% increase in noninterest income. Asset quality improved, with nonperforming assets falling 27% to $21.8 million (0.63% of loan-related assets) and net charge-offs halving to $6.4 million. The efficiency ratio was 59.6%.
The company's growth strategy relies heavily on acquisitions. In early 1994 it completed three poolings-of-interests: The First Savings Bank (about $2.0 billionc in assets, South Carolina's largest thrift), Regency Bancshares ($263 million), and Home Federal Savings Bank ($98 million). Shareholders approved the issuance of up to 8,305,000 shares for The First at a December 27, 1993 special meeting by an overwhelming margin.
Pro forma for these deals, the company has more than $8 billiond in assets. Management warned that 1994 would bring consolidation challenges, higher nonperforming assets and loan losses in dollar terms (though still expected below 1.00% of loan-related assets), and a drag on net yield from thrift-type assets.
Note that the filing is from Southern National Corporation, which later merged with BB&T to form Truist Financial. The filing date is March 24, 1994 (signature date), with the 10-K dated for fiscal year ended December 31, 1993.
02—Key points
Key Highlights
- Net income rose 52% to $72.0 million in 1993, and fully diluted EPS rose 46% to $2.03 (primary EPS $2.16), versus $1.39 in 1992.
- Profitability exceeded management's minimum goals: ROA of 1.35% (goal 1%) and ROE of 17.32% (goal 15%), with a 12% EPS growth target also surpassed.
- Total assets grew 18% to $5.9 billion and deposits grew 10% to $4.5 billion; core deposits exceeded loans at year-end.
- Asset quality improved: nonperforming assets fell 27% to $21.8 million (0.63% of loan-related assets), and net charge-offs fell 50% to $6.4 million (0.20% of average loans). The allowance was 1.15% of loans and 203% of nonaccrual loans.
- Noninterest income rose 52% to $66.3 million, helped by a $13.6 million net securities gain from the Q1 1993 sale of $269 million in mortgage-backed securities.
- Pending acquisitions of The First Savings Bank ($2.0B assets), Regency Bancshares ($263M), and Home Federal ($98M), all completed in early 1994, lift the company above $8 billion in assets and make it the 3rd-largest bank in South Carolina.
- Capital remained strong: Tier 1 risk-based ratio of 14.43%, total risk-based ratio of 15.56%, and leverage ratio of 8.6%, all well above regulatory minimums. Dividends rose to $0.64 per share, the 21st consecutive annual increase.
03—Questions
Frequently Asked Questions
What drove the large increase in 1993 earnings, and how sustainable is it?
Earnings growth came from balance sheet growth (acquisitions of FedFirst and East Coast Savings plus organic loan growth), a 62% drop in the provision for loan losses to $5.6 million, and a $13.6 million securities gain. The securities gain is non-recurring, and the 1993 results also include a $3.6 million after-tax cumulative effect charge from accounting changes (SFAS 106 and SFAS 109 adoption). Management's 1994 guidance anticipates higher loan losses and integration costs from the three early-1994 mergers, so the 52% growth rate is unlikely to repeat.
How significant is the acquisition of The First Savings Bank for investors?
It is the company's largest deal to date, about five times larger than any prior merger. The First had $2.0 billion in assets and $1.5 billion in deposits, and it moved Southern National from 9th to 3rd in South Carolina deposit share. The company expects to cut The First's operating expenses by over 20% and sold bad loans at a bulk sale immediately after the merger. Because the deal was accounted for as a pooling-of-interests, prior periods were restated. Investors should watch integration progress, since the company acknowledged the combination poses 'great challenges' and that asset quality ratios will be modestly adversely affected in 1994.
Is the company's capital position strong enough to support continued acquisitions?
Yes, by the filing's measures. Shareholders' equity was $503 million (8.5% of assets), Tier 1 risk-based capital was 14.43%, and the leverage ratio was 8.6%, compared with regulatory minimums of 4% and 3%. Management says it can pursue mergers without immediately returning to the capital markets. Book value per share rose 12.7% to $13.47. Note that the company's Series A preferred stock ($77 million liquidation value) and the convertible structure could dilute common holders if converted.
What are the main risks highlighted in the filing?
Key risks include: (1) interest rate sensitivity, since net yield on earning assets fell from 4.89% to 4.71% due to prepayments, thrift-asset mix, and competitive loan pricing; (2) integration risk from absorbing $3.1 billion in thrift assets in 1994; (3) higher expected nonperforming assets and loan losses after the mergers; (4) an ongoing lawsuit involving Kenyon Home Furnishings seeking more than $40 million from SNBNC, which management says will not be material; and (5) possible increases in FDIC deposit insurance assessments, which the company flagged as a potential adverse factor.
04—Continue