Slipping margins kept Southern National Corp.'s earnings flat in the second quarter, at $57.3 million, but strong loan growth left analysts relatively optimistic about the rest of the year.

"The earnings power, despite a slight shortfall this quarter, is still very much intact," said Wheat First analyst David Stumpf.

Analysts pointed in particular to a drop in the company's net interest margin, to 4.06% from 4.14% in the first quarter.

Like most banks in the fiercely competitive Carolina market, Southern National has struggled with a rising cost of funds, as customers shifted from low-yielding money market and savings accounts to certificates of deposit. That problem was exacerbated in Southern National's case by a need to retain customers in the wake of a recent merger.

Southern National, now with $20.7 billion of assets, closed its merger with Wilson-based BB&T Financial Corp. in February. It completed a systems conversion on May 30.

"They had enough trouble retaining accounts during this period," Mr. Stumpf said. "They certainly didn't want to lose any because of rate. They had to be aggressive."

Southern National chairman and CEO John A. Allison said the company actually "increased the number of customer accounts during the weeks when the systems conversion was being implemented." Consumer-led loan growth was also strong during the quarter: 12% on an annualized basis.

"Things are on track for the acceleration of earnings that we expect for the third and fourth quarter as operating synergies really kick in," said analyst John A. Heffern, with Natwest Securities Corp.

Several basis points in margin drag came from Southern National's derivatives portfolio, which has a notional value of $1.4 billion, with an unrealized loss of $4.2 million. Chief financial officer Scott E. Reed said the portfolio will be gradually eliminated over the next year and a half.

Southern National, which is based in Winston-Salem, N.C., took several nonrecurring items during the quarter, offsetting a $13 million pretax gain on the sale of 12 branches with $16.5 million in merger-related expenses.

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