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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED:
DECEMBER 31, 1995
COMMISSION FILE NUMBER: 1-10853
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SOUTHERN NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NORTH CAROLINA 56-0939887
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
200 WEST SECOND STREET 27101
WINSTON-SALEM, NORTH CAROLINA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
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(910) 733-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B)
OF THE SECURITIES EXCHANGE ACT OF 1934:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
------------------------------------ ----------------------------------
COMMON STOCK, $5 PAR VALUE NEW YORK STOCK EXCHANGE
DEPOSITARY SHARES, STATED VALUE $25 NEW YORK STOCK EXCHANGE
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
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 [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 31, 1996 was approximately $2.9 billion. The number of
shares of the Registrant's Common Stock outstanding on January 31, 1996 was
100,997,127.
Portions of the Proxy Statement of Registrant for the Annual Meeting of
Shareholders to be held on April 23, 1996, are incorporated in Part III of
this Report.
This Form 10-K has 75 pages excluding exhibits.
The Exhibit Index begins following page II-75.
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II-1
CROSS REFERENCE INDEX
PAGE
--------------------
PART I Item 1 Business.............................. II-4
Item 2 Properties............................ II-19, II-57
Item 3 Legal Proceedings..................... II-66
Item 4 Submission of Matters to a Vote of
Shareholders......................... II-2
There has been no submission of
matters to a vote of shareholders
during the quarter ended December 31,
1995.
PART II Item 5 Market for the Registrant's Common
Stock and Related Shareholder
Matters.............................. II-13, II-14, II-36,
II-38, II-46
Item 6 Selected Financial Data............... II-41
Item 7 Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... II-20
Item 8 Financial Statements and Supplementary
Data................................. II-40
Consolidated Balance Sheets at
December 31, 1995 and 1994........... II-44
Consolidated Statements of Income for
each of the years in the three-year
period ended December 31, 1995....... II-45
Consolidated Statements of Changes in
Shareholders' Equity for each of the
years in the three-year period ended
December 31, 1995.................... II-46
Consolidated Statements of Cash Flows
for each of the years in the three-
year period ended December 31, 1995.. II-47
Notes to Consolidated Financial
Statements........................... II-48
Report of Independent Public
Accountants.......................... II-43
Quarterly Financial Summary of 1995
and 1994............................. II-40
Item 9 There have been no disagreements with
accountants on accounting and
financial disclosures.
PART III Item 10 Directors and Executive Officers of
the Registrant....................... *
Item 11 Executive Compensation................ *
Item 12 Security Ownership of Certain
Beneficial Owners and Management..... *
Item 13 Certain Relationships and Related
Transactions......................... *
II-2
PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a)(1) Financial Statements (See Item 8 for reference).
(2) Financial Statement Schedules normally required on Form 10-K
are omitted since they are not applicable.
(3) Exhibits have been filed separately with the Commission and
are available upon written request.
(b) Southern National Corporation ("Southern National") filed a
Form 8-K under Item 5 on February 24, 1995, which included
consolidated financial statements for BB&T Financial
Corporation ("BB&T") as of December 31, 1993, and pro forma
condensed financial information relating to Southern
National's merger with BB&T. Southern National filed a Form
8-K under Item 5 on February 24, 1995, which included the
consolidated financial statements of Commerce Bank
("Commerce") as of September 30, 1994. Southern National
filed a Form 8-K under Item 2 on March 14, 1995, to report
the completion of the merger of the bank holding companies of
BB&T and Southern National, effective February 28, 1995. A
Form 8-K/A was subsequently filed on May 15, 1995, to amend
this Form 8-K in order to file BB&T's 1994 audited financial
statements, as well as related pro forma statements including
Southern National and Commerce. A second amendment on Form 8-
K/A dated May 22, 1995 was filed to update the information
filed on May 15, 1995. A third amendment on Form 8-K/A was
filed on August 4, 1995 to further update the pro forma
financial information included in the previous filings. A
Form 8-K was filed under Item 5 on May 24, 1995, to place the
1994 Summary Annual Report on file with the Securities and
Exchange Commission. On June 30, 1995, Southern National
filed a Current Report on Form 8-K under Item 5 to restate
the December 31, 1994 Form 10-K for the mergers with Commerce
and BB&T. On August 3, 1995, Southern National filed a Form
8-K under Item 5 to report the results of operations and
financial condition as of June 30, 1995. On October 19, 1995,
Southern National filed a Form 8-K under Item 5 to report the
results of operations and financial condition as of September
30, 1995. On January 22, 1996, Southern National filed a Form
8-K under Item 5 to report the results of operations and
financial condition as of December 31, 1995.
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* Information is incorporated by reference to Registrant's Proxy Statement
for the 1996 Annual Meeting of Shareholders filed as an exhibit to this
Form 10-K.
II-3
BUSINESS
GENERAL
Southern National Corporation ("Southern National" or the "Corporation" or
the "Company") is a multi-bank holding company headquartered in Winston-Salem,
North Carolina. Southern National conducts its operations in North Carolina,
South Carolina and Virginia primarily through its commercial banking
subsidiaries and, to a lesser extent, through its other subsidiaries.
Substantially all of Southern National's loans are to businesses and
individuals in the Carolinas. Southern National has no material amount of
foreign loans and no loans that can be defined as highly-leveraged
transactions. The principal assets of Southern National are all of the
outstanding shares of common stock of Branch Banking and Trust Company,
Winston-Salem, North Carolina; BB&T Financial Corporation of South Carolina,
Greenville, South Carolina, which in turn owns all the outstanding shares of
Branch Banking and Trust Company of South Carolina, Greenville, South
Carolina; BB&T Financial Corporation of Virginia, which in turn owns all the
outstanding shares of Commerce Bank; and Unified Investors Life Insurance
Company.
Subsidiaries
Branch Banking and Trust Company ("BB&T-NC"), Southern National's largest
subsidiary, is the oldest bank in North Carolina and currently operates
through 317 banking offices throughout North Carolina. BB&T-NC focuses on
providing a wide range of banking services in its local market for retail and
commercial customers, including small and mid-size businesses, public agencies
and local governments, trust customers and individuals. BB&T Leasing Corp., a
wholly-owned subsidiary of BB&T-NC, located in Charlotte, North Carolina,
offers lease financing to commercial businesses and municipal governments.
BB&T Investment Services, Inc., also a wholly-owned subsidiary of BB&T-NC
located in Wilson, North Carolina, offers customers investment alternatives,
including discount brokerage services, fixed-rate and variable-rate annuities,
mutual funds and government and municipal bonds. BB&T-NC has numerous
additional subsidiaries, including BB&T Insurance Services, Inc., located in
Raleigh, North Carolina, which offers life and property and casualty insurance
on an agency basis, Goddard Technology Corporation, which engages in the
design and production of imaging and security devices and programs, and Prime
Rate Premium Finance Corporation, Inc., which provides insurance premium
financing and services to customers in Virginia and the Carolinas.
BB&T of South Carolina ("BB&T-SC") serves South Carolina through 103 banking
offices. BB&T-SC focuses on providing a wide range of banking services in its
local market for retail and commercial customers, including small and mid-size
businesses, public agencies, local governments, trust customers and
individuals. BB&T-SC's subsidiaries include BB&T Investment Services of South
Carolina, Inc., which is licensed as a general broker/dealer of securities and
is currently engaged in retailing of mutual funds, U.S. Government securities,
municipal securities, fixed and variable insurance annuity products and unit
investment trusts.
Commerce Bank of Virginia Beach, Virginia ("Commerce"), acquired on January
10, 1995 by BB&T prior to merger with Southern National, operates 21 banking
offices in the Hampton Roads Region of Virginia. Commerce offers a full range
of commercial and retail banking services and provides Southern National with
a strong initial presence in Virginia.
Southern National's other significant active subsidiary, Unified Investors
Life Insurance Company ("Unified"), is a reinsurer and underwriter of certain
credit life and credit accident and health insurance policies written by a
non-affiliated insurance company in connection with loans made by the bank
subsidiaries.
II-4
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TABLE 1
SELECTED FINANCIAL DATA OF SUBSIDIARIES
AS OF/FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
BB&T-NC BB&T-SC COMMERCE
----------------------------------- -------------------------------- --------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
----------- ----------- ----------- ---------- ---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Total assets........... $15,991,534 $15,245,447 $13,302,191 $3,818,547 $4,084,659 $3,904,893 $737,462 $700,343 $689,630
Securities............. 4,236,682 4,088,564 3,713,066 942,193 1,064,061 994,397 154,358 187,461 247,175
Loans and leases, net
of unearned income*... 10,599,611 9,922,471 8,551,758 2,703,600 2,725,868 2,611,304 505,767 450,798 378,258
Deposits............... 11,544,525 10,925,196 10,189,091 2,923,981 2,956,733 3,097,767 669,000 628,750 634,141
Shareholder's equity... 1,111,680 1,104,458 1,056,798 360,262 303,058 193,742 60,734 47,865 43,589
Net interest income.... 555,765 549,231 499,179 153,669 157,550 152,030 31,231 28,863 26,264
Provision for loan and
lease losses.......... 24,772 8,004 24,603 4,718 7,241 25,173 1,910 2,600 2,825
Noninterest income..... 198,122 183,862 172,929 55,094 44,432 39,967 4,650 8,793 10,655
Noninterest expense.... 528,477 446,902 425,056 114,915 120,929 211,706 25,965 24,832 23,706
Net income (loss)...... 136,016 183,240 142,277 58,566 47,109 (61,464) 4,853 7,011 6,551
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* Includes loans held for sale.
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Acquisitions
Profitability and market share have been enhanced through both internal
growth and acquisitions during recent years. Specifically, expansion has been
enhanced both by the acquisition of financial institutions (including thrift
institutions) and the purchase of deposits and assets from the Resolution
Trust Corporation in federally-assisted transactions.
During the three years ended December 31, 1995, Southern National completed
several mergers and acquisitions of thrift institutions and financial services
companies. On February 28, 1995, Southern National merged with BB&T Financial
Corporation ("BB&T"), a multi-bank holding company with $11.0 billion in total
assets. Each BB&T shareholder received 1.45 shares of Southern National common
stock for each share of BB&T common stock held. A total of 57.9 million shares
of Southern National common stock was issued in conjunction with the merger.
Competition
The banking industry is highly competitive and dramatic change continues to
occur. The banking subsidiaries of Southern National compete actively with
national and state banks, savings and loan associations, securities dealers,
mortgage bankers, finance companies and insurance companies. Competition for
deposits continues to grow as depositors move their funds to nontraditional
financial institutions.
MARKET AREA
Southern National's primary market area consists of North Carolina, South
Carolina and Virginia. These states continue to support one of the most
dynamic and fastest growing economies in the nation. The area's employment
base is diverse, consisting of manufacturing industries, service,
wholesale/retail, strong financial centers and agricultural enterprises. Among
the primary area industries in which Southern National has significant
commercial lending relationships are textiles, furniture and health care. With
modern infrastructures and extensive educational systems, Southern National's
current market area is adequate to support consistent growth in assets and
deposits in the future. Even so, management expects to continue to employ
aggressive growth strategies, including possible expansion into neighboring
states. The current market area includes numerous small communities that
Southern National seeks to serve. Management believes that maintaining a
community bank approach as asset size and available services grow will
strengthen the Corporation's ability to successfully move into new states and
communities and successfully be the bank of choice for small to mid-sized
commercial customers in these areas.
II-5
LENDING ACTIVITIES
The primary goal of the Southern National lending function is to help
customers achieve their financial goals and secure their financial futures.
This purpose can best be accomplished by building strong, profitable customer
relationships over time, with the Southern National becoming an important
contributor to the prosperity and well-being of our customers. Southern
National's philosophy of lending is to attempt to meet all legitimate business
and consumer credit needs within defined market segments where standards of
safety, profitability and liquidity can be met.
Southern National focuses lending efforts on small to intermediate
commercial and industrial loans, one-to-four family residential mortgage loans
and other consumer loans. Typically, fixed-rate mortgage loans are sold in the
secondary mortgage market and adjustable-rate mortgages are retained for the
portfolio. Loan growth typically follows economic cycles and has been strong
during 1995, primarily in the mortgage category. Management's lending strategy
is to establish market share in strategic cities and develop customer
relationships by providing quality products and services to the customer base.
Once the relationship is established, management focuses on small business
lending and retail banking through the branches to generate additional growth.
During 1995, management's lending focus changed from an emphasis on
competitive pricing of loans to an emphasis on marketing loan products from a
quality perspective. During the merger of Southern National and BB&T, pricing
strategies surrounding loans and deposits were very competitive in order to
protect current market positions and retain customer relationships. However,
market research performed during and after the merger identified quality
service as the primary concern of borrowers.
It is Southern National's intention to conduct lending activities in the
context of the Corporation's community bank focus, with decentralized lending
decisions made as close to the customer as practicable.
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TABLE 2
COMPOSITION OF LOAN AND LEASE PORTFOLIO*
DECEMBER 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
Loans--
Commercial, financial
and agricultural...... $ 2,098,306 $ 2,679,046 $ 2,031,561 $ 1,868,658 $1,783,219
Real estate--construc-
tion and land develop-
ment.................. 949,513 701,181 702,108 592,267 643,890
Real estate--mortgage.. 8,671,941 7,787,792 7,114,136 5,947,434 5,403,192
Consumer............... 1,540,251 1,553,906 1,523,281 1,473,526 1,477,479
----------- ----------- ----------- ----------- ----------
Loans held for invest-
ment................. 13,260,011 12,721,925 11,371,086 9,881,885 9,307,780
Loans held for sale... 245,280 136,855 682,097 426,281 262,842
----------- ----------- ----------- ----------- ----------
Total loans.......... 13,505,291 12,858,780 12,053,183 10,308,166 9,570,622
Leases.................. 376,152 304,544 225,312 170,358 122,394
----------- ----------- ----------- ----------- ----------
Total loans and
leases............... $13,881,443 $13,163,324 $12,278,495 $10,478,524 $9,693,016
=========== =========== =========== =========== ==========
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* Balances are gross of unearned income.
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One-to-Four Family Residential Mortgage Lending
Southern National engages in mortgage loan originations by offering fixed-
and adjustable-rate government and conventional loans for the purpose of
constructing, purchasing or refinancing owner-occupied properties. As
mentioned above, the Corporation usually retains adjustable-rate loans for the
portfolio and sells fixed-rate loans and government loans within the secondary
mortgage market. Servicing rights on loans sold are typically retained by
Southern National. Loans are generally offered in amounts up to 95% of the
appraised value of the collateral
II-6
for terms up to 30 years based on the qualifications of the borrower. Except
in the "Community Reinvestment Act" program discussed below, private mortgage
insurance is required in an amount sufficient to reduce Southern National's
exposure to less than 80% of the loan-to-value ratio. Pricing for mortgage
loans is established to be highly-competitive with area lenders. Southern
National does not originate loans with negative amortization. Risks associated
with the residential lending function include interest rate risk, which is
mitigated through the sale of substantially all fixed-rate loans, and default
risk by the borrower, which is lessened through underwriting procedures and
private mortgage insurance. Southern National also purchases mortgage loans
through various correspondents and subjects them to the same underwriting and
investment strategies as loans originated through the branch delivery system.
The Corporation also offers, as part of its Community Reinvestment Act
("CRA") program, more flexible underwriting criteria to broaden the
availability of mortgage loans in the communities Southern National serves.
CRA loans are available at loan-to-value ratios up to 97% for households with
incomes up to a specified percentage of county median incomes. Such loans do
not require private mortgage insurance. These loans are retained in the
portfolio since they do not meet the necessary requirements to be sold in the
secondary mortgage market at the time of origination.
Commercial Lending
Southern National's commercial lending program is generally targeted to
serve small to middle-market businesses with sales of $250 million or less,
although in-house limits do allow lending to larger customers, including
national customers who have some reasonable business connections with the
banks' geographically-served markets. Commercial lending includes commercial,
financial, agricultural, industrial and real estate loans. Pricing on
commercial loans, driven largely by competition, is usually tied to the prime
rate.
Construction Lending
Real estate construction loans include 12 month contract housing loans which
are intended to convert to permanent one-to-four family residential mortgage
loans upon completion of the construction. These loans have terms and options
similar to residential mortgage loans and allow a rate to be "locked in" by
the borrower during the 12 month construction period. The loans also allow a
"float down" option once during the term of the construction loan. Such loans
are priced higher than other residential mortgage loans because of the added
"float down" risk and the shorter term of the loan.
Southern National also originates commercial construction loans. These loans
are usually to in-market developers, businesses, individuals or real estate
investors for the construction of commercial structures in the Corporation's
market area, including, but not limited to, industrial facilities, apartments,
shopping centers, office buildings, hotels and warehouses. The properties may
be for sale, lease or owner-occupancy. The Corporation generally requires the
borrower to make a commitment to "take-out" the construction loan and
typically requires significant levels of pre-sales, preleasing or, in the case
of owner-occupied properties, that the owner has adequate resources to repay
the debt. Generally, these loans carry floating interest rates tied to the
Corporation's prime interest rate or some other similar index, and range in
term from six to eighteen months.
Consumer Lending
Southern National offers various consumer loan products. Both secured and
unsecured loans are marketed to existing clients and to any other creditworthy
candidates. Standard Home Equity Loans and Lines are underwritten with note
amounts and credit limits that ensure consistency with the banks' loan-to-
value policy (80% for consumer loans secured by real estate). Numerous forms
of unsecured loans, including revolving credits (bankcards, DDA overdraft
protection and personal lines of credit) are provided and various installment
loan products, including vehicle loans, are offered. Pricing of such loans is
based, to a great degree, on in-market competition. Closed-end installment
loans are usually priced as fixed-rate simple interest loans, while most
revolving products are priced with variable rates.
II-7
Leasing
Southern National provides leasing products and services in North and South
Carolina through Southern National Leasing Corp. ("Leasing"). Since Leasing is
a separate subsidiary, it is not restricted to North and South Carolina to
obtain business. Leasing provides three primary products: finance or capital
leases, true leases (as defined under the Internal Revenue Code) and other
operating leases. Leasing is primarily involved in commercial leasing. Leasing
provides products and services for small to medium-sized commercial customers
primarily in Southern National's market area. Such products include vehicles,
rolling stock and tangible personal property. Leasing also solicits business
from municipal customers and is seeking to augment the existing customer base
with larger commercial customers. For the twenty year history with Southern
National, the sales effort of Leasing has been directed at fleet leasing. The
mix of vehicle and equipment leases has remained approximately 75% vehicle to
25% equipment.
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TABLE 3
SELECTED LOAN MATURITIES AND INTEREST SENSITIVITY*
DECEMBER 31, 1995
------------------------------------
COMMERCIAL,
FINANCIAL
AND REAL ESTATE:
AGRICULTURAL CONSTRUCTION TOTAL
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
Fixed rate:
1 year or less (2)...................... $ 164,088 $144,136 $ 308,224
1-5 years............................... 265,436 74,252 339,688
After 5 years........................... 53,087 -- 53,087
---------- -------- ----------
Total................................. 482,611 218,388 700,999
---------- -------- ----------
Variable rate:
1 year or less (2)...................... 759,377 482,543 1,241,920
1-5 years............................... 775,534 248,582 1,024,116
After 5 years........................... 80,784 -- 80,784
---------- -------- ----------
Total................................. 1,615,695 731,125 2,346,820
---------- -------- ----------
Total loans and leases (1).......... $2,098,306 $949,513 $3,047,819
========== ======== ==========
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* Balances are gross of unearned income.
(1) The table excludes:
(i) consumer loans to individuals for household, family
and other personal expenditures...................... $ 1,540,251
(ii) real estate mortgage loans............................ 8,671,941
(iii) loans held for sale................................... 245,280
(iv) leases................................................ 376,152
-----------
$10,833,624
===========
(2) Includes loans due on demand.
Scheduled repayments are reported in the maturity category in which the
payment is due. Determinations of maturities are based upon contract terms.
Southern National's credit policy does not permit automatic renewals of loans.
At the scheduled maturity date (including balloon payment date), the customer
must request a new loan to replace the matured loan and execute a new note
with rate, terms and conditions renegotiated at that time.
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II-8
NONACCRUAL LOANS AND LEASES
It is Southern National's policy to place commercial loans and leases on
nonaccrual status when full collection of principal and interest becomes
doubtful, or when any portion of principal or interest becomes 90 days past
due, whichever occurs first. When loans are placed on nonaccrual status,
interest receivable is reversed against interest income in the current period.
Interest payments received thereafter are applied as a reduction to the
remaining principal balance so long as concern exists as to the ultimate
collection of the principal. Loans and leases are removed from nonaccrual
status when they become current as to both principal and interest and when the
collectibility of principal or interest is no longer doubtful.
Mortgage loans and other consumer loans are also placed on nonaccrual status
when full collection of principal and interest becomes doubtful, but they are
subject to longer periods of time before they are automatically placed on
nonaccrual. This period of time varies for different types of consumer loans.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is established through a provision
for loan and lease losses based on management's evaluation of the risk
inherent in the loan portfolio and changes in the nature and volume of loan
activity. This evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers the loans' risk
grades, the estimated fair value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
consideration in providing for an adequate reserve. Southern National utilizes
ten "risk grades" to determine the repayment capacity of borrowers. Southern
National's objective is to maintain a loan portfolio that is diverse in terms
of loan type, industry concentration, geographic distribution and borrower
concentration in order to reduce overall credit risk by minimizing the adverse
impact of any single event or combination of related events. Although
management believes that the best information available is used to determine
the adequacy of the allowance, the nature of the process by which management
determines the appropriate allowance for credit losses requires the exercise
of considerable judgment. Unforeseen market conditions could result in
adjustments in the allowance which would affect earnings. Future additions to
Southern National's allowance will be the result of periodic loan, property
and collateral reviews as well as projected changes in overall economic and
real estate markets.
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TABLE 4
ALLOCATION OF RESERVE BY CATEGORY
DECEMBER 31,
-----------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------- ----------------- ----------------- ----------------- -----------------
% LOANS % LOANS % LOANS % LOANS % LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at end of period
applicable to:
Commercial, financial
and agricultural...... $ 27,824 15% $ 35,869 20% $ 44,018 17% $ 31,036 18% $ 26,049 18%
Real estate:
Construction and land
development........... 13,443 7 10,874 5 12,311 6 10,260 5 10,352 7
Mortgage............... 76,079 64 63,186 61 63,996 63 50,444 61 37,168 59
-------- --- -------- --- -------- --- -------- --- -------- ---
Real estate--total..... 89,522 71 74,060 66 76,307 69 60,704 66 47,520 66
-------- --- -------- --- -------- --- -------- --- -------- ---
Consumer................ 23,824 11 23,444 12 23,138 12 20,621 14 25,279 15
Leases.................. 3,443 3 906 2 1,218 2 1,313 2 1,610 1
Unallocated............. 27,545 37,455 24,664 21,910 15,511
-------- --- -------- --- -------- --- -------- --- -------- ---
Total.................. $172,158 100% $171,734 100% $169,345 100% $135,584 100% $115,969 100%
======== === ======== === ======== === ======== === ======== ===
- -------------------------------------------------------------------------------
II-9
The following table sets forth information with respect to Southern
National's allowance for loan and lease losses for the most recent five years.
- -------------------------------------------------------------------------------
TABLE 5
COMPOSITION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
Balance, beginning of
period................. $ 171,734 $ 169,345 $ 137,400 $ 116,221 $ 87,457
----------- ----------- ----------- ----------- ----------
Charge-offs:
Commercial, financial
and agricultural..... (10,151) (10,759) (23,912) (27,131) (29,575)
Real estate........... (9,993) (6,694) (7,502) (10,796) (9,726)
Consumer.............. (21,717) (11,971) (13,433) (18,129) (19,519)
Lease receivables..... (614) (646) (771) (1,428) (1,308)
----------- ----------- ----------- ----------- ----------
Total charge-offs.... (42,475) (30,070) (45,618) (57,484) (60,128)
----------- ----------- ----------- ----------- ----------
Recoveries:
Commercial, financial
and agricultural..... 4,177 6,770 5,892 3,872 2,347
Real estate........... 2,567 2,308 1,261 3,340 789
Consumer.............. 4,360 4,122 3,640 2,901 2,381
Lease receivables..... 395 294 149 188 116
----------- ----------- ----------- ----------- ----------
Total recoveries..... 11,499 13,494 10,942 10,301 5,633
----------- ----------- ----------- ----------- ----------
Net charge-offs......... (30,976) (16,576) (34,676) (47,183) (54,495)
----------- ----------- ----------- ----------- ----------
Provision charged to
expense............... 31,400 17,846 53,311 62,871 75,844
----------- ----------- ----------- ----------- ----------
Allowance of loans
acquired in purchase
transactions.......... -- 1,119 13,310 3,675 7,163
----------- ----------- ----------- ----------- ----------
Balance, end of period.. $ 172,158 $ 171,734 $ 169,345 $ 135,584 $ 115,969
=========== =========== =========== =========== ==========
Average loans and
leases*................ $13,640,565 $12,360,633 $11,177,299 $10,149,563 $9,187,287
Net charge-offs as a
percentage of average
loans and leases....... 0.23% 0.13% 0.31% 0.46% 0.59%
=========== =========== =========== =========== ==========
- --------
* Loans and leases are net of unearned income and include loans held for sale.
- -------------------------------------------------------------------------------
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual loans and leases and foreclosed
property. Southern National directs significant energy to maintaining low
levels of nonperforming assets and works quickly with delinquent borrowers to
resolve problems. Loans are considered delinquent in most cases the first day
after payment is due. After a loan has been delinquent for ten days, Southern
National mails a reminder notice to borrowers, and if the borrower does not
contact a collection officer, late charges are assessed on the sixteenth day
after the due date. Numerous attempts to work with the borrower to establish a
repayment plan are made throughout the delinquent period of the loan. When a
commercial loan becomes 90 days past due, the loan is placed on nonaccrual
status. For mortgage and most consumer loans, the period of time before a
delinquent loan is placed on nonaccrual status varies, as discussed above. In
some cases, loans may be placed on nonaccrual status earlier based on specific
circumstances surrounding the loan. If the collection of principal and/or
interest becomes doubtful at any time during the collection process, the loan
is placed on nonaccrual status. Every effort is made to reach an agreement on
payment with the borrower. If it becomes necessary to foreclose on loans,
acquired assets are quickly sold to minimize the cost of carrying such assets.
II-10
INVESTMENT ACTIVITIES
Southern National maintains a portion of its assets as investment
securities. Banks are allowed to purchase, sell, deal in and hold certain
investment securities as prescribed by regulations. These investments include
all obligations of the U.S. Treasury, agencies of the Federal government,
obligations of any state or political subdivision, various types of corporate
debt, mutual funds, limited equity securities and certain derivative
securities.
Investment portfolio activities are governed internally by a written, board-
approved investment policy. Investment policy is carried out by the
Corporation's Asset and Liability Committee ("ALCO") which meets regularly to
review the economic environment, assess current activities for appropriateness
and establish investment strategies. The ALCO also has much broader
responsibilities which are discussed in the section "Asset/Liability
Management" of "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Corporation maintains its investment portfolio in accordance with the
Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." This statement established accounting procedures
consistent with the intent to hold securities until maturity, to hold
securities in an available-for-sale capacity or to trade securities.
Investment strategies are established by the ALCO in consideration of the
interest rate cycle, mix of the balance sheet, actual and anticipated loan
demand, funding opportunities and the overall interest rate sensitivity of the
Corporation. In general, the investment portfolio is managed in a manner
appropriate to the attainment of the following goals: (i) to provide a
sufficient margin of liquid assets and liabilities to cover unanticipated
deposit and loan fluctuations, seasonal funds flow variations and overall
funds management objectives; (ii) to provide eligible securities to secure
public funds and trust deposits as prescribed by law; and (iii) to earn the
maximum return on funds invested that is commensurate with meeting the
requirements of (i) and (ii).
Within the overall context of the primary purposes of portfolio management
as just described, investment strategy during 1995 was established and
continually adjusted within an environment of stable short-term interest rates
since the second quarter.
At December 31, 1995, the investment portfolio represented 26% of the total
assets of the Corporation. That percentage is somewhat higher than historical
norms for the Corporation. During the past four years, investment securities
have increased as a percentage of total assets. Management has judged overall
liquidity and interest rate sensitivity to be adequate to allow the growth of
both the investment and loan portfolios during that time. It is anticipated
that the opportunities that permitted the growth of both portfolios will not
be present in the immediate future, and, as a result, management has begun to
allow the investment portfolio to decline as a percentage of total assets
toward more historical norms.
As has been the case for the past several years, investment activity during
1995 was centered on obligations of the U.S. Treasury and Federal agencies.
U.S. Treasury and Federal agencies comprised 94% of the total book value of
the portfolio at year end. The value of these securities from return and
quality perspectives made them relatively more attractive than other types of
investments. Emphasis continued to be placed on short and intermediate-term
maturities, balancing reasonable stability between liquidity and yield. The
average maturity of the entire portfolio at December 31, 1995 was 3 years
compared to 4 years at December 31, 1994. Table 11--"Securities" shows the
maturity distribution by category of Southern National's investment portfolio
at December 31, 1995.
During the fourth quarter of 1995, Southern National transferred $1.5
billion of securities classified as held to maturity into the securities
available-for-sale category. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for additional discussion of
this transaction.
II-11
The following table provides information regarding the composition of
Southern National's securities portfolio.
- -------------------------------------------------------------------------------
TABLE 6
COMPOSITION OF SECURITIES PORTFOLIO
DECEMBER 31,
--------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Securities held to maturity (at amortized
cost):
U.S. Treasury, government and agency
obligations............................... $ 9,461 $1,190,558 $2,433,380
States and political subdivisions.......... 144,508 165,520 203,422
Mortgage-backed securities................. -- 608,676 567,520
Other securities........................... -- 665 100,272
---------- ---------- ----------
Total securities held to maturity........ 153,969 1,965,419 3,304,594
---------- ---------- ----------
Securities available for sale (1995 and 1994
at market,
1993 at amortized cost):
U.S. Treasury, government and agency
obligations............................... 4,060,423 3,024,792 1,384,017
States and political subdivisions.......... 20,773 16,918 --
Mortgage-backed securities................. 977,727 310,314 535,299
Other securities........................... 142,421 107,674 1,572
---------- ---------- ----------
Total securities available for sale...... 5,201,344 3,459,698 1,920,888
---------- ---------- ----------
Total securities............................. $5,355,313 $5,425,117 $5,225,482
========== ========== ==========
- -------------------------------------------------------------------------------
SOURCES OF FUNDS
Deposits are the primary source of funds for lending and investing
activities. The amortization and scheduled payment of loans and maturities of
investment securities provide a stable source of funds, while deposit
fluctuations and loan prepayments are significantly influenced by the overall
interest rate environment and other market conditions. Federal Home Loan Bank
("FHLB") advances, Federal funds purchased and short-term borrowed funds all
provide supplemental liquidity sources based on specific needs, or if
management determines that these are the best sources of funds to meet current
requirements.
Deposits
Customer deposits are attracted principally from within Southern National's
market area through the offering of a broad selection of deposit instruments
including demand deposits, negotiable order of withdrawal accounts, passbook
and statement savings accounts, money market deposits, certificates of deposit
and individual retirement accounts. Deposit account terms vary with respect to
the minimum balance required, the time period the funds must remain on deposit
and the interest rate. Interest rates paid on specific deposits are set by the
ALCO and are determined based on (i) the interest rates offered by
competitors, (ii) anticipated needs for cash and the timing of the cash flow
needs offset by the availability of more cost-effective funding sources and
(iii) anticipated future economic conditions and interest rates. Customer
deposits are attractive sources of liquidity because of stability, pricing
control and the ability to generate fee income through the cross-sale of
deposit-related services.
II-12
- -------------------------------------------------------------------------------
TABLE 7
TIME DEPOSITS $100,000 AND OVER
(DOLLARS IN THOUSANDS)
Maturity
Less than three months................................. $ 864,652
Four through six months................................ 368,789
Seven through twelve months............................ 243,542
Over twelve months..................................... 315,147
----------
BALANCE AT DECEMBER 31, 1995............................. $1,792,130
==========
- -------------------------------------------------------------------------------
Short-Term Borrowed Funds
Southern National's ability to borrow significant funds through non-deposit
sources generates additional flexibility to meet the needs of customers by
offsetting liquidity risk and to reach the goals set by the ALCO. Southern
National has done this in the past primarily through securities sold under
repurchase agreements. Other components of short-term borrowed funds at year
end were master notes, Federal funds purchased and U.S. Treasury tax and loan
deposit notes payable.
- -------------------------------------------------------------------------------
TABLE 8
SHORT-TERM BORROWED FUNDS
The following information summarizes certain pertinent information for the
past three years on securities sold under agreement to repurchase, Federal
funds purchased, master notes, Federal Reserve discount window borrowings,
U.S. Treasury tax and loan deposit notes payable and other short-term borrowed
funds.
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Maximum outstanding at any month-end
during the year.......................... $3,724,127 $2,975,957 $1,998,481
Average outstanding during the year....... 3,055,180 2,321,379 1,349,156
Average interest rate during the year..... 5.85% 4.24% 3.23%
Average interest rate at end of year...... 5.28 5.49 2.94
- -------------------------------------------------------------------------------
CAPITAL ADEQUACY AND RESOURCES
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. Close attention is given to regulatory levels
of capital as percentages of assets and risk-weighted assets. The accompanying
table outlines the regulatory minimums for Tier 1 capital, total risk-based
capital and the leverage ratio, as well as such amounts for Southern National
as of December 31, 1995.
- -------------------------------------------------------------------------------
TABLE 9
CAPITAL ADEQUACY
REGULATORY SOUTHERN BB&T- BB&T-
MINIMUMS NATIONAL NC SC COMMERCE
---------- -------- ----- ----- --------
Risk-based capital ratios:
Tier 1 capital (1)................... 4.0% 13.0% 10.4% 14.1% 11.2%
Total risk-based capital (2)......... 8.0 14.3 11.6 15.3 12.5
Tier 1 leverage ratio (3).............. 3.0 7.8 6.4 9.0 8.2
- --------
(1) Shareholders' equity less non-qualifying intangible assets; computed as a
ratio of risk-weighted assets, as defined in the risk-based capital
guidelines.
(2) Tier 1 capital plus qualifying loan loss allowance and subordinated debt;
computed as a ratio of risk-weighted assets, as defined in the risk-based
capital guidelines.
(3) Tier 1 capital computed as a ratio of fourth quarter average assets less
goodwill.
II-13
CERTAIN REGULATORY CONSIDERATIONS
GENERAL
As a bank holding company, the Company is subject to regulation under the
Bank Holding Company Act of 1956 (as amended, the "BHCA") and its examination
and reporting requirements. Under the BHCA, bank holding companies may not
directly or indirectly acquire the ownership or control of more than five
percent of the voting shares or substantially all of the assets of any
company, including a bank, without the prior approval of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). In
addition, bank holding companies are generally prohibited under the BHCA from
engaging in nonbanking activities, subject to certain exceptions.
In addition, BB&T-NC, BB&T-SC and Commerce (collectively, the "Banks") are
extensively regulated under state and federal law. As state-chartered
commercial banks, the Banks are subject to regulation, supervision and
examination by state banking authorities in their respective home states,
including the North Carolina Commissioner, in the case of BB&T-NC, the South
Carolina Commissioner, in the case of BB&T-SC, and the Virginia State
Corporation Commission, Bureau of Financial Institutions, in the case of
Commerce. As federally-insured, nonmember banks, each of the Banks is also
subject to regulation, supervision and examination by the Federal Deposit
Insurance Corporation (the "FDIC").
The earnings of the Company's subsidiaries, and therefore the earnings of
the Company, are affected by general economic conditions, management policies
and the legislative and governmental actions of various regulatory
authorities, including those referred to above. In addition, there are
numerous governmental requirements and regulations which affect the activities
of the Company and its subsidiaries.
The following description summarizes some of the state and federal laws to
which the Company and the Banks are subject. To the extent statutory or
regulatory provisions or proposals are described, the description is qualified
in its entirety by reference to the particular statutory or regulatory
provisions or proposals.
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from its banking and
other subsidiaries. A major portion of the revenues of the Company result from
amounts paid as dividends to the Company by its banking subsidiaries. The
Company's banking subsidiaries are subject to state laws and regulations that
limit the amount of dividends they can pay. The Company does not expect that
these laws and regulations will materially impact the ability of its banking
subsidiaries to pay dividends. During the year ended December 31, 1995, the
Banks paid $91.5 million in cash dividends to the Company.
In addition, both the Company and the Banks are subject to various general
regulatory policies and requirements relating to the payment of dividends,
including requirements to maintain adequate capital above regulatory minimums.
The appropriate federal or state regulatory authority is authorized to
determine under certain circumstances relating to the financial condition of a
bank or bank holding company that the payment of dividends would be an unsafe
or unsound practice and to prohibit payment thereof. The Federal Reserve Board
has indicated that banking organizations should generally pay dividends only
out of current operating earnings.
CAPITAL
The Company. The minimum requirement for a bank holding company's ratio of
capital to risk-weighted assets (including certain off-balance-sheet
activities, such as standby letters of credit) is 8 percent. At least half of
the total capital is to be composed of common equity, retained earnings and
qualifying perpetual preferred stock, less certain intangibles ("Tier 1
capital"). The remainder may consist of subordinated debt, qualifying
preferred stock and a limited amount of the loan loss allowance ("Tier 2
capital" and, together with Tier 1 capital, "total capital"). At December 31,
1995, the Company's Tier 1 and total capital ratios were 13.0% and 14.3%,
respectively.
II-14
In addition, the Federal Reserve Board has established minimum leverage
ratio requirements for bank holding companies. These requirements provide for
a minimum leverage ratio of Tier 1 capital to adjusted average quarterly
assets ("leverage ratio") equal to 3 percent for bank holding companies that
meet certain specified criteria, including that they have the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a leverage ratio of from at least 4 to 5 percent. The Company's
leverage ratio at December 31, 1995, was 7.8%. The requirements also provide
that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant
reliance on intangible assets. Furthermore, the requirements indicate that the
Federal Reserve Board will continue to consider a "tangible Tier 1 leverage
ratio" (deducting all intangibles) in evaluating proposals for expansion or
new activity.
The Banks. The FDIC has adopted minimum risk-based and leverage ratio
guidelines to which the Banks are subject. Under the risk-based capital
requirements of the FDIC, each of the Banks is required to maintain a minimum
ratio of total capital (Tier 1 plus Tier 2 capital) to total risk-adjusted
assets (which include the credit risk equivalents of certain off-balance sheet
items) of 8 percent, of which half (4 percent) must be Tier 1 capital. In
addition, the FDIC requires a minimum leverage ratio (Tier 1 capital to
average total consolidated assets) of 3 percent. These risk-based capital and
leverage ratios are minimum supervisory ratios generally applicable to banks
that meet certain specified criteria, including that they have one of the two
highest regulatory ratings. Banking institutions not meeting these criteria
are expected to operate with capital positions well above the minimum ratios.
In addition, the FDIC may set capital requirements for a particular bank that
are higher than the minimum ratios when circumstances warrant.
The FDIC's risk-based capital standards explicitly identify concentrations
of credit risk and the risk arising from non-traditional activities, as well
as an institution's ability to manage these risks, as important factors to be
taken into account by the agency in assessing an institution's overall capital
adequacy. The capital regulations also provide that an institution's exposure
to a decline in the economic value of its capital due to changes in interest
rates be considered by the agency as a factor in evaluating a bank's capital
adequacy. The banking agencies issued for comment a proposed joint policy
statement that describes the process the banking agencies will use to measure
and assess the exposure of a bank's net economic value to changes in interest
rates. The agencies may, ultimately, establish an explicit capital charge for
interest rate risk.
Under federal banking laws, failure to meet the minimum regulatory capital
requirements could subject a banking institution to a variety of enforcement
remedies available to federal regulatory authorities, including, in the most
severe cases, the termination of deposit insurance by the FDIC and placing the
institution into conservatorship or receivership.
The capital ratios of each of the Banks exceeded all minimum regulatory
capital requirements as of December 31, 1995. As of December 31, 1995, the
ratio of total capital to total risk-adjusted assets for BB&T-NC, BB&T-SC and
Commerce were 11.6%, 15.3% and 12.5%, respectively, and the Banks' leverage
ratios (Tier 1 capital to average total consolidated assets) were 6.4%, 9.0%
and 8.2%, respectively.
FIRREA
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), among other things, imposes liability on an institution the
deposits of which are insured by the FDIC, such as the Banks, for certain
potential obligations to the FDIC incurred in connection with other FDIC-
insured institutions under common control with such institution.
Under Federal Reserve Board policy, the Company is expected to act as a
source of financial strength to each of the Banks and to commit resources to
support each of such subsidiaries. This support may be required at times when,
absent such Federal Reserve Board policy, the Company may not find itself able
to provide it.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary banks. In the event of a bank holding
II-15
company's bankruptcy, any commitment by the bank holding company to a federal
bank regulatory agency to maintain the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
PROMPT CORRECTIVE ACTION UNDER FDICIA
The prompt corrective action provisions of the Federal Deposit Insurance
Company Improvement Act of 1991 ("FDICIA") significantly expanded the
regulatory and enforcement powers of federal banking regulators, including the
FDIC. Among other things, FDICIA establishes additional capital standards for
insured depository institutions and requires specific enforcement actions by
the appropriate federal regulatory agencies against institutions that fail to
meet these standards. The extent of these powers depends upon whether the
institutions in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized."
The FDIC's regulations establish specific actions that are permitted or, in
certain cases, required to be taken by regulators with respect to institutions
falling within one of the three undercapitalized categories. Depending on the
level of an institution's capital, the agency's corrective powers can include:
requiring a capital restoration plan; placing limits on asset growth and
restrictions on activities; requiring the institution to issue additional
stock (including voting stock) or to be acquired; placing restrictions on
transactions with affiliates; restricting the interest rate the institution
may pay on deposits; ordering a new election for the institution's board of
directors; requiring that certain senior executive officers or directors be
dismissed; prohibiting the institution from accepting deposits from
correspondent banks; requiring the institution to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated debt;
prohibiting the holding company from making capital distributions without
prior regulatory approval; and, in the most severe cases, appointing a
receiver for the institution. A bank that is undercapitalized is required to
submit a capital restoration plan, and such a plan will not be accepted
unless, among other things, the bank holding company guarantees the capital
plan, up to a certain specified amount. Under certain circumstances, a "well
capitalized," "adequately capitalized" or "undercapitalized" institution may
be required to comply with restrictions applicable to the next lowest capital
category.
As of December 31, 1995, the Company and each of the Banks were classified
as "well capitalized."
CONSERVATORSHIP AND RECEIVERSHIP POWERS OF THE FEDERAL AND STATE BANKING
AGENCIES
The federal banking agencies have broad enforcement powers over depository
institutions, including the power to terminate deposit insurance, impose
substantial fines and other civil penalties and to appoint a conservator or
receiver. The federal statutes to which the Company and its subsidiaries are
subject also contain criminal penalties. In addition to the grounds discussed
under "Prompt Corrective Action Under FDICIA," the FDIC may appoint itself as
conservator or receiver for each of the Banks if any one or more of a number
of circumstances exist, including, without limitation, the fact that the bank
is undercapitalized and has no reasonable prospect of becoming adequately
capitalized; fails to become adequately capitalized when required to do so;
fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan.
State regulatory authorities have broad enforcement powers over state
banking institutions chartered in each of their states including powers to
impose fines and other civil penalties and to appoint a conservator (with the
approval of the Governor in the case of North Carolina) in order to conserve
the assets of any such institution for the benefit of depositors and other
creditors thereof. The state statutes to which the Company and its
subsidiaries are subject also contain criminal penalties. In addition, the
North Carolina Commissioner has the authority to take possession of a state
bank in certain circumstances, including, among other things, when it appears
that such bank has violated its charter or any applicable laws or is
conducting its business in an unauthorized or unsafe manner, or is in an
unsafe or unsound condition to transact its business or has an impairment of
its capital stock. A conservator has the authority, under the direction of the
applicable state
II-16
authority, to take possession of the books, records and assets of a bank and
to exercise all powers of such state authority in order to preserve the assets
of such bank.
The FDIC may provide federal assistance to a "troubled institution" without
placing the institution into conservatorship or receivership. In such a case,
preexisting debtholders and shareholders may be required to make substantial
concessions and, insofar as practical, the FDIC will succeed to their
interests in proportion to the amount of federal assistance provided.
INSOLVENCY, LIQUIDATION, OR OTHER DEFAULT BY THE BANKS
In the event of the liquidation or other resolution of any federally-insured
depository institution, such as each of the Banks, the claims of depositors of
such an institution (including claims by the FDIC as subrogee of insured
depositors) and administrative expenses of the receiver are entitled to
priority in payment over the claims of any other senior or general creditors
of the institution, other than secured creditors. A substantial majority of
the liabilities of each of the Banks are deposits or secured liabilities.
A depository institution insured by the FDIC can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (i) the default of a commonly-controlled depository institution or (ii)
any assistance provided by the FDIC to a commonly-controlled depository
institution in danger of default. However, such liability to the FDIC would be
subordinated in right of payment to deposit liabilities and to most secured,
senior, general or subordinated obligations, other than obligations owed to
any affiliate of the depository institution (with certain exceptions) and any
obligations to shareholders of such depository institution in their capacity
as such.
As conservator or receiver for an insured depository institution, and in
order to promote the orderly administration of the institution's affairs, the
FDIC may disaffirm or repudiate any contract or lease to which such
institution is a party. The FDIC as conservator or receiver is also permitted
to enforce most types of contracts pursuant to their terms notwithstanding any
acceleration provisions therein, and may transfer to a new obligor any of the
institution's assets and liabilities, without approval or consent of the
institution's creditors. Pursuant to FDICIA, the FDIC is also authorized to
settle all uninsured and unsecured claims in the insolvency of an insured bank
by making a final settlement payment at a percentage rate reflecting an
average of the FDIC's receivership recovery experience and constituting full
payment and disposition of the FDIC's obligations to such uninsured and
unsecured claimants.
Should a state regulatory authority elect to take possession of any bank for
the purpose of liquidation, administrative claims and claims of depositors are
entitled to priority in payment over the claims of creditors. Each of the
state authorities may appoint the FDIC as its agent for the purpose of
liquidation of a bank, provided that the liabilities of such bank to its
depositors are insured by the FDIC.
If the FDIC or state regulatory agency were appointed receiver of a bank,
the amount paid on claims in respect of the bank's obligations to its
creditors would depend upon, among other factors, the amount of assets in the
receivership and the relative priority of the claim.
DEPOSIT INSURANCE ASSESSMENTS
The deposits of each of the Banks are insured by the FDIC, up to applicable
limits. Most of the deposits of the Banks are subject to deposit premium
assessments of the Bank Insurance Fund ("BIF") of the FDIC. In addition,
approximately 40 percent of the Banks' deposits (which are related to each
Bank's acquisition of thrift deposits) is subject to assessments by the
Savings Association Insurance Fund ("SAIF") of the FDIC. Under the FDIC's
risk-based insurance system, BIF-assessed deposits are currently subject to
premiums of between $.00 and $.27 per $100 of deposits, depending upon the
institution's capital position and other supervisory factors. The current
premiums reflect a reduction, effective January 1, 1996, from a range of $.04
to $.31 per $100 of deposits. The rate applicable to the BIF-assessed deposits
of each of the Banks is currently $.00 per
II-17
$100 of eligible deposits, with a minimum semiannual assessment of $1,000. The
range of premiums applicable to SAIF-assessed deposits is between $.23 and
$.31 per $100 of deposits, and the assessment rate for each of the Banks'
SAIF-assessed deposits is $.23 per $100 of eligible deposits.
Proposed budget reconciliation legislation that contains provisions to
recapitalize the SAIF was passed by both houses of Congress and reconciled in
conference committee. However, the President vetoed the proposed budget
reconciliation legislation on December 6, 1995, for reasons unrelated to the
SAIF recapitalization issue. Draft conference report language released by the
House Committee on Banking and Financial Services includes provisions for a
one-time special assessment, as determined by the FDIC, on SAIF-assessable
deposits of insured depository institutions in an amount adequate to cause the
SAIF to achieve its specific designated reserve ratio of 1.25 percent. The
proposed legislation called for a special assessment in the range of $.80 per
$100 of insured deposits for SAIF institutions.
The draft conference report language provides that the assessment would be
applied to the amount of SAIF-assessable deposits held as of March 31, 1995.
However, more recent negotiations have resulted in a proposal that the cut-off
date for SAIF-assessable deposits be December 31, 1995. The SAIF-assessable
deposits of BB&T-NC and BB&T-SC as of March 31, 1995 totaled approximately
$4.3 billion and $1.5 billion, respectively. Under the proposed legislation,
BB&T-NC would receive a 20 percent discount on the assessment, because the
bank's SAIF-assessable deposits were less than 50 percent of its total
assessable deposits as of June 30, 1995. The pretax impact on the Company of
this one-time assessment is not expected to exceed $41.0 million. The Company
expects to record this expense following the enactment of the legislation. In
the event that the SAIF is recapitalized pursuant to this legislation, it is
expected that the assessment rates applicable to SAIF-assessable deposits
would be reduced.
The proposed legislation contains additional provisions that, among other
things, would require BIF-member institutions to share pro rata in the
obligations of SAIF members for certain government bonds.
The final form of the proposed legislation, including whether the
legislation will contain some or all of the provisions discussed above, cannot
be determined with certainty at this time. Similarly, the date of passage of
the final form of the legislation, or whether this or any similar legislation
will be passed during this session of Congress, cannot be determined with
certainty at this time.
Under the federal banking laws, a federally-insured institution is
prohibited from paying interest on its capital notes or debentures (if such
interest is required to be paid only out of net profits) or distributing any
of its capital assets while it remains in default in the payment of any
assessment due to the FDIC.
SAFETY AND SOUNDNESS STANDARDS
Effective August 9, 1995, the federal banking agencies published final
agency guidelines that establish safety and soundness standards addressing
operational and managerial, as well as compensation matters for insured
financial institutions like the Banks, as required by FDICIA. Banks failing to
meet these standards are required to submit compliance plans to their
appropriate federal regulators. On this same date, the agencies issued for
comment proposed guidelines regarding asset quality and earnings standards for
insured institutions.
INTERSTATE BANKING AND BRANCHING LEGISLATION
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("IBBEA"), authorizes interstate acquisitions of banks and bank holding
companies without geographic limitation. In addition, beginning June 1, 1997,
IBBEA authorizes a bank to merge with a bank in another state as long as
neither of the states has opted out of interstate branching between the date
of enactment of IBBEA and May 31, 1997. IBBEA further provides that states may
enact laws permitting interstate bank merger transactions prior to June 1,
1997. A bank may establish and operate a de novo branch in a state in which
the bank does not maintain a branch if that state expressly permits de novo
branching. Once a bank has established branches in a state through an
interstate
II-18
merger transaction, the bank may establish and acquire additional branches at
any location in the state where any bank involved in the interstate merger
transaction could have established or acquired branches under applicable
federal or state law. A bank that has established a branch in a state through
de novo branching may establish and acquire additional branches in such state
in the same manner and to the same extent as a bank having a branch in such
state as a result of an interstate merger. If a state opts out of interstate
branching within the specified time period, no bank in any other state may
establish a branch in the opting out state, whether through an acquisition or
de novo.
North Carolina has enacted an early opt-in law permitting interstate bank
merger transactions effective June 22, 1995. The North Carolina law permits de
novo branching on a reciprocal basis until June 1, 1997, and unrestricted de
novo branching thereafter. Virginia has enacted an early opt-in law permitting
interstate bank merger transactions effective July 1, 1995. The Virginia law
permits de novo branching on a reciprocal basis. At this time, South Carolina
has not enacted an early opt-in law.
EMPLOYEES
At December 31, 1995, Southern National had approximately 7,700 full-time-
equivalent employees.
PROPERTIES
Southern National and its significant subsidiaries occupy headquarters
offices that are either owned or operated under long-term leases and also own
free-standing operations centers in Wilson, Charlotte and Lumberton. Branch
office locations are variously owned or leased. The premises occupied by
Southern National and its subsidiaries are considered to be well-located and
suitably equipped to serve as financial service facilities.
II-19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of the financial condition and results
of operations of Southern National Corporation ("Southern National" or the
"Corporation") for each of the three years in the period ended December 31,
1995, and related financial information are presented in conjunction with the
consolidated financial statements and related notes to assist in the
evaluation of Southern National's 1995 performance.
On February 28, 1995, Southern National and BB&T Financial Corporation
("BB&T") merged in a transaction accounted for under the pooling-of-interests
method of accounting. The merger created the sixth largest bank holding
company in the Southeast and the 36th largest in the U.S. BB&T's acquisition
of Commerce Bank of Virginia Beach, Virginia ("Commerce") on January 10, 1995,
was also accounted for as a pooling-of-interests. Accordingly, all discussion
contained herein of prior results and future prospects is presented as if
Southern National, BB&T and Commerce were combined at the beginning of each
period presented. The results might have been different had the companies
actually been combined throughout the periods presented, and the financial
results presented are not necessarily indicative of future performance.
Certain adjustments have been made to conform accounting methodology, and
certain amounts for prior years have been reclassified to conform the
statement presentations. The primary adjustment required was to conform BB&T's
accounting for the adoption of a new accounting policy for postretirement
benefits other than pensions to that of Southern National. In adopting the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 106,
"Accounting for Postretirement Benefits Other Than Pensions," in 1993, BB&T
elected to amortize the accumulated postretirement obligation related to the
adoption over a period of 21 years, while Southern National elected to reflect
the adoption through the recording of a cumulative charge for this change in
accounting principle. In conforming BB&T's transition methodology to that
elected by Southern National, the cumulative charge resulting from a change in
accounting principle recorded in 1993 was increased by $7.0 million, net of
related income taxes, while noninterest expenses were reduced by $559,000 for
both 1994 and 1993.
Southern National incurred significant nonrecurring expenses during 1995
resulting from the merger with BB&T. These charges totaled $76.3 million,
after tax, and were comprised primarily of severance and other personnel
costs, branch closings and divestitures, merger and conversion costs and
consolidations of bank operations. See "Analysis of Results of Operations" for
additional discussion concerning the impact of these charges.
ANALYSIS OF FINANCIAL CONDITION
The economy's slower growth during 1995 was reflected in the banking
industry by moderate loan growth, tighter liquidity and declining interest-
rate spreads, while capitalization remained strong. Continued growth in loan
portfolios throughout the industry tightened liquidity at many institutions.
Liquidity for funding loan portfolio activities is typically derived from
deposits, borrowings or sales of assets such as securities. These trends have
created higher loan to deposit ratios throughout the industry. As market
interest rates decreased in 1995, the importance of deposits as a funding
source (and the value of related customer relationships as openings to offer
other products) kept many institutions from lowering deposit rates to the same
degree as decreases in market interest rates. This contributed to narrower
interest rate margins during the year.
For Southern National, average assets totaled $20.3 billion in 1995, an
increase of approximately 6.8% over the average of $19.0 billion in 1994.
Average assets grew 11.2% in 1994 compared to 1993. At the end of 1995, assets
totaled $20.5 billion.
The five-year compound rate of growth in average assets was 9.7%. Over the
same five-year period, the compound annual growth rates based on average
balances have been 9.0% for loans, 13.9% for securities and 6.6% for deposits.
All growth rates have been enhanced by the effects of acquisitions accounted
for as purchases.
II-20
- -------------------------------------------------------------------------------
TABLE 10
COMPOSITION OF AVERAGE TOTAL ASSETS
% CHANGE
---------------
1995 V. 1994 V.
1995 1994 1993 1994 1993
----------- ----------- ----------- ------- -------
(DOLLARS IN THOUSANDS)
Securities *............ $ 5,405,773 $ 5,350,982 $ 4,670,213 1 % 15 %
Federal funds sold and
other earning assets... 44,384 130,670 152,370 (66) (14)
Loans and leases, net of
unearned income **..... 13,640,565 12,360,633 11,177,299 10 11
----------- ----------- -----------
Average earning assets.. 19,090,722 17,842,285 15,999,882 7 12
Non-earning assets...... 1,182,306 1,133,525 1,067,159 4 6
----------- ----------- -----------
Average total assets.... $20,273,028 $18,975,810 $17,067,041 7 % 11 %
=========== =========== ===========
Average earning assets
as a percentage of
average total assets... 94.2% 94.0% 93.7%
=========== =========== ===========
- --------
* Based on amortized cost.
** Includes loans held for sale based on lower of amortized cost or market.
Amounts are gross of the allowance for loan and lease losses.
- -------------------------------------------------------------------------------
SECURITIES
The securities portfolios provide earnings and liquidity, as well as
providing an effective tool in managing interest rate risk. Management has
continued to emphasize investments with a maturity of five years or less
because of the changing interest rate environment and the strong economy of
the last two years. U.S. Treasury securities, which continue to comprise the
majority of the portfolio, provide adequate current yields with minimal risk
and maturities structured to address liquidity concerns.
During 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement, which was adopted
by Southern National as of January 1, 1994, addresses the accounting and
reporting of investments in equity securities that have readily determinable
fair values and all investments in debt securities. These investments are
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 depreciation or appreciation, net of tax, reported
as a separate component of shareholders' equity. Securities classified as held
to maturity are carried in the financial statements at amortized cost.
Securities classified as trading are carried at estimated fair value with
market adjustments, fees, gains or losses and interest income earned on the
securities recognized in current period earnings. Southern National engages in
securities trading transactions as a normal course of business, but had no
securities classified as trading at year end.
Securities decreased 1.3% in 1995 to a total of $5.4 billion at the end of
the year. This followed an increase of 3.8% in 1994.
Southern National historically has maintained a securities portfolio of 21-
25% of total assets. However, securities have been 25-28% of assets in recent
years because of reduced demand for loans. At the end of 1995, securities
represented 26% of assets. This percentage is lower than the prior year
balance of 27% because lower-yielding U.S. Treasuries have been allowed to
mature during the fourth quarter without reinvestment of the proceeds as
discussed below. Over the long term, Southern National expects the securities
portfolio to return to historic levels of 21-25% of total assets.
II-21
The market value of the available-for-sale portfolio was $51.2 million
greater than the amortized cost of these securities. At December 31, 1995,
Southern National's available-for-sale portfolio had net unrealized
appreciation, net of tax, of $31.2 million, which is reported as a separate
component of equity. Equity adjustments resulting from market valuation gains
and losses do not represent permanent increases or reductions in equity and
are not considered for purposes of calculating actual levels of risk-based
capital. If securities so designated are sold, then the actual gains or losses
realized are reported in current period earnings.
Market valuation gains or losses in the Corporation's held-to-maturity
category affect neither earnings nor capital since these securities are
carried at amortized cost. The Corporation's held-to-maturity securities
totaled $154.0 million at December 31, 1995, with net unrealized gains totaled
$5.9 million.
The fully taxable equivalent ("FTE") yield on the total securities portfolio
was 6.22% for the year ended December 31, 1995, compared to 5.85% for the year
ended December 31, 1994 and 6.43% for 1993.
During the first quarter of 1995, securities declined $196.6 million because
of a restructuring of the securities portfolio. This restructuring was
undertaken to conform the investment policies and portfolios of the combined
companies after merger. Mortgage-backed securities with average projected
maturities of approximately five years accounted for the majority of
securities sold. The balance was comprised of older, lower-yielding U.S.
Treasury and Federal agency securities with average maturities of three to
five years. The average combined yield at cost for securities sold was
approximately 6.00%. The total loss recognized on the sales was $19.8 million.
Reinvestment of the proceeds from the restructuring was accomplished during
the first and second quarters. U.S. Treasury and Federal agency securities
with average maturities of three years and average yields at cost of
approximately 7.00% were purchased.
The restructuring of the securities portfolio resulted in a shift in
portfolio holdings. The combined balance sheets of BB&T and SNB contained a
high concentration of mortgage-related assets, comprised of fixed-rate loans
and securities acquired as a result of acquisitions of thrift institutions
during the last few years. This concentration of mortgage-related assets had
become a significant factor on the balance sheets of both organizations. The
sale of mortgage-backed securities was, in part, carried out to reduce the
concentration of this type of asset on the balance sheet of the combined
organization. Mortgage-related assets typically have longer durations than
other bank assets and are generally more sensitive to changes in interest
rates. The replacement of these securities with U.S. Treasury and Federal
agency securities improved the mix of assets from both credit and interest
sensitivity measurements.
At December 31, 1995, the balance in the Corporation's available-for-sale
category was $5.2 billion, which represents approximately 97% of the entire
investment portfolio. This balance represents a 50% increase over the December
31, 1994 balance. This significant increase resulted from a fourth quarter
transfer of the bulk of Southern National's securities which were previously
classified as held to maturity into the available-for-sale category. The
Financial Accounting Standards Board ("FASB") provided enterprises with the
opportunity to make a one-time reassessment of the classification of all
investment securities held at that time, such that the reclassification of any
security from the held-to-maturity category would not call into question the
enterprise's intent to hold other debt securities to maturity in the future.
Management anticipates that this classification will allow more flexibility in
the day-to-day management of the overall portfolio than the prior
classifications.
During the fourth quarter of 1995, Southern National began to reshape the
balance sheet by changing the mix of investments held. The change in mix has
been undertaken to improve the overall interest yield of the securities
portfolio. This effort will continue into the first two quarters of 1996.
Lower-yielding U.S. Treasuries which matured during the quarter were not
reinvested in similar securities because many such securities have yields
below the current Federal funds rate and the advantages these investments
provided in prior years through reduced state taxes are currently less
beneficial for Southern National. This effort resulted in the runoff of
approximately $400 million in U.S. Treasuries during the quarter. The proceeds
from these maturities were used primarily to pay down overnight funds. These
securities were replaced in the portfolio by $301 million of longer-term
higher-yielding mortgage-backed securities which were obtained through the
securitization of a portion of Southern National's mortgage loan portfolio as
discussed in the "Loans and Leases" section.
II-22
Management expects interest rates to decrease somewhat, but remain mostly
stable throughout 1996. A major investment strategy for the first half of 1996
will be to continue to allow lower-yielding U.S. Treasuries to mature without
reinvestment in similar securities. Anticipated investment strategies include
continued emphasis on securitization of mortgage loans and retaining these
securities in the available for sale portfolio for the foreseeable future,
high quality U.S. Treasury and Federal agency securities, investment in short
and intermediate maturities, and a slight decline in the portion of securities
categorized as held to maturity. The Corporation's ALCO will continually
evaluate such strategies in consideration of actual economic and balance sheet
developments.
- -------------------------------------------------------------------------------
TABLE 11
SECURITIES
DECEMBER 31, 1995
--------------------------------
CARRYING VALUE AVERAGE YIELD (3)
-------------- -----------------
(DOLLARS IN THOUSANDS)
U.S. Treasury, government and agency
obligations (1)
Within one year............................ $2,028,045 5.93%
One to five years.......................... 2,238,489 6.55
Five to ten years.......................... 476,974 6.45
After ten years............................ 304,103 6.90
---------- ----
Total.................................... 5,047,611 6.31
---------- ----
States and political subdivisions
Within one year............................ 23,038 9.61
One to five years.......................... 91,633 8.89
Five to ten years.......................... 49,378 8.76
After ten years............................ 1,232 7.98
---------- ----
Total.................................... 165,281 8.94
---------- ----
Other securities
Within one year............................ 200 7.29
One to five years.......................... 3,238 9.15
Five to ten years.......................... 667 7.84
After ten years............................ -- --
---------- ----
Total.................................... 4,105 8.85
---------- ----
Securities with no stated maturity........... 138,316 9.15
---------- ----
Total securities (2)..................... $5,355,313 6.47%
========== ====
- --------
(1) Included in U.S. Treasury, government and agency obligations are mortgage-
backed securities totaling $977.7 million classified as available for sale
and disclosed 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 because of the monthly return of principal on certain securities.
(2) Includes securities held to maturity of $154.0 million disclosed at
amortized cost and securities available for sale of $5.2 billion disclosed
at estimated fair value.
(3) Taxable equivalent basis as applied to amortized cost.
- -------------------------------------------------------------------------------
LOANS AND LEASES
Net loans and leases totaled approximately $13.6 billion at the end of 1995.
This represented an increase of $704.0 million in 1995, following an increase
of $874.3 million in 1994. While the economy has expanded at a moderate rate
over the past two years, loan demand has not been as strong as might
historically be expected in a
II-23
growing economy. The long-range objective of Southern National is to maintain
a rate of internal growth which approximates that of its markets in the
Carolinas and Virginia. Southern National believes that this will result in a
rate of increase which will be sustainable and profitable.
During 1995, interest rates decreased slightly which led to an increase in
mortgage originations. The overall economic environment remained stable, with
mixed results from leading economic indicators. Consumer spending and
borrowing remained strong, while automobile sales, real income levels and new
job rates fell. 1995 was similarly a year of mixed results for Southern
National's market area. In addition to growth in mortgage loans, Southern
National has seen significant growth in more-profitable retail lending during
1995. Management anticipates continued growth in overall loan demand.
Southern National concentrated efforts on expanding the leasing function
throughout 1995. Municipal leasing, primarily tax-exempt leases with counties
and municipalities, was stronger than in the prior year. The leasing function
has developed numerous lease-based products and services that have been
effectively marketed to current Southern National customers and noncustomers.
The leasing subsidiary provides a quality stream of earnings. Lease
receivables, gross of unearned income, grew $71.6 million or 23.5% during
1995.
The acquisitions of thrift institutions completed in recent years have
created a concentration of mortgage loans in the portfolio higher than many of
Southern National's peers. As discussed in the "Securities" section, Southern
National securitized $301 million of fixed-rate mortgage loans during the
fourth quarter in an attempt to lower this concentration. Management plans to
securitize an additional $800 million during the first two quarters of 1996 to
continue this process.
ASSET QUALITY
The credit quality of the loan and lease portfolio remained relatively
constant during the first and second quarters of 1995, continuing favorable
trends in asset quality ratios since 1991. As reflected in Table 12--"Asset
Quality," nonperforming assets ("NPA's") were $68.4 million at year end, up
$9.2 million or 15.5% for the year. As a percentage of total assets, NPA's
increased from .30% at December 31, 1994 to .33% at current year end. As a
percentage of loans plus foreclosed properties, NPA's increased from .45% to
.49%. The allowance for losses as a percentage of loans and leases was 1.25%
at December 31, 1995, compared to 1.31% at December 31, 1994. Certain asset
quality measures deteriorated somewhat during the third and fourth quarters of
1995. The increases in nonperforming assets and the corresponding increases in
net charge-offs during the quarters reflect a reorganization of the
collections function which resulted from the merger of Southern National and
BB&T. Also, Southern National's asset quality ratios have been unusually
strong compared to historic norms. Increases in net charge-offs to a more
normalized level were expected by management as segments of the overall
economy softened during the second half of 1995. Loans 90 days or more past
due and still accruing interest increased slightly during 1995 to a balance of
$29.1 million compared to a December 31, 1994 balance of $24.2 million.
Southern National assigns risk grades to all commercial loans in the
portfolio. This assignment of loans to one of ten categories is based upon the
relative strength of the repayment source. All significant loans in the four
highest risk grades are reviewed monthly for appropriateness of risk grade,
accrual status and loss reserves.
II-24
The following table reflects relevant asset quality information for Southern
National for the most recent three years.
- -------------------------------------------------------------------------------
TABLE 12
ASSET QUALITY
DECEMBER 31,
-------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
Nonaccrual loans and leases......................... $61,489 $47,039 $61,737
Foreclosed property................................. 6,868 12,153 23,510
------- ------- -------
Nonperforming assets................................ $68,357 $59,192 $85,247
======= ======= =======
Loans 90 days or more past due and still accruing... $29,094 $24,224 $21,741
======= ======= =======
ASSET QUALITY RATIOS
Nonaccrual loans and leases as a percentage of
loans and leases................................. 0.45% 0.36% 0.50%
Nonperforming assets as a percentage of:
Total assets.................................... 0.33 0.30 0.45
Loans and leases plus foreclosed property....... 0.49 0.45 0.70
Net charge-offs as a percentage of average loans
and leases....................................... 0.23 0.13 0.31
Allowance for losses as a percentage of loans and
leases........................................... 1.25 1.31 1.38
Ratio of allowance for losses to:
Net charge-offs................................. 5.56X 10.36x 4.88x
Nonaccrual loans and leases..................... 2.80 3.65 2.74
- --------
NOTE: Items referring to loans and leases are net of unearned income, gross of
the allowance and include loans held for sale.
- -------------------------------------------------------------------------------
DEPOSITS AND OTHER BORROWINGS
Average deposits remained fairly stable at $14.3 billion, following an
increase of approximately 5.6% in 1994. End of period interest-bearing
deposits increased approximately $327.2 million in 1995 to a balance of $12.8
billion while non-interest bearing demand deposits increased $42.7 million to
$1.9 billion.
Core deposits compose Southern National's primary funding source, but
management also uses short-term borrowed funds, primarily Federal funds
purchased and repurchase agreements, to meet funding needs. Management also
employs long-term debt for additional funding. Southern National's average
short-term borrowed funds increased $733.8 million during 1995, while average
long-term debt increased $450.3 million. These increases were necessary
because of strong loan demand and a lack of growth in average deposits. The
rates on short-term borrowed funds are primarily floating and typically
indexed to various money market rates compared to loans which are largely
based on the prime rate. Remaining borrowings and sales of available-for-sale
securities were used to increase holdings of investment securities.
During the quarters immediately following the merger of Southern National
and BB&T, management adopted aggressive pricing strategies for loans and
deposits in an effort to protect the customer base of the new bank. While
these tactics proved successful in maintaining valuable customer
relationships, they also contributed to the compression in net interest margin
from 4.29% during 1994 to 4.05% during 1995. Also, the use of funding sources
other than deposits placed additional pressure on the net interest margin. In
an effort to control the cost of funds during 1996, management has developed a
$2 billion bank note program to ease the reliance on shorter-term funding.
Management has also emphasized the use of brokered deposits, Federal Home Loan
Bank ("FHLB") advances and foreign deposits instead of short-term borrowed
funds. FHLB advances are among the most cost-effective and most convenient
alternative funding sources because such funds are fully securitized by
II-25
mortgage loans. While brokered deposits and foreign deposits still compose a
small portion of total deposits, these sources of funds are also more cost-
effective than other nondeposit sources.
Southern National faces an ongoing challenge in attracting new deposits and
other core funds as competition from both financial and non-financial
institutions continues to increase. Trends during 1995 have been encouraging
as Southern National maintained and increased the number of customer accounts
during the conversion process.
Southern National continually considers liquidity needs in evaluating
funding sources. The ultimate goal is to maintain funding flexibility, which
will allow Southern National to react rapidly to opportunities brought about
by growth and market volatility.
- -------------------------------------------------------------------------------
TABLE 13
COMPOSITION OF AVERAGE DEPOSITS AND OTHER BORROWINGS
% CHANGE
-----------
1995 1994
V. V.
1995 1994 1993 1994 1993
--------------- --------------- --------------- ---- ----
(DOLLARS IN THOUSANDS)
Savings deposits........ $ 2,854,827 15% $ 3,433,750 20% $ 2,908,944 19% (17)% 18%
Money market deposits... 1,935,157 11 1,971,263 11 2,039,937 13 (2) (3)
Time deposits........... 7,715,365 42 7,155,207 42 7,040,758 45 8 2
----------- --- ----------- --- ----------- ---
Total interest-bearing
deposits............... 12,505,349 68 12,560,220 73 11,989,639 77 -- 5
Demand deposits......... 1,745,827 9 1,738,508 10 1,556,411 10 -- 12
----------- --- ----------- --- ----------- ---
Total deposits.......... 14,251,176 77 14,298,728 83 13,546,050 87 -- 6
Short-term borrowed
funds.................. 3,055,180 17 2,321,379 13 1,349,156 9 32 72
Long-term debt.......... 1,127,575 6 677,227 4 597,519 4 66 13
----------- --- ----------- --- ----------- ---
Total deposits and other
borrowings............. $18,433,931 100% $17,297,334 100% $15,492,725 100% 7% 12%
=========== === =========== === =========== === === ===
- -------------------------------------------------------------------------------
ANALYSIS OF RESULTS OF OPERATIONS
Consolidated net income for 1995 totaled $178.1 million, which produced
primary earnings per share of $1.66 and fully diluted earnings per share of
$1.64. Net income was $236.9 million in 1994 and $85.8 million in 1993. In
1993, income before the cumulative effect of changes in accounting principles,
net of income taxes, totaled $120.1 million. Primary earnings per share were
$2.26 in 1994 and $.81 in 1993, while fully diluted per share earnings were
$2.21 and $.81, respectively. Before the cumulative effect of changes in
accounting principles in 1993, both primary and fully diluted per share
earnings were $1.16.
The cumulative effect of changes in accounting principles, net of related
income taxes, recorded in 1993 included $12.6 million to record the
accumulated postretirement obligation related to the adoption of SFAS No. 106,
and $28.0 million as a result of the adoption of SFAS No. 72, "Accounting For
Certain Acquisitions of Banking and Thrift Institutions," by a merged company,
less a $6.4 million benefit resulting from the adoption of SFAS No. 109,
"Accounting for Income Taxes," implemented as of January 1, 1994.
The returns on average assets were .88% for 1995, 1.25% for 1994 and .50%
for 1993. For the same years, the returns on average common equity were
11.56%, 16.88% and 6.19%, respectively.
The decrease in earnings during 1995 was caused by $108.0 million in pretax
nonrecurring charges related to the merger between Southern National and BB&T
and $19.8 million in securities losses resulting from the restructuring of the
securities portfolio discussed in the "Analysis of Financial Condition"
section, which was offset by a $12.3 million gain on the sale of divested
deposits made necessary by the merger. The net after-tax
II-26
impact of these nonrecurring items and securities losses was to reduce net
income by $76.3 million. A brief description of the nature of the nonrecurring
items is presented below:
(INCREASE)
DECREASE IN
INCOME
YEAR-TO-DATE
----------------------
(DOLLARS IN THOUSANDS)
Other service charges, commissions and fees...... $ 470
Other noninterest income (premium on divested
deposits)....................................... (12,294)
Securities losses................................ 19,787
Personnel expense................................ 59,771
Occupancy expense................................ 3,690
Furniture and equipment expense.................. 6,668
Other noninterest expense........................ 37,358
Income taxes (pre-tax equivalent)*............... 4,566
--------
Total.......................................... $120,016
========
Total--net of tax.............................. $ 76,331
========
- --------
* Recapture of tax bad debt reserve.
Excluding nonrecurring items and securities losses, Southern National would
have had net income of $254.5 million, or $2.34 per fully diluted share. This
represents a $17.6 million or 7.4% increase over earnings from the prior year.
Recurring earnings for 1995 provided returns of 1.26% on average assets and
16.65% on average common shareholders' equity.
At December 31, 1995, approximately $37.9 million of the total pretax amount
of nonrecurring items had not yet been incurred and are reflected on the
Consolidated Balance Sheets as accrued liabilities of $28.8 million relating
to termination of employee contracts and severance and $9.1 million of other
accrued liabilities.
NET INTEREST INCOME
Net interest income is Southern National's primary source of revenue. The
amount of net interest income is determined based on a number of factors,
including the volume of interest-earning assets and interest-bearing
liabilities and the interest rates earned and paid to obtain the asset-
generating funds. The difference between rates earned on interest-earning
assets (with an adjustment made to tax-exempt income to provide comparability
with taxable income) and the cost of supporting funds is measured by the net
yield on earning assets. The accompanying table presents the dollar amount of
changes in interest income and interest expense and distinguishes between the
changes related to average outstanding balances of interest-earning assets and
interest-bearing liabilities (volume) and the changes related to average
interest rates on such assets and liabilities (rate). Changes attributable to
both volume and rate have been allocated proportionately.
II-27
TABLE 14
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE
----------------------------------- ---------------- -------------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------
FULLY TAXABLE EQUIVALENT--(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury, government and other (5)...... $ 5,235,169 $ 5,171,260 $ 4,469,880 6.13% 5.74% 6.28% $ 320,950 $ 296,933 $ 280,541
States and political subdivisions............ 170,604 179,722 200,333 8.94 9.08 9.97 15,255 16,323 19,978
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------
Total securities (5)....................... 5,405,773 5,350,982 4,670,213 6.22 5.85 6.43 336,205 313,256 300,519
Other earning assets (2)..................... 44,384 130,670 152,370 5.75 3.97 2.89 2,552 5,184 4,410
Loans and leases, net of unearned
income (1)(3)(4)(5)......................... 13,640,565 12,360,633 11,177,299 9.10 8.31 8.24 1,241,954 1,027,693 921,235
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------
Total earning assets....................... 19,090,722 17,842,285 15,999,882 8.28 7.54 7.66 1,580,711 1,346,133 1,226,164
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------
Non-earning assets......................... 1,182,306 1,133,525 1,067,159
----------- ----------- -----------
Total assets.............................. $20,273,028 $18,975,810 $17,067,041
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings deposits............................ $ 2,854,827 $ 3,433,750 $ 2,908,944 2.28 2.19 2.42 65,202 75,125 70,507
Money market deposits....................... 1,935,157 1,971,263 2,039,937 3.29 2.73 2.65 63,665 53,874 54,028
Time deposits............................... 7,715,365 7,155,207 7,040,758 5.55 4.37 4.31 428,282 312,877 303,659
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------
Total interest-bearing deposits............ 12,505,349 12,560,220 11,989,639 4.46 3.52 3.57 557,149 441,876 428,194
Short-term borrowed funds.................... 3,055,180 2,321,379 1,349,156 5.85 4.24 3.23 178,879 98,476 43,608
Long-term debt............................... 1,127,575 677,227 597,519 6.26 6.04 5.76 70,599 40,927 34,390
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------
Total interest-bearing liabilities......... 16,688,104 15,558,826 13,936,314 4.83 3.74 3.63 806,627 581,279 506,192
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------
Demand deposits............................ 1,745,827 1,738,508 1,556,411
Other liabilities.......................... 269,128 231,864 197,370
Shareholders' equity....................... 1,569,969 1,446,612 1,376,946
----------- ----------- -----------
Total liabilities and shareholders'
equity................................... $20,273,028 $18,975,810 $17,067,041
=========== =========== ===========
Average interest rate spread................. 3.45 3.80 4.03
Net yield on earning assets.................. 4.05% 4.29% 4.50% $ 774,084 $ 764,854 $ 719,972
==== ==== ==== ========== ========== =========
Taxable equivalent adjustment................ $ 32,535 $ 28,088 $ 26,456
========== ========== =========
1995 V. 1994 1994 V. 1993
---------------------------- ----------------------------
CHANGE DUE TO CHANGE DUE TO
INCREASE ----------------- INCREASE -----------------
(DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
---------- -------- ------- ---------- -------- -------
FULLY TAXABLE EQUIVALENT--(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury, government and other (5)......... $24,017 $ 20,309 $ 3,708 $16,392 $(25,199) $41,591
States and political subdivisions............... (1,068) (250) (818) (3,655) (1,698) (1,957)
-------- -------- ------- ------- -------- -------
Total securities (5)........................... 22,949 20,059 2,890 12,737 (26,897) 39,634
Other earning assets (2)......................... (2,632) 1,706 (4,338) 774 1,467 (693)
Loans and leases, net of unearned
income (1)(3)(4)(5)............................. 214,261 102,569 111,692 106,458 8,138 98,320
-------- -------- ------- ------- -------- -------
Total earning assets........................... 234,578 124,334 110,244 119,969 (17,292) 137,261
-------- -------- ------- ------- -------- -------
Non-earning assets.............................
Total assets..................................
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings deposits................................ (9,923) 3,184 (13,107) 4,618 (7,298) 11,916
Money market deposits........................... 9,791 10,794 (1,003) (154) 1,695 (1,849)
Time deposits................................... 115,405 89,425 25,980 9,218 4,245 4,973
-------- -------- ------- ------- -------- -------
Total interest-bearing deposits................ 115,273 103,403 11,870 13,682 (1,358) 15,040
Short-term borrowed funds........................ 80,403 43,901 36,502 54,868 16,595 38,273
Long-term debt................................... 29,672 1,526 28,146 6,537 1,783 4,754
-------- -------- ------- ------- -------- -------
Total interest-bearing liabilities............. 225,348 148,830 76,518 75,087 17,020 58,067
-------- -------- ------- ------- -------- -------
Demand deposits................................
Other liabilities..............................
Shareholders' equity...........................
Total liabilities and shareholders' equity....
Average interest rate spread.....................
Net yield on earning assets...................... $ 9,230 $(24,496) $33,726 $44,882 $(34,312) $79,194
======== ======== ======= ======= ======== =======
Taxable equivalent adjustment....................
- ----
(1) Yields related to securities, loans and leases exempt from both federal
and state income taxes, federal income taxes only or state income taxes
only are stated on a taxable equivalent basis assuming tax rates in effect
for the periods presented.
(2) Includes Federal funds sold and securities purchased under resale
agreements or similar arrangements.
(3) Loan fees, which are not material for any of the periods shown, have been
included for rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances.
(5) Includes assets which were held for sale or available for sale at
amortized cost.
II-28
For 1995, net interest income represented 76.6% of net revenues (net
interest income plus noninterest income), compared with 76.5% in 1994 and
75.9% in 1993.
Net interest income totaled $741.5 million in 1995, compared with $736.8
million in 1994 and $693.5 million in 1993. There was compression both in the
interest rate spread and margin in 1995. Accordingly, the growth in net
interest income in 1995 and 1994 was primarily a result of growth in average
earning assets.
The taxable equivalent net yield on average earning assets is a primary
measure used in evaluating the effectiveness of the management of earning
assets and funding liabilities. The net yield on average earning assets was
4.05% in 1995, 4.29% in 1994 and 4.50% in 1993. The margin decline during the
past year was caused by aggressive pricing strategies for loans and deposits
in an effort to protect the customer base following conversion.
Southern National uses synthetic instruments commonly known as derivatives
to hedge specified assets and liabilities. These hedges contributed net
interest expense of $10.3 million in 1995, compared with net interest income
of $900,000 in 1994 and $17.1 million in 1993. See "Balance Sheet
Repositioning" for additional discussion of hedging activities.
PROVISION FOR LOAN AND LEASE LOSSES
An annual provision for loan and lease losses is charged against earnings in
order to maintain the allowance for loan and lease losses at a level
considered adequate by management to absorb potential losses existing in the
loan portfolio. The provision recorded by Southern National in 1995 was $31.4
million, compared with $17.8 million in 1994 and $53.3 million in 1993.
Southern National has experienced unusually strong asset quality and has
experienced very low levels of net charge-offs since 1991. During the second
half of 1995, many asset quality ratios returned to historically normal
levels. As a result, Southern National increased its provision for loan and
lease losses during 1995. This increase was necessary to maintain an adequate
allowance for loan and lease losses. At December 31, 1995, the allowance stood
at 1.25% of loans and leases outstanding and the coverage ratio of nonaccrual
loans and leases was at 2.80 times. These amounts decreased slightly from the
1994 amounts of 1.31% and 3.65 times, respectively.
NONINTEREST INCOME
Noninterest income includes service charges on deposit accounts, trust
revenues, mortgage banking revenues, insurance commissions, gains and losses
on securities transactions, and other commissions and fees derived from
banking and bank-related activities. Over the past five years, noninterest
income has grown at a compound annual rate of 10.5%.
Noninterest income for 1995 totaled $226.4 million, compared with $226.0
million in 1994 and $220.3 million in 1993. Securities losses of $18.6 million
were the primary factor contributing to the flat rate of growth in noninterest
income during 1995. The securities losses were composed primarily of the $19.8
million losses incurred in the first quarter in association with the
securities restructuring discussed in the "Analysis of Financial Condition."
The impact of these securities losses was offset to an extent by a $12.3
million gain on the sale of divested deposits reflected in the table above.
This divestiture was necessary because of antitrust regulations associated
with the Southern National merger with BB&T.
The percentage of total revenues, calculated as net interest income plus
noninterest income excluding securities gains or losses, derived from
noninterest (fee-based) income for 1995 was 25.6%, up from 23.7% 1994.
Service charges on deposit accounts represent the largest single source of
noninterest revenue. Such revenues totaled $89.6 million in 1995, an increase
of $4.5 million or 5.3% from 1994, which in turn represented an increase of
$3.0 million or 3.6% from 1993. Deposit services are repriced annually to
reflect current costs and
II-29
competitive factors. The primary factor contributing to the relatively slow
growth in service charges on deposit accounts is the decline in transaction
accounts and the flat growth in total deposits.
Mortgage banking income (which includes servicing fees and profits and
losses from the origination and sale of loans reduced by the amortization of
excess servicing fees receivable) increased $1.5 million or 6.0% to a total of
$26.4 million for 1995. Mortgage banking income totaled $24.9 million in 1994
and $25.1 million in 1993. As discussed in "Note G to the Consolidated
Financial Statements," mortgage banking income was positively affected by the
adoption of SFAS No. 122 during 1995. The implementation of the statement
increased pretax mortgage banking income $7.0 million for the year. Excluding
the impact of the adoption of SFAS No. 122, income from mortgage banking
activities would have decreased $5.1 million, because Southern National
experienced losses from the sale of mortgage loans. Southern National recorded
gains from the origination and sale of mortgages totaling approximately $5.1
million in 1995, including the impact of SFAS No. 122, and losses of $2.0
million in 1994. The 1993 results of operations include the amortization of
$3.9 million of mortgage servicing rights to conform the accounting policies
of certain acquired entities to those of Southern National. Southern National
originated approximately $2.0 billion in home mortgage loans during 1995 and
1994 and $3.0 billion in 1993. The decrease since 1993 is because home
mortgage interest rates were unusually low in 1993, and, as a result,
originations were heavy as homeowners prepaid existing mortgages and
refinanced with new mortgages.
General insurance commissions increased approximately $1.7 million or 12.6%
in 1995 to a total of $15.6 million. General insurance commissions totaled
$13.8 million in 1994 and $11.2 million in 1993. The insurance agencies have
become an increasingly important source of noninterest revenue, and this trend
is expected to accelerate in the future. The network of insurance agencies has
been expanded through acquisitions in recent years. Southern National intends
to continue to expand its insurance agency operations through both
acquisitions and internally generated growth.
The offering of trust services has been a traditional service of both
Southern National and BB&T. Trust revenues from corporate and personal trust
services totaled $18.6 million in 1995. This was an increase of $1.4 million
or 8.4% over the revenues of $17.2 million in 1994, which in turn was an
increase of $2.1 million or 14.3% over the $15.0 million earned in 1993.
Managed assets totaled $4.5 billion at the end of 1995. A strong effort is
being made to expand the corporate trust business, particularly employee
benefit plans. Southern National also offers its own family of mutual funds.
Southern National now manages seven mutual funds, which provide investment
alternatives both for trust clients and for other customers. The broker/dealer
subsidiaries are the principal marketing agents of Southern National's
proprietary mutual funds.
Other nondeposit fees and commissions increased by $6.0 million to a level
of $60.9 million in 1995 compared with $54.9 million for 1994. Major sources
of nondeposit fees and commissions generating the increase were bankcard
income, up $5.6 million from the prior year balance, and bank service fees and
commissions, which increased $3.4 million during 1995. Bank service fees and
commissions include, among other items, investment brokerage income, debit
card interchange fees, safe deposit box rent and rental income from operating
leases.
In recent years both Southern National and BB&T established broker/dealer
subsidiary corporations. Both began to take a more active role in selling
various securities to their customers, with an emphasis being placed on the
sale of fixed-rate debt securities, shares of proprietary mutual funds and
annuities.
Other income was up $6.8 million or 25.2% for 1995 because of a gain
realized during the second quarter on the divestiture of deposits which was
undertaken to comply with antitrust restrictions following the Southern
National merger with BB&T. Excluding the impact of this gain, other income
decreased $5.5 million because of losses on sales of fixed assets. Other
income for 1993 was $26.3 million.
The ability to generate significant additional amounts of noninterest
revenues in the future will be a requisite to the ultimate success of Southern
National. Through its subsidiaries, Southern National will focus on four
II-30
primary areas--mortgage banking, trust, insurance and investment brokerage
activities. An important element of the merger of Southern National and BB&T
was the additional marketing capability provided by merging the operations of
the banks and the ability to cross-sell the stronger services of the existing
banks to the customers of the other banks.
- -------------------------------------------------------------------------------
TABLE 15
NONINTEREST INCOME
% CHANGE
---------------
1995 V. 1994 V.
1995 1994 1993 1994 1993
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
Service charges on deposit ac-
counts............................ $ 89,621 $ 85,106 $ 82,143 5% 4%
-------- -------- --------
General insurance fees and commis-
sions............................. 15,572 13,830 11,168 13 24
Trust fees......................... 18,629 17,180 15,034 8 14
Mortgage banking activities........ 26,408 24,920 25,116 6 (1)
Other fees and commissions......... 60,869 54,891 43,752 11 25
-------- -------- --------
Total nondeposit fees and
commissions..................... 121,478 110,821 95,070 10 17
-------- -------- --------
Securities (losses) gains, net..... (18,600) 3,074 16,841 NM NM
Other income....................... 33,851 27,046 26,264 25 3
-------- -------- --------
Total noninterest income......... $226,350 $226,047 $220,318 --% 3%
======== ======== ======== === ===
- --------
NM--not meaningful.
- -------------------------------------------------------------------------------
NONINTEREST EXPENSE
Noninterest expense for 1995 increased $89.0 million or 15.3% to a total of
$672.3 million. This followed a decrease of 12.0% in 1994. Certain material
nonrecurring costs and expenses related to merger of Southern National and
BB&T were recorded in 1995, as discussed above. Special accruals and expenses
related to mergers also led to an elevated level of noninterest expense in
1993. The acquisitions of seven savings associations in 1994 and two in 1993
were accounted for as purchases, and, accordingly, prior period history for
these institutions was not restated.
Total personnel expense increased $48.8 million or 16.6% in 1995 compared to
1994. This increase was 4.9% in 1994. The increase during 1995 reflects $59.8
million of nonrecurring merger-related costs. These costs include severance
pay, termination of employment contracts, early retirement packages and other
related benefits. Excluding these nonrecurring charges, total personnel
expense, the largest component of noninterest expense, decreased $11.0 million
to $282.4 million. This decline reflected staff reductions and efficiencies of
scale accomplished as a result of the Southern National/BB&T merger.
Premiums paid to the FDIC for deposit insurance decreased $9.7 million or
29.7% to a total of $23.0 million for 1995. For 1994, the expense increased
$2.0 million or 6.4%. The rate increased from an annual rate of $.12 per $100
of deposits in 1990 to $.23 per $100 of deposits for the period beginning July
1, 1991. However, in 1995, the FDIC reduced the rates paid from $.23 per $100
to $.04 on deposits insured by the Bank Insurance Fund. On January 1, 1996,
the FDIC eliminated the deposit insurance premium. Combined with continued
flat deposit growth, this rate decrease resulted in significant savings on
deposit insurance premiums during the third and fourth quarters of 1995.
Legislation has been proposed that would result in the payment of a one-time
assessment by financial institutions with deposits insured by the Savings
Association Insurance Fund (SAIF). Because of numerous
II-31
acquisitions of thrift institutions, approximately 40% of Southern National's
deposits are SAIF-insured. The one-time assessment rate, to be determined by
the FDIC, is expected to be $.80 per $100 of deposits. Commercial banks with
SAIF-insured deposits acquired from thrifts will likely be allowed a reduction
of 20% of the assessment base. This adjustment would be available only to
banks which had less than 50% of their total deposits in the SAIF at June 30,
1995. The pre-tax impact of this one-time assessment on Southern National is
anticipated to be approximately $40.3 million. Southern National will record
this expense when the legislation is enacted.
Net occupancy expense totaled $48.5 million in 1995. This represented an
increase of $4.7 million or 10.8% over the expense of $43.8 million incurred
in 1994, which in turn was 2.8% greater than the expense of $42.6 million
recorded in 1993. Furniture and equipment expense totaled $58.7 million in
1995, compared with $44.3 million in 1994 and $47.5 million in 1993. These
increases reflected in 1995 include $10.4 million of nonrecurring charges
relating to branch closings and the consolidation of bank operations and
systems associated with the Southern National/BB&T merger. Combined occupancy
and equipment expense, excluding nonrecurring charges, for the year increased
$8.7 million or 9.9%, compared to 1994. On-going depreciation of property and
equipment purchased in connection with implementing the merger was a major
component of the increase.
Other noninterest expense increased $30.8 million from 1994 to 1995,
primarily as a result of merger-related expenses. These expenses included
operational charge-offs, branch and departmental supplies, donations, legal
fees, accounting fees, printing costs, regulatory filing fees and professional
services. Excluding the impact of these charges, other noninterest expenses
decreased $6.5 million or 3.9%, primarily because of efficiencies achieved
from the merger.
- -------------------------------------------------------------------------------
TABLE 16
NONINTEREST EXPENSE
% CHANGE
---------------
1995 V. 1994 V.
1995 1994 1993 1994 1993
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
Salaries............................ $282,213 $237,356 $236,034 19 % 1 %
Employee benefits................... 59,987 56,077 53,453 7 5
-------- -------- --------
Total personnel expense........... 342,200 293,433 289,487 17 1
-------- -------- --------
Net occupancy expense............... 48,501 43,775 42,597 11 3
Furniture and equipment expense..... 58,657 44,299 47,510 32 (7)
-------- -------- --------
Total occupancy and equipment
expense.......................... 107,158 88,074 90,107 22 (2)
-------- -------- --------
Federal deposit insurance expense... 22,995 32,697 30,730 (30) 6
Loss on bulk sale of assets......... -- -- 49,147 NM NM
Other expense....................... 199,950 169,132 203,773 18 (17)
-------- -------- --------
Total noninterest expense......... $672,303 $583,336 $663,244 15 % (12)%
======== ======== ======== === ===
- --------
NM--not meaningful.
- -------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES
The maximum combined incremental federal and state statutory tax rate for
Southern National was 40.04%. Because of its investments in tax-exempt loans
and securities and certain tax planning strategies, the effective tax rates
were 32.6% in 1995, 34.5% in 1994 and 39.1% in 1993. The effective tax rate
was higher in 1993 due to the recapture of tax bad debt reserves by merged
savings institutions.
II-32
Southern National adopted the provisions of SFAS No. 109 in 1993. The
adoption of the provisions of this statement necessitated a change from the
deferral method of accounting for income taxes to the asset and liability
method. The objective of the asset and liability method is to establish
deferred tax assets and liabilities for the temporary differences between the
financial reporting basis and the tax basis of pretax income at enacted tax
rates expected to be in effect when such amounts are realized or settled. The
change in accounting method enabled Southern National to record a tax benefit
of approximately $6.4 million as the cumulative effect of changes in
accounting principles. The increase in the federal tax rate from 34% to 35% in
1993 had no material impact on Southern National.
ASSET/LIABILITY MANAGEMENT
Asset/liability management activities are designed to achieve relatively
stable net interest margins and assure liquidity by coordinating the volumes,
maturities or repricings and interest rate sensitivities of earning assets,
deposits and borrowed funds. It is the responsibility of the Asset/Liability
Management Committee ("ALCO") to determine and achieve the most appropriate
size and mix of earning assets and interest-bearing liabilities, as well as
ensure an adequate level of liquidity and capital, while achieving desired
growth in earnings and total assets. The ALCO also sets policy guidelines and
establishes long-term strategies with respect to interest rate exposure and
liquidity. The ALCO meets regularly to review Southern National's interest
rate and liquidity risk exposures in relation to present and prospective
market and business conditions, and adopts funding and balance sheet
management strategies that are intended to assure that the potential impact on
earnings and liquidity of fluctuations in interest rates 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.
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
securities, repayment of loans and growth in core deposits. Federal funds
purchased, repurchase agreements and other short-term borrowed funds
supplement these traditional sources. Management believes liquidity obtainable
from these sources is adequate to meet current requirements.
Total cash and cash equivalents increased to $702.8 million at December 31,
1995 compared to $671.8 million in 1994 and $859.6 million in 1993. Net cash
provided by operating activities for the year decreased from $500.7 million to
$225.8 million. Cash provided by operating activities in 1993 was $346.9
million. The 1995 decrease was primarily the result of significantly higher
net income in the prior year and increases in 1995 in purchases and
originations of loans held for sale, offset by increases in proceeds from
sales of loans held for sale. Net cash flows used in investing activities
decreased from $1.5 billion in 1994 to $527.3 million in 1995. Cash used in
investing activities during 1993 was $1.7 billion. The primary factor creating
the $975.3 million
II-33
decline in cash flows used in investing activities during 1995 was a $710.8
million decrease in loan originations, net of principal collected. Activity in
securities added $454.8 million more to cash flows in 1995 compared to 1994.
Cash flows provided by financing activities decreased from $814.0 million to
$332.5 million because of a $1.5 billion decrease in net cash flows related to
short-term borrowed funds, offset by a $650.7 million increase in the net cash
provided by deposits compared to 1994 and a net increase of $399.7 million in
long-term debt activity. In 1993, Southern National's net cash flows provided
from financing activities were $1.4 billion.
BALANCE SHEET REPOSITIONING
Southern National uses off-balance sheet financial instruments to manage
interest rate sensitivity and net interest income. These instruments, commonly
referred to as derivatives, primarily consist of interest rate swaps and
collars, floors and ceilings.
Derivatives contracts are written in amounts referred to as notional
amounts. Notional amounts do not represent amounts to be exchanged between
parties and are not a measure of financial risks, but only provide the basis
for calculating payments between the counterparties. On December 31, 1995,
Southern National had outstanding derivatives contracts with notional amounts
totaling $743.4 million. The estimated fair value of open contracts used for
asset/liability management purposes at December 31, 1995, reflected pretax net
unrealized losses of $6.1 million.
The derivatives used at Southern National provide for the exchange of
interest payments between counterparties--either variable for fixed or fixed
for variable. Thus, credit risk arises when amounts receivable from a
counterparty exceed those payable. The risk of loss with any counterparty is
limited to a small fraction of the notional amount. Southern National deals
only with national market makers with strong credit ratings in its derivatives
activities. Southern National further controls the risk of loss by subjecting
counterparties to credit reviews and approvals similar to those used in making
loans and other extensions of credit. All of the derivatives contracts to
which Southern National is a party settle monthly, quarterly or semiannually.
Accordingly, the amount of off-balance sheet credit exposure to which Southern
National is exposed at any time is immaterial. Further, Southern National has
netting agreements with the dealers with which it does business. Because of
these netting agreements, Southern National had a minimal amount of off-
balance sheet credit exposure at December 31, 1995.
Southern National's interest rate sensitivity is illustrated in the
following interest rate sensitivity gap table. The table reflects rate-
sensitive positions at December 31, 1995, and is not necessarily reflective of
positions throughout each year. The carrying amounts of interest-rate-
sensitive assets and liabilities and the notional amounts of swaps and other
derivative financial instruments are presented in the periods in which they
next reprice to market rates or mature and are aggregated to show the interest
rate sensitivity gap. To reflect anticipated prepayments, certain asset and
liability categories are included in the table based on estimated rather than
contractual maturity dates.
II-34
- -------------------------------------------------------------------------------
TABLE 17
INTEREST RATE SENSITIVITY GAP ANALYSIS
DECEMBER 31, 1995
EXPECTED REPRICING OR MATURITY DATE
-------------------------------------------------------------------------------------------
WITHIN ONE TO TWO TO AFTER FIVE
ONE YEAR TWO YEARS FIVE YEARS YEARS TOTAL
----------------- ----------------- ---------------- ----------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- ---- ----------- ---- ---------- ---- ---------- ----- ----------- ----
(DOLLARS IN THOUSANDS)
ASSETS
Securities and other
interest-earning
assets*............... $ 2,027,791 6.02% $ 697,084 6.54% $2,085,758 6.71% $ 494,672 7.16% $ 5,305,305 6.47%
Federal funds sold..... 118,977 5.50 -- -- -- -- -- -- 118,977 5.50
Loans and leases....... 8,743,557 8.98 1,456,900 8.35 2,558,912 8.23 1,053,116 10.43 13,812,485 8.89
----------- ---- ----------- ---- ---------- ---- ---------- ----- ----------- ----
TOTAL INTEREST-EARNING
ASSETS................. 10,890,325 2,153,984 4,644,670 1,547,788 19,236,767
----------- ---- ----------- ---- ---------- ---- ---------- ----- ----------- ----
LIABILITIES
Time deposits.......... 6,476,175 5.55 1,014,498 6.14 654,955 6.35 11,405 3.95 8,157,033 5.69
Savings and interest
checking**............ -- -- 954,893 2.18 318,298 2.18 318,297 2.18 1,591,488 2.18
Money market
accounts**............ 1,524,905 3.51 1,524,905 3.51 -- -- -- -- 3,049,810 3.51
Federal funds
purchased............. 1,501,682 5.52 -- -- -- -- -- -- 1,501,682 5.52
Other borrowings....... 2,094,425 5.30 87,093 7.56 191,001 6.49 1,019 9.26 2,373,538 5.48
----------- ---- ----------- ---- ---------- ---- ---------- ----- ----------- ----
TOTAL INTEREST-BEARING
LIABILITIES............ 11,597,187 3,581,389 1,164,254 330,721 16,673,551
----------- ----------- ---------- ---------- -----------
ASSET-LIABILITY GAP..... $ (706,862) $(1,427,405) $3,480,416 $1,217,067
----------- ----------- ---------- ----------
DERIVATIVES AFFECTING
INTEREST RATE
SENSITIVITY
Pay fixed interest rate
swaps................. 311,888 5.38 (15,947) 8.14 (291,272) 5.30 (4,669) 5.98
Receive fixed interest
rate swaps............ (100,000) 4.66 75,000 6.24 25,000 6.70 -- --
Basis swaps............ (250,000) 5.76 -- -- -- -- 250,000 5.81
----------- ----------- ---------- ----------
INTEREST RATE
SENSITIVITY GAP........ $ (744,974) $(1,368,352) $3,214,144 $1,462,398
=========== =========== ========== ==========
CUMULATIVE INTEREST RATE
SENSITIVITY GAP........ $ (744,974) $(2,113,326) $1,100,818 $2,563,216
=========== =========== ========== ==========
- --------
* Securities based on amortized cost.
** Projected runoff of non-maturity deposits was computed based upon decay
rate assumptions developed by bank regulators to assist banks in addressing
FDICIA rule 305.
- -------------------------------------------------------------------------------
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 Board of
Governors of the Federal Reserve System ("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
II-35
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 true earnings potential than other
analyses such as static or dynamic gap.
The asset/liability management process involves various analyses. Management
determines the most likely outlook for the economy and interest rates by
analyzing environmental factors including regulatory changes, monetary and
fiscal policies and the overall state of the economy. Southern National's
current and prospective liquidity position, current balance sheet volumes and
projected growth, accessibility of funds for short-term needs and capital
maintenance are all considered, given the current environmental situation.
Management proceeds by analyzing interest rate sensitivity, risk-based capital
requirements and results from past strategies to develop a strategy to meet
performance goals.
The following table represents the sensitivity position of Southern National
as of a point in time. This position can be modified by management within a
short time period if necessary. 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.
- -------------------------------------------------------------------------------
TABLE 18
INTEREST SENSITIVITY SIMULATION ANALYSIS
INTEREST ANNUALIZED
RATE PERCENTAGE
SCENARIO CHANGE IN
----------- NET INTEREST
LINEAR PRIME INCOME
----------- ----- ------------
+3.00% 11.50% 1.0%
+1.50 10.00 0.7
Most likely 8.50 --
-1.50 7.00 (0.4)
-3.00 5.50 (1.1)
- -------------------------------------------------------------------------------
Management has established parameters for asset/liability management which
proscribe a maximum impact on net interest income of 3% for a 150 basis point
change over six months from the most likely interest rate scenario, and no
more than a maximum 6% for a 300 basis point change over 12 months. It is
management's ongoing objective to effectively manage the impact of changes in
interest rates and minimize the resulting effect on earnings as evidenced by
the preceding table.
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 grew 11.9% in 1995 and 7.0% in 1994. Additional equity
has come from the retention of earnings and from new shares of stock issued
under employee benefit and stock option plans and the dividend
II-36
reinvestment plan. The conversion of convertible debentures to common stock
generated an additional $4.9 million in 1995. Southern National adopted SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
in 1995. The provisions of this statement require securities classified as
available for sale be carried at estimated fair value with net unrealized
appreciation or depreciation recorded as an adjustment to shareholders'
equity. At the end of 1995, Southern National had recorded net unrealized
appreciation of $31.2 million, net of tax.
- -------------------------------------------------------------------------------
TABLE 19
CAPITAL--COMPONENTS AND RATIOS
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
Tier 1 capital................................... $ 1,593,366 $ 1,513,090
Tier 2 capital................................... 153,279 158,484
----------- -----------
Total regulatory capital......................... $ 1,746,645 $ 1,671,574
=========== ===========
Risk-based capital ratios:
Tier 1 capital................................. 13.0% 12.3%
Total regulatory capital....................... 14.3 13.6
Tier 1 leverage ratio.......................... 7.8 7.8
- -------------------------------------------------------------------------------
Traditionally, Southern National has been considered to be strongly
capitalized. The ratio of shareholders' equity to year-end assets was 8.2% at
the end of 1995, compared with 7.5% a year earlier. While management views the
equity-to-assets ratio as the principal indicator of capital strength,
additional measures are used by regulators. Bank holding companies and their
subsidiaries are subject to risk-based capital measures. The risk-based
capital ratios measure the relationship of capital to a combination of balance
sheet and off-balance sheet credit risk. The values of both balance sheet and
off-balance sheet items are adjusted to reflect credit risk.
Tier 1 capital is required to be at least 4% of risk-weighted assets, and
total capital must be at least 8% of risk-weighted assets. The Tier 1 capital
ratio for Southern National at the end of 1995 was 13.0%, and the total
capital ratio was 14.3%. At the end of 1994, those ratios were 12.3% and
13.6%, respectively.
Another measure used by regulators is the leverage ratio which is the ratio
of tangible equity to tangible assets. The minimum required leverage ratio for
a well-capitalized bank is 3%, while the leverage ratio for Southern National
was 7.8% at the end of 1995 and 7.8% at the end of 1994.
On January 11, 1996, the Corporation announced a plan to repurchase up to
4.3 million shares of its common stock. This repurchase program, which is
discussed further in "Stock and Dividends," is expected to reduce the Tier 1
and total capital ratios by approximately 1%.
II-37
- -------------------------------------------------------------------------------
TABLE 20
SELECTED EQUITY DATA AND RATIOS
1995 1994 1993
------ ------ ------
Book value per common share at year end.............. $15.52 $13.92 $13.14
Book value per common share percentage increase (de-
crease) over prior year end......................... 11.49% 5.94% (0.61)%
Common dividends per share as a percentage increase
over prior year end................................. 16.22 15.63 28.00
Equity at year end to year end:
Total assets....................................... 8.17 7.54 7.42
Net loans and leases*.............................. 12.27 11.57 11.59
Deposits........................................... 11.40 10.45 9.58
Equity and long-term debt.......................... 54.74 62.17 62.56
- --------
* Amounts are net of unearned income and the allowance for loan and lease
losses and include loans held for sale.
- -------------------------------------------------------------------------------
STOCK AND DIVIDENDS
The management of Southern National continually monitors capital for
adequacy to provide a foundation for future asset growth and to promote
investor and depositor confidence. At the end of 1995, Southern National had
103.4 million shares of common stock issued and outstanding compared to 102.2
million shares outstanding at the previous year end.
Southern National's ability to pay dividends is primarily dependent on
earnings from operations, the adequacy of capital and the availability of
liquid assets for distribution. The parent company's ability to replenish
liquid assets available for distribution is primarily dependent on the ability
of the banking subsidiaries to pay dividends to the parent company.
Historically, Southern National's cash dividends have been approximately one
third of earnings resulting from management's goal to retain sufficient
capital to support future growth and to meet regulatory requirements while
providing a competitive return on investment to shareholders. Southern
National's common dividend payout ratio, computed by dividing dividends per
common share by earnings available per common share, was 51.8% in 1995.
Excluding the impact of the nonrecurring merger-related charges discussed in
"Analysis of Results of Operations," the dividend payout ratio would have been
35.8%. Southern National's quarterly cash dividend per common share was
increased 15% after the second quarter to $.23 per common share. This increase
marked the 23nd consecutive year that cash dividends have been increased. A
discussion of dividend restrictions is included in Note N--"Regulatory
Requirements and Other Restrictions."
Southern National's common stock is traded on the New York Stock Exchange
("NYSE") under the symbol "SNB." The accompanying table, "Quarterly Common
Stock Summary," sets forth the high, low and last sales prices for the common
stock as reported on the NYSE Composite Tape and the cash dividends paid per
share of common stock for each of the last eight quarters.
II-38
- -------------------------------------------------------------------------------
TABLE 21
QUARTERLY COMMON STOCK SUMMARY
1995 1994
------------------------------ ------------------------------
SALES PRICES SALES PRICES
-------------------- DIVIDENDS -------------------- DIVIDENDS
HIGH LOW LAST PAID HIGH LOW LAST PAID
------ ------ ------ --------- ------ ------ ------ ---------
Quarter Ended
March 31....... $22.38 $18.88 $19.88 $0.20 $20.50 $18.38 $19.13 $0.17
June 30........ 24.13 19.88 24.00 0.20 21.88 18.88 20.00 0.17
September 30... 27.13 23.63 26.25 0.23 21.88 20.00 20.75 0.20
December 31.... 27.00 25.63 26.25 0.23 21.13 17.13 19.13 0.20
Year......... 27.13 18.88 26.25 0.86 21.88 17.13 19.13 0.74
- -------------------------------------------------------------------------------
At December 31, 1995, Southern National had 733,869 shares of 6.75%
Cumulative Convertible Preferred Stock, Series A issued and outstanding in the
form of 2,935,476 depositary shares, at a stated value of $25 per depositary
share. Each depositary share represents a one-quarter interest in a preferred
share and is convertible at the option of the holder into 1.4767 shares of
common stock. On February 28, 1996, Southern National announced that the
preferred stock would be redeemed on March 29, 1996, at the redemption price
of $104.5 per share. In order to facilitate the preferred stock redemption,
Southern National repurchased 4.3 million shares of common stock during the
first quarter of 1996 to be used in the anticipated conversion of preferred
stock.
FOURTH QUARTER RESULTS
Net income for the fourth quarter of 1995 was $70.1 million, compared to
earnings of $62.6 million for the prior year. On a per share basis, fully
diluted net income was $.64 for the current quarter compared to $.58 a year
ago. Annualized returns on average assets and average common equity were 1.36%
and 17.35%, respectively, for the fourth quarter. The primary factor driving
the improvement in 1995 was $7.4 million of savings in noninterest expense,
which reflects the realization of efficiencies from the Southern National/BB&T
merger.
In the fourth quarter of 1995, net interest income fully-taxable equivalent
("FTE") was $198.1 million compared to a 1994 fourth quarter balance of $197.5
million. This increase resulted from growth in average earning assets, offset
by a decrease in the net yield FTE.
The accompanying table, "Quarterly Financial Summary--Unaudited," presents
condensed information relating to eight quarters in the period ended December
31, 1995.
II-39
- --------------------------------------------------------------------------------
TABLE 22
QUARTERLY FINANCIAL SUMMARY--UNAUDITED
1995 1994
----------------------------------------------- -----------------------------------------------
SECOND
FOURTH THIRD SECOND FIRST FOURTH THIRD QUARTER FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED SUMMARY OF
OPERATIONS
Net interest income
FTE................... $ 198,106 $ 192,785 $ 192,920 $ 190,273 $ 197,512 $ 193,577 $ 188,327 $ 185,438
FTE adjustment......... 8,611 8,514 7,958 7,452 7,248 7,001 7,061 6,778
Provision for loan and
lease losses.......... 10,400 7,000 7,000 7,000 7,104 2,339 2,902 5,501
Securities gains (loss-
es), net.............. 131 1,114 -- (19,845) 7 919 627 1,521
Noninterest income..... 60,695 60,451 67,377 56,427 58,264 54,841 52,618 57,250
Noninterest expense.... 138,701 144,743 159,903 228,956 146,138 144,080 145,140 147,978
Provision for income
taxes................. 31,130 31,613 27,528 (4,208) 32,651 33,766 29,361 28,981
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ 70,090 $ 62,480 $ 57,908 $ (12,345) $ 62,642 $ 62,151 $ 57,108 $ 54,971
=========== =========== =========== =========== =========== =========== =========== ===========
Fully diluted income
(loss) per share...... $ 0.64 $ 0.57 $ 0.53 $ (0.13) $ 0.58 $ 0.58 $ 0.53 $ 0.52
=========== =========== =========== =========== =========== =========== =========== ===========
SELECTED AVERAGE BAL-
ANCES
Assets................. $20,439,534 $20,609,158 $20,250,286 $19,782,219 $19,524,878 $19,071,278 $18,712,128 $18,550,660
Securities, at amor-
tized cost............ 5,321,514 5,452,924 5,466,584 5,382,220 5,449,499 5,350,772 5,410,458 5,218,880
Loans and leases *..... 13,915,553 13,889,121 13,543,229 13,203,804 12,865,637 12,424,214 12,082,232 12,060,904
Total earning assets... 19,289,285 19,373,078 19,057,370 18,632,839 18,389,384 17,958,437 17,601,661 17,436,117
Deposits............... 14,221,698 14,211,266 14,314,915 14,257,659 14,334,248 14,330,620 14,221,620 14,307,119
Short-term borrowed
funds................. 2,930,923 3,201,200 3,219,920 2,866,363 2,643,910 2,445,588 2,232,787 1,954,290
Long-term debt......... 1,376,756 1,309,932 910,946 905,484 807,457 610,943 630,600 659,225
Total interest-bearing
liabilities........... 16,639,774 17,017,201 16,736,208 16,352,460 16,029,882 15,683,955 15,385,668 15,116,022
Shareholders' equity... $ 1,644,418 $ 1,589,630 $ 1,540,429 $ 1,503,636 $ 1,498,350 $ 1,452,916 $ 1,416,683 $ 1,417,537
=========== =========== =========== =========== =========== =========== =========== ===========
- --------
* Loans and leases are net of unearned income and include loans held for sale.
- --------------------------------------------------------------------------------
II-40
SIX-YEAR FINANCIAL SUMMARY AND SELECTED RATIOS
FIVE-YEAR
COMPOUND
1995 1994 1993 1992 1991 1990 GROWTH RATE
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF OPERATIONS
Interest income......... $ 1,548,176 $ 1,318,045 $ 1,199,708 $ 1,207,989 $ 1,243,470 $ 1,238,433 4.6%
Interest expense........ 806,627 581,279 506,192 589,785 743,322 801,650 0.1
----------- ----------- ----------- ----------- ----------- -----------
Net interest income..... 741,549 736,766 693,516 618,204 500,148 436,783 11.2
Provision for loan and
lease losses........... 31,400 17,846 53,311 62,871 75,844 54,106 (10.3)
----------- ----------- ----------- ----------- ----------- -----------
Net interest income af-
ter provision for loan
and lease losses....... 710,149 718,920 640,205 555,333 424,304 382,677 13.2
Noninterest income...... 226,350 226,047 220,318 185,873 178,016 137,555 10.5
Noninterest expense..... 672,303 583,336 663,244 510,158 435,184 391,978 11.4
----------- ----------- ----------- ----------- ----------- -----------
Income before income
taxes.................. 264,196 361,631 197,279 231,048 167,136 128,254 15.6
Provision for income
taxes.................. 86,063 124,759 77,188 84,322 51,593 35,529 19.4
----------- ----------- ----------- ----------- ----------- -----------
Income before cumulative
effect of changes in
accounting principles.. 178,133 236,872 120,091 146,726 115,543 92,725 13.9
Less: cumulative effect
of changes in
accounting
principles, net
of income taxes..... -- -- 34,263 -- -- -- NM
----------- ----------- ----------- ----------- ----------- -----------
Net income.............. $ 178,133 $ 236,872 $ 85,828 $ 146,726 $ 115,543 $ 92,725 13.9
=========== =========== =========== =========== =========== ===========
EARNINGS PER COMMON
SHARE
Average shares outstand-
ing (000's)
Primary................ 103,982 102,349 99,180 92,766 84,851 81,501 5.0
Fully diluted.......... 109,008 107,399 105,064 100,433 88,276 84,311 5.3
Primary earnings
Income before
cumulative effect..... $ 1.66 $ 2.26 $ 1.16 $ 1.53 $ 1.36 $ 1.14 7.8
Less: cumulative
effect................ -- -- 0.35 -- -- -- NM
----------- ----------- ----------- ----------- ----------- -----------
Net income............. $ 1.66 $ 2.26 $ 0.81 $ 1.53 $ 1.36 $ 1.14 7.8
=========== =========== =========== =========== =========== ===========
Fully diluted
Income before
cumulative effect..... $ 1.64 $ 2.21 $ 1.16 $ 1.48 $ 1.33 $ 1.12 7.9
Less: cumulative
effect................ -- -- 0.35 -- -- -- NM
----------- ----------- ----------- ----------- ----------- -----------
Net income............. $ 1.64 $ 2.21 $ 0.81 $ 1.48 $ 1.33 $ 1.12 7.9
=========== =========== =========== =========== =========== ===========
Cash dividends.......... $ 0.86 $ 0.74 $ 0.64 $ 0.50 $ 0.46 $ 0.42 15.4
Shareholders' equity.... 15.52 13.92 13.14 13.22 12.17 11.03 7.1
AVERAGE BALANCE SHEETS
Securities at carrying
value.................. $ 5,394,372 $ 5,340,070 $ 4,670,213 $ 3,998,587 $ 3,336,542 $ 2,825,787 13.8
Loans and leases*....... 13,465,835 12,195,004 11,029,260 10,024,523 9,087,120 8,732,557 9.0
Other assets............ 1,412,821 1,440,736 1,367,568 1,339,742 1,252,057 1,206,474 3.2
----------- ----------- ----------- ----------- ----------- -----------
Total assets........... $20,273,028 $18,975,810 $17,067,041 $15,362,852 $13,675,719 $12,764,818 9.7
=========== =========== =========== =========== =========== ===========
Deposits................ $14,251,176 $14,298,728 $13,546,050 $12,601,590 $11,398,365 $10,364,697 6.6
Other liabilities....... 3,324,308 2,553,243 1,546,526 1,416,923 1,206,790 1,438,077 18.2
Long-term debt.......... 1,127,575 677,227 597,519 153,064 142,359 144,738 50.8
Common shareholders' eq-
uity................... 1,497,624 1,372,469 1,302,803 1,125,470 928,205 817,306 12.9
Preferred shareholders'
equity................. 72,345 74,143 74,143 65,805 -- -- NM
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity.. $20,273,028 $18,975,810 $17,067,041 $15,362,852 $13,675,719 $12,764,818 9.7
=========== =========== =========== =========== =========== ===========
PERIOD END BALANCES
Total assets............ $20,492,929 $19,855,063 $18,858,370 $15,966,986 $14,436,338 $13,012,846 9.5
Deposits................ 14,684,056 14,314,154 14,594,952 13,044,173 12,166,090 10,847,996 6.2
Long-term debt.......... 1,383,935 910,755 837,241 423,211 417,050 499,187 22.6
Shareholders' equity.... 1,674,063 1,496,477 1,398,726 1,266,898 1,024,546 848,763 14.6
SELECTED PERFORMANCE RA-
TIOS
Rate of return on:
Average total assets... 0.88% 1.25% 0.50% 0.96% 0.84% 0.73%
Average common
shareholders' equity.. 11.56 16.88 6.19 12.63 12.45 11.35
Dividend payout......... 51.81 32.74 79.01 32.68 33.82 36.84
Average equity to aver-
age assets............. 7.74 7.62 8.07 7.75 6.79 6.40
- --------
* Loans and leases are net of unearned income and the allowance for losses.
Amounts include loans held for sale.
NM--not meaningful.
II-41
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Southern National is responsible for the preparation of
the financial statements, related financial data and other information in this
Annual Report on Form 10-K. The financial statements are prepared in
accordance with generally accepted accounting principles and include amounts
based on management's estimates and judgment where appropriate. Financial
information appearing throughout this Annual Report on Form 10-K is consistent
with the financial statements.
Southern National's accounting system, which records, summarizes and reports
financial transactions, is supported by an internal control structure which
provides reasonable assurance that assets are safeguarded and that
transactions are recorded in accordance with Southern National's policies and
established accounting procedures. As an integral part of the internal control
structure, Southern National maintains a professional staff of internal
auditors who monitor compliance with and assess the effectiveness of the
internal control structure.
The Audit Committee of Southern National's Board of Directors, composed
solely of outside directors, meets regularly with Southern National's
management, internal auditors and independent public accountants to review
matters relating to financial reporting, internal control structure and the
nature, extent and results of the audit effort. The independent public
accountants and the internal auditors have access to the Audit Committee with
or without management present.
The financial statements have been audited by Arthur Andersen LLP,
independent public accountants, who render an independent opinion on
management's financial statements. Their appointment was recommended by the
Audit Committee, approved by the Board of Directors and ratified by the
shareholders. Their examination provides an objective assessment of the degree
to which Southern National's management meets its responsibility for financial
reporting. Their opinion on the financial statements is based on auditing
procedures which include reviewing the internal control structure to determine
the timing and scope of audit procedures and performing selected tests of
transactions and records as they deem appropriate. These auditing procedures
are designed to provide a reasonable level of assurance that the financial
statements are fairly presented in all material respects.
John A. Allison Scott E. Reed Sherry A. Kellett
Chairman and Chief Financial Officer Controller
Chief Executive Officer
II-42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Southern National Corporation:
We have audited the accompanying consolidated balance sheets of Southern
National Corporation (a North Carolina corporation) and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southern National
Corporation and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As explained in Note A to the consolidated financial statements, effective
January 1, 1995, the Company changed its method of accounting for mortgage
servicing rights, and effective January 1, 1994, the Company changed its
method of accounting for investments in debt and equity securities. As
explained in Notes A and L to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for acquisitions
of thrift institutions, income taxes and postretirement benefits other than
pensions.
Arthur Andersen LLP
Charlotte, North Carolina,
January 18, 1996, (except
with respect to the matter
discussed in Note J, as to
which the date is February
28, 1996).
II-43
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1994
----------- -----------
ASSETS
Cash and due from banks............................. $ 582,612 $ 637,794
Interest-bearing bank balances...................... 1,172 20,962
Federal funds sold and securities purchased under
resale agreements or similar arrangements.......... 118,977 13,021
Securities available for sale....................... 5,201,344 3,459,698
Loans held for sale................................. 245,280 136,351
Securities held to maturity (fair value: $159,886 in
1995 and $1,889,911 in 1994)....................... 153,969 1,965,419
Loans and leases, net of unearned income............ 13,567,205 12,971,751
Allowance for loan and lease losses................ (172,158) (171,734)
----------- -----------
Loans and leases, net............................ 13,395,047 12,800,017
----------- -----------
Premises and equipment, net......................... 312,002 333,069
Other assets........................................ 482,526 488,732
----------- -----------
Total assets..................................... $20,492,929 $19,855,063
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing................................ $ 1,885,725 $ 1,843,019
Interest-bearing................................... 12,798,331 12,471,135
----------- -----------
Total deposits................................... 14,684,056 14,314,154
Short-term borrowed funds........................... 2,491,285 2,902,528
Long-term debt...................................... 1,383,935 910,755
Accounts payable and other liabilities.............. 259,590 231,149
----------- -----------
Total liabilities................................ 18,818,866 18,358,586
----------- -----------
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares
authorized, issued and outstanding 733,869 in 1995
and 770,000 in 1994............................... 3,669 3,850
Common stock, $5 par, 300,000,000 shares
authorized, issued and outstanding 103,357,440 in
1995 and 102,215,032 in 1994...................... 516,787 511,075
Paid-in capital.................................... 279,204 285,599
Retained earnings.................................. 847,550 775,979
Loan to employee stock ownership plan and unvested
restricted stock.................................. (4,314) (7,442)
Net unrealized appreciation (depreciation) on
securities available for sale..................... 31,167 (72,584)
----------- -----------
Total shareholders' equity....................... 1,674,063 1,496,477
----------- -----------
Total liabilities and shareholders' equity....... $20,492,929 $19,855,063
=========== ===========
See notes to consolidated financial statements.
II-44
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1994 1993
---------- ---------- ---------
INTEREST INCOME
Interest and fees on loans and leases........ $1,233,222 $1,021,056 $915,570
Interest and dividends on securities......... 312,423 291,805 279,728
Interest on short-term investments........... 2,531 5,184 4,410
---------- ---------- ---------
Total interest income....................... 1,548,176 1,318,045 1,199,708
---------- ---------- ---------
INTEREST EXPENSE
Interest on deposits......................... 557,149 441,876 428,194
Interest on short-term borrowed funds........ 178,879 98,476 43,608
Interest on long-term debt................... 70,599 40,927 34,390
---------- ---------- ---------
Total interest expense...................... 806,627 581,279 506,192
---------- ---------- ---------
NET INTEREST INCOME........................... 741,549 736,766 693,516
Provision for loan and lease losses.......... 31,400 17,846 53,311
---------- ---------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
AND LEASE LOSSES............................. 710,149 718,920 640,205
NONINTEREST INCOME
Service charges on deposit accounts.......... 89,621 85,106 82,143
Trust fees................................... 18,629 17,180 15,034
Mortgage banking activities.................. 26,408 24,920 25,116
Other nondeposit fees and commissions........ 76,441 68,721 54,920
Securities (losses) gains, net............... (18,600) 3,074 16,841
Other income................................. 33,851 27,046 26,264
---------- ---------- ---------
Total noninterest income.................... 226,350 226,047 220,318
---------- ---------- ---------
NONINTEREST EXPENSE
Salaries..................................... 282,213 237,356 236,034
Employee benefits............................ 59,987 56,077 53,453
Net occupancy expense........................ 48,501 43,775 42,597
Furniture and equipment expense.............. 58,657 44,299 47,510
Federal deposit insurance expense............ 22,995 32,697 30,730
Loss on bulk sale of assets.................. -- -- 49,147
Other expense................................ 199,950 169,132 203,773
---------- ---------- ---------
Total noninterest expense................... 672,303 583,336 663,244
---------- ---------- ---------
EARNINGS
Income before income taxes................... 264,196 361,631 197,279
Provision for income taxes................... 86,063 124,759 77,188
---------- ---------- ---------
Income before cumulative effect of changes in
accounting principles....................... 178,133 236,872 120,091
Less: cumulative effect of changes in
accounting principles, net of income taxes.. -- -- 34,263
---------- ---------- ---------
NET INCOME.................................... 178,133 236,872 85,828
Preferred dividend requirements.............. 5,079 5,198 5,198
---------- ---------- ---------
Income applicable to common shares........... $ 173,054 $ 231,674 $ 80,630
========== ========== =========
PER COMMON SHARE
Net income:
Primary
Income before cumulative effect............ $ 1.66 $ 2.26 $ 1.16
Less: cumulative effect.................... -- -- 0.35
---------- ---------- ---------
Net income................................ $ 1.66 $ 2.26 $ 0.81
========== ========== =========
Fully diluted
Income before cumulative effect............ $ 1.64 $ 2.21 $ 1.16
Less: cumulative effect.................... -- -- 0.35
---------- ---------- ---------
Net income................................ $ 1.64 $ 2.21 $ 0.81
========== ========== =========
Cash dividends paid per common share......... $ 0.86 $ 0.74 $ 0.64
========== ========== =========
See notes to consolidated financial statements.
II-45
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
SHARES OF RETAINED
COMMON PREFERRED COMMON PAID-IN EARNINGS
STOCK STOCK STOCK CAPITAL AND OTHER* TOTAL
----------- --------- -------- -------- ---------- ----------
BALANCE, JANUARY 1,
1993................... 90,235,616 $3,850 $451,178 $213,115 $ 598,755 $1,266,898
ADD (DEDUCT)
Net income............. -- -- -- -- 85,828 85,828
Common stock issued.... 11,863,839 -- 59,318 84,921 (11,247) 132,992
Redemption of common
stock................. (1,340,088) -- (6,700) (23,571) (4) (30,275)
Reconciliation of
fiscal year to
calendar year for
merged company........ 63,927 -- 320 191 4,641 5,152
Cash dividends declared
by merged companies... -- -- -- -- (37,101) (37,101)
Cash dividends declared
by Southern National:
Common stock........... -- -- -- -- (18,921) (18,921)
Preferred stock........ -- -- -- -- (5,198) (5,198)
Other.................. -- -- -- 770 (1,419) (649)
----------- ------ -------- -------- --------- ----------
BALANCE, DECEMBER 31,
1993................... 100,823,294 3,850 504,116 275,426 615,334 1,398,726
ADD (DEDUCT)
Net income............. -- -- -- -- 236,872 236,872
Common stock issued.... 2,478,223 -- 12,391 26,138 (36) 38,493
Redemption of common
stock................. (1,086,485) -- (5,432) (18,130) -- (23,562)
Net depreciation on
securities available
for sale.............. -- -- -- -- (72,584) (72,584)
Cash dividends declared
by merged companies... -- -- -- -- (51,652) (51,652)
Cash dividends declared
by Southern National:
Common stock........... -- -- -- -- (30,156) (30,156)
Preferred stock........ -- -- -- -- (5,198) (5,198)
Other.................. -- -- -- 2,165 3,373 5,538
----------- ------ -------- -------- --------- ----------
BALANCE, DECEMBER 31,
1994................... 102,215,032 3,850 511,075 285,599 695,953 1,496,477
ADD (DEDUCT)
Net income............. -- -- -- -- 178,133 178,133
Common stock issued.... 3,030,923 -- 15,155 33,663 -- 48,818
Redemption of common
stock................. (1,993,351) -- (9,967) (37,344) -- (47,311)
Net appreciation on
securities available
for sale.............. -- -- -- -- 103,751 103,751
Preferred stock
cancellations and
conversions........... 104,836 (181) 524 (2,714) -- (2,371)
Cash dividends declared
by Southern National:
Common stock........... -- -- -- -- (101,483) (101,483)
Preferred stock........ -- -- -- -- (5,079) (5,079)
Other.................. -- -- -- -- 3,128 3,128
----------- ------ -------- -------- --------- ----------
BALANCE, DECEMBER 31,
1995.................. 103,357,440 $3,669 $516,787 $279,204 $ 874,403 $1,674,063
=========== ====== ======== ======== ========= ==========
- --------
* Includes unrealized losses on equity securities, net unrealized
appreciation (depreciation) on securities available for sale, unvested
restricted stock and loan to employee stock ownership plan.
See notes to consolidated financial statements.
II-46
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
1995 1994 1993
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 178,133 $ 236,872 $ 85,828
Adjustments to reconcile net income to
net cash provided by operating
activities:
Cumulative effect of changes in
accounting principles, net of taxes.. -- -- 34,263
Provision for loan and lease losses... 31,400 17,846 53,311
Depreciation of premises and
equipment............................ 36,024 35,531 41,014
Amortization of goodwill and other
intangibles.......................... 10,600 2,184 10,741
Accretion of negative goodwill........ (6,310) (1,114) (279)
Amortization of unearned stock
compensation......................... 3,128 1,711 730
Discount accretion and premium
amortization on securities, net...... (27,193) (571) 12,328
Loss (gain) on sales of trading
account securities, net.............. 60 (769) (1,441)
Loss (gain) on sales of securities,
net.................................. 18,600 (3,074) (16,841)
Loss (gain) on sales of loans and
mortgage loan servicing rights, net.. 2,379 1,327 (15,013)
Loss (gain) on disposals of premises
and equipment, net................... 3,971 (1,746) 1,040
Loss on foreclosed property and other
real estate, net..................... 4,129 169 4,743
Loss on bulk sale of assets........... -- -- 49,147
Proceeds from sales of trading account
securities, net of purchases......... (60) 769 1,441
Proceeds from sales of loans held for
sale................................. 789,164 596,249 986,343
Purchases of loans held for sale...... (311,059) (33,351) (97,619)
Origination of loans held for sale,
net of principal collected........... (589,413) (272,115) (751,936)
Reconciliation of fiscal year of
merged companies to calendar year.... -- -- 5,267
Decrease (increase) in:
Accrued interest receivable.......... (19,415) (24,207) (791)
Other assets......................... 894 (76,910) (77,186)
Increase (decrease) in:
Accrued interest payable............. 10,992 2,880 (4,313)
Accounts payable and other
liabilities......................... 89,753 19,008 26,114
----------- ----------- -----------
Net cash provided by operating
activities......................... 225,777 500,689 346,891
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities
available for sale.................... 1,290,237 772,597 445,099
Proceeds from maturities of securities
available for sale.................... 1,087,926 792,590 901,480
Purchases of securities available for
sale.................................. (2,531,842) (1,490,117) (1,296,653)
Proceeds from sales of securities held
to maturity........................... 2,109 -- 88,845
Proceeds from maturities of securities
held to maturity...................... 288,191 460,987 654,724
Purchases of securities held to
maturity.............................. (8,103) (862,317) (1,541,558)
Leases made to customers............... (18,091) (44,379) (43,034)
Principal collected on leases.......... 14,620 41,661 34,750
Loan originations, net of principal
collected............................. (432,962) (1,143,769) (952,556)
Purchases of loans..................... (189,997) (27,864) (3,907)
Net cash acquired in transactions
accounted for under the purchase
method of accounting.................. -- 2,262 72,939
Proceeds from disposals of premises and
equipment............................. 16,373 6,897 4,507
Purchases of premises and equipment.... (57,147) (70,695) (101,347)
Proceeds from sales of foreclosed
property.............................. 11,979 27,413 69,968
Investment in other real estate held
for development or sale............... -- -- (4,139)
Proceeds from sales of other real
estate held for development or sale... 1,728 9,519 --
Other.................................. (2,287) 22,696 (38,747)
----------- ----------- -----------
Net cash used in investing
activities......................... (527,266) (1,502,519) (1,709,629)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits.... 369,902 (280,798) 290,050
Net (decrease) increase in short-term
borrowed funds........................ (411,243) 1,097,996 751,329
Proceeds from long-term debt........... 2,945,052 356,439 588,082
Repayments of long-term debt........... (2,471,872) (282,925) (230,724)
Net proceeds from common stock issued.. 43,781 23,630 113,160
Common and preferred stock acquired and
retired............................... (49,682) (23,562) (30,275)
Cash dividends paid on common and
preferred stock....................... (93,465) (76,805) (61,056)
----------- ----------- -----------
Net cash provided by financing
activities......................... 332,473 813,975 1,420,566
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS...................... 30,984 (187,855) 57,828
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR............................... 671,777 859,632 801,804
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR.................................. $ 702,761 $ 671,777 $ 859,632
=========== =========== ===========
See notes to consolidated financial statements.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest............................... $ 795,635 $ 579,180 $ 506,839
Income taxes........................... 110,638 143,416 119,880
Noncash financing and investing
activities:
Transfer of securities from held to
maturity to available for sale........ 1,560,412 -- --
Transfer of loans to foreclosed
property.............................. 9,567 20,358 32,112
Transfer of fixed assets to other real
estate owned.......................... 21,846 -- --
Capital lease obligation............... -- -- 1,285
Securitization of mortgage loans....... 354,882 7,497 4,311
=========== =========== ===========
II-47
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Southern National Corporation ("Southern National" or "Parent Company") is a
multi-bank holding company organized under the laws of North Carolina and
registered with the Federal Reserve Board under the Bank Holding Company Act
of 1956, as amended. Branch Banking and Trust Company ("BB&T-NC"), Branch
Banking and Trust Company of South Carolina ("BB&T-SC") and Commerce Bank
("Commerce") (collectively, the "Banks" or the "Subsidiaries") comprise the
Parent Company's principal subsidiaries.
The accounting and reporting policies of Southern National Corporation and
Subsidiaries are in accordance with generally accepted accounting principles
and conform to general practices within the banking industry. The following is
a summary of the more significant policies.
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of Southern National include the
accounts of the Parent Company and its subsidiaries, substantially all of
which are wholly-owned. In consolidation, all significant intercompany
accounts and transactions have been eliminated. Prior period financial
statements have been restated to include the accounts of companies acquired in
material transactions accounted for as poolings-of-interests. (See Note B.)
Results of operations of companies acquired in transactions accounted for as
purchases are included from the dates of acquisition.
Certain amounts for prior years have been reclassified to conform with
statement presentations for 1995. The reclassifications have no effect on
either shareholders' equity or net income as previously reported.
Nature of Operations
Southern National is a multi-bank holding company headquartered in Winston-
Salem, North Carolina. Southern National conducts its operations in North
Carolina, South Carolina and Virginia primarily through its commercial banking
subsidiaries and, to a lesser extent, through its other subsidiaries. Southern
National's subsidiaries provide a full range of traditional commercial banking
services and additional services including investment brokerage, insurance and
leasing. Substantially all of Southern National's loans are to businesses and
individuals in the Carolinas.
Securities
On January 1, 1994, Southern National adopted Statement of Financial
Accounting Standards ("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 for all investments in debt securities. These investments are
to be classified in one of three categories: held to maturity, available for
sale and trading. At January 1, 1994, $3.0 billion of securities, with a
market value of $3.1 billion, were classified as available for sale, and,
accordingly, $22.3 million, net of tax, was recorded as an adjustment to
shareholders' equity.
Debt securities acquired with both the intent and ability to be held to
maturity are classified as held to maturity and reported at amortized cost.
Gains or losses realized from the sale of securities held to maturity, if any,
are determined by specific identification and are included in noninterest
income.
Securities, which may be used to meet liquidity needs arising from
unanticipated deposit and loan fluctuations, changes in regulatory capital and
investment requirements, or unforeseen changes in market conditions, including
interest rates, market values or inflation rates, are classified as available
for sale. Securities
II-48
available for sale are reported at estimated fair value, with unrealized gains
and losses reported as a separate component of shareholders' equity, net of
tax. Gains or losses realized from the sale of securities available for sale
are determined by specific identification and are included in noninterest
income.
Trading account securities, of which none were held on December 31, 1995 and
1994, are selected according to fundamental and technical analyses that
identify potential market movements. Trading account securities are positioned
to take advantage of such movements and are reported at fair value. Market
adjustments, fees, gains or losses and interest income earned on trading
account securities are included in noninterest income. Gains or losses
realized from the sale of trading securities are determined by specific
identification.
During the fourth quarter of 1995, Southern National transferred $1.5
billion of securities which were previously classified as held to maturity
under SFAS No. 115 to the available-for-sale category. In November, 1995, the
Financial Accounting Standards Board ("FASB") provided enterprises the
opportunity to make a one-time reassessment of the classification of all
investment securities held at the time of the reassessment, such that the
reclassification of any security from the held-to-maturity category would not
call into question the enterprise's intent to hold other debt securities to
maturity in the future. Management anticipates that this classification will
allow more flexibility in the day-to-day management of the overall portfolio
than the prior classifications.
Loans Held for Sale
Loans held for sale are reported at the lower of cost or market value on an
aggregate loan basis. Gains or losses realized on the sales of loans are
recognized at the time of sale and are determined by the difference between
the net sales proceeds and the carrying value of the loans sold, adjusted for
any yield differential and a normal servicing fee. Any resulting deferred
premium or discount is amortized, as an adjustment of servicing income, over
the estimated lives of the loans using the level-yield method.
Loans and Lease Receivables
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their
outstanding principal balance adjusted for any deferred fees or costs on
originated loans and unamortized premiums or discounts. The net amount of
nonrefundable loan origination fees, including commitment fees, and certain
direct costs associated with the lending process is deferred and amortized to
interest income over the contractual lives of the loans using methods which
approximate level-yield, with adjustments for prepayments as they occur. If
the commitment expires unexercised, the income is recognized upon expiration
of the commitment. Discounts and premiums are amortized to interest income
over the estimated life of the loans using methods which approximate level-
yield.
Commercial loans and substantially all installment loans accrue interest on
the unpaid balance of the loans. Lease receivables consist primarily of direct
financing leases on rolling stock, equipment and real property. Lease
receivables are stated as the total amount of lease payments receivable plus
guaranteed residual values, less unearned income. Recognition of income over
the lives of the lease contracts approximates the level-yield method.
Allowance for Losses
The provision for loan and lease losses charged to noninterest expense is
the estimated amount required to maintain the allowance for loan and lease
losses at a level adequate to cover estimated incurred losses related to loans
and leases currently outstanding. The primary factors considered in
determining the allowance are the distribution of loans by risk class, the
amount of the allowance specifically allocated to nonperforming loans and
other problem loans, prior years' loan loss experience, economic conditions in
Southern National's market areas and the growth of the credit portfolio. While
management uses the best information available in establishing the allowance
for losses, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
valuations or if required by regulators based upon information at the time of
their examinations. Such adjustments to original estimates, as necessary, are
made in
II-49
the period in which these factors and other relevant considerations indicate
that loss levels may vary from previous estimates.
Nonperforming Assets
Nonperforming assets include loans and leases on which interest is not being
accrued and foreclosed property. Foreclosed property consists of real estate
and other assets acquired through customers' loan defaults.
Commercial and unsecured consumer loans and leases are generally placed on
nonaccrual status when concern exists that principal or interest is not fully
collectible, or when any portion of principal or interest becomes 90 days past
due, whichever occurs first. Mortgage loans and most other consumer loans past
due 90 days or more may remain on accrual status if management determines that
concern over the collectability of principal and interest is not significant.
When loans are placed on nonaccrual status, interest receivable is reversed
against interest income in the current period. Interest payments received
thereafter are applied as a reduction to the remaining principal balance when
concern exists as to the ultimate collection of the principal. Loans and
leases are removed from nonaccrual status when they become current as to both
principal and interest and when concern no longer exists as to the
collectability of principal or interest.
Assets acquired as a result of foreclosure are valued at the lower of cost
or fair value, and carried thereafter at the lower of cost or fair value less
estimated costs to sell the asset. Cost is the sum of unpaid principal,
accrued but unpaid interest and acquisition costs associated with the loan.
Any excess of unpaid principal over fair value at the time of foreclosure is
charged to the allowance for losses. Generally, such properties are appraised
annually and the carrying value, if greater than the fair value, less costs to
sell, is adjusted with a charge to income. Routine maintenance costs, declines
in market value and net losses on disposal are included in other noninterest
expense.
Premises and Equipment
Premises, equipment, capital leases and leasehold improvements are stated at
cost less accumulated depreciation or amortization. Depreciation is computed
principally using the straightline method over the estimated useful lives of
the related assets. Leasehold improvements are amortized on a straightline
basis over the lesser of the lease terms or the estimated useful lives of the
improvements. Capitalized leases are amortized by the same methods as premises
and equipment over the estimated useful lives or the lease term, whichever is
lesser. Obligations under capital leases are amortized using the interest
method to allocate payments between principal reduction and interest expense.
Income Taxes
The operating results of Southern National and its subsidiaries are included
in a consolidated federal income tax return. Each subsidiary pays its
calculated portion of federal income taxes to Southern National, or receives
payment from Southern National to the extent that tax benefits are realized.
Deferred income taxes have been provided where different accounting methods
have been used for reporting for income tax purposes and for financial
reporting purposes. As of January 1, 1993, Southern National adopted SFAS No.
109, "Accounting for Income Taxes," which changed the method of accounting for
income taxes. As a result of adopting SFAS No. 109, Southern National
recognized a cumulative benefit of the change in accounting principle of
$6,368,000. The benefit is included under the caption "Cumulative effect of
changes in accounting principles, net of income taxes" in the Consolidated
Statements of Income. The effect of this change, excluding the cumulative
benefit, for the year ended December 31, 1993, had no incremental effect on
net income or fully diluted earnings per share. The operating results of
acquired institutions were included in their respective income tax returns
prior to consummation of the acquisitions.
Off-Balance Sheet Instruments
Southern National utilizes financial forward and futures contracts, options
written, interest rate caps and floors written and interest rate swaps to
hedge or alter interest rate risk associated with the asset/liability
II-50
management, investment, mortgage banking and trading account functions. These
represent future commitments to purchase or sell financial instruments and,
accordingly, the related notional values are not reflected in the Consolidated
Balance Sheets. Amounts receivable or payable under derivative financial
instruments used to manage interest rate risks arising from Southern
National's financial assets and financial liabilities are recognized as income
or expense unless the instrument qualifies for hedge accounting. Gains and
losses on qualifying hedges of existing assets or liabilities are deferred and
are recognized in income as an adjustment of yield. Gains and losses on
terminations of derivatives are deferred and amortized as yield adjustments
over the remaining terms of the hedged asset or liability or the remaining
term of the hedge.
Per Share Data
Primary net income per common share has been computed by dividing net income
applicable to common shares by the weighted average number of shares of common
stock and common stock equivalents of dilutive stock options outstanding
during the years.
Fully diluted net income per common share has been computed by dividing net
income, as adjusted for the interest expense related to convertible debt, by
the weighted average number of shares of common stock, common stock
equivalents and other potentially dilutive securities outstanding during the
years. Other potentially dilutive securities include the number of shares
issuable upon conversion of the preferred stock. Restricted stock grants are
considered as issued for purposes of calculating net income per share.
Weighted average numbers of shares were as follows:
1995 1994 1993
----------- ----------- -----------
Primary.................................. 103,982,495 102,348,773 99,179,656
Fully diluted............................ 109,007,628 107,399,466 105,064,145
Intangible Assets
The cost in excess of the fair value of net assets acquired in transactions
accounted for as purchases (goodwill), premiums paid on acquisitions of
deposits (core deposit intangibles) and other identifiable intangible assets
are included in other assets in the "Consolidated Balance Sheets." Such assets
are being amortized on straightline or accelerated bases over periods ranging
from 5 to 15 years. At December 31, 1995, Southern National had $41.3 million
recorded as goodwill and $8.3 million as core deposit and other intangibles,
net of amortization. Negative goodwill is created when the fair value of the
net assets purchased exceeds the purchase price. Such balances are included in
other liabilities in the "Consolidated Balance Sheets" and are being amortized
over periods ranging from 10 to 15 years. At December 31, 1995, Southern
National had negative goodwill totaling $45.4 million, net of amortization.
Mortgage Servicing Rights
Amounts paid to acquire the right to service certain mortgage loans are
capitalized. These rights are then amortized over the estimated lives of the
loans to which they relate. In May 1995, the FASB issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights," which amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities." SFAS No. 122 requires
that mortgage banking enterprises recognize, as separate assets, rights to
service mortgage loans for others, however those servicing rights are
acquired. The statement further requires mortgage banking enterprises to
assess their capitalized mortgage servicing rights for impairment based on the
fair value of those rights. Southern National elected, in the third quarter of
1995, to adopt this statement effective as of January 1, 1995. The impact of
the adoption of this statement resulted in additional mortgage banking income
of $7.0 million, before taxes, or $.04 per fully diluted share, after taxes,
during 1995. SFAS No. 122 prohibits retroactive application to prior years. At
December 31, 1995, Southern National had capitalized mortgage servicing rights
totaling $18.3 million.
II-51
Changes in Accounting Principles and Effects of New Accounting Pronouncements
Effective January 1, 1993, The First Savings Bank, FSB, an entity acquired
by Southern National during 1994, adopted SFAS No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions." As a result of adopting SFAS
No. 72, a cumulative charge totaling $28,019,000 was recognized in 1993. The
charge is included under the caption "Cumulative effect of changes in
accounting principles, net of income taxes" in the "Consolidated Statements of
Income."
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which was
adopted by Southern National as of January 1, 1994, 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. The implementation did not have a material impact on the
consolidated financial position or consolidated results of operations.
As of January 1, 1995, Southern National adopted SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," which was amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures." SFAS No. 114, as amended, requires that impaired loans be
measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate, or as a practical expedient, at the
loan's observable market price or the fair value of the collateral if the loan
is collateral-dependent. When the measure of the impaired loan is less than
the recorded investment in the loan, the impairment is recorded through a
valuation allowance. The bank had previously measured the allowance for credit
losses using methods similar to those prescribed in SFAS No. 114. As a result
of adopting these statements, no additional allowance for loan losses was
required as of January 1, 1995.
The total recorded investment for impaired loans at December 31, 1995, was
$21.8 million, offset by a valuation allowance of $3.8 million, which resulted
in a net carrying value of $18.0 million. There were no investments in
impaired loans which did not have a related valuation allowance. The average
recorded investment in impaired loans during 1995 totaled $16.2 million.
Southern National recognizes no interest income on loans that are impaired.
Cash receipts for both principal and interest are applied directly to
principal.
During 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
establishes accounting standards for long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and to be disposed
of. The statement requires such assets to be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Any resulting impairment loss is required to be
reported in the period in which the recognition criteria are first applied and
met. Southern National adopted the provisions of the statement on January 1,
1996. The implementation did not have a material impact on the consolidated
financial position or consolidated results of operations.
In October of 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation," which establishes financial accounting and reporting
standards for stock-based compensation plans. The statement defines a fair
value based method of accounting for an employee stock option or similar
equity instrument and encourages the adoption of that method of accounting.
However, the statement also allows entities to continue to account for such
plans under Accounting Principles Board ("APB") Opinion No. 25. Entities
electing to remain with the accounting in Opinion No. 25 must make pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting defined in the statement had been applied. Southern
National adopted the statement effective January 1, 1996 and elected to
continue to account for stock-based compensation plans under the provisions of
Opinion No. 25. Therefore, the implementation of the statement did not have an
impact on Southern National's consolidated financial position or consolidated
results of operations.
II-52
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.
Supplemental Disclosures of Cash Flow Information
As referenced in the "Consolidated Statements of Cash Flows," Southern
National acquired assets and assumed liabilities in transactions accounted for
under the purchase method of accounting. The fair values of these assets
acquired and liabilities assumed, at acquisition, were as follows:
1995 1994 1993
--------------- --------
(DOLLARS IN THOUSANDS)
Fair value of net assets acquired................ $ -- $ 6,203 $60,099
Purchase price................................... -- 15,016 43,359
------ -------- --------
Excess of net assets acquired over purchase price
(purchase price over net assets acquired)....... $ -- $ (8,813) $16,740
====== ======== ========
Income and Expense Recognition
Items of income and expense are recognized using the accrual basis of
accounting, except for some immaterial amounts.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE B. ACQUISITIONS AND MERGERS
Completed Acquisitions
On February 24, 1993, Southern National completed the acquisition of First
Fincorp, Inc. (Fincorp), and its wholly-owned subsidiary, First Financial
Savings Bank, Inc. of Kinston, North Carolina. The merger was consummated
through the issuance of 976,065 shares of Southern National common stock for
all of the outstanding common stock of Fincorp for a total purchase price of
$22.3 million, which was approximately the same as the fair value of the net
assets acquired. At the date of acquisition, Fincorp had assets of
approximately $322.0 million.
On May 18, 1993, Southern National completed the acquisitions of Carolina
Savings Bank (Carolina) of Wilmington, North Carolina and Edenton Savings and
Loan Association (Edenton) of Edenton, North Carolina. The transactions
involved simultaneous conversions from mutual to stock associations and
acquisition by Southern National. Southern National sold 735,414 shares of its
common stock to eligible members of the institutions, natural persons in the
communities in which they operated and the public. The net proceeds of
approximately $15.3 million were used to purchase all of the stock of Carolina
and Edenton. Negative goodwill of approximately $5.7 million resulted from the
transactions. At the date of acquisition, Carolina and Edenton had assets of
approximately $142.0 million and $40.0 million, respectively.
II-53
On October 7, 1993, Southern National acquired East Coast Savings Bank,
headquartered in Goldsboro, North Carolina. Southern National issued 1,172,475
shares of common stock in the conversion/merger of this North Carolina-
chartered mutual saving bank and an additional 242,470 shares pursuant to
restricted stock grants.
On October 29, 1993, Southern National completed the acquisition of Mutual
Savings Bank of Rockingham County, SSB (Mutual) of Reidsville, North Carolina.
The transaction involved simultaneous conversion from a mutual to a stock
association and acquisition by Southern National. Southern National sold
313,982 shares of its common stock to eligible members of the institution and
natural persons in the community in which they operated. The net proceeds of
approximately $6.2 million were used to purchase all of the stock of Mutual.
Negative goodwill of approximately $2.9 million resulted from the transaction.
At the date of acquisition, Mutual had assets of approximately $87.0 million.
On November 24, 1993, Southern National completed the acquisition of Old
Stone Bank of North Carolina (Old Stone) of High Point, North Carolina. The
merger was consummated for a cash payment of $58.3 million for all of the
outstanding common stock of Old Stone. Goodwill of approximately $27.7 million
resulted from the transaction. At the date of acquisition, Old Stone had
assets of approximately $537.0 million.
On December 23, 1993, Southern National completed the acquisition of
Citizens Savings Bank, SSB (Citizens Savings) of Mooresville, North Carolina.
The transaction involved a simultaneous conversion from a mutual to a stock
associaton and acquisition by Southern National. Southern National sold
313,883 shares of its common stock to eligible members of the institution and
natural persons in the community in which they operated. The net proceeds of
approximately $5.8 million were used to purchase all of the common stock of
Citizens Savings. Negative goodwill of approximately $1.9 million resulted
from the transaction. At the date of acquisition, Citizens Savings had assets
of approximately $63.0 million.
On June 1, 1994, Southern National completed its acquisition of McLean,
Brady & McLean Agency, Inc. ("McLean") by the issuance of 38,823 shares of
Southern National common stock. In conjunction with the acquisition of McLean,
Southern National recorded $1.1 million of expiration rights which are being
amortized over 10 years.
On June 6, 1994, Southern National completed its acquisition of Leasing
Associates, Inc. ("Leasing") by the issuance of 97,876 shares of Southern
National common stock.
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. ("Prime Rate") by the issuance of 590,406
shares of Southern National common stock. In conjunction with the acquisition
of Prime Rate, Southern National recorded $8.8 million of goodwill which is
being amortized over 15 years.
These acquisitions were accounted for under the purchase method of
accounting, and, therefore, the financial information contained herein
includes data relevant to the acquirees since the date of acquisition.
Mergers
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 was accounted for as a pooling-of-interests in which BB&T
shareholders received 1.45 shares of the common stock of the resulting company
for each share of BB&T stock held. The merger of the bank holding companies
was completed on February 28, 1995. On January 10, 1995, Southern National
acquired Commerce through the issuance of 5,210,476 shares of Southern
National common stock for all of the outstanding stock of Commerce.
Several adjustments were required to restate Southern National and BB&T.
Among these were adjustments necessary to implement SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions." SFAS No. 106
allowed employers to recognize the transition obligation associated with
implementation immediately, subject to certain limitations, or on a delayed
basis over the plan participants'
II-54
future service periods. Southern National and BB&T elected to treat the
transition obligation differently, and these adjustments conform BB&T's
transition methodology to that elected by Southern National. The cumulative
charge resulting from a change in accounting principle recorded for 1993 was
increased by $7.0 million, net of related income taxes, while noninterest
expenses were reduced by $559,000 for both 1994 and 1993.
NOTE C. SECURITIES
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------------------------- ---------------------------------------
GROSS UNREALIZED ESTIMATED GROSS UNREALIZED ESTIMATED
AMORTIZED ----------------- FAIR AMORTIZED ----------------- FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---------- -------- -------- ---------- ---------- ------- --------- ----------
(DOLLARS IN THOUSANDS)
Securities held to
maturity:
U.S. Treasury,
government and agency
obligations........... $ 9,461 $ -- $ 172 $ 9,289 $1,190,558 $ 386 $ 44,434 $1,146,510
States and political
subdivisions.......... 144,508 6,194 105 150,597 165,520 2,591 2,156 165,955
Mortgage-backed
securities............ -- -- -- -- 608,676 102 31,977 576,801
Other securities....... -- -- -- -- 665 5 25 645
---------- -------- -------- ---------- ---------- ------- --------- ----------
Total securities held
to maturity........... 153,969 6,194 277 159,886 1,965,419 3,084 78,592 1,889,911
---------- -------- -------- ---------- ---------- ------- --------- ----------
Securities available for
sale:
U.S. Treasury,
government and agency
obligations........... 4,013,272 54,400 7,249 4,060,423 3,128,154 788 104,150 3,024,792
States and political
subdivisions.......... 20,612 257 96 20,773 18,501 9 1,592 16,918
Mortgage-backed
securities............ 973,339 8,415 4,027 977,727 324,007 617 14,310 310,314
Other securities....... 142,942 3 524 142,421 108,799 -- 1,125 107,674
---------- -------- -------- ---------- ---------- ------- --------- ----------
Total securities
available for sale.... 5,150,165 63,075 11,896 5,201,344 3,579,461 1,414 121,177 3,459,698
---------- -------- -------- ---------- ---------- ------- --------- ----------
Total securities....... $5,304,134 $ 69,269 $ 12,173 $5,361,230 $5,544,880 $ 4,498 $ 199,769 $5,349,609
========== ======== ======== ========== ========== ======= ========= ==========
Securities with a book value of approximately $2.4 billion and $2.7 billion
at December 31, 1995 and 1994, respectively, were pledged to secure municipal
deposits, securities sold under agreements to repurchase, Federal Reserve
discount window borrowings and for other purposes as required by law.
At December 31, 1995 and 1994, there was no concentration of investments in
obligations of states and political subdivisions that were secured by or
payable from the same taxing authority or revenue source and that exceeded ten
percent of shareholders' equity.
Proceeds from sales of securities during 1995, 1994 and 1993 were $1.3
billion, $772.6 million and $533.9 million, respectively. Gross gains of $2.7
million, $3.6 million and $18.0 million and gross losses of $21.3 million,
$527,000 and $1.1 million were realized on those sales in 1995, 1994 and 1993,
respectively.
The amortized cost and estimated fair value of the securities portfolio at
December 31, 1995, by contractual maturity, are shown in the accompanying
table. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
II-55
DECEMBER 31, 1995
-----------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
------------------- ---------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
TOTAL DEBT SECURITIES COST VALUE COST VALUE
--------------------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Due in one year or less.......... $ 32,499 $ 32,477 $1,999,431 $2,015,545
Due after one year through five
years........................... 86,565 90,190 2,012,333 2,042,853
Due after five years through ten
years........................... 34,855 37,165 20,945 21,615
Due after ten years.............. 50 54 1,175 1,183
-------- -------- ---------- ----------
153,969 159,886 4,033,884 4,081,196
Mortgage-backed securities....... -- -- 973,339 977,727
-------- -------- ---------- ----------
Total securities................. $153,969 $159,886 $5,007,223 $5,058,923
======== ======== ========== ==========
NOTE D. LOANS AND LEASES
DECEMBER 31,
-----------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
Loans--
Commercial, financial and agricultural............ $ 2,098,306 $ 2,679,046
Real estate--construction and land development.... 949,513 701,181
Real estate--mortgage............................. 8,671,941 7,787,792
Consumer.......................................... 1,540,251 1,553,906
----------- -----------
Loans held for investment....................... 13,260,011 12,721,925
----------- -----------
Leases............................................ 376,152 304,544
----------- -----------
Total loans and leases.......................... 13,636,163 13,026,469
Less: unearned income......................... 68,958 54,718
----------- -----------
Loans and leases, net of unearned income........ $13,567,205 $12,971,751
=========== ===========
The net investment in direct financing leases was $315.5 million and $257.6
million at December 31, 1995 and 1994, respectively. Southern National had
loans held for sale at December 31, 1995 and 1994 totaling $245.3 million and
$136.4 million, respectively.
Southern National's only significant concentration of credit at December 31,
1995 occurred in real estate loans, which totaled $9.6 billion. However, this
amount was not concentrated in any specific market or geographic area other
than Southern National's primary market.
The following table provides an analysis of loans made to directors,
executive officers and their interests, which in the aggregate exceeded
$60,000 at any time during 1995. All amounts shown represent loans made by
Southern National's subsidiary banks in the ordinary course of business at the
Banks' normal credit terms, including interest rate and collateralization
prevailing at the time for comparable transactions with other persons:
(DOLLARS IN THOUSANDS)
----------------------
Balance, December 31, 1994........................ $118,327
Additions......................................... 76,589
Repayments........................................ 96,578
--------
BALANCE, DECEMBER 31, 1995........................ $ 98,338
========
II-56
NOTE E. ALLOWANCE FOR LOAN AND LEASE LOSSES
DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
Balance, January 1............................. $171,734 $169,345 $137,400
Provision for losses charged to expense........ 31,400 17,846 53,311
Allowances of purchased companies.............. -- 1,119 13,310
-------- -------- --------
Subtotal..................................... 203,134 188,310 204,021
-------- -------- --------
Loans charged-off.............................. (42,475) (30,070) (45,618)
Recoveries..................................... 11,499 13,494 10,942
-------- -------- --------
Net charge-offs.............................. (30,976) (16,576) (34,676)
-------- -------- --------
Balance, December 31........................... $172,158 $171,734 $169,345
======== ======== ========
At December 31, 1995, 1994 and 1993, the amount of loans not currently
accruing interest was $61.5 million, $47.0 million and $61.7 million,
respectively, and loans 90 days or more past due and still accruing interest
were $29.1 million, $24.2 million and $21.7 million, respectively. The gross
interest income that would have been earned during 1995 if the outstanding
nonaccrual loans and leases had been current in accordance with the original
terms and had been outstanding throughout the period (or since origination, if
held for part of the period) was approximately $5.7 million. Foreclosed
property was $6.9 million, $12.2 million and $23.5 million at December 31,
1995, 1994 and 1993, respectively.
NOTE F. PREMISES AND EQUIPMENT
DECEMBER 31,
-----------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
Land and land improvements.......................... $ 47,158 $ 55,368
Buildings and building improvements................. 224,469 230,464
Furniture and equipment............................. 232,349 252,998
Capitalized leases on premises and equipment........ 4,257 6,385
----------- -----------
508,233 545,215
Less--accumulated depreciation and amortization..... 196,231 212,146
----------- -----------
Net premises and equipment........................ $ 312,002 $ 333,069
=========== ===========
Depreciation expense, which is included in occupancy and equipment expense,
was $36.0 million, $35.5 million and $41.0 million in 1995, 1994 and 1993,
respectively.
II-57
Southern National has noncancellable leases covering certain premises and
equipment. Total rent expense applicable to operating leases was $28.7
million, $21.9 million and $23.8 million for 1995, 1994 and 1993,
respectively. Future minimum lease payments for operating and capitalized
leases for years subsequent to 1995 are as follows:
LEASES
--------------------------
OPERATING CAPITALIZED
------------ ------------
(DOLLARS IN THOUSANDS)
Year ended December 31:
1996.......................................... $ 18,902 $ 513
1997.......................................... 15,443 513
1998.......................................... 12,488 514
1999.......................................... 10,547 514
2000.......................................... 9,793 514
2001 and years later.......................... 65,974 6,518
------------ ----------
Total minimum lease payments.................... $ 133,147 9,086
============
Less--amount representing interest.............. 4,961
----------
Present value of net minimum payments on capi-
talized leases (Note I)........................ $ 4,125
==========
NOTE G. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
"Consolidated Balance Sheets". The unpaid principal balances of mortgage loans
serviced for others were $5.4 billion and $5.1 billion at December 31, 1995
and 1994, respectively.
The following is a summary of capitalized mortgage servicing rights, net of
accumulated amortization and adjustments necessary to present the balances at
the lower of cost or estimated fair value, which are included in the
"Consolidated Balance Sheets" in other assets:
CAPITALIZED MORTGAGE
SERVICING RIGHTS
----------------------
(DOLLARS IN THOUSANDS)
Balance, December 31, 1994.......................... $ 4,670
Amount capitalized at acquisition of mortgage
loans............................................ 16,751
Amortization expense.............................. (2,761)
Change in valuation allowance..................... (395)
-------
BALANCE, DECEMBER 31, 1995.......................... $18,265
=======
Capitalized mortgage servicing rights are being amortized on a disaggregated
loan basis using an accelerated method over the estimated life of the
servicing income. The servicing rights portfolio is analyzed each quarter to
identify possible impairment using a disaggregated discounted cash flow
methodology that is stratified by predominant risk characteristics. These
characteristics include stratification based on interest rates in intervals of
150 basis points, type of loan and maturity of loan. Based upon this analysis
for impairment, a valuation allowance of $395,000 was recorded as of December
31, 1995.
II-58
NOTE H. SHORT-TERM BORROWED FUNDS
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
Federal funds purchased............................. $ 812,165 $ 1,381,610
Term Federal funds purchased........................ 350,000 --
Securities sold under agreements to repurchase...... 689,517 1,239,492
Master notes........................................ 396,273 254,269
U.S. Treasury tax and loan deposit notes payable.... 63,588 22,713
Short-term Federal Home Loan Bank advances.......... 175,000 --
Other short-term borrowed funds..................... 4,742 4,444
----------- -----------
Total short-term borrowed funds................... $ 2,491,285 $ 2,902,528
=========== ===========
Federal funds purchased represent unsecured borrowings from other banks and
generally mature daily. Term Federal funds purchased are identical to Federal
funds; however, maturities vary and are greater than one day. Securities sold
under agreements to repurchase are borrowings collateralized by securities of
the U.S. Government or its agencies and have maturities ranging from one to
ninety days. U.S. Treasury tax and loan deposit notes payable are payable upon
demand to the U.S. Treasury. Master notes are unsecured, non-negotiable
obligations of Southern National (variable rate commercial paper). Short-term
Federal Home Loan Bank advances are secured by one to four family residential
mortgage loans and generally mature daily.
NOTE I. LONG-TERM DEBT
DECEMBER 31,
------------------------
1995 1994
------------ -----------
(DOLLARS IN THOUSANDS)
$5 million Industrial Revenue Bond, dated 1984, se-
cured by premises with a net book value of
$5,879,000 at December 31, 1995, due in quarterly
installments of $83,340 through the second quarter
1999, and one final installment of $82,940 in
1999. Interest rate is
variable--76.99% of prime--6.544% at December 31,
1995.............................................. $ 1,250 $ 1,583
Capitalized leases, varying maturities to 2028 with
rates from 8.11% to 12.65%. This represents the
unamortized balances due on leases of various fa-
cilities.......................................... 4,125 6,152
Medium-term bank notes, varying maturities to 1996
with rates from 4.73% to 4.84%.................... 201,979 336,923
Advances from Federal Home Loan Bank, varying matu-
rities to 2015 with rates from 1.00% to 8.95%..... 1,175,830 553,796
9.28%, $20 million senior capital notes, dated
1986, due in annual installments. The notes were
paid in full during 1995.......................... -- 7,000
10%, convertible subordinated capital notes, dated
1990, due in 2002. The notes were converted into
Southern National's common stock during 1995...... -- 4,995
Other mortgage indebtedness........................ 751 306
------------ ----------
$ 1,383,935 $ 910,755
============ ==========
Excluding the capitalized leases set forth in Note F, future debt maturities
total $1.4 billion and are $487.1 million, $675.4 million, $64.6 million,
$15.5 million, and $112.0 million for the next five years. The maturities for
2001 and later years are $25.3 million.
II-59
NOTE J. SHAREHOLDERS' EQUITY
The authorized capital stock of Southern National consists of 300,000,000
shares of common stock, $5 par value, and 5,000,000 shares of preferred stock,
$5 par value. At December 31, 1995, 103,357,440 shares of common stock and
733,869 shares of preferred stock were issued and outstanding. On January 11,
1996, Southern National announced a plan to repurchase up to 4.3 million
shares of common stock. On February 28, 1996, Southern National announced that
these shares would be used in the anticipated conversion of the preferred
stock which will be redeemed on March 29, 1996, at the price of $104.05 per
share. Each share of preferred stock is convertible into 5.9068 shares of
common stock.
Stock Option Plans
In April 1994 and May 1995, the shareholders approved Omnibus Stock
Incentive Plans ("Omnibus Plans") which cover the award of incentive stock
options, non-qualified stock options, shares of restricted stock, performance
shares and stock appreciation rights. The Omnibus Plans are intended to allow
Southern National to recruit and retain employees with ability and initiative.
The maximum number of shares that can be issued under the terms of the plans
is 6,000,000. At December 31, 1995, 2,117,419 incentive stock options at
prices ranging from $5.8828 to $26.375 and 2,237,197 non-qualified stock
options at prices ranging from $.01 to $23.7069 were outstanding. The stock
options vest over three years and have a ten year term.
The incentive stock option plan ("ISOP") and the non-qualified stock option
plan ("NQSOP") were established to retain key officers and key management
employees and to offer them the incentive to use their best efforts on behalf
of Southern National. The plans, which expire on December 19, 2000, further
provide for up to 1,101,000 shares of common stock to be reserved for the
granting of options, which have a four year vesting schedule and must be
exercised within ten years from the date granted. Incentive stock options
granted must have an exercise price equal to at least 100% of the fair market
value of common stock on the date granted, and the non-qualified stock options
must have an exercise price equal to at least 85% of the fair market value on
the date granted. At December 31, 1995, options to purchase 416,243 shares of
common stock at prices ranging from $9.50 to $16.75 were outstanding pursuant
to the NQSOP. At December 31, 1995, options to purchase 177,524 shares of
common stock at an exercise price of $19.7770 were outstanding pursuant to the
ISOP.
The Non-Employee Directors' Stock Option Plan ("Directors' Plan") is
intended to provide incentives to non-employee directors to remain on the
Board of Directors and share in the profitability of Southern National and
creates a deferred compensation system for participating non-employee
directors. Each non-employee director may elect to defer 0%, 50% or 100% of
the annual retainer fee for each calendar year and apply that percentage
toward the grant of options to purchase Southern National common stock. Such
elections are required to be in writing and are irrevocable for each calendar
year. The exercise price at which shares of Southern National common stock may
be purchased shall be equal to 75% of the market value of the common stock as
of the date of grant. Options are vested in six months and may be exercised
anytime thereafter until the expiration date, which is 10 years from the date
of grant. The Directors' Plan provides for the reservation of up to 400,000
shares of Southern National common stock. At December 31, 1995, options to
purchase 227,339 shares of common stock at prices ranging from $12.7155 to
$17.0400 were outstanding pursuant to the Directors' Plan.
Southern National also has options outstanding from companies acquired in
prior years. These options, which are not included in the plans described
above, totaled 367,446 as of December 31, 1995, with option prices ranging
from $2.6667 to $23.7069.
II-60
SHARE ACTIVITY
-----------------------------
1995 1994 1993
--------- --------- ---------
OPTION ACTIVITY
Outstanding January 1......................... 4,989,579 4,532,967 4,522,122
Granted ($.01 to $26.38)...................... 1,265,406 1,109,234 1,061,106
Options of acquired companies................. -- -- 76,776
Exercised ($.01 to $23.71).................... 556,972 598,777 1,105,517
Expired or forfeited ($2.67 to $22.93)........ 154,845 53,845 21,520
--------- --------- ---------
Outstanding December 31 ($.01 to $26.38)...... 5,543,168 4,989,579 4,532,967
========= ========= =========
Options exercisable at December 31, 1995
($.01 to $23.71 per share)................... 3,974,332
=========
NOTE K. INCOME TAXES
The total provision for income taxes was allocated as follows:
1995 1994 1993
------- -------- -------
(DOLLARS IN THOUSANDS)
Income from operations........................... $86,063 $124,759 $77,188
Cumulative effect of changes in accounting
principles...................................... -- -- (2,897)
------- -------- -------
Total provision for income taxes............... $86,063 $124,759 $74,291
======= ======== =======
The provision for income taxes attributable to operations was composed of the
following:
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
Currently payable:
Federal...................................... $ 97,420 $133,522 $ 88,449
State........................................ 2,842 9,581 6,970
-------- -------- --------
100,262 143,103 95,419
Deferred (benefit) expense..................... (14,199) (18,344) (18,231)
-------- -------- --------
Provision for income taxes..................... $ 86,063 $124,759 $ 77,188
======== ======== ========
The reasons for the difference between the provision for income taxes
attributable to operations and the amount computed by applying the statutory
federal income tax rate to income before income taxes were as follows:
1995 1994 1993
------- -------- -------
(DOLLARS IN THOUSANDS)
Federal income taxes at statutory rates of 35%.. $92,469 $126,571 $69,048
Tax-exempt income from securities, loans and
leases less related non-deductible interest
expense........................................ (6,503) (6,597) (7,050)
State income taxes, net of federal tax benefit.. 1,561 3,539 2,584
Changes in tax accounting method for bad debts
of savings institutions converting to a
commercial bank................................ 2,594 -- 9,389
Other, net...................................... (4,058) 1,246 3,217
------- -------- -------
Provision for income taxes...................... $86,063 $124,759 $77,188
======= ======== =======
Effective income tax rate....................... 32.6% 34.5% 39.1%
======= ======== =======
II-61
The tax effects of temporary differences that gave rise to significant
portions of the net deferred tax assets (liabilities) in the "Consolidated
Balance Sheets" at December 31 were:
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Allowance for losses........................... $ 64,889 $ 66,103
Deferred compensation.......................... 17,726 5,318
Postretirement benefits other than pensions.... 10,651 15,441
Unrealized losses on securities available for
sale.......................................... -- 47,180
Tax deferred loss on sale of loans............. -- 8,552
Difference in basis of assets (other than de-
preciation)................................... 2,336 6,366
Other.......................................... 14,274 15,699
----------- -----------
Total tax deferred assets........................ 109,876 164,659
----------- -----------
Deferred tax liabilities:
Tax accounting method changes.................. (10,493) (8,113)
Depreciation................................... (15,390) (12,002)
Unrealized gains on securities available for
sale.......................................... (20,014) --
Lease financing................................ (13,558) (12,270)
Dividends on FHLB stock........................ (3,567) (4,681)
Other.......................................... (9,205) (10,187)
----------- -----------
Total tax deferred liabilities................... (72,227) (47,253)
----------- -----------
Net deferred tax asset........................... $ 37,649 $117,406
=========== ===========
The deferred tax assets have been determined to be realizable, and,
accordingly, a valuation allowance was not required. At December 31, 1995,
there were no operating losses, income tax credits or alternative minimum tax
credit carryforwards.
Income tax benefits related to securities losses for 1995 were $7.1 million.
Income taxes on securities gains for 1994 and 1993 were $1.2 million and $6.4
million, respectively.
NOTE L. BENEFIT PLANS
The following table discloses expenses relating to employee benefit plans on
a restated basis.
1995 1994* 1993*
------- ------- -------
(DOLLARS IN THOUSANDS)
Defined benefit plans............................... $15,632 $10,705 $ 8,379
Employee stock ownership plans (ESOP)............... 5,167 5,178 3,843
Defined contribution plans.......................... 4,009 4,246 3,350
------- ------- -------
Total expense related to benefit plans............ $24,808 $20,129 $15,572
======= ======= =======
--------
* Amounts restated for material acquisitions accounted for as poolings-of-
interests.
Retirement Plans
Southern National had a noncontributory defined benefit pension plan
covering substantially all employees. The benefits were based on years of
service and the employee's compensation during the five consecutive years of
employment that produced the highest average pay. Southern National's
contributions to the plan were in amounts between the minimum required for
funding standard account purposes and the maximum deductible for Internal
Revenue Service purposes. Contributions to the plan of $516,000, $5,173,000
and $3,089,000 were made in 1995, 1994 and 1993, respectively.
II-62
Supplemental retirement benefits are provided to certain key officers under
Southern National's Supplemental Executive Retirement Plan, which was
effective January 1, 1989. This plan is not qualified under the Internal
Revenue Code. Although technically an unfunded plan, insurance policies on the
lives of the covered employees are intended to be adequate to fund future
benefits.
BB&T sponsored a noncontributory defined benefit pension plan covering
substantially all employees. The benefits are based on years of service, age
at retirement and the employee's compensation during the last five years of
employment. Contributions to the plan are based upon the Frozen Initial
Liability actuarial funding method and comply with the funding requirements of
the Employee Retirement Income Security Act.
Supplemental retirement benefits are provided to certain key officers under
BB&T's Supplemental Executive Retirement Plans. These plans are not qualified
under the Internal Revenue Code.
Net periodic pension cost, which is included in employee benefits expense,
consisted of the following components in 1995, 1994 and 1993.
1995 1994 1993
------- -------- -------
(DOLLARS IN THOUSANDS)
Service cost..................................... $ 9,658 $ 9,431 $ 6,732
Interest cost.................................... 10,864 9,504 7,988
Actual return on assets.......................... (25,226) 711 (7,947)
Early retirement................................. 3,372 -- --
Net amortization and deferral.................... 16,414 (10,699) (1,050)
------- -------- -------
Net periodic pension cost ..................... $15,082 $ 8,947 $ 5,723
======= ======== =======
The following table sets forth the plans' funded status at December 31, 1995
and 1994.
PLANS FOR WHICH PLANS FOR WHICH
ASSETS EXCEED ACCUMULATED BENEFITS
ACCUMULATED BENEFITS EXCEED ASSETS
---------------------- ----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Accumulated benefit ob-
ligation:
Vested benefits....... $(104,000) $ (87,986) $ -- $ --
Nonvested benefits.... (3,566) (3,061) -- --
---------- ---------- ---------- ----------
$(107,566) $ (91,047) $ -- $ --
========== ========== ========== ==========
Projected benefit
obligation at
December 31............ $(140,394) $ (127,382) $(9,929) $ (4,193)
Plan assets at fair
value.................. 129,574 115,829 -- --
---------- ---------- ---------- ----------
Plan assets in excess of
(less than) projected
benefit obligation..... (10,820) (11,553) (9,929) (4,193)
Unrecognized transition
amount................. (6,162) (6,980) 364 408
Unrecognized prior serv-
ice cost............... (7,503) 1,114 3,313 707
Unrecognized net loss... 16,717 23,161 3,214 649
Minimum liability
adjustment............. -- -- (2,597) --
---------- ---------- ---------- ----------
(Accrued) prepaid pen-
sion cost included in
(other liabilities)
other assets .......... $ (7,768) $ 5,742 $(5,635) $ (2,429)
========== ========== ========== ==========
Actuarial assumptions used in calculating these amounts were:
1995 1994 1993
---- ------- -------
Rate of increase in future compensation............ 5.5% 4.8-6.0% 5.5-6.0%
Weighted average discount rate..................... 7.5 7.8 7.0-8.0
Weighted average expected long-term rate of return
on assets......................................... 8.0 8.0-9.0 9.0
Plan assets consist primarily of obligations of the U.S. Treasury and
Federal agencies and corporations for Southern National and listed stocks and
U.S. government securities for BB&T. Plan assets of the combined plans
II-63
included 7,859,765 and 5,492,021 shares of Southern National common stock at
December 31, 1995 and 1994, respectively.
Effective January 1, 1996, Southern National's and BB&T's qualified pension
plans were merged into a single noncontributory defined benefit pension plan.
This plan covers substantially all employees of the merged institution. Like
the predecessor plans, benefits are based on years of service, age at
retirement and the employee's compensation during the five highest consecutive
years of earnings within the last ten years of employment.
Postretirement Benefits
Effective December 31, 1992, Southern National adopted a revised retiree
medical program ("Plan") in preparation for the implementation of SFAS No.
106, "Accounting for Postretirement Benefits Other Than Pensions." The Plan
covers employees retiring after January 1, 1993 who are eligible for
participation in the Southern National pension plan and have at least ten
years of service. The Plan requires retiree contributions, with a subsidy by
Southern National based upon years of service of the employee at the time of
retirement. The subsidy is adjusted each year for movement of the Consumer
Price Index. There is no employer subsidy for dependent benefits. Employees
who retired prior to January 1, 1993 are grandfathered and may choose from
three comprehensive medical options with varying deductibles. Effective
January 1, 1993, BB&T revised its retiree health care plan to provide a
flexible benefit amount which retirees can use to purchase health care and
life insurance benefits.
Southern National adopted SFAS No. 106 as of January 1, 1993. As a result of
adopting SFAS No. 106, Southern National recognized a cumulative charge for
this change in accounting principle of $12,612,000 (net of $7,595,000 of
deferred income tax benefits). The charge is included under the caption
"Cumulative effect of changes in accounting principles, net of income taxes"
in the "Consolidated Statements of Income." The effect of this change, net of
income taxes and excluding the cumulative charge, for the year ended December
31, 1993 was to decrease net income by $1,304,000.
The following table sets forth the components of the retiree benefit plan
and the amount recognized in the consolidated financial statements at December
31, 1995, 1994 and 1993.
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
Net periodic postretirement benefit cost:
Service cost............................... $ 972 $ 990 $ 491
Interest cost.............................. 2,248 1,841 1,454
Amortization of net loss and other......... 156 104 --
-------- -------- --------
Total expense............................ $ 3,376 $ 2,935 $ 1,945
======== ======== ========
Reconciliation of funded status:
Accumulated postretirement benefit obliga-
tion...................................... $(30,735) $(27,590) $(23,682)
Unrecognized net loss...................... 3,348 1,356 3,797
-------- -------- --------
Accrued postretirement benefit costs
included in other liabilities........... $(27,387) $(26,234) $(19,885)
======== ======== ========
Actuarial assumptions used in calculating these amounts were:
1995 1994 1993
-------- --------- ---------
Annual rate of increase in the per capita
cost of health care claims:
Current year............................ 8.0-11.0% 10.0-12.0% 13.0-15.7%
Final constant amount................... 4.75-5.0 5.0 5.0-6.5
Annual decrease......................... 0.8-1.0 1.0 1.0-2.3
General inflation rate.................... 4.0 4.0 4.0-5.5
Weighted average discount rate............ 7.5 7.8 7.0-8.5
Impact of 1% increase in assumed health
care cost on:............................
Net periodic benefit cost............... 2.0-3.0 0.0-1.0 N/A
Expected postretirement benefit obliga-
tion................................... 3.0-4.0 1.1-3.0 N/A
- --------
N/A--not available.
Effective January 1, 1996, these plans were merged into a single plan.
II-64
Employee Stock Ownership Plan
Southern National's Employee Stock Ownership Plan allows all employees to
acquire common stock in Southern National by contributing up to 15% of their
salaries to the plan. Southern National matches 100% of each employee's
contributions, up to a maximum of 6% of the employee's salary.
Savings and Thrift Plan
The Savings and Thrift Plan permits eligible employees to make contributions
up to 16% of base compensation, with Southern National's matching
contributions up to 4% of the employee's base compensation.
Effective January 1, 1996, Southern National's Employee Stock Ownership Plan
was merged into the former BB&T Savings and Thrift Plan to form the Southern
National Corporation 401-k Savings Plan. The new plan permits employees to
contribute up to 16% of their compensation. Southern National matches up to 6%
of the employee's compensation with a 100% matching contribution.
Settlement Agreements
In connection with the merger of Southern National and BB&T, two executive
officers of Southern National agreed to retire during 1995. Southern National
entered into settlement agreements with both executive officers to settle
existing employment contracts. One of the settlement agreements provides for
annual payments of $1,655,000 less the company-provided portion of certain
benefits payable under existing benefit plans. The payments continue for the
life of the officer and his current wife but in no event for a period of less
than fifteen years. The executive officer has agreed not to compete in a
defined geographic area for fifteen years and to serve as a consultant to the
merged company for five years. The settlement agreement with the other
executive officer provides for annual payments of $312,000 for ten years or
until death. The present value of future payments to be made pursuant to these
agreements was recorded in 1995.
Other
There are various other employment contracts, deferred compensation
arrangements and covenants not to compete with selected members of management
and certain retirees.
NOTE M. COMMITMENTS AND CONTINGENCIES
Southern National is a party to financial instruments with off balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, options written,
standby letters of credit and financial guarantees, interest rate caps and
floors written, interest rate swaps and forward and futures contracts.
Southern National's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit and standby letters of credit and financial guarantees written is
represented by the contractual notional amount of those instruments. Southern
National uses the same credit policies in making commitments and conditional
obligations as it does for on balance sheet instruments.
CONTRACT OR
NOTIONAL AMOUNT AT
DECEMBER 31,
-----------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend, originate or purchase
credit.......................................... $ 4,372,503 $ 3,733,152
Standby letters of credit and financial
guarantees written.............................. 138,911 143,660
Commercial letters of credit..................... 27,742 17,089
Securities lent.................................. -- 51,137
Financial instruments whose notional or contract
amounts exceed the amount of credit risk:
Commitments to sell loans and securities......... 261,000 40,392
Foreign exchange contracts....................... 109,747 69,751
II-65
Commitments to extend credit are arrangements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Southern National evaluates
each customer's creditworthiness on a case-by-case basis. The amount and type
of collateral obtained, if deemed necessary by Southern National upon
extension of credit, is based on management's evaluation of the
creditworthiness of the counterparty.
Standby letters of credit and financial guarantees written are conditional
commitments issued by Southern National to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing and similar transactions. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers, and letters of credit are collateralized when
necessary.
Forward commitments to sell mortgage loans and mortgage-backed securities
are contracts for delayed delivery of securities in which Southern National
agrees to make delivery at a specified future date of a specified instrument,
at a specified price or yield. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
securities' values and interest rates.
Regulatory Proceedings
Legislation was proposed during the third quarter of 1995 that would result
in the payment of a one-time assessment by financial institutions with
deposits insured by the Savings Association Insurance Fund (SAIF). Because of
numerous acquisitions of thrift institutions, approximately 40% of Southern
National's deposits are SAIF-insured. The one-time assessment rate, to be
determined by the Federal Deposit Insurance Corporation, is expected to be
$.80 per $100 of deposits. Commercial banks with SAIF-insured deposits
acquired from thrifts will likely be allowed a reduction of 20% of the
assessment base. This adjustment would be available only to banks with less
than 50% of their total deposits in the SAIF. The pretax impact of this one-
time assessment on Southern National is not expected to exceed $41.0 million.
Southern National will record this expense when the legislation is enacted.
Legal Proceedings
The nature of the business of Southern National's banking subsidiaries
ordinarily results in a certain amount of litigation. The subsidiaries of
Southern National are involved in various legal proceedings, all of which are
considered incidental to the normal conduct of business. Management believes
that the liabilities arising from these proceedings will not have a materially
adverse effect on the consolidated financial position or consolidated results
of operations of Southern National.
NOTE N. REGULATORY REQUIREMENTS AND OTHER RESTRICTIONS
The Banks are required by the Board of Governors of the Federal Reserve
System to maintain reserve balances based on certain percentages of deposit
types. At December 31, 1995, these reserves amounted to $34.3 million.
Subject to restrictions imposed by state laws and federal regulations, the
Boards of Directors of the subsidiary banks could have declared dividends from
their retained earnings up to $670.8 million at December 31, 1995. The
subsidiary banks are prohibited from paying dividends from their capital stock
and paid-in capital accounts and are required by regulatory authorities to
maintain minimum capital levels. Southern National was in compliance with
these requirements at December 31, 1995.
II-66
NOTE O. PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1995 1994
---------- ----------
ASSETS
Cash and due from banks................................. $ 5,318 $ 164,013
Interest-bearing bank balances.......................... 396,331 62,146
Investment securities................................... 17,870 78,010
Investment in bank subsidiaries, at underlying book
value.................................................. 1,641,833 1,450,626
Investment in other subsidiaries, at underlying book
value.................................................. 4,128 4,373
Premises................................................ 5,879 6,158
Other assets............................................ 44,030 8,025
---------- ----------
Total assets.......................................... $2,115,389 $1,773,351
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowed funds............................... $ 396,273 $ 254,269
Dividends payable....................................... 24,389 10,201
Accounts payable and accrued liabilities................ 19,414 3,821
Capital notes and mortgages............................. 1,250 8,583
---------- ----------
Total liabilities..................................... 441,326 276,874
---------- ----------
Total shareholders' equity............................ 1,674,063 1,496,477
---------- ----------
Total liabilities and shareholders' equity............ $2,115,389 $1,773,351
========== ==========
CONDENSED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
1995 1994 1993
-------- -------- --------
INCOME
Dividends from subsidiaries..................... $226,386 $138,201 $101,216
Interest and other income from subsidiaries..... 17,269 13,291 10,864
Interest on investment securities............... 900 1,560 2,295
Other income.................................... 6,143 3,595 2,230
-------- -------- --------
Total income.................................. 250,698 156,647 116,605
-------- -------- --------
EXPENSES
Interest expense................................ 17,859 12,393 9,315
Occupancy expense............................... 171 172 450
Other expenses.................................. 23,126 6,927 6,078
-------- -------- --------
Total expenses................................ 41,156 19,492 15,843
-------- -------- --------
Income before income tax benefit and equity in
undistributed earnings of subsidiaries.......... 209,542 137,155 100,762
Income tax benefit............................... 6,140 433 22
-------- -------- --------
Income before equity in undistributed earnings of
subsidiaries.................................... 215,682 137,588 100,784
Net income of subsidiaries (less than) in excess
of dividends from subsidiaries.................. (37,549) 99,284 (14,956)
-------- -------- --------
NET INCOME....................................... $178,133 $236,872 $ 85,828
======== ======== ========
II-67
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
1995 1994 1993
--------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 178,133 $236,872 $ 85,828
Adjustments to reconcile net income to net
cash provided by operating activities:
Net income of subsidiaries less than (in
excess of) dividends from subsidiaries..... 37,549 (99,284) 14,956
Depreciation of premises and equipment...... 171 172 1,041
Amortization of unearned compensation....... 3,128 1,711 730
Discount accretion and premium amortization
on securities.............................. (298) 83 126
Loss on sales of securities................. 340 -- --
Loss on disposal of premises and equipment.. 29 -- --
Reconciliation of fiscal year of merged
companies to calendar year................. -- -- (51)
Increase in receivables from subsidiaries... -- (23,914) (7,384)
(Increase) decrease in other assets......... (153,759) 63,592 (62,423)
Increase (decrease) in accounts payable and
accrued liabilities........................ 16,773 (955) (707)
--------- -------- ---------
Net cash provided by operating activities. 82,066 178,277 32,116
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available
for sale.................................... 87 10,128 --
Proceeds from maturities of securities
available for sale.......................... 63,500 65,002 180
Purchases of securities available for sale... (6,067) (63,177) --
Proceeds from sales of securities held to
maturity.................................... 520 -- --
Proceeds from maturities of securities held
to maturity................................. -- -- 5,000
Purchases of securities held to maturity..... -- -- (66,915)
Repayment of note from bank subsidiary....... -- 30,000 --
Sale of savings bank subsidiary to bank
subsidiary.................................. -- 58,883 --
Proceeds from sales of premises and
equipment................................... 79 -- --
Investment in subsidiaries................... -- (67,492) (116)
Cash payment for stock acquired through
purchase conversions........................ -- -- (28,818)
Cash payment for purchased companies......... -- -- (58,250)
Other........................................ -- (32,328) (3,379)
--------- -------- ---------
Net cash provided by (used in) investing
activities............................... 58,119 1,016 (152,298)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in long-term debt................... (7,333) (53,333) (3,334)
Net increase in short-term borrowings........ 142,004 95,614 48,050
Advances from bank subsidiary................ -- -- 58,250
Repayment of advance from bank subsidiary.... -- (58,250) --
Net proceeds from common stock issued........ 43,781 23,630 113,160
Common stock acquired and retired............ (49,682) (23,562) (30,275)
Cash dividends paid on common and preferred
stock....................................... (93,465) (76,805) (61,056)
Other........................................ -- 1,656 1,551
--------- -------- ---------
Net cash provided by (used in) financing
activities............................... 35,305 (91,050) 126,346
--------- -------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS..... 175,490 88,243 6,164
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR......................................... 226,159 137,916 131,752
--------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR...... $ 401,649 $226,159 $ 137,916
========= ======== =========
NOTE P. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires Southern National to disclose the estimated fair value of its on- and
off-balance sheet financial instruments. A financial instrument is defined by
SFAS No. 107 as cash, evidence of an ownership interest in an entity or a
contract that creates a contractual obligation or right to deliver to or
receive cash or another financial instrument from a second entity on
potentially favorable or unfavorable terms.
II-68
Fair value estimates are made at a point in time, based on relevant market
data and information about the financial instrument. SFAS No. 107 specifies
that fair values should be calculated based on the value of one trading unit
without regard to any premium or discount that may result from concentrations
of ownership of a financial instrument, possible tax ramifications, estimated
transaction costs that may result from bulk sales or the relationship between
various financial instruments. Because no readily available market exists for
a significant portion of Southern National's financial instruments, fair value
estimates for these instruments are based on judgments regarding current
economic conditions, currency and interest rate risk characteristics, loss
experience and other factors. Many of these estimates involve uncertainties
and matters of significant judgment and cannot be determined with precision.
Therefore, the calculated fair value estimates cannot always be substantiated
by comparison to independent markets and, in many cases, may not be realizable
in a current sale of the instrument. Changes in assumptions could
significantly affect the estimates.
The following methods and assumptions were used by Southern National in
estimating the fair value of its financial instruments at December 31, 1995
and 1994.
Cash and cash equivalents: For these short-term instruments, the carrying
amounts are a reasonable estimate of fair values.
Securities: Fair values for securities are based on quoted market prices, if
available. If quoted market prices are not available, fair values are based on
quoted market prices for similar securities.
Loans receivable: The fair values for certain mortgage loans and credit card
loans are based on quoted prices of similar loans, adjusted for differences in
loan characteristics. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently being offered
for loans with similar terms and credit quality. The carrying amounts of
accrued interest approximate fair values.
Deposit liabilities: The fair values for demand deposits, interest-checking
accounts, savings accounts and certain money market accounts are, by
definition, equal to the amount payable on demand at the reporting date, i.e.,
their carrying amounts. Fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies current interest rates
to aggregate expected maturities.
Short-term borrowed funds: The carrying amounts of Federal funds purchased,
borrowings under repurchase agreements, master notes and other short-term
borrowings approximate their fair values.
Long-term debt: The fair values of long-term debt are estimated based on
quoted market prices for similar instruments or by using discounted cash flow
analyses, based on Southern National's current incremental borrowing rates for
similar types of instruments.
Interest rate swap agreements: The fair values of interest rate swaps (used
for hedging purposes) are the estimated amounts that the Corporation would
receive or pay to terminate the swap agreements at the reporting date, taking
into account current interest rates and the current creditworthiness of the
swap counterparties.
Commitments to extend credit, standby letters of credit and financial
guarantees written: The fair values of commitments are estimated using the
fees charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair values also consider the
difference between current levels of interest rates and the committed rates.
The fair values of guarantees and letters of credit are estimated based on
fees currently charged for similar agreements.
Other off-balance sheet instruments: The fair values for off-balance sheet
instruments (futures, forwards, options, and commitments to sell or purchase
financial instruments) are estimated based on quoted prices, if available. For
instruments for which there are no quoted prices, fair values are estimated
using current settlement values or pricing models.
II-69
1995 1994
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Financial assets:
Cash and cash
equivalents............. $ 702,761 $ 702,761 $ 671,777 $ 671,777
Securities available for
sale.................... 5,201,344 5,201,344 3,459,698 3,459,698
Securities held to
maturity................ 153,969 159,886 1,965,419 1,889,911
Loans and leases
Loans.................. 13,496,944 13,591,792 12,850,548 12,589,297
Leases................. 315,541 N/A 257,554 N/A
Allowance for losses... (172,158) N/A (171,734) N/A
----------- -----------
Net loans and
leases.............. $13,640,327 $12,936,368
=========== ===========
Financial liabilities:
Deposits................. $14,684,056 14,717,187 $14,314,154 14,320,080
Short-term borrowed
funds................... 2,491,285 2,491,285 2,902,528 2,902,528
Long-term debt........... 1,379,810 1,385,634 904,603 904,780
Capitalized leases....... 4,125 N/A 6,152 N/A
- -------------------------------------------------------------------------------
NOTIONAL/ NOTIONAL/
CONTRACT FAIR CONTRACT FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
Unrecognized financial
instruments:
Interest rate swaps, caps
and floors.............. $ 743,413 $ (6,067) $ 2,411,325 $ (92,838)
Commitments to extend,
originate or purchase
credit.................. 4,372,503 (7,654) 3,733,152 (12,993)
Standby and commercial
letters of credit and
financial guarantees
written................. 166,653 (2,500) 160,749 (2,121)
Commitments to sell loans
and securities.......... 261,000 (3,232) 40,392 29
Option contracts
purchased............... 8,000 -- 3,000 8
Option contracts
written................. 8,000 (160) -- --
- --------
N/A--not applicable.
NOTE Q. 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 1995,
management used interest rate swaps, caps and floors to supplement balance
sheet repositioning. Such actions were designed to lower the interest
sensitivity of Southern National 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 December 31, 1995, derivatives with a total notional
value of $743.4 million, with terms ranging up to seven years, were
outstanding.
II-70
The following tables set forth certain information concerning Southern
National's interest rate swaps at December 31, 1995:
INTEREST RATE SWAPS, CAPS AND FLOORS
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
NOTIONAL RECEIVE PAY FAIR
TYPE AMOUNT RATE RATE VALUE
---- ----------- ----------- ---------- -----------
Receive fixed swaps......... $ 140,000 7.16% 5.95% $ 1,005
Pay fixed swaps............. 353,413 5.85 5.84 (3,384)
Basis swaps................. 250,000 5.81 5.76 (3,688)
---------- -------- ---------- -----------
Total....................... $ 743,413 6.08% 5.83% $ (6,067)
========== ======== ========== ===========
RECEIVE PAY FIXED BASIS
YEAR-TO-DATE ACTIVITY FIXED SWAPS SWAPS SWAPS TOTAL
--------------------- ----------- ----------- ---------- -----------
Balance, December 31, 1994.. $1,200,000 $111,325 $1,100,000 $ 2,411,325
Additions................... 50,000 254,700 -- 304,700
Maturities/amortizations.... (710,000) (11,175) -- (721,175)
Terminations................ (400,000) (1,437) (850,000) (1,251,437)
---------- -------- ---------- -----------
Balance, December 31, 1995.. $ 140,000 $353,413 $ 250,000 $ 743,413
========== ======== ========== ===========
ONE YEAR ONE TO FIVE FIVE TO 10
MATURITY SCHEDULE OR LESS YEARS YEARS TOTAL
----------------- ----------- ----------- ---------- -----------
Receive fixed swaps......... $ 40,000 $100,000 $ -- $ 140,000
Pay fixed swaps............. 41,525 307,219 4,669 353,413
Basis swaps................. -- 250,000 -- 250,000
---------- -------- ---------- -----------
Total....................... $ 81,525 $657,219 $ 4,669 $ 743,413
========== ======== ========== ===========
As of December 31, 1995, unearned income from new swap transactions and
unamortized expenses from terminated swap transactions were $972,000 and $2.6
million, respectively. The unamortized deferred premiums and the realized
deferred losses will be recognized in the next year. For the year ended
December 31, 1995, the combination of active and terminated transactions
resulted in pretax expenses of $10.3 million.
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 1995, options were
written on securities totaling $673.2 million. Option fee income was $2.0
million for 1995. There were no unexercised options outstanding at December
31, 1995.
Southern National also utilizes over-the-counter put and call options in its
mortgage banking activities to hedge the mortgage pipeline. At December 31,
1995, purchased option contracts with a par value of $8.0 million remain
outstanding. Written option contracts with a par value of $8.0 million were
also outstanding.
The $743.4 million of derivatives are primarily used to hedge variable rate
commercial loans, adjustable rate mortgage loans, retail certificates of
deposit and floating rate notes.
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
II-71
transactions were large commercial banks and investment banks. Annually, the
counterparties are reviewed for creditworthiness by Southern National's credit
policy group. Where appropriate, master netting agreements are arranged or
collateral is obtained in the form of rights to securities.
Other risks associated with interest-sensitive derivatives include the
impact on fixed positions during periods of changing interest rates. Indexed
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 from an environment of rising interest rates in which
derivatives produce negative cash flows while being 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.
II-72
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 HEREUNTO DULY AUTHORIZED, IN THE CITY OF WINSTON-SALEM, STATE OF
NORTH CAROLINA, ON MARCH 18, 1996.
Southern National Corporation
(Registrant)
By: /s/ John A. Allison, IV
----------------------------------
JOHN A. ALLISON, IV
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT
AND IN THE CAPACITIES INDICATED ON MARCH 18, 1996.
/s/ John A. Allison, IV
-----------------------------------
JOHN A. ALLISON, IV
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
/s/ Scott E. Reed
-----------------------------------
SCOTT E. REED
SENIOR EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
/s/ Sherry A. Kellett
-----------------------------------
SHERRY A. KELLETT
EXECUTIVE VICE PRESIDENT AND
CONTROLLER
A Majority of the Directors of the Registrant are included.
/s/ Paul B. Barringer
-----------------------------------
PAUL B. BARRINGER
DIRECTOR
/s/ W. R. Cuthbertson, Jr.
-----------------------------------
W. R. CUTHBERTSON, JR.
DIRECTOR
/s/ A. J. Dooley, Sr.
-----------------------------------
A. J. DOOLEY, SR.
DIRECTOR
II-73
/s/ Joe L. Dudley, Sr.
--------------------------------------
JOE L. DUDLEY, SR.
DIRECTOR
/s/ Tom D. Efird
--------------------------------------
TOM D. EFIRD
DIRECTOR
/s/ O. William Fenn, Jr.
--------------------------------------
O. WILLIAM FENN, JR.
DIRECTOR
/s/ Paul S. Goldsmith
--------------------------------------
PAUL S. GOLDSMITH
DIRECTOR
/s/ Lloyd Vincent Hackley
--------------------------------------
LLOYD VINCENT HACKLEY
DIRECTOR
/s/ Ernest F. Hardee
--------------------------------------
ERNEST F. HARDEE
DIRECTOR
/s/ Richard Janeway, M.D.
--------------------------------------
RICHARD JANEWAY, M.D.
DIRECTOR
/s/ J. Ernest Lathem, M.D.
--------------------------------------
J. ERNEST LATHEM, M.D.
DIRECTOR
/s/ Joseph A. McAleer, Jr.
--------------------------------------
JOSEPH A. MCALEER, JR.
DIRECTOR
/s/ Albert O. McCauley
--------------------------------------
ALBERT O. MCCAULEY
DIRECTOR
II-74
/s/ James Dickson McLean, Jr.
-------------------------------------
JAMES DICKSON MCLEAN, JR.
DIRECTOR
/s/ Charles E. Nichols
-------------------------------------
CHARLES E. NICHOLS
DIRECTOR
/s/ L. Glenn Orr, Jr.
-------------------------------------
L. GLENN ORR, JR.
DIRECTOR
/s/ A. Winniett Peters
-------------------------------------
A. WINNIETT PETERS
DIRECTOR
/s/ Richard L. Player, Jr.
-------------------------------------
RICHARD L. PLAYER, JR.
DIRECTOR
/s/ C. Edward Pleasants, Jr.
-------------------------------------
C. EDWARD PLEASANTS, JR.
DIRECTOR
/s/ Nido R. Qubein
-------------------------------------
NIDO R. QUBEIN
DIRECTOR
/s/ A. Tab Williams, Jr.
-------------------------------------
A. TAB WILLIAMS, JR.
DIRECTOR
-------------------------------------
JAMES H. MAYNARD
DIRECTOR
-------------------------------------
RONALD E. DEAL
DIRECTOR
II-75
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
2(a) Agreement and Plan of Incorporated herein by
Reorganization dated as of July reference to Registration No.
29, 1994 and amended and restated 33-57861.
as of October 22, 1994 between
Southern National and BB&T.
2(b) Plan of Merger as of July 29, 1994 Incorporated herein by
as amended and restated on October reference to Registration No.
22, 1994 between Southern National 33-57861.
and BB&T.
3(a) Articles of Incorporation of Incorporated herein by
Southern National Corporation, as reference to Registration No.
amended. 33-29586
3(b) Bylaws of Southern National Incorporated herein by
Corporation, as amended. reference to Registration No.
33-29586.
4 Form of Articles of Amendment to Incorporated herein by
Articles of Incorporation of reference to Registration No.
Southern National Corporation 33-44557.
relating to Cumulative Convertible
Preferred Stock, Series A.
10(a)* Employment Contract dated July 16, Incorporated herein by
1981, by and between Branch reference to Registration No.
Banking and Trust Company (as 33-29586.
successor to Southern National
Bank of North Carolina), Southern
National Corporation and L. Glenn
Orr, Jr.
10(b)* Employment Contract dated July 17, Incorporated herein by
1986, by and between Southern reference to Registration No.
National Corporation, Branch 33-8137.
Banking and Trust Company (as
successor to Southern National
Bank of North Carolina) and Gary
E. Carlton.
10(c)* Amendment to Employment Contract Incorporated herein by
dated June 15, 1987, by and reference to Registration No.
between Southern National 33-29586.
Corporation, Branch Banking and
Trust Company (as successor to
Southern National Bank of North
Carolina) and Gary E. Carlton.
10(d)* Amendment to Employment Contract Incorporated herein by
dated June 15, 1989, by and reference to Registration No.
between Southern National 33-29586.
Corporation, Branch Banking and
Trust Company (as successor to
Southern National Bank of North
Carolina) and L. Glenn Orr, Jr.
10(e)* Death Benefit Only Plan, Dated Incorporated herein by
April 23, 1990, by and between reference to Registration No.
Branch Banking and Trust Company 33-33984.
(as successor to Southern National
Bank of North Carolina) and L.
Glenn Orr, Jr.
10(f)* Non-Employee Directors' Stock Incorporated herein by
Option Plan of Southern National reference to Registration No.
Corporation. 33-57871.
10(g)* Southern National Corporation 1994 Incorporated herein by
Omnibus Stock Incentive Plan. reference to Registration No.
33-57865.
10(h)* Settlement and Non-Compete Incorporated herein by
Agreement, dated February 28, reference to Registration No.
1995, by and between Southern 33-56437.
National Corporation and L. Glenn
Orr, Jr.
10(i)* Settlement Agreement, Waiver and Incorporated herein by
General Release dated September reference to Registration No.
19, 1994, by and between Southern 33-56437.
National Corporation, Branch
Banking and Trust Company (as
successor to Southern National
Bank of North Carolina) and Gary
E. Carlton.
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
10(j) Southern National Corporation Incorporated herein by
Savings and Thrift Plan. reference to Registration No.
33-57867.
10(k)* Southern National Corporation Incorporated herein by
1995 Omnibus Stock Incentive reference to Southern National
Plan. Corporation's definitive Proxy
Statement for the 1995 Annual
Meeting of Shareholders, dated
April 21, 1995.
10(l)* Form of Branch Banking and Trust Incorporated by reference to
Company Long-Term Incentive Plan. the identified exhibit under
Southern National
Corporation's (as successor to
BB&T Financial Corporation)
Form 10-Q, filed May 14, 1991.
10(m)* Form of Branch Banking and Trust Incorporated by reference to
Company Executive Incentive the identified exhibit under
Compensation Plan. Southern National
Corporation's (as successor to
BB&T Financial Corporation)
Form 10-K, filed February 22,
1985.
10(n)* Form of BB&T Financial Incorporated by reference to
Corporation Non-Employee Director the identified exhibit under
Stock Option Plan. Southern National
Corporation's (as successor to
BB&T Financial Corporation)
Form 10-K, filed March 16,
1992.
11 Statement re computation of Filed herewith.
earnings per share.
21 Subsidiaries of the Registrant. Filed herewith.
22(a) Proxy Statement of the 1996 Future filing incorporated by
Annual Meeting of Shareholders, reference pursuant to the
dated April 23, 1996. General Instructions to Form
10-K Section 33,251 G(3).
23(a) Opinion of Independent Public Filed herewith on page II-43.
Accountants.
23(b) Consent of Independent Public Filed herewith.
Accountants.
23(c) Opinion of Independent Public Filed herewith.
Accountants on financial
statement schedule.
27 Financial Data Schedule. Filed as an exhibit to the
electronically-filed document
as required.
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* Management compensatory plan or arrangement.