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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, 1996
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
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, $5 PAR VALUE NEW YORK STOCK EXCHANGE
SHARE PURCHASE RIGHTS 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
amendment 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, 1997 was approximately $4.2 billion. The number of
shares of the Registrant's Common Stock outstanding on January 31, 1997 was
109,466,577.
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on April 22, 1997, are incorporated by reference in
Part III of this Report.
The Exhibit Index begins on page 81.
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1
CROSS REFERENCE INDEX
PAGE
------
PART I Item 1 Business............................................. 4
Item 2 Properties........................................... 18, 59
Item 3 Legal Proceedings.................................... 70
Item 4 Submission of Matters to a Vote of Shareholders...... 2
None.
PART II Item 5 Market for the Registrant's Common Stock and Related 38-39
Shareholder Matters.................................
On November 7, 1996, the Registrant issued 70,207
shares of common stock to the three shareholders of
an insurance agency based in Greenville, South
Carolina in exchange for the transfer of
substantially all of the net assets of such agency
to Branch Banking and Trust Company ("BB&T-NC"). On
November 13, 1996, the Registrant issued 48,120
shares of common stock to the two shareholders of a
second insurance agency based in Greenville, South
Carolina in exchange for the transfer of
substantially all of the net assets of such agency
to BB&T-NC. On November 22, 1996, the Registrant
issued 492,063 shares of common stock to the five
shareholders of an insurance agency based in
Columbia, South Carolina in exchange for the
transfer of substantially all of the net assets of
such agency to BB&T-NC. The Registrant made each of
the foregoing issuances in reliance on the exemption
from registration provided under Section 4(2) of the
Securities Act and based on the number of purchasers
(as to each transaction and in the aggregate), their
ability to evaluate the merits and risks of the
investment and the absence of public solicitation of
investors.
Item 6 Selected Financial Data.............................. 42
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 19
Item 8 Financial Statements and Supplementary Data.......... 41
Consolidated Balance Sheets at December 31, 1996 and
1995................................................ 45
Consolidated Statements of Income for each of the
years in the three-year period ended December 31,
1996................................................ 46
Consolidated Statements of Changes in Shareholders'
Equity for each of the years in the three-year
period ended December 31, 1996...................... 47
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended December 31,
1996................................................ 48
Notes to Consolidated Financial Statements........... 49
Report of Independent Public Accountants............. 44
Quarterly Financial Summary for 1996 and 1995........ 41
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.
None.
PART III Item 10 Directors and Executive Officers of the Registrant... *, 15
Item 11 Executive Compensation............................... *
Item 12 Security Ownership of Certain Beneficial Owners and
Management.......................................... *
Item 13 Certain Relationships and Related Transactions....... *
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 on January 22, 1996, under Item 5 to report the
results of operations and financial condition as of December
31, 1995. Southern National filed a Form 8-K under Item 5 on
April 15, 1996 to report the results of operations and
financial condition as of March 31, 1996. Southern National
filed a Form 8-K under Item 5 on May 3, 1996 to report plans
to acquire Regional Acceptance Corporation of Greenville,
North Carolina. Southern National filed a Form 8-K under Item
5 on July 12, 1996 to report the results of operations and
financial condition as of June 30, 1996. Southern National
filed a Form 8-K under Item 5 on August 27, 1996 to report
plans to acquire Fidelity Financial Bankshares Corporation of
Richmond, Virginia. Southern National filed a Form 8-K under
Item 5 on September 3, 1996 to report that the acquisition of
Regional Acceptance Corporation had been completed through
the issuance of 5.85 million shares of common stock. Southern
National filed a Form 8-K under Item 5 on October 11, 1996 to
report the results of operations and financial condition as
of September 30, 1996. Southern National filed a Form 8-K
under Item 5 on October 11, 1996 to report plans to purchase
a number of common shares equal to the amount issued in the
Fidelity Financial Bankshares Corporation transaction.
Southern National also reported that the transaction would be
accounted for as a purchase, instead of a pooling of
interests, which was originally planned. Southern National
filed a Form 8-K under Item 5 on November 4, 1996 to report
plans to acquire United Carolina Bancshares Corporation of
Whiteville, North Carolina. Southern National filed a Form 8-
K under Item 5 on December 19, 1996 to announce the adoption
of a shareholder rights plan. Southern National filed a Form
8-K under Item 5 on January 14, 1997 to report the results of
operations and financial condition as of December 31, 1996.
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* The information called for by Item 10 is incorporated herein by reference to
the information that appears under the headings "Additional Matters Relating
to the SNC Meeting--Election of Directors" and "--Section 16(a) Beneficial
Ownership Reporting Compliance" in the Registrant's Proxy Statement for the
1997 Annual Meeting of Shareholders.
The information called for by Item 11 is incorporated herein by reference to
the information that appears under the headings "Additional Matters Relating
to the SNC Meeting--Compensation of Executive Officers", "Retirement Plans"
and "SNC Compensation Committee Report on Executive Compensation" in the
Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders.
The information called for by Item 12 is incorporated herein by reference to
the information that appears under the headings "Additional Matters Relating
to the SNC Meeting--Security Ownership" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Registrant's Proxy Statement for the
1997 Annual Meeting of Shareholders.
The information called for by Item 13 is incorporated herein by reference to
the information that appears under the headings "Additional Matters Relating
to the SNC Meeting--Compensation Committee Interlocks and Insider
Participation" and "Transactions with Officers and Directors" in the
Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders.
3
BUSINESS
GENERAL
Southern National Corporation ("Southern National" or the "Corporation") 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 and
Virginia. The principal assets of Southern National are all of the outstanding
shares of common stock of Branch Banking and Trust Company, of Winston-Salem,
North Carolina; BB&T Financial Corporation of South Carolina, located in
Greenville, South Carolina, which in turn owns all the outstanding shares of
Branch Banking and Trust Company of South Carolina; BB&T Financial Corporation
of Virginia, which in turn owns all the outstanding shares of Branch Banking
and Trust Company of Virginia; and Regional Acceptance Corporation of
Greenville, North Carolina.
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 299 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-sized businesses, public
agencies and local governments, trust customers and individuals. BB&T-NC's
subsidiaries include BB&T Leasing Corp., in Charlotte, North Carolina, which
offers lease financing to commercial businesses. 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 Insurance Services, Inc., located in
Raleigh, North Carolina, offers life and property and casualty insurance on an
agency basis. Southern National currently has the largest independent
insurance agency network in North and South Carolina. BB&T-NC has numerous
additional subsidiaries, including 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-NC also owns 51% of AutoBase Information Systems, Inc.
("AutoBase"), a Charlotte, North Carolina-based company that uses advanced
technologies to simplify the car-buying process for consumers and automotive
dealers.
Branch Banking & Trust Company of South Carolina ("BB&T-SC") serves South
Carolina through 95 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-sized 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 the retailing of
mutual funds, U.S. Government securities, municipal securities, fixed and
variable rate insurance annuity products and unit investment trusts.
Branch Banking & Trust Company of Virginia ("BB&T-VA"), operates 21 banking
offices in the Hampton Roads Region of Virginia. BB&T-VA offers a full range
of commercial and retail banking services and provides Southern National with
a strong initial presence in Virginia.
Regional Acceptance Corporation ("Regional Acceptance"), a subsidiary of
Southern National, was acquired effective September 1, 1996. Regional
Acceptance, which operates 28 branch offices in the Carolinas, Tennessee and
Virginia, specializes in indirect financing for consumer purchases of mid-
model and late-model used automobiles.
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.
4
The following table discloses selected information related to Southern
National's banking subsidiaries:
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TABLE 1
SELECTED FINANCIAL DATA OF BANKING SUBSIDIARIES
AS OF / FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
BB&T-NC BB&T-SC BB&T-VA
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1996 1995 1994 1996 1995 1994 1996 1995 1994
----------- ----------- ----------- ---------- ---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Total assets........... $16,595,684 $15,991,534 $15,245,447 $3,826,477 $3,818,547 $4,084,659 $790,955 $737,462 $700,343
Securities............. 4,164,538 4,236,682 4,088,564 929,753 942,193 1,064,061 147,019 154,358 187,461
Loans and leases, net
of unearned income*... 11,253,963 10,599,611 9,922,471 2,635,833 2,703,600 2,725,868 550,218 505,767 450,798
Deposits............... 11,975,969 11,544,525 10,925,196 2,987,021 2,923,981 2,956,733 690,318 669,000 628,750
Shareholder's equity... 1,307,223 1,111,680 1,104,458 373,622 360,262 303,058 67,039 60,734 47,865
Net interest income.... 609,150 555,765 549,231 159,000 153,669 157,550 35,144 31,231 28,863
Provision for loan and
lease losses.......... 36,875 24,772 8,004 7,355 4,718 7,241 2,550 1,910 2,600
Noninterest income..... 277,775 198,122 183,862 54,459 55,094 44,432 10,296 4,650 8,793
Noninterest expense.... 543,788 528,477 446,902 128,315 114,915 120,929 24,839 25,965 24,832
Net income............. 208,406 136,016 183,240 52,785 58,566 47,109 11,791 4,853 7,011
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* Includes loans held for sale.
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Acquisitions and Pending Mergers
Profitability and market share have been enhanced through both internal
growth and acquisitions in recent years. The acquisition strategy of Southern
National is focused on three primary objectives: (1) to pursue in-market
acquisitions of high-quality banks and thrifts in the $250 million to $5
billion range, (2) to acquire companies in niche markets that provide products
or services that can be offered to Southern National's current customer base,
and (3) to build a portfolio of "venture capital" investments by taking an
equity interest in first and second stage companies that have a product with
potential application for the financial services industry.
On September 1, 1996, Southern National acquired Regional Acceptance in a
stock transaction valued at $167 million. Regional Acceptance's shareholders
received .3861 shares of Southern National's common stock for each share of
common stock held.
On August 22, 1996, Southern National announced plans to acquire Fidelity
Financial Bankshares Corporation of Richmond, Virginia, ("Fidelity") in a
stock transaction valued at $59.4 million. Fidelity, with $321 million in
assets, operates seven branches in the Richmond metropolitan area through its
subsidiary, Fidelity Federal Savings Bank. The savings bank will merge into
BB&T-VA. The merger of Fidelity will be accounted for as a purchase.
On August 29, 1996, Southern National announced that it had become a
majority shareholder of AutoBase, by purchasing 51% of the Charlotte, North
Carolina-based company's outstanding common stock. AutoBase will continue to
operate under its name as a subsidiary of BB&T-NC.
Southern National also purchased certain assets and liabilities of four
insurance agencies during 1996 with combined premiums of $65 million. These
agencies were Boyle-Vaughan Associates, Inc., of Columbia, South Carolina, the
William Goldsmith Agency Inc. and the C. Dan Joyner Insurance Agency, both of
Greenville, South Carolina and the James R. Lingle Agency, Inc. of Florence,
South Carolina. These acquisitions solidify Southern National's position as
the Carolinas' largest network of independent insurance agencies.
5
On November 4, 1996, Southern National and United Carolina Bancshares
Corporation ("UCB") jointly announced the signing of a merger agreement. The
merger will be accounted for as a pooling of interests in which UCB
shareholders will receive 1.135 shares of Southern National common stock for
each share of UCB common stock held. The transaction is valued at $985
million.
On January 23, 1997, Southern National announced plans to acquire Refloat,
Inc. of Mount Airy, North Carolina, and its principal subsidiary, Sheffield
Financial Corp., a finance company in Clemmons, North Carolina that
specializes in loans to small commercial lawn care businesses across the
country.
On February 4, 1997, Southern National announced plans to acquire Phillips
Factors Corporation and its subsidiaries, Phillips Financial Corporation and
Phillips Acceptance Corporation, all of High Point, North Carolina. Phillips
Financial Corporation, which will operate as a subsidiary of Southern
National, purchases and manages receivables in the temporary staffing industry
nationwide. It also provides payroll processing services to that industry.
Phillips Factors Corporation buys and manages account receivables primarily in
the furniture, textiles and home furnishings-related industries.
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
financial products continues to grow as customers move to nontraditional
financial institutions. For additional information on markets, Southern
National's competitive position and strategies, see "Market Area" and "Lending
Activities" below.
MARKET AREA
Southern National's primary market area consists of North Carolina, South
Carolina and Virginia. The area's employment base consists of manufacturing
industries, service, wholesale/retail, 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. Southern National believes its 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 move
into new states and communities and to target small to mid-sized commercial
customers in these areas.
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 Southern National becoming an important
contributor to the prosperity and well-being of its 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 steady,
with increasing momentum, during 1996. 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
6
small business lending and retail banking through the branches to generate
additional growth. During 1996, management's lending focus emphasized
marketing loan products from a quality, service-driven perspective. After the
merger of Southern National and BB&T Financial Corporation in early 1995,
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,
-----------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Loans--
Commercial, financial
and agricultural...... $ 2,375,121 $ 2,098,306 $ 2,679,046 $ 2,031,561 $ 1,868,658
Real estate--
construction and land
development........... 1,228,043 949,513 701,181 702,108 592,267
Real estate--mortgage.. 8,513,945 8,671,941 7,787,792 7,114,136 5,947,434
Consumer............... 1,830,519 1,716,399 1,702,058 1,608,443 1,532,536
----------- ----------- ----------- ----------- -----------
Loans held for invest-
ment................. 13,947,628 13,436,159 12,870,077 11,456,248 9,940,895
Loans held for sale... 219,469 245,280 136,855 682,097 426,281
----------- ----------- ----------- ----------- -----------
Total loans.......... 14,167,097 13,681,439 13,006,932 12,138,345 10,367,176
Leases.................. 576,991 376,152 304,544 225,312 170,358
----------- ----------- ----------- ----------- -----------
Total loans and
leases............... $14,744,088 $14,057,591 $13,311,476 $12,363,657 $10,537,534
=========== =========== =========== =========== ===========
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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 for terms up to 30 years based on the
qualifications of the borrower. Except in the Community Reinvestment Act
("CRA") 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 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-
7
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 currently 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
Corporation's 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. 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, pre-leasing 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 Corporation's 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.
Through the acquisition of Regional Acceptance, Southern National is
expanding the sales finance function by accepting riskier loans on customer
purchases of mid-model to late-model used automobiles. Such loans are priced
higher than Southern National's normal grade consumer loans based on the
higher level of risk associated with these types of loans.
Leasing
Southern National provides commercial leasing products and services in North
Carolina, South Carolina and Virginia primarily through BB&T 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 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 is
8
seeking to augment the existing customer base with larger commercial
customers. For the twenty-two 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.
Southern National also solicits leasing business from municipalities in
North and South Carolina through its subsidiary banks.
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TABLE 3
SELECTED LOAN MATURITIES AND INTEREST SENSITIVITY*
DECEMBER 31, 1996
------------------------------------
COMMERCIAL,
FINANCIAL
AND REAL ESTATE:
AGRICULTURAL CONSTRUCTION TOTAL
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
Fixed rate:
1 year or less (2)...................... $ 185,734 $ 189,241 $ 374,975
1-5 years............................... 294,990 93,208 388,198
After 5 years........................... 65,553 -- 65,553
---------- ---------- ----------
Total................................. 546,277 282,449 828,726
---------- ---------- ----------
Variable rate:
1 year or less (2)...................... 859,556 633,547 1,493,103
1-5 years............................... 877,845 312,047 1,189,892
After 5 years........................... 91,443 -- 91,443
---------- ---------- ----------
Total................................. 1,828,844 945,594 2,774,438
---------- ---------- ----------
Total loans and leases (1).......... $2,375,121 $1,228,043 $3,603,164
========== ========== ==========
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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............................ $ 1,830,519
(ii) real estate mortgage loans.............................. 8,513,945
(iii) loans held for sale.................................... 219,469
(iv) leases.................................................. 576,991
------------
$ 11,140,924
============
(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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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
9
against interest income in the current period and any prior year interest is
charged off. 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 collectability 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
collectability 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.
- -------------------------------------------------------------------------------
TABLE 4
ALLOCATION OF RESERVE BY CATEGORY
DECEMBER 31,
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ----------------- -----------------
% 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...... $ 25,750 16% $ 27,824 15% $ 35,869 20% $ 44,018 17% $ 31,036 18%
Real estate:
Construction and land
development........... 11,036 8 13,443 7 10,874 5 12,311 6 10,260 5
Mortgage............... 77,251 60 76,079 63 63,186 60 63,996 62 50,444 60
-------- --- -------- --- -------- --- -------- --- -------- ---
Real estate--total..... 88,287 68 89,522 70 74,060 65 76,307 68 60,704 65
-------- --- -------- --- -------- --- -------- --- -------- ---
Consumer................ 38,626 12 27,254 13 25,812 13 24,581 14 21,677 15
Leases.................. 3,679 4 3,443 2 906 2 1,218 1 1,313 2
Unallocated............. 27,590 -- 27,545 -- 37,455 -- 24,664 -- 21,910 --
-------- --- -------- --- -------- --- -------- --- -------- ---
Total.................. $183,932 100% $175,588 100% $174,102 100% $170,788 100% $136,640 100%
======== === ======== === ======== === ======== === ======== ===
- -------------------------------------------------------------------------------
10
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,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Balance, beginning of
period................. $ 175,588 $ 174,102 $ 170,788 $ 138,456 $ 117,113
----------- ----------- ----------- ----------- -----------
Charge-offs:
Commercial, financial
and agricultural..... (8,966) (10,151) (10,759) (23,912) (27,131)
Real estate........... (10,555) (9,993) (6,694) (7,502) (10,796)
Consumer.............. (39,195) (23,969) (13,467) (14,369) (18,873)
Lease receivables..... (768) (614) (647) (771) (1,428)
----------- ----------- ----------- ----------- -----------
Total charge-offs.... (59,484) (44,727) (31,567) (46,554) (58,228)
----------- ----------- ----------- ----------- -----------
Recoveries:
Commercial, financial
and agricultural..... 4,632 4,177 6,770 5,892 3,872
Real estate........... 4,501 2,567 2,308 1,261 3,340
Consumer.............. 4,898 4,442 4,208 3,716 3,096
Lease receivables..... 136 395 295 149 188
----------- ----------- ----------- ----------- -----------
Total recoveries..... 14,167 11,581 13,581 11,018 10,496
----------- ----------- ----------- ----------- -----------
Net charge-offs......... (45,317) (33,146) (17,986) (35,536) (47,732)
----------- ----------- ----------- ----------- -----------
Provision charged to
expense............... 53,661 34,632 20,181 54,558 63,584
----------- ----------- ----------- ----------- -----------
Allowance of loans
acquired in purchase
transactions.......... -- -- 1,119 13,310 3,675
----------- ----------- ----------- ----------- -----------
Balance, end of period.. $ 183,932 $ 175,588 $ 174,102 $ 170,788 $ 136,640
=========== =========== =========== =========== ===========
Average loans and
leases*................ $14,190,985 $13,768,629 $12,456,509 $11,235,092 $10,194,358
Net charge-offs as a
percentage of average
loans and leases....... 0.32% 0.24% 0.14% 0.32% 0.47%
=========== =========== =========== =========== ===========
- --------
* Loans and leases are net of unearned income and include loans held for sale.
- -------------------------------------------------------------------------------
NONPERFORMING ASSETS AND CLASSIFIED ASSETS
Nonperforming assets include nonaccrual loans and leases, foreclosed real
estate and other repossessions. 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 or unsecured consumer loan becomes
90 days past due, the loan is placed on nonaccrual status. For mortgage and
most other 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
11
agreement on payment with the borrower. If it becomes necessary to foreclose
on loans, acquired assets are aggressively marketed to minimize the cost of
carrying such assets.
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 bank 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, Market Risk Management,
of "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Investment strategies are established by the ALCO in consideration of the
interest rate cycle, balance sheet mix, 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 1996 was established and
continually adjusted within an environment of stable short-term interest rates
since the second quarter, as set by the Federal Reserve's Open Market
Committee.
At December 31, 1996, the investment portfolio represented approximately 25%
of the total assets of the Corporation. Management has judged overall
liquidity and interest rate sensitivity to be adequate to allow the continued
growth of both the investment and loan portfolios. As described below, during
1996 and 1995 whole mortgage loans were securitized and placed in the
investment portfolio, increasing investment yields, improving the liquidity of
those assets, and reducing required loan reserves. A similar amount of lower-
yielding investments was allowed to mature; thus, the total amount of
securities holdings was only slightly reduced as a percentage of total assets.
Overall liquidity was maintained at acceptable levels and balance sheet
profitability was increased.
As has been the case for the past several years, investment activity during
1996 was centered on obligations of the U.S. Treasury and Federal agencies.
Including mortgage-backed securities, U.S. Treasuries and Federal agencies
comprised 92% 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 contractual maturity of the
entire portfolio at December 31, 1996 was 7 years and 4 months compared to 3
years at December 31, 1995. This increase in maturity reflects rapid growth in
Southern National's holdings of mortgage-backed securities resulting from the
securitization of $1.2 billion of mortgage loans during 1995 and 1996. These
mortgage-backed securities have replaced U.S. Treasuries in the portfolio
which have significantly shorter contractual maturities than mortgage-backed
securities. However, the actual cash flows relating to the investment
portfolio, particularly for mortgage-backed securities, are expected to be
significantly shorter than contractual maturity because the actual payments of
the securities and the resultant opportunity to reinvest those cash flows are
subject to prepayments. At December 31, 1996, the approximate
12
expected maturity of Southern National's investment portfolio was 3 years.
Table 11--"Securities" shows the maturity distribution by category of Southern
National's investment portfolio at December 31, 1996.
The following table provides information regarding the composition of
Southern National's securities portfolio.
- -------------------------------------------------------------------------------
TABLE 6
COMPOSITION OF SECURITIES PORTFOLIO
DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Securities held to maturity (at amortized
cost):
U.S. Treasury, government and agency obli-
gations................................... $ 6,283 $ 9,461 $1,190,558
States and political subdivisions.......... 118,435 144,508 165,520
Mortgage-backed securities................. -- -- 608,676
Other securities........................... -- -- 665
---------- ---------- ----------
Total securities held to maturity........ 124,718 153,969 1,965,419
---------- ---------- ----------
Securities available for sale (at estimated
fair value):
U.S. Treasury, government and agency
obligations............................... 3,115,625 4,060,423 3,024,792
States and political subdivisions.......... 22,875 20,773 16,918
Mortgage-backed securities................. 1,725,715 977,727 310,314
Other securities........................... 272,574 142,421 107,674
---------- ---------- ----------
Total securities available for sale...... 5,136,789 5,201,344 3,459,698
---------- ---------- ----------
Total securities............................. $5,261,507 $5,355,313 $5,425,117
========== ========== ==========
- -------------------------------------------------------------------------------
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 other 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 rate savings, 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.
13
- -------------------------------------------------------------------------------
TABLE 7
TIME DEPOSITS $100,000 AND OVER
(DOLLARS IN THOUSANDS)
Maturity
Less than three months................................. $ 881,276
Four through six months................................ 451,835
Seven through twelve months............................ 352,348
Over twelve months..................................... 318,921
----------
BALANCE AT DECEMBER 31, 1996............................. $2,004,380
==========
At December 31, 1996, the scheduled maturities of time deposits are $5.7
billion, $2.1 billion, $214.2 million, $151.7 million and $57.9 million for
each of the next five years. The maturities for 2002 and later years total
$22.7 million.
- -------------------------------------------------------------------------------
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. Components
of short-term borrowed funds at year end were master notes, securities sold
under repurchase agreements, FHLB advances, 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 short-term borrowed funds:
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Maximum outstanding at any month-end
during the year.......................... $2,326,704 $3,828,258 $3,060,225
Average outstanding during the year....... 2,011,565 3,148,179 2,389,428
Average interest rate during the year..... 5.27% 5.91% 4.33%
Average interest rate at end of year...... 4.79 5.36 5.48
- -------------------------------------------------------------------------------
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, 1996.
14
- -------------------------------------------------------------------------------
TABLE 9
CAPITAL ADEQUACY
REGULATORY SOUTHERN BB&T- BB&T- BB&T-
MINIMUMS NATIONAL NC SC VA
---------- -------- ----- ----- -----
Risk-based capital ratios:
Tier 1 capital (1)................... 4.0% 11.7% 11.0% 14.4% 11.7%
Total risk-based capital (2)......... 8.0 14.7 12.3 15.7 12.9
Tier 1 leverage ratio (3).............. 3.0 8.0 7.5 9.7 8.6
- --------
(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.
- -------------------------------------------------------------------------------
EXECUTIVE OFFICERS OF SOUTHERN NATIONAL
Southern National's Chairman and Chief Executive Officer is John A. Allison,
IV. Mr. Allison is 48 and has 26 years of service with the Corporation. (For
purposes of this paragraph, the term "Corporation" refers to both Southern
National Corporation and the former BB&T Financial Corporation.) W. Kendall
Chalk is the Senior Executive Vice President for the Lending Group. Mr. Chalk
is 51 and has served for 22 years. Robert E. Greene is the President of Branch
Banking and Trust Company and is the Senior Executive Vice President for
Administrative Services for the Corporation. Mr. Greene is 47 and has served
the Corporation for 24 years. Kelly S. King is the President of Southern
National Corporation and is the Senior Executive Vice President for the
Branching Network. Mr. King is 48 and has 25 years of service with the
Corporation. Morris D. Marley is the Senior Executive Vice President for Funds
Management. Mr. Marley is 46 and has served the Corporation for 12 years.
Scott E. Reed is the Senior Executive Vice President and Chief Financial
Officer. Mr. Reed is 48 and has 25 years of service with the Corporation.
Michael W. Sperry is the Senior Executive Vice President for Corporate
Banking. Mr. Sperry is 52 and has 7 years of service with the Corporation.
Henry G. Williamson, Jr. is the Chief Operating Officer for the Corporate
Group. Mr. Williamson is 49 and has 25 years of service with the Corporation.
Prior to the merger of BB&T Financial Corporation with Southern National
Corporation in 1995, Messrs. Allison, Chalk, King, Reed and Williamson served
in substantially the same positions with BB&T Financial Corporation.
15
CERTAIN REGULATORY CONSIDERATIONS
GENERAL
As a bank holding company, Southern National is subject to regulation under
the Bank Holding Company Act of 1956 (as amended, the "BHCA") and the
examination and reporting requirements of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). Under the BHCA, a bank
holding company may not directly or indirectly acquire ownership or control of
more than 5% of the voting shares or substantially all of the assets of any
additional bank or merge or consolidate with another bank holding company
without the prior approval of the Federal Reserve Board. The BHCA also
generally limits the activities of a bank holding company to that of banking,
managing or controlling banks, or any other activity which is determined to be
so closely related to banking or to managing or controlling banks that an
exception is allowed for those activities.
As state-chartered commercial banks, BB&T-NC, BB&T-SC and BB&T-VA
(collectively, the "Banks") are subject to regulation, supervision and
examination by state bank authorities in their respective home states. These
authorities include 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's Bureau of Financial Institutions, in the case
of BB&T-VA. Each of the Banks is also subject to regulation, supervision and
examination by the Federal Deposit Insurance Corporation (the "FDIC"). State
and federal law also govern the activities in which the Banks engage, the
investments they make and the aggregate amount of loans that may be granted to
one borrower. Various consumer and compliance laws and regulations also affect
the Banks' operations.
The earnings of Southern National's subsidiaries, and therefore the earnings
of Southern National, are affected by general economic conditions, management
policies and the legislative and governmental actions of various regulatory
authorities, including those referred to above. The following description
summarizes some of the state and federal laws to which Southern National 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
Southern National is a legal entity separate and distinct from its banking
and other subsidiaries. A major portion of the revenues of Southern National
result from amounts paid as dividends to Southern National by its bank
subsidiaries. Southern National's banking subsidiaries are subject to state
laws and regulations that limit the amount of dividends they can pay. In
addition, both Southern National and the Banks are subject to various general
regulatory policies relating to the payment of dividends, including
requirements to maintain adequate capital above regulatory minimums. The
Federal Reserve Board has indicated that banking organizations should
generally pay dividends only if (1) the organization's net income available to
common shareholders over the past year has been sufficient to fund fully the
dividends and (2) the prospective rate of earnings retention appears
consistent with the organization's capital needs, asset quality and overall
financial condition. Southern National does not expect that any of these laws,
regulations or policies will materially impact the ability of its Banks to pay
dividends. During the year ended December 31, 1996, the Banks recorded $125.7
million in cash dividends to Southern National.
CAPITAL
The Federal Reserve Board and the FDIC have issued substantially similar
risk-based and leverage capital guidelines applicable to banking organizations
they supervise. Under the risk-based capital requirements, Southern National
and the Banks are each generally required to maintain a minimum ratio of total
capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit), of 8%. 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 certain subordinated
16
debt, certain hybrid capital instruments and other 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, 1996, Southern
National's Tier 1 capital and total capital ratios were 11.7% and 14.7%,
respectively, and the ratio of total capital to total risk-adjusted assets for
BB&T-NC, BB&T-SC, and BB&T-VA were 12.3%, 15.7% and 12.9%, respectively.
In addition, each of the Federal bank regulatory agencies has established
minimum leverage capital ratio requirements for banking organizations. These
requirements provide for a minimum leverage ratio of Tier 1 capital to
adjusted average quarterly assets equal to 3% for banks and bank holding
companies that meet certain specified criteria. All other banks and bank
holding companies will generally be required to maintain a leverage ratio of
at least 100 to 200 basis points above the stated minimum. Southern National's
leverage ratio at December 31, 1996 was 8.0%, and the Banks' leverage ratios
were 7.5%, 9.7% and 8.6%, respectively.
The risk-based capital standards of both the Federal Reserve Board and the
FDIC 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 guidelines
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 Federal Reserve Board
also has recently issued additional capital guidelines for bank holding
companies that engage in certain trading activities.
DEPOSIT INSURANCE ASSESSMENTS
The deposits of each Bank are insured by the FDIC up to the limits set forth
under applicable law. A majority of the deposits of the Banks are subject to
the deposit insurance assessments of the Bank Insurance Fund ("BIF") of the
FDIC. However, approximately 40% of the deposits of BB&T-NC and BB&T-SC
(relating to the Banks' acquisitions of various savings associations) are
subject to assessments imposed by the Savings Association Insurance Fund
("SAIF") of the FDIC.
Pursuant to budget reconciliation legislation enacted in 1996, the FDIC
imposed a special assessment on SAIF-assessable deposits of $.657 per $100 of
SAIF-assessable deposits in order to increase the SAIF's net worth to 1.25% of
SAIF-insured deposits as of October 1, 1996. Certain institutions that engaged
in thrift acquisitions, including BB&T-NC and BB&T-VA, received a 20% discount
on the assessment. As a result, the pre-tax impact of the special assessment
on Southern National was approximately $33 million and was recorded as an
expense as of September 30, 1996.
The FDIC thereafter equalized the assessment rates for BIF-insured and SAIF-
insured deposits effective January 1, 1997. Thus, for the semi-annual period
beginning January 1, 1997, the assessments imposed on all FDIC deposits for
deposit insurance have an effective rate ranging from 0 to 27 basis points per
$100 of insured deposits, depending on the institution's capital position and
other supervisory factors. However, because the legislation enacted in 1996
requires that both SAIF-insured and BIF-insured deposits pay a pro rata
portion of the interest due on the obligations issued by the Financing
Corporation ("FICO"), the FDIC is assessing BIF-insured deposits an additional
1.30 basis points per $100 of deposits, and SAIF-insured deposits an
additional 6.48 basis points per $100 of deposits, to cover those obligations.
OTHER SAFETY AND SOUNDNESS REGULATIONS
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution becomes in danger of default or is in
default. For example, under a policy of the Federal Reserve Board with respect
to bank holding company operations, a bank holding company is required to
serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions
17
in circumstances where it might not do so otherwise. In addition, the "cross-
guarantee" provisions of Federal law require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the SAIF or the BIF as a result of the default of a
commonly controlled insured depository institution or for any assistance
provided by the FDIC to a commonly controlled insured depository institution
in danger of default. The FDIC may decline to enforce the cross-guarantee
provision if it determines that a waiver is in the best interests of the SAIF
or the BIF or both. The FDIC's claim for reimbursement is superior to claims
of shareholders of the insured depository institution or its holding company
but is subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institution.
The Federal banking agencies also have broad powers under current Federal
law to take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institution
in question is well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized or critically undercapitalized, as defined by
the law. As of December 31, 1996, Southern National and each of the Banks were
classified as well-capitalized.
State regulatory authorities also have broad enforcement powers over the
Banks, including the power to impose fines and other civil and criminal
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. The North
Carolina Commissioner also 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, is conducting
its business in an unauthorized or unsafe manner, is in an unsafe or unsound
condition to transact its business or has an impairment of its capital stock.
INTERSTATE BANKING AND BRANCHING
Current Federal law authorizes interstate acquisitions of banks and bank
holding companies without geographic limitation. Effective June 1, 1997, a
bank headquartered in one state will be authorized to merge with a bank
headquartered in another state, as long as neither of the states has opted out
of such interstate merger authority prior to such date. States are authorized
to enact laws permitting such interstate bank merger transactions prior to
June 1, 1997, as well as authorizing a bank to establish "de novo" interstate
branches. North Carolina, South Carolina and Virginia have enacted early "opt
in" laws, permitting interstate bank merger transactions. Once a bank has
established branches in a state through an interstate merger transaction, the
bank may establish and acquire additional branches at any location in the
state where a bank headquartered in that state could have established or
acquired branches under applicable Federal or state law.
EMPLOYEES
At December 31, 1996, Southern National had approximately 7,800 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, North
Carolina. 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. See
Note F. "Premises and Equipment" of Notes to Consolidated Financial Statements
in this report.
18
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,
1996, 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 1996 performance.
This report contains certain forward-looking statements with respect to the
financial condition, results of operations and business of Southern National.
These forward-looking statements involve certain risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) competitive pressure in the banking industry
increases significantly; (2) changes in the interest rate environment reduce
margins; (3) general economic conditions, either nationally or regionally, are
less favorable than expected, resulting in, among other things, a
deterioration in credit quality; (4) changes occur in the regulatory
environment; (5) changes occur in business conditions and inflation; (6)
expected cost savings associated with pending mergers cannot be fully
realized; (7) deposit attrition, customer loss or revenue loss following
pending mergers is greater than expected; (8) required operational
divestitures associated with pending mergers are greater than expected; and
(9) changes occur in the securities markets.
Economic indicators during 1996 revealed steady, modest growth in the
economy and relatively low pressure on inflation. Job growth, retail sales,
auto sales and home sales were moderate, with growth rates easing by the end
of the year. Consumer confidence remained high throughout 1996, despite low
levels of growth in the gross domestic product. The Federal Reserve's Open
Market Committee, which determines pricing on key central funding sources,
voted to cut the Federal funds rate 25 basis points to 5.25% in January, 1996.
This was the central bank's only action on interest rates during the year. The
commercial banking industry experienced slower growth in loans, with overall
loan growth falling into the single digits. 1996 continued to be a year of
industry consolidation, with several large bank mergers. Credit quality also
began to modestly erode during the year, particularly in revolving credit
portfolios, creating concern for institutions with large credit card
portfolios.
ANALYSIS OF FINANCIAL CONDITION
Average assets totaled $20.6 billion in 1996, an increase of approximately
.8% over the average of $20.4 billion in 1995. Average assets increased 7.0%
in 1995 compared to 1994. At the end of 1996, assets totaled $21.2 billion.
The modest growth during 1996 reflects a restructuring of the balance sheet
undertaken by management during 1995. As further discussed below, Southern
National has changed the composition of assets by securitizing mortgage loans
and replacing U.S. Treasuries in the securities portfolio with the resulting
mortgage-backed securities. These efforts have improved net interest margin by
improving the yields of both the loans and securities portfolios while
enabling management to pay down more volatile short-term borrowed funds. These
actions have served to improve earnings while maintaining a steady level of
total and average assets.
Southern National's other assets increased $120.9 million in 1996 as a
result of increases in cash surrender value of life insurance, up $58.9
million, mortgage servicing rights, which increased $18.8 million, and
intangible assets, up $13.9 million.
The five-year compound rate of growth in average assets was 8.5%. Over the
same five-year period, the compound annual growth rates based on average
balances have been 9.0% for loans, 9.2% for securities and 5.3% for deposits.
All growth rates have been enhanced by the effects of acquisitions accounted
for as purchases.
19
- -------------------------------------------------------------------------------
TABLE 10
COMPOSITION OF AVERAGE TOTAL ASSETS
% CHANGE
----------------
1996 V. 1995 V.
1996 1995 1994 1995 1994
----------- ----------- ----------- ------- -------
(DOLLARS IN THOUSANDS)
Securities*............. $ 5,175,119 $ 5,405,773 $ 5,350,982 (4.3)% 1.0 %
Federal funds sold and
other earning assets... 13,631 44,384 130,670 (69.3) (66.0)
Loans and leases, net of
unearned income**...... 14,190,985 13,768,629 12,456,509 3.1 10.5
----------- ----------- -----------
Average earning assets.. 19,379,735 19,218,786 17,938,161 .8 7.1
Non-earning assets...... 1,194,335 1,185,084 1,134,455 .8 4.5
----------- ----------- -----------
Average total assets.... $20,574,070 $20,403,870 $19,072,616 .8 % 7.0 %
=========== =========== ===========
Average earning assets
as percent of average
total assets........... 94.2% 94.2% 94.1%
=========== =========== ===========
- --------
* 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
historically emphasized investments with a maturity of five years or less
because of the changing interest rate environment and to provide greater
flexibility in balance sheet management. As a result of the acquisition of
longer-term mortgage-backed securities, and the runoff of lower-yielding,
shorter maturity U.S. Treasuries, the maturity of the total portfolio now
exceeds seven years. However, the actual expected maturity of the investment
portfolio is approximately three years because of the faster prepayment
streams associated with mortgage-backed securities. 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 the fourth quarter of 1995 and throughout 1996, Southern National
securitized mortgages held in the loan portfolio and transferred them to the
investment portfolio. Management determined that this strategy would increase
yields in the investment portfolio by allowing lower-yielding securities to
run off and replacing them with higher-yielding mortgage-backed securities.
Total outstanding securities decreased 1.8% in 1996 to a total of $5.3
billion at the end of the year. Securities held to maturity only make up 2.4%
of the total portfolio and are primarily composed of investments in states and
municipalities. Such securities are carried at amortized cost and totaled
$124.7 million at year end, compared to $154.0 million outstanding at the end
of 1995. Market valuation gains in the Corporation's held-to-maturity category
affect neither earnings nor capital. The held-to-maturity portfolio had a net
unrealized gain of $3.7 million at December 31, 1996.
Securities available for sale totaled $5.1 billion at year end and are
carried at estimated fair value in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115. The available-for-sale portfolio is
primarily composed of investments in U.S. Treasuries, government and agency
obligations, which, excluding mortgage-backed securities, composed 60.7% of
the outstanding balance at year end. This percentage has decreased from the
1995 percentage of 78.1%, which reflects management's efforts to invest in
higher yielding mortgage-backed securities obtained through the securitization
of a portion of Southern National's mortgage loan portfolio. At December 31,
1996, mortgage-backed securities comprised 33.6% of the available-
20
for-sale portfolio, compared to 18.8% at the end of 1995. The available-for-
sale portfolio also contains investments in states and municipalities, which
composed less than 1% of the portfolio, and equity and other securities, which
composed the remaining 5.3% of the portfolio. The percentage of holdings in
states and municipalities did not significantly change from the prior year.
The available-for-sale portfolio composed 97.6% of total securities. During
the fourth quarter of 1995, Southern National transferred $1.6 billion of
securities which were previously classified as held to maturity to the
available-for-sale category. 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 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 believes that this classification allows
more flexibility in the day-to-day management of the overall portfolio than
the held-to-maturity classifications. Southern National held no securities
classified as trading at December 31, 1996 or 1995.
The market value of the available-for-sale portfolio was $20.1 million
greater than the amortized cost of these securities. At December 31, 1996,
Southern National's available-for-sale portfolio had net unrealized
appreciation, net of tax, of $11.8 million, which is reported as a separate
component of equity. This compares to net unrealized appreciation of $31.2
million at December 31, 1995. Equity adjustments resulting from market
valuation gains and losses do not represent permanent increases or reductions
in equity. If securities that are categorized as available for sale are held
until they mature for strategic reasons, or if market values improve during
the period of time held, any fluctuations in estimated fair value will be
reflected as a separate component of equity, net of tax. If securities so
designated are sold, then the actual gains or losses realized are reported in
current period earnings.
The fully taxable equivalent ("FTE") yield on the total securities portfolio
was 6.69% for the year ended December 31, 1996, compared to 6.22% for the
prior year. The improvement in FTE yield resulted from higher yields for each
category of investments. U.S. Treasuries improved from 6.05% to 6.50%,
mortgage-backed securities increased from 6.60% to 6.94% and state and
municipal securities grew from 8.94% to 8.99%.
Management expects interest rates to remain relatively stable throughout
1997. A major investment strategy for the first half of 1997 will be to
selectively replace lower-yielding securities with other high-quality U.S.
Treasury and Federal agency obligations, with short and intermediate
maturities. The Corporation's Asset/Liability Management Committee ("ALCO")
will continually evaluate such strategies in consideration of actual economic
and balance sheet developments.
21
- -------------------------------------------------------------------------------
TABLE 11
SECURITIES
DECEMBER 31, 1996
--------------------------------
CARRYING VALUE AVERAGE YIELD (3)
-------------- -----------------
(DOLLARS IN THOUSANDS)
U.S. Treasury, government and agency obliga-
tions (1)
Within one year............................ $ 568,228 6.31%
One to five years.......................... 2,837,819 6.56
Five to ten years.......................... 152,960 6.55
After ten years............................ 1,288,616 7.21
---------- ----
Total.................................... 4,847,623 6.70
---------- ----
States and political subdivisions
Within one year............................ 18,944 8.46
One to five years.......................... 90,759 8.81
Five to ten years.......................... 31,262 8.80
After ten years............................ 345 7.83
---------- ----
Total.................................... 141,310 8.76
---------- ----
Other securities
Within one year............................ 100 6.24
One to five years.......................... 2,968 8.22
Five to ten years.......................... 185,556 6.68
---------- ----
Total.................................... 188,624 6.70
---------- ----
Securities with no stated maturity........... 83,950 8.22
---------- ----
Total securities (2)..................... $5,261,507 6.78%
========== ====
- --------
(1) Included in U.S. Treasury, government and agency obligations are mortgage-
backed securities totaling $1.7 billion 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 $124.7 million disclosed at
amortized cost and securities available for sale of $5.1 billion disclosed
at estimated fair value.
(3) Taxable equivalent basis as applied to amortized cost.
- -------------------------------------------------------------------------------
LOANS AND LEASES
Net loans and leases, including loans held for sale, totaled approximately
$14.4 billion at the end of 1996. This represented an increase of $623.7
million in 1996 or 4.5%. This rate of growth includes the impact of $1.2
billion in mortgage loans securitizations. Excluding the impact of the
mortgage loan securitizations, loans and leases, including loans held for
sale, grew at a rate of 10.1% from December 31, 1995 to December 31, 1996.
Average loans for the twelve months increased 3.1% over the prior year.
Excluding the impact of the securitizations, average loans increased 7.9%
compared with year-end 1995.
The objective of these loan securitizations has been to maintain adequate
regulatory liquidity requirements while using proceeds from maturities of
lower-yielding U.S. Treasuries to fund higher-yielding consumer and commercial
loans and to reduce short-term borrowed funds.
22
The net yield on loans has decreased from 9.23% for the twelve months ended
December 1995 to 9.12% for the current year, attributable to overall market
rates. A better indicator of the success of the balance sheet management
strategies is the improvement in overall net interest margin (FTE) from 4.14%
in 1995 to 4.45% for the current year.
Southern National's long range lending strategy is to maintain a rate of
internal growth which approximates that of its markets in the Carolinas and
Virginia. Management believes that this will result in a rate of increase
which will be sustainable and profitable. Average commercial loans increased
at a rate of 7.4% during 1996 and yielded 9.0%. Average consumer loans grew
7.2% over the course of the year and yielded 10.5%. Average mortgage loans,
including the impact of securitizations, decreased 6.9% during 1996, while
yielding 7.9%. Excluding the impact of the securitizations, average mortgage
loans increased 9.3%.
The acquisition of Regional Acceptance Corporation ("Regional Acceptance")
in the third quarter of 1996 is expected to increase consumer loan growth and
change the composition of the loan portfolio to include a greater percentage
of higher-yielding consumer loans. Regional Acceptance specializes in indirect
financing for consumer purchases of mid-model and late-model used automobiles.
Southern National concentrated efforts on expanding the leasing function
throughout 1996. Municipal leasing, primarily tax-exempt leases with counties
and municipalities, was stronger than in the prior year. The leasing function,
which provides a quality stream of earnings, has developed numerous lease-
based products and services that have been effectively marketed to current
Southern National customers and noncustomers. End of period lease receivables,
gross of unearned income, grew $200.8 million or 53.3%, during 1996.
Management will seek to continue the current balance sheet strategies
entering 1997. The trends in loan growth show increasing momentum in demand
during the third and fourth quarters of 1996. Excluding the impact of the
mortgage loan securitizations, end of period loans grew at an annualized rate
of 12.3% during the fourth quarter of 1996 compared to the third quarter.
Growth in average loans improved to 10.0% for the fourth quarter compared to
the third quarter, with particular strength in commercial loans, which
increased 14.3% over the same time frame.
ASSET QUALITY
The credit quality of the loan and lease portfolio remained relatively
constant during 1996 compared to 1995. As reflected in Table 12--"Asset
Quality," nonperforming assets ("NPAs") were $80.2 million at year end, up
$4.3 million or 5.6% for the year. However, as a percentage of total assets,
NPAs were .38% at December 31, 1996 compared to .37% at the end of the prior
year. As a percentage of loans plus foreclosed properties, NPAs were .55% at
December 31, 1996 compared to .54% at the end of 1995. The allowance for loan
and lease losses as a percentage of loans and leases was 1.26% at December 31,
1996, compared to 1.26% at December 31, 1995. Loans 90 days or more past due
and still accruing interest increased slightly during 1996 to a balance of
$32.1 million compared to a December 31, 1995 balance of $29.1 million. These
ratios reflect very consistent levels of asset quality during the year. Net
charge-offs as a percentage of average loans and leases increased from .24% in
1995 to .32% in 1996, primarily as a result of higher charge-offs in consumer
lending. Management considers a charge-off level of .32% to be within
reasonable norms from an historical perspective.
Regional Acceptance also experienced higher-than-expected net charge-offs in
the last two quarters of 1996. These higher net charge-offs are indicative of
the current nature of the used automobile financing industry. This level of
net charge-offs is not expected to have a material impact on Southern
National's consolidated financial condition or consolidated results of
operations.
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. Management does not anticipate any
significant deterioration in asset quality levels during 1997.
23
The following table reflects relevant asset quality information for Southern
National for the most recent three years.
- -------------------------------------------------------------------------------
TABLE 12
ASSET QUALITY
DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
Nonaccrual loans and leases*........................ $59,717 $62,231 $48,545
Foreclosed property................................. 20,452 13,652 13,521
------- ------- -------
Nonperforming assets................................ $80,169 $75,883 $62,066
======= ======= =======
Loans 90 days or more past due and still accruing... $32,052 $29,094 $24,224
======= ======= =======
ASSET QUALITY RATIOS
Nonaccrual loans and leases as a percentage of
loans and leases................................. .41% .45% .36%
Nonperforming assets as a percentage of:
Total assets.................................... .38 .37 .31
Loans and leases plus foreclosed property....... .55 .54 .47
Net charge-offs as a percentage of average loans
and leases....................................... .32 .24 .14
Allowance for losses as a percentage of loans and
leases........................................... 1.26 1.26 1.32
Ratio of allowance for losses to:
Net charge-offs................................. 4.06X 5.30x 9.68x
Nonaccrual loans and leases..................... 3.08 2.82 3.59
- --------
NOTE: Items referring to loans and leases are net of unearned income, gross
of the allowance and include loans held for sale.
* Includes $16.0 million of impaired loans at December 31, 1996. See Note
A in the "Notes to Consolidated Financial Statements."
- -------------------------------------------------------------------------------
DEPOSITS AND OTHER BORROWINGS
Management's primary objectives for funding balance sheet activity are to
provide adequate, stable, cost-effective sources of funds. Core deposits
compose Southern National's primary funding source, despite trends away from
traditional transaction and savings accounts by depositors. As depositors have
sought greater returns in recent years, growth rates for deposits have
typically not kept pace with asset growth. Southern National's total deposits
at December 31, 1996, compared to year-end 1995, increased 1.8% to $15.0
billion. This modest increase was led by a 5.6% increase in noninterest-
bearing demand deposits and a 10.6% increase in money rate savings accounts.
These increases were offset somewhat by a 13.5% decrease in deposits in
savings and interest checking accounts. Other time deposits, including
individual retirement accounts and certificates of deposit, increased less
than 1% and remain Southern National's largest component of total deposits at
54.9%. Average deposits increased 3.7% in 1996 to a balance of $14.8 billion.
Management also used various other short-term borrowed funds to meet funding
needs. Among these are Federal funds purchased, which composed 35.0% of total
short-term borrowed funds and securities sold under repurchase agreements,
which composed 29.4% of short-term borrowed funds at year end. Management also
utilized master notes, U.S. Treasury tax and loan deposit notes and short-term
Federal Home Loan Bank ("FHLB") advances to supplement short-term funding
needs. In certain circumstances, management also used foreign deposits and, to
a lesser degree, brokered certificates of deposit. Although average short-term
borrowed funds decreased $1.1 billion or 36.1%, this was offset by a $538.0
million increase in average foreign deposits, which are classified as other
time deposits. Management has diversified both short-term and long-term
funding
24
sources and the shift to foreign deposits represents an effort to establish
available credit lines with nonbank providers of such funds. Total short-term
borrowed funds at year-end 1996 decreased $332.1 million or 12.8% compared to
year-end 1995.
The rates paid on average short-term borrowed funds decreased from 5.91% in
1995 to 5.27% during 1996. This decrease resulted from a decline in short-term
money market rates as well as the increased availability of short-term funding
sources providing management the ability to execute on a more cost-effective
strategy.
Management also employs long-term debt for additional funding, and
management significantly increased reliance on longer-term funding sources
during 1996. Southern National's total end of period outstanding long-term
debt increased 48.3% to $2.1 billion. On average, long-term debt increased
$731.0 million. Southern National's long-term debt consists primarily of FHLB
advances, which composed 67.0% of total outstanding long-term debt at December
31, 1996. FHLB advances are the most cost-effective long-term funding source
and the FHLB provides Southern National the flexibility to structure the debt
to manage interest rate risk and liquidity as needed. In an effort to
diversify long-term funding sources, management developed various debt
programs, including a $2 billion senior and subordinated banknote program. The
initial debt issuance was $225 million for five years at a fixed coupon rate
of 5.70%. The remainder of the $424.8 million outstanding at year end was
shorter-term floating rate banknotes. In addition to the $2 billion banknote
program, Southern National also registered $1 billion in debt for future
funding needs. On May 21, 1996, Southern National issued $250 million of 7.05%
subordinated long-term notes which mature in 2003. The average rate paid on
long-term debt during 1996 decreased from 6.26% for 1995 to 5.78% for 1996.
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. Management will continue to focus on
traditional core funding strategies during 1997, including targeting growth in
noninterest-bearing deposits.
- -------------------------------------------------------------------------------
TABLE 13
COMPOSITION OF AVERAGE DEPOSITS AND OTHER BORROWINGS
% CHANGE
----------------
1996 V. 1995 V.
1996 1995 1994 1995 1994
--------------- --------------- --------------- ------- -------
(DOLLARS IN THOUSANDS)
Savings, interest
checking and MRS
sweeps................. $ 3,156,994 17% $ 3,237,553 18% $ 3,433,750 20% (2.5)% (5.7)%
Money rate savings...... 1,416,791 8 1,552,431 8 1,971,263 11 (8.7) (21.2)
Other time deposits..... 8,346,545 44 7,715,365 42 7,155,207 41 8.2 7.8
----------- --- ----------- --- ----------- ---
Total interest-bearing
deposits............... 12,920,330 69 12,505,349 68 12,560,220 72 3.3 (.4)
Noninterest-bearing
demand deposits........ 1,857,207 10 1,745,827 9 1,738,508 10 6.4 .4
----------- --- ----------- --- ----------- ---
Total deposits.......... 14,777,537 79 14,251,176 77 14,298,728 82 3.7 (.3)
Short-term borrowed
funds.................. 2,011,565 11 3,148,179 17 2,389,428 14 (36.1) 31.8
Long-term debt.......... 1,858,569 10 1,127,575 6 677,227 4 64.8 66.5
----------- --- ----------- --- ----------- ---
Total deposits and other
borrowings............. $18,647,671 100% $18,526,930 100% $17,365,383 100% .6% 6.7 %
=========== === =========== === =========== === ===== =====
- -------------------------------------------------------------------------------
ANALYSIS OF RESULTS OF OPERATIONS
Consolidated net income for 1996 totaled $283.7 million, which generated
primary earnings per share of $2.56 and fully diluted earnings per share of
$2.54. Net income for the prior year was $186.3 million and net earnings for
1994 were $243.8 million. Primary earnings per share were $1.65 in 1995 and
$2.21 in 1994, while fully diluted per share earnings were $1.62 and $2.16,
respectively.
25
Management utilizes the return on average assets ratio to measure the
profitability of each dollar of assets and to compare Southern National's
performance to peers. The returns on average assets produced by the earnings
discussed above were 1.38% for 1996, .91% for 1995 and 1.28% for 1994.
Management's target return on average assets is 1.25%, which places Southern
National among industry leaders. A similar measure of profitability is return
on average common equity. Southern National's returns on average common equity
were 17.21%, 11.84% and 17.07%, for the years ended December 31, 1996, 1995
and 1994, respectively.
Southern National incurred significant nonrecurring expenses during both
1996 and 1995 which are reflected in the earnings and profitability ratios
above. During the third quarter of 1996, Southern National recorded a one-time
assessment by the Federal Deposit Insurance Corporation ("FDIC") which was
charged to all financial institutions with deposits insured by the Savings
Association Insurance Fund ("SAIF"). The impact of Southern National's
assessment was approximately $33 million on a pre-tax basis. On an after-tax
basis, the assessment totaled $21.3 million or $.19 per fully diluted share.
Excluding the impact of the assessment, Southern National's net income for
1996 would have been $304.9 million or $2.73 per fully diluted share.
Recurring earnings for 1996 provided returns of 1.48% on average assets and
18.51% on average common shareholders' equity.
During 1995, Southern National incurred $108.0 million in pre-tax
nonrecurring expenses relating to the merger between Southern National and
BB&T Financial Corporation ("BB&T") and $19.8 million in securities losses
resulting from a restructuring of the securities portfolio. These costs were
offset somewhat by a $12.3 million gain on the sale of divested deposits made
necessary by the merger. The net after-tax impact of these nonrecurring items
and securities losses was to reduce net income by $76.3 million. Excluding the
impact of these nonrecurring items, Southern National's net income for 1995
would have been $262.7 million, or $2.29 per fully diluted share. Recurring
earnings for 1995 produced returns of 1.29% on average assets and 16.83% on
average common shareholders' equity.
On a recurring basis, Southern National's net income grew $42.3 million or
16.1% during 1996. Fully diluted earnings per share increased $.44 or 19.2%.
Southern National accomplished many objectives which were established in
conjunction with the merger of Southern National and BB&T. The success in
achieving goals set by management led to the growth in recurring earnings.
NET INTEREST INCOME
Net interest income is Southern National's primary source of revenue. The
amount of net interest income is influenced by 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. 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.
26
TABLE 14
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AVERAGE BALANCES YIELD/RATE
------------------------------------- ------------------
1996 1995 1994 1996 1995 1994
----------- ----------- ----------- ---- ---- ----
(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury, government and other (5)........... $ 5,024,926 $ 5,235,169 $ 5,171,260 6.62% 6.13% 5.74%
States and political subdivisions................. 150,193 170,604 179,722 8.99 8.94 9.08
----------- ----------- ----------- ---- ---- ----
Total securities (5).......................... 5,175,119 5,405,773 5,350,982 6.69 6.22 5.85
Other earning assets (2)............................. 13,631 44,384 130,670 5.65 5.75 3.97
Loans and leases, net of unearned income (1)(3)(4)(5) 14,190,985 13,768,629 12,456,509 9.12 9.23 8.42
----------- ----------- ----------- ---- ---- ----
Total earning assets.......................... 19,379,735 19,218,786 17,938,161 8.47 8.37 7.62
----------- ----------- ----------- ---- ---- ----
Non-earning assets............................ 1,194,335 1,185,084 1,134,455
----------- ----------- -----------
Total assets............................. $20,574,070 $20,403,870 $19,072,616
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings, interest-checking and MRS sweeps......... $ 3,156,994 $ 3,237,553 $ 3,433,750 1.70 2.26 2.19
Money rate savings................................ 1,416,791 1,552,431 1,971,263 3.62 3.59 2.73
Other time deposits............................... 8,346,545 7,715,365 7,155,207 5.51 5.55 4.37
----------- ----------- ----------- ---- ---- ----
Total interest-bearing deposits............... 12,920,330 12,505,349 12,560,220 4.37 4.46 3.52
Short-term borrowed funds............................ 2,011,565 3,148,179 2,389,428 5.27 5.91 4.33
Long-term debt....................................... 1,858,569 1,127,575 677,227 5.78 6.26 6.04
----------- ----------- ----------- ---- ---- ----
Total interest-bearing liabilities............ 16,790,464 16,781,103 15,626,875 4.63 4.85 3.75
----------- ----------- ----------- ---- ---- ----
Noninterest-bearing demand deposits........... 1,857,207 1,745,827 1,738,508
Other liabilities............................. 266,864 273,911 235,183
Shareholders' equity.......................... 1,659,535 1,603,029 1,472,050
----------- ----------- -----------
Total liabilities and shareholders' equity. $20,574,070 $20,403,870 $19,072,616
=========== =========== ===========
Average interest rate spread......................... 3.84 3.52 3.87
Net yield on earning assets.......................... 4.45% 4.14% 4.36%
==== ==== ====
Taxable equivalent adjustment........................
1996 V. 1995
---------------------------------
INCOME/EXPENSE CHANGE DUE TO
--------------------------------- INCREASE ---------------------
1996 1995 1994 (DECREASE) RATE VOLUME
--------- --------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury, government and other (5)........... $ 332,725 $ 320,950 $ 296,933 $ 11,775 $ 25,009 $ (13,234)
States and political subdivisions................. 13,503 15,255 16,323 (1,752) 83 (1,835)
--------- --------- --------- ---------- --------- ----------
Total securities (5).......................... 346,228 336,205 313,256 10,023 25,092 (15,069)
Other earning assets (2)............................. 771 2,552 5,184 (1,781) (41) (1,740)
Loans and leases, net of unearned income (1)(3)(4)(5) 1,293,802 1,270,390 1,049,190 23,412 (15,224) 38,636
--------- --------- --------- ---------- --------- ----------
Total earning assets.......................... 1,640,801 1,609,147 1,367,630 31,654 9,827 21,827
Non-earning assets............................
Total assets.............................
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings, interest-checking and MRS sweeps......... 53,531 73,203 75,125 (19,672) (17,892) (1,780)
Money rate savings................................ 51,226 55,664 53,874 (4,438) 463 (4,901)
Other time deposits............................... 459,990 428,282 312,877 31,708 (3,098) 34,806
--------- --------- --------- ---------- --------- ----------
Total interest-bearing deposits............... 564,747 557,149 441,876 7,598 (20,527) 28,125
Short-term borrowed funds............................ 105,936 186,194 103,493 (80,258) (18,685) (61,573)
Long-term debt....................................... 107,437 70,599 40,927 36,838 (5,790) 42,628
--------- --------- --------- ---------- --------- ----------
Total interest-bearing liabilities............ 778,120 813,942 586,296 (35,822) (45,002) 9,180
--------- --------- --------- ---------- --------- ----------
Noninterest-bearing demand deposits...........
Other liabilities.............................
Shareholders' equity..........................
Total liabilities and shareholders' equity.
Average interest rate spread.........................
Net yield on earning assets.......................... $ 862,681 795,205 $ 781,334 $ 67,476 $ 54,829 $ 12,647
========= ========= ========= ========== ========= ==========
Taxable equivalent adjustment........................ $ 34,188 $ 32,535 $ 28,088
========= ========= =========
1995 v. 1994
---------------------------------------
Change due to
INCREASE --------------------------
DECREASE) Rate Volume
---------- ----------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury, government and other (5)........... $ 24,017 $ 20,309 $ 3,708
States and political subdivisions................. (1,068) (250) (818)
---------- ----------- ------------
Total securities (5).......................... 22,949 20,059 2,890
Other earning assets (2)............................. (2,632) 1,706 (4,338)
Loans and leases, net of unearned income (1)(3)(4)(5) 221,200 105,149 116,051
---------- ----------- ------------
Total earning assets.......................... 241,517 126,914 114,603
---------- ----------- ------------
Non-earning assets............................
Total assets.............................
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings, interest-checking and MRS sweeps......... (1,922) 2,461 (4,383)
Money rate savings................................ 1,790 14,683 (12,893)
Other time deposits............................... 115,405 89,425 25,980
---------- ----------- ------------
Total interest-bearing deposits............... 115,273 106,569 8,704
Short-term borrowed funds............................ 82,701 44,253 38,448
Long-term debt....................................... 29,672 1,526 28,146
---------- ----------- ------------
Total interest-bearing liabilities............ 227,646 152,348 75,298
---------- ----------- ------------
Noninterest-bearing demand deposits...........
Other liabilities.............................
Shareholders' equity..........................
Total liabilities and shareholders' equity.
Average interest rate spread.........................
Net yield on earning assets.......................... $ 13,871 $ (25,434) $ 39,305
========== =========== ============
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. Only the
interest collected on such loans has been included as income.
(5) Includes assets which were held for sale or available for sale at
amortized cost.
27
For 1996, net interest income on a fully taxable equivalent basis ("FTE")
totaled $862.7 million, compared with $795.2 million in 1995 and $781.3
million in 1994. During 1996, there was improvement in interest income from
investment securities, up $10.0 million, and from loans, up $23.4 million.
During the same time frame, reduced interest rates and the use of more cost-
effective funding sources drove total interest expense down $35.8 million.
Comparing 1995 with 1994, net interest income increased $13.9 million.
The taxable equivalent net yield on average earning assets is the primary
measure used in evaluating the effectiveness of the management of earning
assets and funding liabilities. The net yield on average earning assets was
4.45% in 1996, 4.14% in 1995 and 4.36% in 1994. The increase in margin during
1996 reflects management's efforts to restructure the balance sheet by
securitizing mortgage loans and holding the resulting mortgage-backed
securities in the securities available-for-sale portfolio instead of holding
lower-yielding U.S. Treasuries, as discussed earlier. The yield on total
earning assets increased 10 basis points, driven by higher volumes of average
loans and higher rates earned on average investments. Also, management's use
of more cost-effective funding strategies, such as growing core deposits,
particularly noninterest-bearing deposits, and utilizing more stable FHLB
advances and other longer-term debt, rather than more volatile short-term
borrowed funds, contributed to the improved margin. The cost of total
interest-bearing liabilities decreased 22 basis points because of
significantly lower rates paid on all funding sources except money rate
savings.
The 22 basis point margin decline during 1995 was caused by aggressive
pricing strategies for loans and deposits put in place by management following
the merger of Southern National and BB&T in an effort to protect the customer
base. While the total yield on interest-earning assets increased 75 basis
points over 1994, the rates paid on deposits and other borrowings increased
110 basis points during the year.
PROVISION FOR LOAN AND LEASE LOSSES
A 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 amount of the provision is based on continuing evaluation of
problem loans, analytical reviews of loan loss experience in relation to
outstanding loans, management's judgment with respect to current and expected
economic conditions and their impact on the existing loan portfolio. The
provision recorded by Southern National in 1996 was $53.7 million, compared
with $34.6 million in 1995 and $20.2 million in 1994.
The increase in the provision for loan and lease losses was influenced by
two factors: charge-offs and growth in loans. During recent years, Southern
National has experienced unusually low levels of charge-offs. During 1995,
many asset quality indicators began to return to historically normal levels.
Also, growth in loans during 1995 and 1996 was relatively strong. At December
31, 1996 and 1995, the allowance was 1.26% of loans and leases outstanding.
The coverage ratio of nonaccrual loans and leases was at 3.08 times, up
slightly from the prior year ratio of 2.82 times.
The allowance for loan and lease losses is tested for adequacy on a
quarterly basis. Specific reserves are allocated to problem commercial loans
of $1 million or more, assuming the most conservative repayment scenario. All
other commercial loans are segregated into one of ten risk categories
according to the relative strength of the borrower and the repayment sources.
Reserve allocations are then determined by multiplying outstandings in each
category by factors based on historical loan loss experience. Reserve
allocations are derived for consumer loans based on product type, such as
mortgage, retail, bankcard, etc. Allocations are determined by applying
historical loss ratios to estimated outstandings, with adjustments made for
current and anticipated business conditions. This approach, which relates the
allowance to problem loans, is employed because changes in problem loans--both
the level relative to outstandings and the mix by risk category--are leading
indicators of changes in portfolio loss potential.
28
NONINTEREST INCOME
Noninterest income includes service charges on deposit accounts, trust
revenues, mortgage banking income, 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 10.6%.
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, which would grow noninterest
income. The primary strategic objective for 1996 was to achieve these
enhancements in fee-based revenues, and management set a goal of 20% growth in
earnings from noninterest income. Actual growth during 1996 was 28.7%. The
more significant components of this increase are discussed below.
Noninterest income for 1996 totaled $297.4 million, compared with $231.0
million in 1995 and $229.9 million in 1994. The $66.4 million increase during
1996 resulted from growth in all areas of fee-based income combined with gains
on the sale of securities of $3.2 million compared with prior year losses on
sales of securities of $18.6 million. These losses were also the primary
factor contributing to the flat rate of growth in noninterest income during
1995 compared with 1994. The securities losses were composed primarily of the
$19.8 million losses incurred in association with the securities restructuring
undertaken in the first quarter of 1995. The impact of these securities losses
was offset to an extent by a $12.3 million gain on the sale of divested
deposits. 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 1996 was 25.7%, up from 23.9% in 1995 and
22.5% during 1994. Management hopes to grow this percentage to 30% in coming
years.
Service charges on deposit accounts represent the largest single source of
noninterest revenue. Such revenues totaled $107.6 million in 1996, an increase
of $18.0 million or 20.0% from 1995. Service charges during 1995 totaled $89.6
million, which was a 5.3% increase compared with the prior year. The primary
factor contributing to the significant growth in service charges on deposit
accounts during 1996 was a change in the fee structure implemented during the
first quarter. Deposit services are typically repriced annually to reflect
current costs and competitive factors.
Mortgage banking income (which includes normal servicing fees and profits
and losses from the origination and sale of loans) increased $7.9 million or
30.1% to a total of $34.4 million for 1996. Mortgage banking income totaled
$26.4 million in 1995 and $24.9 million in 1994. The primary components of the
1996 increase were servicing fees on loans sold, which increased $5.5 million,
and increases in net gains on sales of mortgage loans because of the
capitalization of mortgage servicing rights under SFAS No. 122.
Agency insurance commissions, which include insurance commissions generated
through Southern National's extensive agency network, increased approximately
$6.8 million or 43.5% in 1996 to a total of $22.4 million. Agency insurance
commissions totaled $15.6 million in 1995 and $13.8 million in 1994. The
insurance agencies have become an increasingly important source of noninterest
revenue for Southern National, and this trend is expected to continue in the
future. Southern National currently maintains the largest independent
insurance agency network in the Carolinas. During 1996, certain assets and
liabilities of four insurance agencies in South Carolina were acquired with
combined premiums totaling $65 million. These acquisitions, accounted for
under the purchase method, increased agency insurance commissions during 1996.
Southern National intends to continue to expand its insurance agency
operations through both acquisitions and internally generated growth.
Other insurance commissions, which include credit-related products offered
through the banking network to borrowers, totaled $11.2 million during 1996,
up 3.0% from the 1995 balance of $10.9 million. Such commissions totaled $10.4
million during 1994.
29
The offering of trust services has been a traditional service of Southern
National. Trust income from corporate and personal trust services totaled
$22.8 million in 1996. This was an increase of $4.2 million or 22.4% over
income of $18.6 million in 1995, which in turn was an increase of $1.4 million
or 8.4% over the $17.2 million earned in 1994. Managed assets totaled $5.0
billion at the end of 1996. Southern National also offers its own family of
mutual funds and manages seven mutual funds with total assets in excess of
$800 million, 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, including bankcard fees, increased by
$14.2 million to a level of $68.8 million in 1996 compared with $54.6 million
for 1995. During 1995, other nondeposit fees and commissions increased 13.2%
from the 1994 income of $48.3 million. Major sources of nondeposit fees and
commissions generating the increases include merchant discounts, up $5.4
million or 35.5% from the 1995 balance and up $7.5 million from the income
recorded in 1994. Another significant component, investment brokerage
commissions, increased $6.8 million during 1996 to a total of $14.7 million.
Investment brokerage commissions increased 9.6% during 1995 to a total of $8.0
million.
Other income decreased $6.8 million or 20.0% for 1996 because of a $12.3
million gain realized during the second quarter of 1995 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 would have increased $5.5 million. Other income in 1995 totaled
$33.9 million, up 25.1% from the 1994 balance of $27.1 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 continue to focus
on four primary areas--mortgage banking, trust, insurance and investment
brokerage activities. Management has invested in the development of
noninterest income products and services for delivery in future years and has
targeted an overall growth rate of 20% per year.
Southern National has also undertaken plans to develop a number of
alternative delivery systems for products and services. During 1996, a PC-
based home banking product called BB&T OnLine was introduced. Management
believes that the service will be an effective tool both for individuals and
small business customers. Southern National currently has plans to expand the
ATM network to grow fee income and to provide added convenience to customers.
Also, Southern National introduced a "loan-by-phone" service and developed an
integrated small business lending process with expert systems and a well-
trained human support system. Southern National currently has plans to open a
"call center" during 1997 to provide greater customer service.
Southern National will also continue to explore strategic acquisitions of
insurance agencies, finance companies and other entities to improve
noninterest income.
30
- -------------------------------------------------------------------------------
TABLE 15
NONINTEREST INCOME
% CHANGE
----------------
1996 V. 1995 V.
1996 1995 1994 1995 1994
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
Service charges on deposits...... $107,581 $ 89,621 $ 85,106 20.0 % 5.3 %
Mortgage banking income.......... 34,352 26,408 24,920 30.1 6.0
Trust income..................... 22,811 18,629 17,180 22.4 8.4
Agency insurance commissions..... 22,353 15,572 13,830 43.5 12.6
Other insurance commissions...... 11,189 10,866 10,413 3.0 4.4
Securities gains (losses), net... 3,206 (18,600) 3,074 NM NM
Merchant discounts............... 20,574 15,189 7,665 35.5 98.2
Other bankcard income............ 7,851 9,259 10,006 (15.2) (7.5)
Investment brokerage
commissions..................... 14,722 7,951 7,256 85.2 9.6
Other bank service fees and
commissions..................... 20,885 17,960 14,538 16.3 23.5
International income............. 3,206 2,895 2,600 10.7 11.3
Amortization of negative
goodwill........................ 6,238 6,239 6,283 -- (.7)
Other noninterest income......... 22,421 29,005 26,990 (22.7) 7.5
-------- -------- -------- ----- ----
Total noninterest income....... $297,389 $230,994 $229,861 28.7 % .5 %
======== ======== ======== ===== ====
- --------
NM--not meaningful.
- -------------------------------------------------------------------------------
NONINTEREST EXPENSE
Noninterest expense for 1996 decreased $27.2 million or 4.0% to a total of
$654.1 million. This followed an increase of 15.5% in 1995 to a total of
$681.2 million. Certain material, nonrecurring costs and expenses affecting
noninterest expense were recorded during both 1996 and 1995. As discussed
earlier, Southern National recorded a special, one-time SAIF assessment during
the third quarter of 1996 totaling approximately $33 million on a pretax
basis. During 1995, Southern National incurred $107.5 million of nonrecurring
costs related to the merger of Southern National and BB&T. Excluding the
impact of the nonrecurring items from both 1996 and 1995, noninterest expense
would have increased $47.3 million or 8.2% from 1995 to 1996. The five-year
compound rate of growth in noninterest expense has been 8.3%.
An important objective following the merger of Southern National and BB&T
was controlling costs. The combining companies expected to achieve significant
cost savings through the elimination of redundant personnel and systems, which
are among the benefits usually associated with an in-market merger. Through
the implementation of a hiring freeze and an early retirement program, as well
as by completing the conversion of the systems of the two companies during
1995, the cost savings have been achieved.
Total personnel expense decreased $43.9 million or 12.7% in 1996 compared to
1995. The 1995 expense was 16.8% higher than personnel expense recorded in
1994. Total personnel expense includes salaries and wages, as well as pension
and other employee benefits. The decrease during 1996 reflects $59.8 million
of nonrecurring merger-related costs recorded in the prior year. These costs
included 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, would
have increased $15.8 million or 5.5% to $302.4 million. The increase in
recurring personnel costs reflects higher incentive-related compensation.
Premiums paid to the FDIC for deposit insurance increased $19.8 million or
86.2% to a total of $42.8 million for 1996. For 1995, the expense decreased
$9.7 million or 29.7%. As discussed earlier, Southern National
31
recorded $33 million of Federal deposit insurance expense during the third
quarter of 1996 associated with a special assessment to recapitalize the SAIF.
This assessment was offset by rate reductions on FDIC insurance expense which
became effective during the latter part of 1995. The rate paid on insurance
premiums 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 and 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, resulting in the
decrease in expense from 1994.
Net occupancy expense totaled $46.1 million in 1996. This represented a
decrease of $3.1 million or 6.3% over the expense of $49.2 million incurred in
1995, which in turn was 11.2% greater than the expense of $44.3 million
recorded in 1994. Furniture and equipment expense totaled $57.5 million in
1996, compared with $58.7 million in 1995 and $44.3 million in 1994. These
fluctuations include the impact in 1995 of $10.4 million of nonrecurring
charges relating to branch closings and the consolidation of bank operations
and systems associated with the Southern National and BB&T merger. Combined
occupancy and equipment expense, excluding nonrecurring charges, would have
increased $6.1 million or 6.2% in 1996 compared to 1995. Depreciation of
property and equipment purchased in connection with implementing the merger
was a major component of the increase.
Other expense increased only $1.2 million from 1995 to 1996, primarily
because of an elevated level of merger-related expenses recorded during 1995.
These merger-related 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 would have increased $38.8 million
or 23.3%. This increase was driven by several components. A primary strategic
objective for 1996 was to increase BB&T brand identity. Southern National
increased advertising and marketing expenditures to accomplish this objective.
Advertising costs totaled $19.0 million during 1996, up from $11.5 million
recorded in 1995 and $10.7 million recorded in 1994. As a result of this
program, it is estimated that awareness of the BB&T brand increased 50%. Other
costs include higher amortization of intangibles and mortgage servicing
rights, which increased $2.2 million in 1996 because of lower interest rates,
and conversion costs associated with the merger of Regional Acceptance.
Many computer systems will incur data processing difficulties resulting from
date codings of transactions after the year 1999. Southern National recognized
expenses during 1996 to begin to upgrade certain computer software and
operating systems to enable the systems to function properly in the year 2000.
Southern National's computer systems are not programmed to consider the start
of a new century, and the process of upgrading the systems' date recognition
to make them year-2000 compliant will continue in the future. Management
anticipates expenditures associated with this upgrade of at least $7 million
to $8 million to be expensed as incurred over the next three years.
32
- -------------------------------------------------------------------------------
TABLE 16
NONINTEREST EXPENSE
% CHANGE
----------------
1996 V. 1995 V.
1996 1995 1994 1995 1994
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
Salaries and wages............... $245,486 $286,321 $240,468 (14.3)% 19.1 %
Pension and other employee bene-
fits............................ 56,897 59,987 56,077 (5.2) 7.0
Net occupancy expense on bank
premises........................ 46,103 49,220 44,281 (6.3) 11.2
Furniture and equipment expense.. 57,491 58,657 44,299 (2.0) 32.4
Federal deposit insurance premi-
ums............................. 42,820 22,995 32,697 86.2 (29.7)
Other insurance.................. 3,275 4,733 4,174 (30.8) 13.4
Foreclosed property expense...... 1,952 3,168 4,645 (38.4) (31.8)
Amortization expense on
intangibles and mortgage
servicing rights................ 12,779 10,600 7,700 20.6 37.7
Software......................... 5,049 8,507 5,403 (40.6) 57.4
Telephone........................ 11,929 11,968 10,921 (.3) 9.6
Donations........................ 5,295 7,341 3,832 (27.9) 91.6
Advertising and public rela-
tions........................... 18,956 11,466 10,688 65.3 7.3
Travel........................... 5,248 5,159 4,064 1.7 26.9
Professional services............ 19,564 20,462 12,247 (4.4) 67.1
Supplies......................... 11,429 17,786 10,207 (35.7) 74.3
Loan and lease expense........... 28,903 22,227 17,034 30.0 30.5
Deposit related expense.......... 12,282 10,677 11,755 15.0 (9.2)
Other noninterest expenses....... 68,595 69,954 69,303 (1.9) .9
-------- -------- --------
Total noninterest expense...... $654,053 $681,228 $589,795 (4.0)% 15.5 %
======== ======== ========
- -------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES
Southern National's provision for income taxes during 1996 was $134.5
million, a 47.1% increase over the provision recorded in 1995. The provision
for income taxes in 1994 totaled $129.3 million. The significant increase in
the provision in 1996 reflects lower earnings in the prior year resulting from
the merger-related costs discussed above. Excluding the impact of the SAIF
assessment during 1996 and the merger-related costs during 1995, the provision
for income taxes increased $15.7 million or 12.0% because of higher recurring
pretax earnings.
Because of its investments in tax-exempt loans and securities and certain
tax planning strategies, the effective tax rates were actually 32.2% in 1996,
32.9% in 1995 and 34.6% in 1994.
MARKET RISK MANAGEMENT
The effective management of market risk is essential to achieving the
Corporation's objectives. As a financial institution, Southern National's
primary market risk exposure is interest rate risk. 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
balance sheet repositioning as an efficient and cost-effective means of
managing interest rate risk. This 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.
33
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 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 ensure that the
potential impact on earnings and liquidity of fluctuations in interest rates
is within conservative standards.
Southern National also utilizes 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,
caps, floors, financial forward and futures contracts and options written and
purchased. Management accounts for these financial instruments as hedges when
the following conditions are met: (1) the specific assets, liabilities, firm
commitments or anticipated transactions (or an identifiable group of
essentially similar items) to be hedged expose Southern National to interest
rate risk or price risk; (2) the financial instrument reduces that exposure;
(3) the financial instrument is designated as a hedge at inception; and (4) at
the inception of the hedge and throughout the hedge period, there is a high
correlation of changes in the fair value or the net interest income associated
with the financial instrument and the hedged items. Southern National does not
utilize derivatives for trading purposes.
Derivative 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, 1996,
Southern National had outstanding interest rate swaps, caps and floors with
notional amounts totaling $1.1 billion. The estimated fair value of open
contracts used for risk management purposes at December 31, 1996, reflected
pretax net unrealized gains of $5.8 million.
Southern National's derivatives used in interest rate risk management are
primarily used to hedge variable rate commercial loans, adjustable rate
mortgage loans, retail certificates of deposit and fixed rate notes. These
hedges contributed net interest expense of $154,200 in 1996, compared with net
interest expense of $10.3 million in 1995 and net interest income of $900,000
in 1994.
Southern National utilizes written covered over-the-counter call options on
specific securities in the available-for-sale securities portfolio in order to
enhance returns. If the securities decrease in value and the option expires
unexercised, Southern National recognizes the premium as income. If the
securities increase in value and the written call option is exercised,
Southern National forfeits the appreciation on the securities exceeding the
option exercise price.
Southern National also utilizes over-the-counter purchased put options and
net purchased put options (combination of purchased put option and written
call option) in its mortgage banking activities. These options are used to
hedge the mortgage warehouse and pipeline against increasing interest rates.
Written call options are used in tandem with purchased put options to create a
net purchased put option that reduces the cost of the hedge.
A derivative is a financial instrument that derives its cash flows, and
therefore its value, by reference to an underlying instrument, index or
reference rate. 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 mitigates 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 derivative 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, 1996.
34
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments" requires, among other things, certain
quantitative and qualitative disclosures with regard to the amounts, nature
and terms of derivative financial instruments. See Note Q, "Derivatives and
Off-Balance Sheet Financial Instruments," for the required quantitative
disclosures.
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, 1996, 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.
- -------------------------------------------------------------------------------
TABLE 17
INTEREST RATE SENSITIVITY GAP ANALYSIS
DECEMBER 31, 1996
EXPECTED REPRICING OR MATURITY DATE
------------------------------------------------------------------------------------------
WITHIN ONE TO THREE TO AFTER FIVE
ONE YEAR THREE 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*............... $ 1,212,853 6.86% $1,618,464 6.55% $1,519,034 6.97% $ 892,146 7.05% $ 5,242,497 6.83%
Federal funds sold and
securities purchased
under resale
agreements or similar
arrangements.......... 19,940 5.25 -- -- -- -- -- -- 19,940 5.25
Loans and leases....... 9,414,183 8.70 3,280,158 8.36 1,416,070 8.68 473,653 14.46 14,584,064 8.81
----------- ---- ---------- ---- ---------- ---- ---------- ----- ----------- ----
TOTAL INTEREST-EARNING
ASSETS................. 10,646,976 4,898,622 2,935,104 1,365,799 19,846,501
----------- ---- ---------- ---- ---------- ---- ---------- ----- ----------- ----
LIABILITIES
Time deposits.......... 6,693,613 5.37 1,289,270 6.00 209,652 6.22 22,686 6.28 8,215,221 5.49
Savings and interest
checking**............ -- -- 825,756 1.56 275,252 1.56 275,252 1.56 1,376,260 1.56
Money rate savings**... 1,686,009 3.30 1,686,009 3.30 -- -- -- -- 3,372,018 3.30
Federal funds
purchased............. 793,075 5.27 -- -- -- -- -- -- 793,075 5.27
Other borrowings....... 2,491,821 5.14 141,427 6.38 506,633 5.74 382,114 5.07 3,521,995 5.27
----------- ---- ---------- ---- ---------- ---- ---------- ----- ----------- ----
TOTAL INTEREST-BEARING
LIABILITIES............ 11,664,518 3,942,462 991,537 680,052 17,278,569
----------- ---------- ---------- ---------- -----------
ASSET-LIABILITY GAP..... (1,017,542) 956,160 1,943,567 685,747
----------- ---------- ---------- ----------
DERIVATIVES AFFECTING
INTEREST RATE
SENSITIVITY
Pay fixed interest rate
swaps................. 288,629 5.35 (268,817) 5.31 (15,520) 5.27 (4,292) 5.98
Receive fixed interest
rate swaps............ (450,000) 5.36 200,000 6.11 -- -- 250,000 6.90
Basis swaps............ (250,000) 5.51 250,000 5.53 -- -- -- --
Floors................. (105,000) -- 105,000 -- -- -- -- --
----------- ---------- ---------- ----------
INTEREST RATE
SENSITIVITY GAP........ $(1,533,913) $1,242,343 $1,928,047 $ 931,455
=========== ========== ========== ==========
CUMULATIVE INTEREST RATE
SENSITIVITY GAP........ $(1,533,913) $ (291,570) $1,636,477 $2,567,932
=========== ========== ========== ==========
- --------
* 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.
- -------------------------------------------------------------------------------
35
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 ("FRB") to regulate money and credit
conditions have a greater effect on a financial institution's profitability
than do the effects of higher costs for goods and services. Through its
balance sheet management function, Southern National is positioned to respond
to changing interest rates and inflationary trends.
Simulation Analysis takes into account the current contractual agreements
that Southern National has made with its customers on deposits, borrowings,
loans, investments and any commitments to enter into those transactions.
Management monitors Southern National's interest sensitivity by means of a
computer-based asset/liability model that incorporates current volumes and
rates, maturity streams, repricing opportunities and anticipated growth. The
model calculates an earnings estimate based on current portfolio balances and
rates, less any balances that are scheduled to reprice or mature. Balances and
rates that will replace the previous balances and any anticipated growth are
added. This level of detail is needed to correctly simulate the effect that
changes in interest rates and anticipated balances will have on the earnings
of Southern National. This method is subject to the assumptions that underlie
the process, but it provides a better illustration of 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 interest
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 interest 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% 11.25% (1.97)%
+1.50 9.75 (1.32)
Most likely 8.25 --
-1.50 6.75 (0.05)
-3.00 5.25 (0.21)
- -------------------------------------------------------------------------------
Management has established parameters for asset/liability management which
prescribe 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
36
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.
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 decreased to $659.7 million at December 31,
1996 compared to $705.7 million in 1995 and $671.8 million in 1994. Net cash
provided by operating activities for the year increased by $74.5 million to
$327.4 million from $253.0 million in 1995, a decrease of $261.2 million from
1994. Cash provided by operating activities in 1994 was $514.1 million. The
1996 increase was primarily the result of significantly higher net income and
cash flows from mortgage banking activities.
Net cash flows used in investing activities increased from $570.6 million in
1995 to $712.9 million in 1996. Cash used in investing activities during 1995
decreased $983.5 million from $1.6 billion in 1994. The primary factor
creating the current year increase in cash flows used in investing activities
was an $888.3 million increase in cash flows used in lending activities offset
by a $752.5 million increase in cash flows provided by investing activities.
Cash flows provided by financing activities decreased to $339.5 million in
1996 primarily because of a $160.1 million increase in cash flows used in the
redemption of common stock offset by a $194.7 million increase in cash flows
provided by long-term debt. Cash flows provided by financing activities were
$852.2 million in 1994 because of increases in short-term borrowed funds.
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 1.0% in 1996. 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 reinvestment plan. The modest
growth in total shareholders' equity during the year reflects current year
earnings, reduced by resources used for the redemption of 6.8 million shares
of common stock and the declaration of $111.3 million in common and preferred
dividends. 4.3 million of the shares repurchased were used to meet the
requirements of the conversion of preferred stock, which was redeemed on March
29, 1996.
Southern National adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," in 1994. The provisions of this statement
require securities classified as available for sale to be carried at estimated
fair value with net unrealized appreciation or depreciation recorded as an
adjustment to shareholders' equity. At the end of 1996, Southern National had
recorded cumulative net unrealized appreciation of $11.8 million, net of tax.
37
- -------------------------------------------------------------------------------
TABLE 19
CAPITAL--COMPONENTS AND RATIOS
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(DOLLARS IN
THOUSANDS)
Tier 1 capital.................................... $1,666,481 $1,630,645
Tier 2 capital.................................... 426,662 155,036
---------- ----------
Total regulatory capital.......................... $2,093,143 1,785,681
========== ==========
Risk-based capital ratios:
Tier 1 capital.................................. 11.7% 13.2%
Total regulatory capital........................ 14.7 14.4
Tier 1 leverage ratio........................... 8.0 7.9
- -------------------------------------------------------------------------------
Traditionally, Southern National has been considered to be strongly
capitalized. The ratio of shareholders' equity to year-end assets was 8.1% at
the end of 1996, compared with 8.3% 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 risk. The values of both balance sheet and off-
balance sheet items are adjusted to reflect these risks.
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 1996 was 11.7%, and the total
capital ratio was 14.7%. At the end of 1995, those ratios were 13.2% and
14.4%, 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 8.0% at the end of 1996 and 7.9% at the end of 1995.
- -------------------------------------------------------------------------------
TABLE 20
SELECTED EQUITY DATA AND RATIOS
1996 1995 1994
------ ------ ------
Book value per common share at year end............... $15.82 $15.04 $13.44
Book value per common share percentage increase over
prior year end....................................... 5.19% 11.90% 6.41%
Common dividends per share as a percentage increase
over prior year...................................... 16.28 16.22 15.63
Equity at year end to year end:
Total assets........................................ 8.14 8.29 7.64
Net loans and leases*............................... 12.01 12.42 11.69
Deposits............................................ 11.56 11.65 10.66
Equity and long-term debt........................... 45.73 55.29 62.62
- --------
* 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 1996, Southern National
38
had 109.3 million shares of common stock issued and outstanding compared to
109.2 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. Southern National's ability to replenish
liquid assets available for distribution is primarily dependent on the ability
of the banking subsidiaries to pay dividends to Southern National.
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 39.1% in 1996.
Excluding the impact of the nonrecurring charges discussed in "Analysis of
Results of Operations," the dividend payout ratio would have been 36.4%.
Southern National's quarterly cash dividend per common share was increased
17.4% after the second quarter to $.27 per common share. This increase marked
the 24th consecutive year that cash dividends have been increased. A
discussion of dividend restrictions is included in Note N--"Regulatory
Requirements and Other Restrictions."
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
outstanding preferred stock which was redeemed on March 29, 1996, at the price
of $104.05 per share.
Southern National's common stock is traded on the New York Stock Exchange
("NYSE") under the symbol "SNB." Southern National's common stock was held by
approximately 42,900 holders of record at December 31, 1996. 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.
- -------------------------------------------------------------------------------
TABLE 21
QUARTERLY COMMON STOCK SUMMARY
1996 1995
------------------------------ ------------------------------
SALES PRICES SALES PRICES
-------------------- DIVIDENDS -------------------- DIVIDENDS
HIGH LOW LAST PAID HIGH LOW LAST PAID
------ ------ ------ --------- ------ ------ ------ ---------
Quarter Ended
March 31....... $29.75 $25.88 $27.75 $ .23 $22.38 $18.88 $19.88 $.20
June 30........ 31.75 28.88 31.75 .23 24.13 19.88 24.00 .20
September 30... 33.88 28.63 33.25 .27 27.13 23.63 26.25 .23
December 31.... 36.75 33.38 36.25 .27 27.00 25.63 26.25 .23
Year......... 36.75 25.88 36.25 1.00 27.13 18.88 26.25 .86
- -------------------------------------------------------------------------------
FOURTH QUARTER RESULTS
Net income for the fourth quarter of 1996 was $79.7 million, compared to
earnings of $72.3 million for the prior year. On a per share basis, fully
diluted net income was $.72 for the quarter compared to $.63 a year ago.
Annualized returns on average assets and average equity were 1.51% and 18.54%,
respectively, for the fourth quarter.
Southern National showed improved net interest income of $214.0 million for
the fourth quarter of 1996 compared to $195.9 million for the same period
during 1995. The increased earnings also resulted from higher noninterest
income, which totaled $80.4 million for the fourth quarter, up from $62.1
million from the fourth quarter of 1995. Southern National's noninterest
expense was $163.2 million, up from the $141.3 million recorded in the fourth
quarter of the prior year.
39
The provision for loan and lease losses increased steadily and significantly
from the first quarter of 1995 through the fourth quarter of 1996. The
increase resulted from ongoing growth in the loan portfolio and higher net
charge-offs.
The $19.8 million net securities losses reflected in the first quarter of
1995 resulted from a restructuring of the securities portfolio which was
undertaken to conform the investment policies and portfolios of Southern
National and BB&T after the merger.
Noninterest income grew significantly during the past two years as reflected
in Table 22. This growth has resulted from higher revenues from service
charges on deposits, insurance commissions, investment brokerage commissions
and mortgage banking income. The ability of Southern National to cross-sell
products and services to the new customer base following the merger provided
much of the growth in fee-based income.
Noninterest expense fluctuated significantly on a quarterly basis in the
past two years as reflected in Table 22. As discussed earlier, Southern
National incurred significant nonrecurring expenses in both 1995 and 1996.
During 1995, Southern National recorded $107.5 million of nonrecurring merger-
related expenses in noninterest expense. On a quarterly basis, such amounts
totaled $83.4 million, $14.9 million, $6.5 million and $2.7 million for the
first, second, third and fourth quarters, respectively. During 1996, Southern
National incurred approximately $33 million in Federal deposit insurance
expense as part of a special, one-time SAIF assessment. This expense was
recorded during the third quarter of 1996. Excluding the impact of this
assessment, Southern National's noninterest expense grew steadily each quarter
of 1996, primarily driven by increased advertising and public relations
expense and higher amortization of intangibles and mortgage servicing rights.
40
The accompanying table, "Quarterly Financial Summary--Unaudited," presents
condensed information relating to eight quarters in the period ended December
31, 1996.
- -------------------------------------------------------------------------------
TABLE 22
QUARTERLY FINANCIAL SUMMARY--UNAUDITED
1996 1995
------------------------------------------------ -----------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
CONSOLIDATED SUMMARY OF
OPERATIONS
Net interest income
FTE................... $ 223,284 $ 215,925 $ 215,769 $ 207,703 $ 204,100 $ 198,400 $ 197,840 $ 194,865
FTE adjustment......... 9,326 8,348 8,446 8,068 8,611 8,514 7,958 7,452
Provision for loan and
lease losses.......... 15,500 13,500 13,261 11,400 11,317 7,933 7,742 7,640
Securities gains
(losses), net......... 2,663 705 (154) (8) 131 1,114 -- (19,845)
Other noninterest
income................ 77,731 74,217 73,238 68,997 61,947 61,611 68,505 57,531
Noninterest expense.... 163,204 187,734 153,471 149,644 141,319 147,121 161,952 231,628
Provision for income
taxes................. 35,968 25,299 37,508 35,729 32,650 32,971 28,784 (2,942)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ 79,680 $ 55,966 $ 76,167 $ 71,851 $ 72,281 $ 64,586 $ 59,909 $ (10,435)
=========== =========== =========== =========== =========== =========== =========== ===========
Fully diluted net
income (loss) per
share................. $ .72 $ .50 $ .68 $ .64 $ .63 $ .56 $ .52 $ (.11)
=========== =========== =========== =========== =========== =========== =========== ===========
SELECTED AVERAGE
BALANCES
Assets................. $21,031,881 $20,703,073 $20,400,678 $20,154,199 $20,579,829 $20,745,290 $20,409,207 $19,930,321
Securities, at
amortized cost........ 5,408,963 5,353,806 4,975,231 4,957,943 5,321,514 5,452,924 5,466,584 5,382,220
Loans and leases *..... 14,326,427 14,145,593 14,269,580 14,021,351 14,051,563 14,020,701 13,698,285 13,347,077
Total earning assets... 19,746,603 19,514,382 19,255,591 18,996,854 19,425,295 19,504,658 19,212,426 18,776,112
Deposits............... 15,018,071 14,993,074 14,589,355 14,504,637 14,221,698 14,211,266 14,305,800 14,266,875
Short-term borrowed
funds................. 1,881,838 1,823,310 2,129,143 2,215,462 3,029,962 3,297,130 3,336,221 2,972,965
Long-term debt......... 2,161,321 1,977,109 1,779,639 1,511,577 1,376,756 1,309,932 910,946 905,484
Total interest-bearing
liabilities........... 17,133,286 16,939,964 16,649,842 16,433,353 16,738,813 17,113,131 16,852,509 16,459,062
Shareholders' equity... 1,709,689 1,642,720 1,631,951 1,653,414 1,680,616 1,623,677 1,580,953 1,541,939
- --------
* Loans and leases are net of unearned income and include loans held for sale.
- -------------------------------------------------------------------------------
41
SIX-YEAR FINANCIAL SUMMARY AND SELECTED RATIOS
FIVE-YEAR
COMPOUND
1996 1995 1994 1993 1992 1991 GROWTH RATE
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF OPERATIONS
Interest income......... $ 1,606,613 $ 1,576,612 $ 1,339,542 $ 1,212,986 $ 1,218,407 $ 1,252,172 5.1%
Interest expense........ 778,120 813,942 586,296 509,110 592,675 746,400 .8
----------- ----------- ----------- ----------- ----------- -----------
Net interest income..... 828,493 762,670 753,246 703,876 625,732 505,772 10.4
Provision for loan and
lease losses........... 53,661 34,632 20,181 54,558 63,584 76,922 (6.9)
----------- ----------- ----------- ----------- ----------- -----------
Net interest income
after provision for
loan and lease losses.. 774,832 728,038 733,065 649,318 562,148 428,850 12.6
Noninterest income...... 297,389 230,994 229,861 223,229 187,541 179,419 10.6
Noninterest expense..... 654,053 681,228 589,795 667,441 513,649 438,617 8.3
----------- ----------- ----------- ----------- ----------- -----------
Income before income
taxes.................. 418,168 277,804 373,131 205,106 236,040 169,652 19.8
Provision for income
taxes.................. 134,504 91,463 129,289 78,925 84,322 51,640 21.1
----------- ----------- ----------- ----------- ----------- -----------
Income before cumulative
effect of changes in
accounting principles.. 283,664 186,341 243,842 126,181 151,718 118,012 19.2
Less: cumulative effect
of changes in
accounting
principles, net of
income taxes -- -- -- 33,792 -- -- NM
----------- ----------- ----------- ----------- ----------- -----------
Net income.............. $ 283,664 $ 186,341 $ 243,842 $ 92,389 $ 151,718 $ 118,012 19.2
=========== =========== =========== =========== =========== ===========
PER COMMON SHARE
Average shares
outstanding (000's)
Primary................ 110,486 109,777 108,143 104,317 97,610 89,195 4.4
Fully diluted.......... 111,836 114,802 113,194 110,201 105,277 92,620 3.8
Primary earnings
Income before
cumulative effect..... $ 2.56 $ 1.65 $ 2.21 $ 1.16 $ 1.51 $ 1.32 14.2
Less: cumulative
effect................ -- -- -- .33 -- -- NM
----------- ----------- ----------- ----------- ----------- -----------
Net income............. $ 2.56 $ 1.65 $ 2.21 $ .83 $ 1.51 $ 1.32 14.2
=========== =========== =========== =========== =========== ===========
Fully diluted
Income before
cumulative effect..... $ 2.54 $ 1.62 $ 2.16 $ 1.16 $ 1.44 $ 1.28 14.7
Less: cumulative
effect................ -- -- -- .33 -- -- NM
----------- ----------- ----------- ----------- ----------- -----------
Net income............. $ 2.54 $ 1.62 $ 2.16 $ .83 $ 1.44 $ 1.28 14.7
=========== =========== =========== =========== =========== ===========
Cash dividends
declared............... $ 1.00 $ .86 $ .74 $ .64 $ .50 $ .46 16.8
Shareholders' equity.... 15.82 15.04 13.44 12.63 12.71 11.64 6.3
AVERAGE BALANCE SHEETS
Securities at carrying
value.................. $ 5,176,841 $ 5,394,372 $ 5,340,070 $ 4,670,213 $ 3,998,587 $ 3,336,542 9.2
Loans and leases *...... 14,008,824 13,591,113 12,290,880 11,087,053 10,069,318 9,123,809 9.0
Other assets............ 1,388,405 1,418,385 1,441,666 1,369,128 1,339,256 1,251,716 2.1
----------- ----------- ----------- ----------- ----------- -----------
Total assets........... $20,574,070 $20,403,870 $19,072,616 $17,126,394 $15,407,161 $13,712,067 8.5
=========== =========== =========== =========== =========== ===========
Deposits................ $14,777,537 $14,251,176 $14,298,728 $13,546,050 $12,601,590 $11,398,365 5.3
Other liabilities....... 2,278,429 3,422,090 2,624,611 1,590,357 1,453,887 1,238,147 13.0
Long-term debt.......... 1,858,569 1,127,575 677,227 597,519 153,064 142,359 67.2
Common shareholders'
equity................. 1,644,376 1,530,684 1,397,907 1,318,325 1,132,815 933,196 12.0
Preferred shareholders'
equity................. 15,159 72,345 74,143 74,143 65,805 -- NM
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity.. $20,574,070 $20,403,870 $19,072,616 $17,126,394 $15,407,161 $13,712,067 8.5
=========== =========== =========== =========== =========== ===========
PERIOD END BALANCES
Total assets............ $21,246,562 $20,636,430 $19,971,602 $18,927,837 $16,016,224 $14,475,718 8.0
Deposits................ 14,953,914 14,684,056 14,314,154 14,594,952 13,044,173 12,166,090 4.2
Long-term debt.......... 2,051,767 1,383,935 910,755 837,241 423,211 417,050 37.5
Shareholders' equity.... 1,729,169 1,711,342 1,525,548 1,420,790 1,275,877 1,030,257 10.9
SELECTED PERFORMANCE
RATIOS
Rate of return on:
Average total assets... 1.38% .91% 1.28% .54% .98% .86%
Average common
shareholders' equity.. 17.21 11.84 17.07 6.61 12.99 12.65
Dividend payout......... 39.06 52.12 33.48 77.11 33.11 34.85
Average equity to
average assets......... 8.07 7.86 7.72 8.13 7.78 6.81
- --------
* Loans and leases are net of unearned income and the allowance for losses.
Amounts include loans held for sale.
NM--Not meaningful.
42
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
43
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, 1996 and 1995, 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, 1996. 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 principals 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, 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.
Arthur Andersen LLP
Charlotte, North Carolina,
January 14, 1997.
44
SOUTHERN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995
----------- -----------
ASSETS
Cash and due from banks............................. $ 638,748 $ 585,527
Interest-bearing deposits with banks................ 1,046 1,172
Federal funds sold and securities purchased under
resale agreements or similar arrangements.......... 19,940 118,977
Securities available for sale....................... 5,136,789 5,201,344
Securities held to maturity (market value: $128,410
in 1996 and $159,886 in 1995)...................... 124,718 153,969
Loans held for sale................................. 219,469 245,280
Loans and leases, net of unearned income............ 14,364,595 13,706,711
Allowance for loan and lease losses................ (183,932) (175,588)
----------- -----------
Loans and leases, net............................ 14,180,663 13,531,123
----------- -----------
Premises and equipment, net......................... 319,082 313,858
Other assets........................................ 606,107 485,180
----------- -----------
Total assets..................................... $21,246,562 $20,636,430
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits................ $ 1,990,415 $ 1,885,725
Savings and interest checking...................... 1,376,260 1,591,488
Money rate savings................................. 3,372,018 3,049,810
Other time deposits................................ 8,215,221 8,157,033
----------- -----------
Total deposits................................... 14,953,914 14,684,056
Short-term borrowed funds........................... 2,263,303 2,595,416
Long-term debt...................................... 2,051,767 1,383,935
Accounts payable and other liabilities.............. 248,409 261,681
----------- -----------
Total liabilities................................ 19,517,393 18,925,088
----------- -----------
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares
authorized, none issued and outstanding at
December 31, 1996 and 733,869 at December 31,
1995.............................................. -- 3,669
Common stock, $5 par, 300,000,000 shares
authorized, issued and outstanding 109,297,489 at
December 31, 1996 and 109,151,655 at December 31,
1995.............................................. 546,487 545,758
Additional paid-in capital......................... 134,758 269,404
Retained earnings.................................. 1,038,067 865,658
Loan to employee stock ownership plan and unvested
restricted stock.................................. (1,952) (4,314)
Net unrealized appreciation on securities available
for sale, net of tax of $8,247 in 1996 and $20,013
in 1995........................................... 11,809 31,167
----------- -----------
Total shareholders' equity....................... 1,729,169 1,711,342
----------- -----------
Total liabilities and shareholders' equity....... $21,246,562 $20,636,430
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
45
SOUTHERN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
---------- ---------- ----------
INTEREST INCOME
Interest and fees on loans and leases..... $1,282,521 $1,261,658 $1,042,553
Interest and dividends on securities...... 323,360 312,423 291,805
Interest on short-term investments........ 732 2,531 5,184
---------- ---------- ----------
Total interest income................... 1,606,613 1,576,612 1,339,542
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits...................... 564,747 557,149 441,876
Interest on short-term borrowed funds..... 105,936 186,194 103,493
Interest on long-term debt................ 107,437 70,599 40,927
---------- ---------- ----------
Total interest expense.................. 778,120 813,942 586,296
---------- ---------- ----------
NET INTEREST INCOME......................... 828,493 762,670 753,246
Provision for loan and lease losses....... 53,661 34,632 20,181
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
AND LEASE LOSSES........................... 774,832 728,038 733,065
---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposits............... 107,581 89,621 85,106
Mortgage banking income................... 34,352 26,408 24,920
Trust income.............................. 22,811 18,629 17,180
Agency insurance commissions.............. 22,353 15,572 13,830
Other insurance commissions............... 11,189 10,866 10,413
Bankcard fees............................. 28,425 24,448 17,671
Other nondeposit fees and commissions..... 40,410 30,186 30,594
Securities gains (losses), net............ 3,206 (18,600) 3,074
Other income.............................. 27,062 33,864 27,073
---------- ---------- ----------
Total noninterest income................ 297,389 230,994 229,861
---------- ---------- ----------
NONINTEREST EXPENSE
Personnel expense......................... 302,383 346,308 296,545
Occupancy and equipment expense........... 103,594 107,877 88,580
Federal deposit insurance expense......... 42,820 22,995 32,697
Other expense............................. 205,256 204,048 171,973
---------- ---------- ----------
Total noninterest expense............... 654,053 681,228 589,795
---------- ---------- ----------
EARNINGS
Income before income taxes................ 418,168 277,804 373,131
Provision for income taxes................ 134,504 91,463 129,289
---------- ---------- ----------
NET INCOME.................................. 283,664 186,341 243,842
Preferred dividend requirements........... 610 5,079 5,198
---------- ---------- ----------
Income applicable to common shares........ $ 283,054 $ 181,262 $ 238,644
========== ========== ==========
PER COMMON SHARE
Net income:
Primary................................. $ 2.56 $ 1.65 $ 2.21
========== ========== ==========
Fully Diluted........................... $ 2.54 $ 1.62 $ 2.16
========== ========== ==========
Cash dividends declared................... $ 1.00 $ .86 $ .74
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
46
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
SHARES OF ADDITIONAL RETAINED TOTAL
COMMON PREFERRED COMMON PAID-IN EARNINGS SHAREHOLDERS'
STOCK STOCK STOCK CAPITAL AND OTHER* EQUITY
----------- --------- -------- ---------- ---------- -------------
BALANCE, DECEMBER 31,
1993, AS PREVIOUSLY
REPORTED............... 100,823,294 $ 3,850 $504,116 $ 275,426 $ 615,334 $1,398,726
Merger with Regional
Acceptance Corporation
accounted for under
the pooling of
interests method...... 5,791,500 -- 28,957 (9,823) 2,930 22,064
----------- ------- -------- --------- ---------- ----------
BALANCE, DECEMBER 31,
1993, AS RESTATED...... 106,614,794 3,850 533,073 265,603 618,264 1,420,790
ADD (DEDUCT)
Net income............. -- -- -- -- 243,842 243,842
Common stock issued.... 2,480,938 -- 12,405 26,161 (36) 38,530
Redemption of common
stock................. (1,086,485) -- (5,432) (18,130) -- (23,562)
Net unrealized
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................... 108,009,247 3,850 540,046 275,799 705,853 1,525,548
ADD (DEDUCT)
Net income............. -- -- -- -- 186,341 186,341
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)
Preferred stock
cancellations and
conversions........... 104,836 (181) 524 (2,714) -- (2,371)
Net unrealized
appreciation on
securities available
for sale.............. -- -- -- -- 103,751 103,751
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................... 109,151,655 3,669 545,758 269,404 892,511 1,711,342
ADD (DEDUCT)
Net income............. -- -- -- -- 283,664 283,664
Common stock issued.... 2,584,625 -- 12,922 55,258 -- 68,180
Redemption of common
stock................. (6,773,483) -- (33,867) (173,520) -- (207,387)
Preferred stock
cancellations and
conversions........... 4,334,692 (3,669) 21,674 (18,005) -- --
Net unrealized
depreciation on
securities available
for sale.............. -- -- -- -- (19,358) (19,358)
Cash dividends declared
by Southern National:
Common stock........... -- -- -- -- (110,645) (110,645)
Preferred stock........ -- -- -- -- (610) (610)
Other.................. -- -- -- 1,621 2,362 3,983
----------- ------- -------- --------- ---------- ----------
BALANCE, DECEMBER 31,
1996................... 109,297,489 $ -- $546,487 $ 134,758 $1,047,924 $1,729,169
=========== ======= ======== ========= ========== ==========
- --------
* Other includes net unrealized appreciation (depreciation) on securities
available for sale, unvested restricted stock and a loan to the employee
stock ownership plan.
The accompanying notes are an integral part of these consolidated financial
statements.
47
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 283,664 $ 186,341 $ 243,842
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan and lease losses.... 53,661 34,632 20,181
Depreciation of premises and
equipment............................. 39,852 36,264 35,730
Amortization of intangibles and
mortgage servicing rights............. 12,779 10,600 7,700
Accretion of negative goodwill......... (6,238) (6,310) (1,114)
Amortization of unearned stock
compensation.......................... 2,450 3,128 1,711
Discount accretion and premium
amortization on securities, net....... 2,168 (27,193) (571)
Loss (gain) on sales of securities,
net................................... (3,206) 18,600 (3,074)
Loss (gain) on sales of loans and
mortgage loan servicing rights, net... (8,293) 2,379 1,327
Loss (gain) on disposals of premises
and equipment, net.................... 178 3,971 (1,759)
Loss on foreclosed property and other
real estate, net...................... 519 4,129 169
Proceeds from sales of loans held for
sale.................................. 1,343,123 789,164 596,249
Purchases of loans held for sale....... (429,523) (311,059) (33,351)
Origination of loans held for sale,
net of principal collected............ (879,496) (589,413) (272,115)
Decrease (increase) in:
Accrued interest receivable........... 21,104 (19,415) (24,207)
Other assets.......................... (104,688) 16,791 (79,612)
Increase (decrease) in:
Accrued interest payable.............. 4,424 10,992 2,880
Accounts payable and other
liabilities.......................... (5,044) 89,377 20,142
----------- ----------- -----------
Net cash provided by operating
activities.......................... 327,434 252,978 514,128
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities
available for sale.................... 593,567 1,290,237 772,597
Proceeds from maturities of securities
available for sale.................... 2,129,525 1,087,926 792,590
Purchases of securities available for
sale.................................. (1,871,172) (2,531,842) (1,490,117)
Proceeds from maturities of securities
held to maturity...................... 31,296 290,300 460,987
Purchases of securities held to
maturity.............................. (2,228) (8,103) (862,317)
Leases made to customers............... (72,390) (18,091) (44,379)
Principal collected on leases.......... 48,222 14,620 41,661
Loan originations, net of principal
collected............................. (1,283,633) (458,303) (1,191,968)
Purchases of loans..................... (232,236) (189,997) (27,864)
Net cash acquired in transactions
accounted for under the purchase
method................................ 1,887 -- 2,262
Purchases and originations of mortgage
servicing rights...................... (24,302) (16,751) (2,948)
Proceeds from disposals of premises and
equipment............................. 7,314 16,373 6,897
Purchases of premises and equipment.... (61,548) (58,404) (71,175)
Proceeds from sales of foreclosed
property.............................. 14,661 11,979 27,413
Proceeds from sales of other real
estate held for development or sale... 8,127 1,728 9,519
Other, net............................. -- (2,287) 22,696
----------- ----------- -----------
Net cash used in investing
activities.......................... (712,910) (570,615) (1,554,146)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits.... 269,858 369,902 (280,798)
Net (decrease) increase in short-term
borrowed funds........................ (332,107) (392,180) 1,136,146
Proceeds from long-term debt........... 1,586,766 2,945,052 356,439
Repayments of long-term debt........... (918,934) (2,471,872) (282,925)
Net proceeds from common stock issued.. 47,462 43,781 23,668
Redemption of common stock............. (207,387) (47,311) (23,562)
Preferred stock cancellations and
conversions........................... -- (2,371) --
Cash dividends paid on common and
preferred stock....................... (106,124) (93,465) (76,805)
----------- ----------- -----------
Net cash provided by financing
activities.......................... 339,534 351,536 852,163
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS...................... (45,942) 33,899 (187,855)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR............................... 705,676 671,777 859,632
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR.................................. $ 659,734 $ 705,676 $ 671,777
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest............................... $ 773,043 $ 803,377 $ 583,705
Income taxes........................... 133,510 116,361 147,619
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.............................. 19,568 9,567 20,358
Transfer of fixed assets to other real
estate owned.......................... 10,466 21,846 --
Common stock issued upon conversion of
debentures............................ -- 4,896 --
Restricted stock issued................ 88 -- --
Securitization of mortgage loans....... 817,268 354,882 7,497
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
48
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 Branch Banking and
Trust Company of Virginia ("BB&T-VA") (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. 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 1996. 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 and Virginia.
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 periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, 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. Accordingly, the
carrying amount of such instruments is considered a reasonable estimate of
fair value.
49
Securities
Southern National classifies investment securities in one of three
categories: held to maturity, available for sale and trading. 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 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, 1996 and
1995, 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 $1.6
billion of securities which were previously classified as held to maturity
under Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" to the
available-for-sale category. 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 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.
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 until the loans are repaid are
reported at their outstanding principal balances adjusted for any deferred
fees or costs 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 are 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 loan 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 at 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.
50
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. A loan is impaired when, based on current information
and events, it is probable that Southern National will be unable to collect
all amounts due according to the contractual terms of the loan agreement. When
the measure of the impaired loan is less than the recorded investment in the
loan, the impairment is recorded through a valuation allowance. Southern
National 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, 1996, was
$16.0 million, offset by a valuation allowance of $2.2 million, which resulted
in a net carrying value of $13.8 million. There were no investments in
impaired loans which did not have a related valuation allowance. The average
recorded investment in impaired loans during 1996 totaled $20.0 million.
Southern National recognizes no interest income on loans that are impaired.
Cash receipts for both principal and interest are applied directly to
principal.
Southern National's policy is to disclose as impaired loans all commercial
loans, greater than $250,000, that are on nonaccrual status. Substantially all
other loans made by Southern National are excluded from the scope of SFAS No.
114 as they are large groups of smaller balance homogeneous loans (residential
mortgage and consumer installment) that are collectively evaluated for
impairment.
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 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.
51
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 straight-line method over the estimated useful lives of
the related assets. Leasehold improvements are amortized on a straight-line
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. Deferred tax assets and liabilities are recognized based
on future tax consequences of the differences arising from their carrying
values and respective tax bases. In the event of changes in the tax laws,
deferred tax assets and liabilities are adjusted in the period of the
enactment of those changes, with effects included in income.
The operating results of acquired institutions were included in their
respective income tax returns prior to consummation of the acquisitions.
Derivatives and Off-Balance Sheet Instruments
Southern National utilizes a variety of derivative financial instruments to
manage various financial risks. These instruments include financial forward
and futures contracts, options written and purchased, interest rate caps and
floors and interest rate swaps. Management accounts for these financial
instruments as hedges when the following conditions are met: (1) the specific
assets, liabilities, firm commitments or anticipated transactions (or an
identifiable group of essentially similar items) to be hedged expose Southern
National to interest rate risk or price risk; (2) the financial instrument
reduces that exposure; (3) the financial instrument is designated as a hedge
at inception; and (4) at the inception of the hedge and throughout the hedge
period, there is a high correlation of changes in the fair value or the net
interest income associated with the financial instrument and the hedged items.
The net interest payable or receivable on interest rate swaps, caps and
floors that are designated as hedges is accrued and recognized as an
adjustment to the interest income or expense of the related asset or
liability. For interest rate forwards, futures and options qualifying as a
hedge, gains and losses are deferred and are recognized in income as an
adjustment of yield. Gains and losses from early terminations of derivatives
are deferred and amortized as yield adjustments over the shorter of the
remaining term of the hedged asset or liability or the remaining term of the
derivative instrument. Upon disposition or settlement of the asset or
liability being hedged, deferral accounting is discontinued and any gains or
losses are recognized in income. Derivative financial instruments that fail to
qualify as a hedge are carried at fair value with gains and losses recognized
in current earnings.
Southern National utilizes written covered over-the-counter call options on
specific securities in the available-for-sale securities portfolio in order to
enhance returns. Fees received are deferred and recognized in
52
noninterest income upon exercise or expiration. Written options are carried at
estimated fair value. Unrealized and realized gains and losses on written call
options are included with securities gains and losses.
Southern National also utilizes over-the-counter purchased put options and
net purchased put options (combination of purchased put option and written
call option) in its mortgage banking activities. These options are used to
hedge the mortgage warehouse and pipeline against increasing interest rates.
Written call options are used in tandem with purchased put options to create a
net purchased put option that reduces the cost of the hedge. Net unrealized
gains and losses on purchased put options and net purchased put options are
carried with loans held for sale at the lower of cost or market on an
aggregate basis. Realized gains and losses on purchased put options and net
purchased put options are included in mortgage banking income.
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:
1996 1995 1994
----------- ----------- -----------
Primary.................................. 110,486,127 109,776,710 108,142,988
Fully diluted............................ 111,836,200 114,801,843 113,193,681
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 straight-line or accelerated bases over periods ranging
from 5 to 15 years. At December 31, 1996, Southern National had $54.4 million
recorded as goodwill and $9.0 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, 1996, Southern
National had negative goodwill totaling $39.2 million, net of amortization.
Mortgage Servicing Rights
Amounts paid to acquire the right to service certain mortgage loans are
capitalized and 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, 1996,
Southern National had capitalized mortgage servicing rights totaling $37.1
million.
53
Changes in Accounting Principles and Effects of New Accounting Pronouncements
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. The required pro forma disclosures relating to SFAS No.
123 are presented in Note J.
In June of 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for such transactions based on
consistent application of a financial components approach. This approach
recognizes the financial and servicing assets an entity controls and the
liabilities it has incurred, as well as derecognizes financial assets when
control has been surrendered and liabilities when they are extinguished. The
statement requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It also requires that servicing assets and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of
transfer. In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125." This
statement allows the implementation of certain provisions of SFAS No. 125 to
be deferred for one year. Southern National adopted SFAS No. 125, as amended
by SFAS No. 127, effective January 1, 1997. Management does not anticipate
that the adoption of these statements will have a material impact on Southern
National's consolidated financial position or consolidated results of
operations.
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:
1996 1995 1994
-------- ----- --------
(DOLLARS IN THOUSANDS)
Fair value of net assets acquired................ $ 1,394 $ -- $ 6,203
Purchase price................................... (22,256) -- (15,016)
-------- ----- --------
Excess of purchase price over net assets ac-
quired.......................................... $(20,862) $ -- $ (8,813)
======== ===== ========
During the first quarter of 1996, Southern National redeemed all outstanding
shares of Convertible Preferred Stock. This transaction, a noncash financing
activity, resulted in the conversion of 733,869 shares of preferred stock into
4,334,692 shares of common stock.
54
Income and Expense Recognition
Items of income and expense are recognized using the accrual basis of
accounting, except for some immaterial amounts.
NOTE B. ACQUISITIONS AND MERGERS
Completed Mergers and Acquisitions
On June 1, 1994, Southern National completed the 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 the acquisition of Leasing
Associates, Inc. by the issuance of 97,876 shares of Southern National common
stock.
On November 1, 1994, Southern National completed the 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.
On June 30, 1996, Southern National completed the purchase of certain fixed
assets and expiration rights from the James R. Lingle Agency of Florence,
South Carolina. In conjunction with the purchase, Southern National recorded
expiration rights totaling $1.7 million which are being amortized over 15
years.
On August 28, 1996, Southern National became a majority shareholder of
AutoBase Information Systems, Inc. ("AutoBase"), through the purchase of 51%
of AutoBase's outstanding common stock. In conjunction with this investment,
Southern National recorded $1.2 million in goodwill which is being amortized
over 15 years.
During November 1996, Southern National completed the acquisitions of three
insurance agencies in South Carolina. On November 7, 1996, Southern National
completed the acquisition of the William Goldsmith Agency Inc., ("Goldsmith")
of Greenville, South Carolina through the issuance of 70,207 shares of common
stock. On
November 13, 1996, Southern National completed the acquisition of the C. Dan
Joyner Insurance Agency ("Joyner"), based in Greenville, South Carolina
through the issuance of 48,120 shares of common stock. Boyle-Vaughan
Associates, Inc. ("Boyle-Vaughan"), based in Columbia, South Carolina was
acquired on November 22, 1996 through the issuance of 492,063 shares of common
stock. In conjunction with the purchase of these agencies, Southern National
recorded $17.9 million in goodwill, which is being amortized over 15 years.
These acquisitions were accounted for under the purchase method of accounting.
The above-discussed 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.
The pro forma effects of 1996 purchases, as if they had been acquired as of
the beginning of the year, are not material.
On June 30, 1994, Southern National completed the acquisition of L.S.B.
Bancshares Inc., of Lexington, S.C. and its wholly-owned subsidiaries, The
Lexington State Bank and The Community Bank of South Carolina ("LSB"). The
transaction was accounted for as a pooling-of-interests, and, accordingly, the
consolidated financial statements include the results of LSB for all periods
presented. The merger was consummated through the issuance of 5,707,694 shares
of Southern National common stock. At the date of acquisition, LSB had assets
of approximately $707,000.
On February 28, 1995, Southern National and BB&T Financial Corporation
("BB&T") completed a merger. The transaction was accounted for as a pooling-
of-interests in which BB&T shareholders received 1.45
55
shares of the common stock of the resulting company for each share of BB&T
stock held. On January 10, 1995, Southern National acquired Commerce Bank
(subsequently, BB&T-VA) through the issuance of 5,210,476 shares of Southern
National common stock for all of the outstanding stock of Commerce Bank.
On September 1, 1996, Southern National completed the acquisition of
Regional Acceptance Corporation of Greenville, N.C. ("Regional Acceptance") in
a transaction accounted for as a pooling-of-interests. Regional Acceptance's
shareholders received .3861 shares of Southern National's common stock for
each share of common stock held. Southern National issued 5.85 million shares
in exchange for all of the outstanding stock of Regional Acceptance. Prior to
the consummation of the Merger, Regional Acceptance recorded total revenues
and net income of $26.0 million and $4.5 million, respectively.
The following presentation reflects key line items on an historical basis
for Southern National and Regional Acceptance and on a pro forma combined
basis assuming the merger was effective as of and for the periods presented.
HISTORICAL
BASIS
SOUTHERN NATIONAL ---------- SOUTHERN
AS ORIGINALLY REGIONAL NATIONAL
REPORTED ACCEPTANCE RESTATED
----------------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
1995
Net interest income................ $ 741,549 $ 21,121 $ 762,670
Net income......................... 178,133 8,208 186,341
Net earnings per share
Primary........................... 1.66 .55 1.65
Fully diluted..................... 1.64 .55 1.62
Assets............................. 20,492,929 143,501 20,636,430
Deposits........................... 14,684,056 -- 14,684,056
Shareholders' equity............... 1,674,063 37,279 1,711,342
1994
Net interest income................ $ 736,766 $ 16,480 $ 753,246
Net income......................... 236,872 6,970 243,842
Net earnings per share
Primary........................... 2.26 .46 2.21
Fully diluted..................... 2.21 .46 2.16
Assets............................. 19,855,063 116,539 19,971,602
Deposits........................... 14,314,154 -- 14,314,154
Shareholders' equity............... 1,496,477 29,071 1,525,548
Pending Mergers and Acquisitions
On August 22, 1996, Southern National announced plans to acquire Fidelity
Financial Bankshares Corporation ("Fidelity") in a transaction to be accounted
for as a purchase. Fidelity's shareholders will receive .7137 shares of
Southern National common stock for each share of Fidelity stock held. The
transaction, which closed in the first quarter of 1997, was valued at $59.4
million on August 22, 1996.
On November 4, 1996, Southern National and United Carolina Bancshares
Corporation ("UCB") jointly announced the signing of an agreement to merge.
The transaction will be accounted for as a pooling-of-interests in which UCB
shareholders will receive 1.135 shares of Southern National's common stock in
exchange for each share of UCB common stock held. The market transaction has
an indicated total value of $985 million based on the November 1, 1996 closing
prices of the stock of both institutions. The merger, if approved, is expected
to be completed by the end of the second quarter of 1997.
56
On January 23, 1997, Southern National announced plans to acquire Refloat,
Inc. of Mount Airy, North Carolina, and its principal subsidiary, Sheffield
Financial Corp., a finance company in Clemmons, North Carolina that
specializes in loans to small commercial lawn care businesses across the
country.
On February 4, 1997, Southern National announced plans to acquire Phillips
Factors Corporation and its subsidiaries, Phillips Financial Corporation and
Phillips Acceptance Corporation, all of High Point, North Carolina. Phillips
Financial Corporation, which will operate as an autonomous subsidiary of
Southern National, purchases and manages receivables in the temporary staffing
industry nationwide. It also provides payroll processing services to that
industry. Phillips Factors Corporation buys and manages account receivables
primarily in the furniture, textiles and home furnishings-related industries.
NOTE C. SECURITIES
The amortized costs and approximate fair values of securities were as
follows:
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------- -------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED --------------- ESTIMATED AMORTIZED --------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
---------- ------- ------- ---------- ---------- ------- ------- ----------
(DOLLARS IN THOUSANDS)
Securities held to matu-
rity:
U.S. Treasury, govern-
ment and agency obli-
gations............... $ 6,283 $ -- $ 4 $ 6,279 $ 9,461 $ -- $ 172 $ 9,289
States and political
subdivisions.......... 118,435 3,835 139 122,131 144,508 6,194 105 150,597
---------- ------- ------- ---------- ---------- ------- ------- ----------
Total securities held
to maturity........... 124,718 3,835 143 128,410 153,969 6,194 277 159,886
---------- ------- ------- ---------- ---------- ------- ------- ----------
Securities available for
sale:
U.S. Treasury, govern-
ment and agency obli-
gations............... 3,111,323 15,452 11,150 3,115,625 4,013,272 54,400 7,249 4,060,423
States and political
subdivisions.......... 22,885 166 176 22,875 20,612 257 96 20,773
Mortgage-backed securi-
ties.................. 1,709,951 29,406 13,642 1,725,715 973,339 8,415 4,027 977,727
Equity and other secu-
rities................ 272,574 2 2 272,574 142,942 3 524 142,421
---------- ------- ------- ---------- ---------- ------- ------- ----------
Total securities avail-
able for sale......... 5,116,733 45,026 24,970 5,136,789 5,150,165 63,075 11,896 5,201,344
---------- ------- ------- ---------- ---------- ------- ------- ----------
Total securities....... $5,241,451 $48,861 $25,113 $5,265,199 $5,304,134 $69,269 $12,173 $5,361,230
========== ======= ======= ========== ========== ======= ======= ==========
Securities with a book value of approximately $3.0 billion and $2.4 billion
at December 31, 1996 and 1995, 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, 1996 and 1995, 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 1996, 1995 and 1994 were $593.6
million, $1.3 billion and $772.6 million, respectively. Gross gains of $5.4
million, $2.7 million and $3.6 million and gross losses of $2.2 million, $21.3
million and $527,000 were realized on those sales in 1996, 1995 and 1994,
respectively.
57
The amortized cost and estimated fair value of the securities portfolio at
December 31, 1996, 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. For purposes of the maturity table, mortgage-
backed securities, which are not due at a single maturity date, have been
allocated over maturity groupings based on the weighted average contractual
maturities of underlying collateral.
DECEMBER 31, 1996
-----------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
------------------- ---------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
DEBT SECURITIES COST VALUE COST VALUE
--------------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Due in one year or less.......... $ 24,778 $ 24,811 $ 561,818 $ 562,494
Due after one year through five
years........................... 80,620 83,147 2,853,004 2,848,723
Due after five years through ten
years........................... 19,270 20,399 351,612 350,507
Due after ten years.............. 50 53 1,266,349 1,291,115
-------- -------- ---------- ----------
Total debt securities.......... $124,718 $128,410 $5,032,783 $5,052,839
======== ======== ========== ==========
NOTE D. LOANS AND LEASES
Loans and leases were composed of the following:
DECEMBER 31,
-----------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
Loans--
Commercial, financial and agricultural............ $ 2,375,121 $ 2,098,306
Real estate--construction and land development.... 1,228,043 949,513
Real estate--mortgage............................. 8,513,945 8,671,941
Consumer.......................................... 1,830,519 1,716,399
----------- -----------
Loans held for investment....................... 13,947,628 13,436,159
----------- -----------
Leases............................................ 576,991 376,152
----------- -----------
Total loans and leases.......................... 14,524,619 13,812,311
Less: unearned income......................... 160,024 105,600
----------- -----------
Loans and leases, net of unearned income........ $14,364,595 $13,706,711
=========== ===========
The net investment in direct financing leases was $470.5 million and $315.5
million at December 31, 1996 and 1995, respectively. Southern National had
loans held for sale at December 31, 1996 and 1995 totaling $219.5 million and
$245.3 million, respectively.
Southern National's only significant concentration of credit at December 31,
1996 occurred in real estate loans, which totaled $10.0 billion. However, this
amount was not concentrated in any specific market or geographic area other
than the Banks' primary market.
58
The following table provides an analysis of loans made to the directors and
executive officers of Southern National and all significant subsidiaries and
their interests, which in the aggregate exceeded $60,000 at any time during
1996. 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, 1995.......................... $ 98,338
Additions........................................... 62,441
Repayments.......................................... 19,514
--------
BALANCE, DECEMBER 31, 1996.......................... $141,265
========
NOTE E. ALLOWANCE FOR LOSSES
An analysis of the allowance for losses is presented in the following table:
DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Balance, January 1............................. $175,588 $174,102 $170,788
Provision for losses charged to expense........ 53,661 34,632 20,181
Allowances of purchased companies.............. -- -- 1,119
-------- -------- --------
Subtotal..................................... 229,249 208,734 192,088
-------- -------- --------
Loans charged-off.............................. (59,484) (44,727) (31,567)
Recoveries..................................... 14,167 11,581 13,581
-------- -------- --------
Net charge-offs.............................. (45,317) (33,146) (17,986)
-------- -------- --------
Balance, December 31........................... $183,932 $175,588 $174,102
======== ======== ========
At December 31, 1996, 1995 and 1994, loans not currently accruing interest
totaled $64.4 million, $66.2 million and $48.5 million, respectively. Loans 90
days or more past due and still accruing interest totaled $32.1 million, $29.1
million and $24.2 million, at December 31, 1996, 1995 and 1994, respectively.
The gross interest income that would have been earned during 1996 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 $5.5 million.
Foreclosed property was $18.8 million, $13.7 million and $13.5 million at
December 31, 1996, 1995 and 1994, respectively.
NOTE F. PREMISES AND EQUIPMENT
DECEMBER 31,
-----------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
Land and land improvements................................ $ 49,178 $ 47,158
Buildings and building improvements....................... 230,122 224,730
Furniture and equipment................................... 240,917 235,149
Capitalized leases on premises and equipment.............. 3,804 4,257
-------- --------
524,021 511,294
Less--accumulated depreciation and amortization........... 204,939 197,436
-------- --------
Net premises and equipment.............................. $319,082 $313,858
======== ========
Depreciation expense, which is included in occupancy and equipment expense,
was $39.9 million, $36.3 million and $35.7 million in 1996, 1995 and 1994,
respectively.
59
Southern National has noncancellable leases covering certain premises and
equipment. Total rent expense applicable to operating leases was $24.5
million, $29.4 million and $22.4 million for 1996, 1995 and 1994,
respectively. Future minimum lease payments for operating and capitalized
leases for years subsequent to 1996 are as follows:
LEASES
---------------------
OPERATING CAPITALIZED
--------- -----------
(DOLLARS IN
THOUSANDS)
Year ended December 31:
1997............................................... $ 17,588 $ 465
1998............................................... 17,005 465
1999............................................... 16,260 465
2000............................................... 15,906 465
2001............................................... 15,050 465
2002 and years later............................... 97,853 5,316
-------- ------
Total minimum lease payments......................... $179,662 7,641
========
Less--amount representing interest................... 4,080
------
Present value of net minimum payments on capitalized
leases (Note I)..................................... $3,561
======
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 $6.7 billion and $5.4 billion at December 31, 1996
and 1995, 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:"
CAPITALIZED
MORTGAGE
SERVICING
RIGHTS
----------------
1996 1995
------- -------
(DOLLARS IN
THOUSANDS)
Balance, January 1,........................................ $18,265 $ 4,670
Amount capitalized....................................... 24,302 16,751
Amortization expense..................................... (5,203) (2,761)
Change in valuation allowance............................ (290) (395)
------- -------
Balance, December 31,...................................... $37,074 $18,265
======= =======
60
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. Following is an analysis
of the aggregate changes in the valuation allowances for mortgage servicing
rights in 1996 and 1995:
VALUATION ALLOWANCE
FOR MORTGAGE SERVICING
RIGHTS
----------------------
(DOLLARS IN THOUSANDS)
Balance, January 1, 1995.............................. $ --
Additions........................................... 395
------
Balance, December 31, 1995............................ 395
------
Additions........................................... 1,184
Reductions.......................................... (894)
------
BALANCE, DECEMBER 31, 1996............................ $ 685
======
NOTE H. SHORT-TERM BORROWED FUNDS
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
Federal funds purchased............................. $ 743,075 $ 812,165
Term Federal funds purchased........................ 50,000 350,000
Securities sold under agreements to repurchase...... 664,457 689,517
Master notes........................................ 566,225 396,273
U.S. Treasury tax and loan deposit notes payable.... 86,938 63,588
Short-term Federal Home Loan Bank advances.......... 150,000 175,000
Other short-term borrowed funds..................... 2,608 108,873
----------- -----------
Total short-term borrowed funds................... $ 2,263,303 $ 2,595,416
=========== ===========
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 typically unsecured and generally mature
daily.
61
NOTE I. LONG-TERM DEBT
DECEMBER 31,
-----------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
$5 million Industrial Revenue Bond, dated 1984, se-
cured by premises with a net book value of
$5,708,000 at December 31, 1996, 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--6.352%
at December 31, 1996............................... $ 1,000 $ 1,250
Capitalized leases, varying maturities to 2028 with
rates from 8.11% to 12.65%. This represents the un-
amortized balances due on leases of various facili-
ties............................................... 3,561 4,125
Medium-term bank notes, unsecured, varying maturi-
ties to 2001 with rates from 5.31% to 5.70%........ 424,794 201,979
Advances from Federal Home Loan Bank, varying matu-
rities to 2016 with rates from 1.00% to 8.95%...... 1,373,795 1,175,830
$250 million Subordinated Notes, unsecured, dated
May 21, 1996, maturing May 23, 2003 with an inter-
est rate of 7.05%*................................. 248,019 --
Other mortgage indebtedness......................... 598 751
----------- -----------
$ 2,051,767 $ 1,383,935
=========== ===========
- --------
* Subordinated notes qualify under the risk-based capital guidelines as Tier 2
supplementary capital.
Excluding the capitalized leases set forth in Note F, future debt maturities
total $2.0 billion and are $550.5 million, $339.6 million, $175.5 million,
$111.7 million, and $418.4 million for the next five years. The maturities for
2002 and later years are $452.5 million.
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, 1996, 109,297,489 shares of common stock and no
shares of preferred stock were issued and outstanding.
62
Stock Option Plans
At December 31, 1996, Southern National had the following stock-based
compensation plans: the 1994 and the 1995 Omnibus Stock Incentive Plans
("Omnibus Plans"), the Incentive Stock Option Plan ("ISOP"), the Non-Qualified
Stock Option Plan ("NQSOP") and the Non-Employee Directors' Stock Option Plan
("Directors' Plan"), which are described below. Southern National accounts for
these plans under Accounting Principles Board ("APB") Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for
these plans been determined based on the fair value at the grant dates for
awards under those plans, consistent with the method of SFAS No. 123, Southern
National's pro forma net income and pro forma earnings per share would have
been as follows:
1996 1995
-------- --------
Net income:
As reported.............................................. $283,664 $186,341
Pro Forma................................................ 281,282 186,028
Primary EPS:
As reported.............................................. 2.56 1.65
Pro Forma................................................ 2.54 1.65
Fully Diluted EPS:
As reported.............................................. 2.54 1.62
Pro Forma................................................ 2.52 1.62
The SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995; therefore, the weighted average fair value
of options granted prior to that date has not been calculated. The fair value
of each option grant was estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted-average assumptions
used for grants in 1996 and 1995, respectively: dividend yield of 3.5% for
both years; expected volatility of 20% for both years; risk free interest
rates of 6.46% and 5.65%; and expected lives of 6.76 years and 6.06 years.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
In April 1994 and May 1995, the shareholders approved the Omnibus Plans
which cover the award of incentive stock options, non-qualified stock options,
shares of restricted stock, performance shares and stock appreciation rights.
In April 1996, the shareholders approved an amendment to the 1995 Omnibus Plan
that increased the maximum number of shares issuable under the terms of the
plan to 6,000,000 shares. The combined shares issuable under both Omnibus
Plans is 10,000,000. The Omnibus Plans are intended to allow Southern National
to recruit and retain employees with ability and initiative and to associate
the employees' interests with those of Southern National and its shareholders.
At December 31, 1996, 2,187,207 incentive stock options at prices ranging from
$5.8828 to $36.625 and 2,056,395 non-qualified stock options at prices ranging
from $.01 to $23.3655 were outstanding. The stock options vest over 3 years
and have a 10 year term.
The ISOP and the 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, 1996, options to purchase 348,660 shares of
common stock at prices ranging from $9.50 to $16.75 were outstanding pursuant
to the NQSOP. At December 31, 1996, options to purchase 157,329 shares of
common stock at an exercise price of $19.777 were outstanding pursuant to the
ISOP.
63
The 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. The plan 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, 1996, options to purchase 291,143 shares of common stock at
prices ranging from $12.7155 to $22.07 were outstanding pursuant to the
Directors' Plan.
Southern National also has options outstanding from companies acquired in
prior years. These options, which have not been included in the plans
described above, totaled 297,067 as of December 31, 1996, with option prices
ranging from $2.6667 to $23.7069.
A summary of the status of the Company's stock option plans at December 31,
1996, 1995 and 1994 and changes during the years then ended is presented
below:
1996 1995 1994
-------------------- -------------------- --------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
Outstanding at beginning
of year................ 5,766,004 $18.18 5,068,067 $15.53 4,546,234 $13.38
Granted................. 102,321 25.73 1,292,163 25.73 1,178,149 19.52
Exercised............... (482,954) 12.40 (548,511) 11.40 (601,492) 6.87
Forfeited or Expired.... (47,570) 15.65 (45,715) 19.22 (54,824) 18.58
--------- ------ --------- ------ --------- ------
Outstanding at end of
year................... 5,337,801 $18.86 5,766,004 $18.18 5,068,067 $15.53
========= ====== ========= ====== ========= ======
Options exercisable at
year-end............... 4,343,933 $17.41 4,133,341 $15.68 2,564,531 $12.53
The weighted average fair value of options granted was $6.89 and $5.12 per
option at December 31, 1996 and 1995, respectively.
The following table summarizes information about the options outstanding at
December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
EXERCISE PRICES AT 12/31/96 LIFE PRICE 12/31/96 PRICE
--------------- ----------- ----------- --------- -------------- ---------
$.01 1,497 4.7yrs $ 0.01 1,497 $ 0.01
$ 2.67 to $ 3.79 37,516 7.1 3.33 37,516 3.33
$ 4.97 to $ 7.45 23,778 0.9 7.26 23,778 7.26
$ 7.71 to $10.22 343,182 4.0 9.14 343,182 9.14
$11.72 to $17.50 1,848,284 4.6 14.32 1,848,284 14.32
$18.13 to $26.75 3,050,035 7.9 22.84 2,087,892 21.87
$28.88 to $36.63 33,509 9.6 33.89 1,784 29.63
--------- --- ------ --------- ------
5,337,801 6.5yrs $18.86 4,343,933 $17.41
========= === ====== ========= ======
64
Shareholder Rights Plan
On January 17, 1997, pursuant to the Rights Agreement approved by the Board
of Directors, Southern National distributed to shareholders one preferred
stock purchase right for each share of Southern National's common stock then
outstanding. Initially, the rights, which expire in 10 years, are not
exercisable and are not transferable apart from the common stock. The rights
will become exercisable only if a person or group acquires 20% or more of
Southern National's common stock, or Southern National's Board of Directors
determines, pursuant to the terms of the Rights Agreement, that any person or
group that has acquired 10% or more of Southern National's common stock is an
"Adverse Person." Each right would then enable the holder to purchase 1/100th
of a share of a new series of Southern National preferred stock at an initial
exercise price of $145.00. The Board of Directors will be entitled to redeem
the rights at $.01 per right under certain circumstances specified in the
Rights Agreement.
Under the terms of the Rights Agreement, if any person or group becomes the
beneficial owner of 25% or more of Southern National's common stock, with
certain exceptions, or if the Board of Directors determines that any 10% or
more stockholder is an "Adverse Person," each right will entitle its holder
(other than the person triggering exercisability of the rights) to purchase,
at the right's then-current exercise price, shares of Southern National's
common stock having a value of twice the right's exercise price. In addition,
if after any person or group has become a 20% or more stockholder, Southern
National is involved in a merger or other business combination transaction
with another person in which its common stock is changed or converted, or
sells 50% or more of its assets or earning power to another person, each right
will entitle its holder to purchase, at the right's then-current exercise
price, shares of common stock of such other person having a value of twice the
right's exercise price.
NOTE K. INCOME TAXES
The provision for income taxes was composed of the following:
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Current expense:
Federal..................................... $128,583 $102,548 $137,459
State....................................... 2,289 3,785 10,567
-------- -------- --------
130,872 106,333 148,026
Deferred expense (benefit).................... 3,632 (14,870) (18,737)
-------- -------- --------
Provision for income taxes.................... $134,504 $ 91,463 $129,289
======== ======== ========
The reasons for the difference between the provision for income taxes and
the amount computed by applying the statutory Federal income tax rate to
income before income taxes were as follows:
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Federal income taxes at statutory rates of
35%.......................................... $146,359 $ 97,232 $130,596
Tax-exempt income from securities, loans and
leases less related non-deductible interest
expense...................................... (7,158) (6,503) (6,597)
State income taxes, net of Federal tax bene-
fit.......................................... 1,793 2,096 4,136
Other, net.................................... (6,490) (1,362) 1,154
-------- -------- --------
Provision for income taxes.................... $134,504 $ 91,463 $129,289
======== ======== ========
Effective income tax rate..................... 32.2% 32.9% 34.6%
======== ======== ========
65
The tax effects of temporary differences that gave rise to significant
portions of the net deferred tax assets (liabilities) in the Consolidated
Balance Sheets were:
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Allowance for losses........................... $ 70,476 $ 66,438
Deferred compensation.......................... 16,945 17,817
Postretirement benefits other than pensions.... 11,280 10,651
Other.......................................... 16,344 16,610
----------- -----------
Total tax deferred assets........................ 115,045 111,516
----------- -----------
Deferred tax liabilities:
Tax accounting method changes.................. (6,599) (10,493)
Depreciation................................... (18,765) (15,390)
Net unrealized appreciation on securities
available for sale............................ (8,248) (20,014)
Lease financing................................ (15,623) (13,558)
Pension plan contribution...................... (6,363) (3,705)
Other.......................................... (13,504) (9,067)
----------- -----------
Total tax deferred liabilities................... (69,102) (72,227)
----------- -----------
Net deferred tax asset........................... $ 45,943 $ 39,289
=========== ===========
The deferred tax assets have been determined to be realizable, and,
accordingly, a valuation allowance was not required. At December 31, 1996,
there were no operating losses, income tax credits or alternative minimum tax
credit carryforwards.
Securities transactions resulted in income tax expense (benefits) of $1.1
million, ($7.1 million) and $1.2 million related to securities gains (losses)
for the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE L. BENEFIT PLANS
Southern National has various employee benefit plans and arrangements.
Employees of acquired entities typically participate in existing Southern
National plans upon consummation of the acquisitions. Credit is usually given
to these employees for years of service at the acquired institution. The
combination of actuarial information for the benefit plans of the acquired
entities is not meaningful because the benefits offered in those plans and
assumptions used in the calculations related to those plans are superseded by
the benefits offered in the Southern National plans and the assumptions used
in the Southern National calculations. Accordingly, the actuarial information
presented for retirement plans and postretirement benefits is that of Southern
National as originally presented.
The following table discloses expenses relating to employee benefit plans on
a restated basis.
1996 1995* 1994*
------- ------- -------
(DOLLARS IN THOUSANDS)
Defined benefit plans............................... $ 9,919 $15,632 $10,705
Defined contribution and ESOP plans................. 10,252 9,235 9,502
------- ------- -------
Total expense related to benefit plans............ $20,171 $24,867 $20,207
======= ======= =======
--------
* Amounts restated for material acquisitions accounted for as poolings-of-
interests.
66
Retirement Plans
Prior to the merger of Southern National and BB&T, both companies had
noncontributory defined benefit plans covering substantially all employees.
Benefits were based on years of service, age at retirement and the employee's
compensation as defined.
Effective January 1, 1996, Southern National's and BB&T's pension plans were
merged into a single noncontributory defined benefit pension plan. This plan
covers substatntially all employees of the merged institution. 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.
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.
Supplemental retirement benefits are provided to certain key officers under
supplemental executive retirement plans ("SERPs"), which are not qualified
under the Internal Revenue Code. Although technically unfunded plans,
insurance policies on the lives of the covered employees partially fund future
benefits.
Net periodic pension cost, which is included in employee benefits expense,
consisted of the following components in 1996, 1995 and 1994.
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Service cost................................... $ 8,860 $ 9,658 $ 9,431
Interest cost.................................. 11,755 10,864 9,504
Actual return on assets........................ (18,498) (25,226) 711
Early retirement............................... -- 3,372 --
Net amortization and deferral and other........ 7,453 16,414 (10,699)
-------- -------- --------
Net periodic pension cost.................... $ 9,570 $ 15,082 $ 8,947
======== ======== ========
The following table sets forth the plans' funded status at December 31, 1996
and 1995.
PLANS FOR WHICH PLANS FOR WHICH
ASSETS EXCEED ACCUMULATED BENEFITS
ACCUMULATED BENEFITS EXCEED ASSETS
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Accumulated benefit obliga-
tion
Vested benefits........... $ (120,396) $ (104,000) $ -- $ --
Nonvested benefits........ (3,107) (3,566) -- --
---------- ---------- ---------- ---------
$ (123,503) $ (107,566) $ -- $ --
========== ========== ========== =========
Projected benefit obligation
at December 31............. $ (161,157) $ (140,394) $ (11,483) $ (9,929)
Plan assets at fair value... 162,126 129,574 -- --
---------- ---------- ---------- ---------
Plan assets in excess of
(less than) projected bene-
fit obligation............. 969 (10,820) (11,483) (9,929)
Unrecognized transition
amount..................... (5,345) (6,162) 321 364
Unrecognized prior service
cost....................... (6,699) (7,503) 3,314 3,313
Unrecognized net loss....... 16,951 16,717 3,233 3,214
Minimum liability adjust-
ment....................... -- -- (620) (2,597)
---------- ---------- ---------- ---------
Prepaid (accrued) pension
cost included in other
assets (other
liabilities)............... $ 5,876 $ (7,768) $ (5,235) $ (5,635)
========== ========== ========== =========
67
Actuarial assumptions used in calculating these amounts were:
1996 1995 1994
---- ---- -------
Rate of increase in future compensation............... 5.5% 5.5% 4.8-6.0%
Weighted average discount rate........................ 7.5 7.5 7.8
Weighted average expected long-term rate of return on
assets............................................... 8.0 8.0 8.0-9.0
Plan assets consist primarily of investments in mutual funds consisting of
equity investments, obligations of the U.S. Treasury and Federal agencies and
corporations. Plan assets included $11.2 million and $7.9 million of Southern
National common stock at December 31, 1996 and 1995, respectively.
Postretirement Benefits
Prior to merger, both Southern National and BB&T revised their retiree
health care plans in preparation for the implementation of SFAS No. 106,
"Accounting for Postretirement Benefits Other Than Pensions." Effective
January 1, 1996, both plans were merged into a single plan. The new plan
covers employees retiring after December 31, 1995 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 periodically reviewed for adjustment. The plan
provides flexible benefits to retirees which may also be used for dependents.
The following table sets forth the components of the retiree benefit plan
and the amount recognized in the consolidated financial statements at December
31, 1996, 1995 and 1994.
1996 1995 1994
-------- -------- ---------
NET PERIODIC POSTRETIREMENT BENEFIT COST:
Service cost.............................. $ 739 $ 972 $ 990
Interest cost............................. 2,029 2,248 1,841
Amortization of net loss and other........ -- 156 104
-------- -------- ---------
Total expense........................... $ 2,768 $ 3,376 $ 2,935
======== ======== =========
RECONCILIATION OF FUNDED STATUS:
Accumulated postretirement benefit obliga-
tion..................................... $(29,046) $(30,735) $ (27,590)
Unrecognized net loss..................... 69 3,348 1,356
-------- -------- ---------
Accrued postretirement benefit costs in-
cluded in other liabilities............ $(28,977) $(27,387) $ (26,234)
======== ======== =========
Actuarial assumptions used in calculating these amounts were:
1996 1995 1994
-------- -------- ---------
Annual rate of increase in the per capita
cost of health care claims
Current year.............................. 11.0% 8.0-11.0% 10.0-12.0%
Final constant amount..................... 5.0 4.75-5.0 5.0
Annual decrease........................... 1.0 .8-1.0 1.0
General inflation rate...................... 4.0 4.0 4.0
Weighted average discount rate.............. 7.5 7.5 7.8
Impact of 1% increase in assumed health care
cost on:
Net periodic benefit cost................. 3.0 2.0-3.0 0.0-1.0
Expected postretirement benefit obliga-
tion..................................... 5.0 3.0-4.0 1.1-3.0
68
401-k Savings Plan
Prior to 1996, Southern National had an Employee Stock Ownership Plan which
allowed all employees to acquire common stock in Southern National by
contributing up to 15% of their salaries to the plan. Southern National
matched 100% of each employee's contributions, up to a maximum of 6% of the
employee's salary. BB&T had a Savings and Thrift Plan which permitted eligible
employees to make contributions up to 16% of base compensation, with 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,
-----------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
Financial instruments whose contract amounts repre-
sent credit risk:
Commitments to extend, originate or purchase
credit.......................................... $ 6,042,999 $ 4,372,503
Standby letters of credit and financial guaran-
tees written.................................... 200,222 138,911
Commercial letters of credit..................... 19,811 27,742
Financial instruments whose notional or contract
amounts exceed the amount of credit risk:
Commitments to sell loans and securities......... 213,991 261,000
Foreign exchange contracts....................... 103,506 109,747
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
69
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.
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
Southern National is required by the Board of Governors of the Federal
Reserve System to maintain reserve balances based on certain percentages of
deposit types subject to various adjustments. At December 31, 1996, these
reserves amounted to $73.0 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 $818.1 million at December 31, 1996. 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, 1996.
Southern National is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on Southern National's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Southern National must meet specific capital guidelines that involve
quantitative measures of its assets, liabilities, and certain off-balance-
sheet items as calculated under regulatory accounting practices. Southern
National's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
See Table 19 in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for additional disclosure concerning regulatory
capital requirements.
70
NOTE O. PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1996 1995
---------- ----------
ASSETS
Cash and due from banks................................ $ 5,860 $ 5,318
Interest-bearing bank balances......................... 587,330 396,331
Investment securities.................................. 20,074 17,870
Investment in banking subsidiaries..................... 1,742,214 1,523,981
Investment in other subsidiaries....................... 51,538 41,408
Premises............................................... 5,708 5,879
Receivables from subsidiaries and other assets......... 182,441 161,881
---------- ----------
Total assets......................................... $2,595,165 $2,152,668
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowed funds.............................. $ 566,225 $ 396,273
Dividends payable...................................... 29,521 24,389
Accounts payable and accrued liabilities............... 21,231 19,414
Long-term debt......................................... 249,019 1,250
---------- ----------
Total liabilities.................................... 865,996 441,326
---------- ----------
Total shareholders' equity........................... 1,729,169 1,711,342
---------- ----------
Total liabilities and shareholders' equity........... $2,595,165 $2,152,668
========== ==========
CONDENSED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
--------- --------- --------
INCOME
Dividends from subsidiaries................... $ 125,708 $ 226,386 $138,201
Interest and other income from subsidiaries... 31,411 17,269 13,291
Interest on investment securities............. 1,850 900 1,560
Other income.................................. 7,835 6,143 3,595
--------- --------- --------
Total income................................ 166,804 250,698 156,647
--------- --------- --------
EXPENSES
Interest expense.............................. 33,845 17,859 12,393
Occupancy expense............................. 171 171 172
Other expenses................................ 6,297 23,126 6,927
--------- --------- --------
Total expenses.............................. 40,313 41,156 19,492
--------- --------- --------
Income before income tax benefit and equity in
undistributed earnings of subsidiaries......... 126,491 209,542 137,155
Income tax benefit.............................. 354 6,140 433
--------- --------- --------
Income before equity in undistributed earnings
of subsidiaries................................ 126,845 215,682 137,588
Net income of subsidiaries (less than) in excess
of dividends from subsidiaries................. 156,819 (29,341) 106,254
--------- --------- --------
NET INCOME...................................... $ 283,664 $ 186,341 $243,842
========= ========= ========
71
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1996 1995 1994
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 283,664 $ 186,341 $ 243,842
Adjustments to reconcile net income to net
cash provided by operating activities:
Net income of subsidiaries (less than) in
excess of dividends from subsidiaries...... (156,819) 29,341 (106,254)
Depreciation of premises and equipment...... 171 171 172
Amortization of unearned compensation....... 2,450 3,172 1,711
Discount accretion and premium amortiza-
tion....................................... 192 (298) 83
Loss (gain) on sales of securities.......... (9) 100 --
Loss on disposals of other real estate
owned...................................... -- 240 --
Loss on disposal of premises and equipment.. -- 29 --
(Increase) decrease in other assets......... 103,440 (146,243) 39,640
Increase (decrease) in accounts payable and
accrued liabilities........................ 1,817 6,011 (955)
--------- --------- ---------
Net cash provided by operating activities.. 234,906 78,864 178,239
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available
for sale................................... 14 87 10,128
Proceeds from maturities of securities
available for sale......................... -- 63,500 65,002
Purchases of securities available for sale.. (2,300) (2,601) (63,177)
Proceeds from sales of securities held to
maturity................................... -- 520 --
Repayment of note from bank subsidiary...... -- -- 30,000
Sale of savings bank subsidiary to bank sub-
sidiary.................................... -- -- 58,883
Proceeds from sales of premises and equip-
ment....................................... -- 79 --
Investment in subsidiaries.................. (68,625) (264) (67,492)
Advances to subsidiaries.................... (306,857) -- --
Repayment of advances to subsidiaries....... 182,875 -- --
Other....................................... -- -- (32,328)
--------- --------- ---------
Net cash (used in) provided by investing
activities................................ (194,893) 61,321 1,016
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in long-term debt... 247,625 (7,333) (53,333)
Net increase in short-term borrowed funds... 169,952 142,004 95,614
Repayment of advance from bank subsidiary... -- -- (58,250)
Net proceeds from common stock issued....... 47,462 43,781 23,668
Redemption of common stock.................. (207,387) (47,311) (23,562)
Preferred stock cancellations and conver-
sions...................................... -- (2,371) --
Cash dividends paid on common and preferred
stock...................................... (106,124) (93,465) (76,805)
Other....................................... -- -- 1,656
--------- --------- ---------
Net cash provided by (used in) financing
activities................................ 151,528 35,305 (91,012)
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.... 191,541 175,490 88,243
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR........................................ 401,649 226,159 137,916
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR..... $ 593,190 $ 401,649 $ 226,159
========= ========= =========
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.
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
72
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, 1996
and 1995.
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 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
borrowed funds 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 Southern National 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.
73
1996 1995
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Financial assets:
Cash and cash equiva-
lents................... $ 659,734 $ 659,734 $ 705,676 $ 705,676
Securities available for
sale.................... 5,136,789 5,136,789 5,201,344 5,201,344
Securities held to matu-
rity.................... 124,718 128,410 153,969 159,886
Loans and leases
Loans.................. 14,113,609 14,109,547 13,636,450 13,735,361
Leases................. 470,455 N/A 315,541 N/A
Allowance for losses... (183,932) N/A (175,588) N/A
----------- -----------
Net loans and
leases.............. $14,400,132 $13,776,403
=========== ===========
Financial liabilities:
Deposits................. $14,953,914 14,994,860 $14,684,056 14,717,187
Short-term borrowed
funds................... 2,263,303 2,263,303 2,595,416 2,595,416
Long-term debt........... 2,048,206 2,144,364 1,379,810 1,385,634
Capitalized leases....... 3,561 N/A 4,125 N/A
- -------------------------------------------------------------------------------
NOTIONAL/ NOTIONAL/
CONTRACT FAIR CONTRACT FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
Unrecognized financial in-
struments:
Interest rate swaps, caps
and floors.............. $ 1,144,114 $ 5,775 $ 743,413 $ (6,067)
Commitments to extend,
originate or purchase
credit.................. 6,042,999 (11,251) 4,372,503 (7,654)
Standby and commercial
letters of credit and
financial guarantees
written................. 220,033 (3,300) 166,653 (2,500)
Commitments to sell loans
and securities.......... 213,991 733 261,000 (3,232)
Foreign exchange con-
tracts.................. 103,506 312 109,747 --
Option contracts pur-
chased.................. 14,000 142 8,000 --
Option contracts writ-
ten..................... 14,000 -- 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 1996,
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, 1996, derivatives with a total notional
value of $1.1 billion, with terms ranging up to seven years, were outstanding.
74
The following tables set forth certain information concerning Southern
National's interest rate swaps at December 31, 1996:
INTEREST RATE SWAPS, CAPS AND FLOORS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
NOTIONAL RECEIVE PAY FAIR
TYPE AMOUNT RATE RATE VALUE
---- ----------- ----------- ----------- ----------
Receive fixed swaps........... $ 485,000 6.60% 5.50% $ 6,698
Pay fixed swaps............... 304,114 5.50 5.43 (25)
Basis swaps................... 250,000 5.53 5.51 (1,251)
Floors........................ 105,000 -- -- 353
---------- -------- -------- ----------
Total......................... $1,144,114 6.02% 5.48% $ 5,775
========== ======== ======== ==========
RECEIVE PAY FIXED BASIS SWAPS
YEAR-TO-DATE ACTIVITY FIXED SWAPS SWAPS AND FLOORS TOTAL
--------------------- ----------- ----------- ----------- ----------
Balance, December 31, 1995.... $ 140,000 $353,413 $250,000 $ 743,413
Additions..................... 450,000 2,015 105,000 557,015
Maturities/amortizations...... (105,000) (51,314) -- (156,314)
---------- -------- -------- ----------
Balance, December 31, 1996.... $ 485,000 $304,114 $355,000 $1,144,114
========== ======== ======== ==========
ONE YEAR ONE TO FIVE FIVE TO 10
ATURITY SCHEDULEM OR LESS YEARS YEARS TOTAL
- ----------------- ----------- ----------- ----------- ----------
Receive fixed swaps........... $ 35,000 $200,000 $250,000 $ 485,000
Pay fixed swaps............... 15,485 284,337 4,292 304,114
Basis swaps................... -- 250,000 -- 250,000
Floors........................ -- 105,000 -- 105,000
---------- -------- -------- ----------
Total......................... $ 50,485 $839,337 $254,292 $1,144,114
========== ======== ======== ==========
As of December 31, 1996, unearned income from new swap transactions
initiated during 1996 was $6.4 million. There were no unamortized deferred
gains or losses from terminated transactions remaining at year end. Active
transactions resulted in pretax net expenses of $300,000.
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 1996, options were
written on securities totaling $375.0 million. Option fee income was $1.1
million for 1996. There were no unexercised options outstanding at December
31, 1996 or 1995.
Southern National also utilizes over-the-counter purchased put options and
net purchased put options (combination of purchased put option and written
call option) in its mortgage banking activities. These options are used to
hedge the mortgage warehouse and pipeline against increasing interest rates.
Written call options are used in tandem with purchased put options to create a
net purchased put option that reduces the cost of the hedge. At December 31,
1996, net purchased put option contracts with a notional value of $14.0
million were outstanding.
The $1.1 billion of derivatives used in interest rate risk management are
primarily used to hedge variable rate commercial loans, adjustable rate
mortgage loans, retail certificates of deposit and fixed rate notes. Southern
National does not utilize derivatives for trading purposes.
75
Although off-balance sheet derivative financial instruments do not expose
Southern National to credit risk equal to the notional amount, such agreements
generate credit risk to the extent of the fair value gain in an off-balance
sheet derivative financial instrument if the counterparty fails to perform.
Such risk is minimized based on the quality of the counterparties and the
consistent monitoring of these agreements. The counterparties to these
transactions were large commercial banks and investment banks. 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. At December 31,
1996, Southern National's interest rate swaps, caps and floors reflected an
unrealized gain of $5.8 million.
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. At
December 31, 1996, Southern National had no indexed amortizing swaps
outstanding.
76
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, AS OF MARCH 17,
1997.
Southern National Corporation
(Registrant)
/s/ John A. Allison, IV
By: _________________________________
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 BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED AS OF MARCH 17, 1997.
/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/ Ronald E. Deal
_____________________________________
RONALD E. DEAL
DIRECTOR
77
/s/ A. J. Dooley, Sr.
_____________________________________
A. J. DOOLEY, SR.
DIRECTOR
/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
78
/s/ James H. Maynard
_____________________________________
JAMES H. MAYNARD
DIRECTOR
/s/ Joseph A. McAleer, Jr.
_____________________________________
JOSEPH A. MCALEER, JR.
DIRECTOR
/s/ Albert O. McCauley
_____________________________________
ALBERT O. MCCAULEY
DIRECTOR
/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
79
/s/ Nido R. Qubein
_____________________________________
NIDO R. QUBEIN
DIRECTOR
/s/ A. Tab Williams, Jr.
_____________________________________
A. TAB WILLIAMS, JR.
DIRECTOR
80
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION LOCATION
------- ----------- --------
2(a) Agreement and Plan of Incorporated herein by reference
Reorganization dated as of July to Registration No. 33-57681.
29, 1994 and amended and
restated as of October 22, 1994
between Southern National and
BB&T.
2(b) Plan of Merger as of July 29, Incorporated herein by reference
1994 as amended and restated on to Registration No. 33-57861.
October 22, 1994 between
Southern National and BB&T.
2(c) Agreement and Plan of Filed herewith.
Reorganization dated as of
November 1, 1996 between
Southern National Corporation
and United Carolina Bancshares
Corporation, as amended.
3(a) Amended and Restated Articles of Filed herewith.
Incorporation of Southern
National Corporation, as
amended.
3(b) Bylaws of Southern National Incorporated herein by reference
Corporation, as amended. to Exhibit 3.2 of the Registration
Statement on Form S-4 filed
June 29, 1989 (No. 33-29586.)
4(a) Articles of Amendment to Amended Included in Exhibit 3(a).
and Restated Articles of
Incorporation of Southern
National Corporation related to
Junior Participating Preferred
Stock.
4(b) Rights Agreement dated as of Incorporated herein by reference
December 17, 1996 between to Exhibit 1 to the registration
Southern National Corporation statement on Form 8-A dated
and Branch Banking and Trust January 10, 1997.
Company, Rights Agent.
4(c) Subordinated Indenture Incorporated herein by reference
(including Form of Subordinated to Exhibit 4(d) of Registration
Debt Security) between Southern No. 333-029899.
National Corporation and State
Street Bank and Trust Company,
Trustee, dated as of May 24,
1996.
4(d) Senior Indenture (including Form Incorporated herein by
of Senior Debt Security) reference to Exhibit 4(c)
between Southern National of Registration
Corporation and State Street No. 333-02899.
Bank and Trust Company,
Trustee, dated as of May 24,
1996.
10(a)* Death Benefit Only Plan, Dated Incorporated herein by
April 23, 1990, by and between reference to Registration
Branch Banking and Trust No. 33-33984.
Company (as successor to
Southern National Bank of North
Carolina) and L. Glenn
Orr, Jr.
10(b)* Non-Employee Directors' Deferred Filed herewith.
Compensation and Stock Option
Plan of Southern National
Corporation.
10(c)* Southern National Corporation Incorporated herein by
1994 Omnibus Stock Incentive reference to Registration
Plan. No. 33-57865.
10(d)* Settlement and Non-Compete Incorporated herein by
Agreement, dated February 28, reference to Registration
1995, by and between Southern No. 33-56437.
National Corporation and L.
Glenn Orr, Jr.
10(e)* Settlement Agreement, Waiver and Incorporated herein by
General Release dated September reference to Registration
19, 1994, by and between No. 33-56437.
Southern National Corporation,
Branch Banking and Trust
Company (as successor to
Southern National Bank of North
Carolina) and Gary E. Carlton.
81
EXHIBIT
NO. DESCRIPTION LOCATION
------- ----------- --------
10(f) Southern National Corporation Savings Incorporated herein by
and Thrift Plan. reference to Registration
No. 33-57867.
10(g)* Southern National Corporation 1995 Filed herewith.
Omnibus Stock Incentive Plan.
10(h)* Form of Branch Banking and Trust Incorporated by reference
Company to the identified exhibit
Long-Term Incentive Plan. under Southern National
Corporation's (as
successor to BB&T
Financial Corporation)
Form 10-Q, filed May 14, 1991.
10(i)* Form of Branch Banking and Trust Incorporated by reference
Company to the identified exhibit
Executive Incentive Compensation under Southern National
Plan. Corporation's (as
successor to BB&T
Financial Corporation)
Form 10-K, filed February 22,
1985.
10(j)* Southern National Deferred Filed herewith.
Compensation Plan for Key Executives
10(k)* Southern National Supplemental Filed herewith.
Executive Retirement Plan
10(l)* Branch Banking and Trust Supplemental Filed herewith.
Executive Retirement Plan
11 Statement re Computation of Earnings Filed herewith.
Per Share.
21 Subsidiaries of the Registrant. Filed herewith.
22 Proxy Statement for the 1997 Annual Future filing incorporated
Meeting by reference pursuant to
of Shareholders, dated April 22, the General Instruction G(3).
1997.
23(a) Consent of Independent Public Filed herewith.
Accountants.
23(b) Opinion of Independent Public Filed herewith.
Accountants.
27 Financial Data Schedule. Filed as an exhibit to the
electronically-filed
document as required.
- --------
* Management compensatory plan or arrangement.
82