<PAGE>
SOUTHERN NATIONAL CORPORATION
April 21, 1995
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Southern National Corporation scheduled for 11:00 a.m. on Tuesday, May 23, 1995
at the University Corporate Center Auditorium, located at 1100 Reynolds
Boulevard, Winston-Salem, North Carolina. The matters scheduled for
consideration at the meeting are described in detail in the Notice of Annual
Meeting of Shareholders and Proxy Statement. In order to be sure your shares
are voted at the meeting if you cannot attend, please complete, sign and return
the enclosed proxy card as soon as possible.
In compliance with appropriate regulations, the Corporation's financial
statements and other required disclosures are presented in its 1994 Form 10-K,
a copy of which follows the Proxy Statement, and which reflects the
Corporation's financial condition prior to its merger on February 28, 1995 (the
"BB&T Merger") with BB&T Financial Corporation ("BB&T Financial").
The Corporation intends shortly to mail to its shareholders a Summary 1994
Annual Report to Shareholders which contains additional information about the
Corporation, including a financial summary. Also, this year the Summary 1994
Annual Report contains restated financial information reflecting the BB&T
Merger. We believe that this Summary 1994 Annual Report provides to our
shareholders, the investment community, and the public financial and other
corporate information in an understandable and useful manner, especially in
light of the significant transaction which occurred in February 1995.
We trust that this presentation will satisfy your informational needs, and at
the same time, provide you with a better understanding of both the financial
history and strategic direction of the "new" Southern National Corporation.
Sincerely,
/s/ John A. Allison IV
John A. Allison IV
Chairman and Chief Executive Officer
<PAGE>
SOUTHERN NATIONAL CORPORATION
200 WEST SECOND STREET
WINSTON-SALEM, NORTH CAROLINA 27101
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
May 23, 1995
TO THE SHAREHOLDERS OF
SOUTHERN NATIONAL CORPORATION:
Notice is hereby given that the Annual Meeting of Shareholders of Southern
National Corporation (the "Corporation" or "SNC") will be held on Tuesday, May
23, 1995 (at 11:00 A.M. local time), at the University Corporate Center
Auditorium, located at 1100 Reynolds Boulevard, Winston-Salem, North Carolina,
for the following purposes:
(1) To elect eight Directors for three-year terms expiring in 1998, five
Directors for two-year terms expiring in 1997 and four Directors for
one-year terms expiring in 1996.
(2) To approve the Southern National Corporation 1995 Omnibus Stock
Incentive Plan.
(3) To approve the Savings and Thrift Plan for Employees of Branch Banking
and Trust Company.
(4) To approve the Corporation's Special Non-Employee Directors Stock
Option Plan.
(5) To ratify the Board of Directors' appointment of Arthur Andersen LLP as
the Corporation's auditors for 1995.
(6) To transact such other business as may properly come before the
meeting.
Pursuant to the provisions of the North Carolina Business Corporation Act,
April 7, 1995 has been fixed as the record date for the determination of
holders of Common Stock entitled to notice of and to vote at the Annual Meeting
of Shareholders or any adjournment thereof. Accordingly, only shareholders of
record at the close of business on the record date will be entitled to notice
of and to vote at said meeting or any adjournment thereof. It is important that
your shares of the Corporation's Common Stock be represented at this meeting in
order that the presence of a quorum may be assured.
A copy of the Annual Report on Form 10-K, containing the financial statements
of the Corporation for the year ended December 31, 1994, is enclosed herewith.
By Order of the Board of Directors
/s/ Jerone C. Herring,
Jerone C. Herring,
Secretary
April 21, 1995
Even if you plan to attend the meeting in person, please date and execute the
enclosed proxy and mail it promptly. If you attend the meeting, you may revoke
your proxy and vote your shares in person. A postage-paid, return-addressed
envelope is enclosed.
<PAGE>
SOUTHERN NATIONAL CORPORATION
200 WEST SECOND STREET
WINSTON-SALEM, NORTH CAROLINA 27101
PROXY STATEMENT
The enclosed proxy, for use only at the Annual Meeting of Shareholders to be
held May 23, 1995, at 11:00 A.M. local time, and any adjournment thereof, is
solicited on behalf of the Board of Directors of Southern National Corporation
(the "Corporation"). The approximate date this proxy material is first being
sent to shareholders is April 21, 1995. Such solicitation is being made by mail
and may be made in person or by fax or telephone by officers or employees of
the Corporation. All expenses incurred in such solicitation will be paid by the
Corporation or its subsidiaries. Banks, brokerage houses and other
institutions, nominees and fiduciaries will be requested to forward the
soliciting material to beneficial owners and to obtain authorization for the
execution of proxies. The Corporation will, upon request, reimburse such
parties for their reasonable expenses in forwarding proxy material to
beneficial owners.
The accompanying proxy is for use at the meeting if a shareholder either will
be unable to attend in person or will attend but wishes to vote by proxy. The
proxy may be revoked by the shareholder at any time before it is exercised by
filing with the Secretary of the Corporation an instrument revoking it, filing
a duly executed proxy bearing a later date or by attending the meeting and
electing to vote in person. All shares of the Corporation's Common Stock
represented by valid proxies received pursuant to this solicitation, and not
revoked before they are exercised, will be voted in the manner specified
therein. If no specification is made, the proxies will be voted in favor of:
(1) electing eight Directors for three-year terms expiring in 1998, five
Directors for two-year terms expiring in 1997 and four Directors for one-year
terms expiring in 1996; (2) approving the Corporation's 1995 Omnibus Stock
Incentive Plan; (3) approving the Savings and Thrift Plan for Employees of
Branch Banking and Trust Company; (4) approving the Corporation's Special Non-
Employee Directors Stock Option Plan; and (5) ratifying the Board of Directors'
appointment of Arthur Andersen LLP as the Corporation's auditors for 1995. The
Corporation has engaged Morrow & Co. to assist in proxy solicitation for an
estimated fee of $8,500, plus out-of-pocket expenses.
VOTING SECURITIES OUTSTANDING
Pursuant to the provisions of the North Carolina Business Corporation Act,
April 7, 1995 has been fixed as the record date for the determination of
holders of Common Stock entitled to notice of and to vote at the Annual Meeting
of Shareholders. Each share of the Corporation's Common Stock issued and
outstanding on April 7, 1995 is entitled to one vote on all proposals at the
meeting, except that shares held by Southern National Bank of North Carolina
("SNB North Carolina"), Southern National Bank of South Carolina ("SNB South
Carolina"), SNB Savings Bank, Inc., SSB, Branch Banking and Trust Company,
Branch Banking and Trust Company of South Carolina, The Lexington State Bank
and Commerce Bank, in a fiduciary capacity, may only be voted in accordance
with the instruments creating the fiduciary capacity. SNB North Carolina, SNB
South Carolina and SNB Savings Bank, Inc., SSB, are collectively referred to
herein as the "SNC Bank Subsidiaries" and Branch Banking and Trust Company,
Branch Banking and Trust Company of South Carolina, The Lexington State Bank
and Commerce Bank, are collectively referred to herein as the "BB&T Bank
Subsidiaries". Holders of shares of Common Stock vote together as a voting
group on all such proposals. As of the close of business on April 7, 1995,
there were 102,235,810 shares of Common Stock of the Corporation outstanding
and entitled to vote.
SECURITY OWNERSHIP
The table below sets forth the beneficial ownership of Common Stock and
Depositary Shares (each Depositary Share representing a one-quarter interest in
a share of the Corporation's 6 3/4% Cumulative Convertible Preferred Stock,
Series A ("6 3/4% Preferred Stock")) by all Directors and nominees, the Chief
I-1
<PAGE>
Executive Officer and the four next most highly compensated executive officers
of the Corporation and BB&T Financial during 1994 currently employed by the
Corporation, all current executive officers of the Corporation and all
Directors and executive officers of the Corporation as a group as of March 1,
1995. As a result of the BB&T Merger, all options to purchase BB&T Financial
common stock were converted to options to purchase the Corporation's Common
Stock. The table below, and all tables in this Proxy Statement reflect this
conversion. Unless otherwise indicated, all persons listed below have sole
voting and investment power over all shares beneficially owned. No shareholder
is known to the Corporation to be the beneficial owner of more than 5% of the
Corporation's Common Stock as of March 1, 1995.
<TABLE>
<CAPTION>
Shares of
Common Depositary
Stock Shares
Name of Beneficial Owner or Beneficially Percent of Beneficially
Number of Persons in Group Owned(1)(2) Common Stock Owned(3)
- --------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
John A. Allison IV...................... 215,241 * --
Paul B. Barringer....................... 46,638 * --
W.R. Cuthbertson, Jr. .................. 177,034 * --
Ronald E. Deal.......................... 24,367 * --
A.J. Dooley, Sr. ....................... 54,923 * --
Joe L. Dudley, Sr. ..................... 4,552 * --
Tom D. Efird............................ 36,325 * --
O. William Fenn, Jr. ................... 25,730 * --
Paul S. Goldsmith....................... 74,485 * --
L. Vincent Hackley...................... 4,262 * --
Ernest F. Hardee........................ 131,003 * --
Richard Janeway, M.D. .................. 27,159 * 400
J. Ernest Lathem, M.D. ................. 244,931 * --
James H. Maynard........................ 106,033 * --
Joseph A. McAleer....................... 700 * --
Albert O. McCauley...................... 2,156 * --
Dickson McLean, Jr. .................... 21,498 * 400
Charles E. Nichols...................... 70,825 * --
L. Glenn Orr, Jr. ...................... 199,636 * --
A. Winniett Peters...................... 24,454 * --
Richard L. Player, Jr. ................. 21,505 * --
C. Edward Pleasants, Jr. ............... 53,914 * --
Nido R. Qubein.......................... 73,227 * --
A. Tab Williams, Jr. ................... 416,166 * 11,000
Gary E. Carlton......................... 61,233 * --
W. Kendall Chalk........................ 97,953 * --
Robert E. Greene........................ 39,707 * --
Kelly S. King........................... 113,531 * --
Morris D. Marley........................ 31,913 * --
Scott E. Reed........................... 104,987 * --
Michael W. Sperry....................... 55,635 * --
Henry G. Williamson, Jr. ............... 160,511 * --
Directors and executive officers as a
group (32 persons)..................... 2,722,234 2.54% 11,800
</TABLE>
- --------
* Less than 1%.
(1) As reported to the Corporation by the Directors and nominees and executive
officers (including shares held by spouses, minor children, affiliated
companies, partnerships and trusts). The table includes options which
become exercisable within 60 days after March 1, 1995 and shares allocated
to individual accounts by the Southern National Employee Stock Ownership
Plan (the "ESOP") and by the Southern National ESOP Excess Plan (the "ESOP
Excess Plan"), voting of which is directed by those named persons and
I-2
<PAGE>
group members who participate in the ESOP and the ESOP Excess Plan and as to
which such persons have no investment power.
(2) Unless otherwise indicated, the persons named in the table have sole voting
and investment power over the shares included in the table. Does not
include shares of Common Stock that could be acquired by conversion of the
6 3/4% Preferred Stock.
(3) Each Depositary Share is convertible into approximately 1.4767 shares of
Common Stock. No shareholder is known to the Corporation to be the
beneficial owner of more than 1% of the 6 3/4% Preferred Stock, as of March
1, 1995.
PROPOSAL 1--ELECTION OF DIRECTORS
On February 28, 1995, BB&T Financial merged with and into the Corporation in a
"merger-of-equals" transaction. Following the BB&T Merger, certain Directors of
BB&T Financial became Directors of the Corporation and certain executive
officers of BB&T Financial became executive officers of the Corporation. Since
the BB&T Merger, the Board of Directors of the Corporation has consisted of 24
persons, of whom 12 were Directors of the Corporation prior to the BB&T Merger
and 12 were named by the BB&T Financial Board of Directors.
Immediately prior to the BB&T Merger, 11 of the 23 Directors of the
Corporation resigned and the Board of Directors of the Corporation adopted a
resolution increasing the size of the Board of Directors of the Corporation
from 23 to 24. Immediately thereafter, the remaining Directors of the
Corporation elected 12 Directors, who were designated by the BB&T Financial
Board of Directors, to serve until the 1995 Annual Meeting of Shareholders of
the Corporation. The Board is divided into three classes, each class to be as
nearly equal in number as possible. There are 17 nominees for election as
Directors, eight of whom will serve for three-year terms expiring in 1998, five
of whom will serve for two-year terms expiring in 1997 and four of whom will
serve for one-year terms expiring in 1996.
It is intended that the persons named in the accompanying form of proxy will
vote to elect the 17 nominees listed below as Directors, unless authority so to
vote is withheld. Although management expects that each of the nominees will be
available for election, in the event a vacancy in the slate of nominees is
occasioned by unexpected occurrence, it is intended that shares of the
Corporation's Common Stock represented by proxies will be voted for the
election of a substitute nominee selected by the persons named in the
accompanying form of proxy. The election of each nominee requires the
affirmative vote of a plurality of the shares of Common Stock cast in the
election of Directors. Votes that are withheld and shares held in street name
that are not voted in the election of Directors will not be included in
determining the number of votes cast.
The names of the nominees for election and the other continuing members of the
Board of Directors, their principal occupations and certain other information
with respect to such persons are as follows.
NOMINEES FOR ELECTION AS DIRECTORS FOR THREE-YEAR TERMS EXPIRING IN 1998
<TABLE>
<CAPTION>
Director of
Corporation
Principal Occupation or BB&T
During the Past Financial
Name Age Five Years; Residences Since/(1)/
---- --- ---------------------- -----------
<C> <C> <S> <C>
John A. Allison IV/(2)/ 46 Chairman and Chief Executive 1986
Officer of the Corporation;
Chairman and Chief Executive
Officer of BB&T Financial until
February 1995; Winston-Salem,
N.C.
W. R. Cuthbertson, 62 Senior Vice President of Branch 1983
Jr./(3)/ Banking and Trust Company;
Charlotte, N.C.
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
Director of
Corporation
Principal Occupation or BB&T
During the Past Financial
Name Age Five Years; Residences Since/(1)/
---- --- ---------------------- -----------
<C> <C> <S> <C>
Ronald E. Deal/(4)/ 51 Chairman of Wesley Hall; 1986
Investor; President of Highland
House Furniture Company until
1988 (furniture manufacturer);
Hickory, N.C.
Tom D. Efird/(3)/ 55 President of Standard 1982
Distributors, Inc. (beverage
wholesaler); Gastonia, N.C.
Richard Janeway, 62 Executive Vice President for 1989
M.D./(4)/ Health Affairs and Executive
Dean; Professor of Neurology and
Research Associate in Radiology,
Bowman Gray School of Medicine,
Wake Forest University; Winston-
Salem, N.C.
James H. Maynard/(2)/ 55 Chairman and Chief Executive 1985
Officer of Investors Management
Corporation (restaurants);
Raleigh, N.C.
Albert O. McCauley/(2)/ 54 Secretary and Treasurer, Quick 1993
Stop Food Marts, Inc.
(convenience stores); McCauley
Moving and Storage of
Fayetteville, Inc.;
Fayetteville, N.C.
L. Glenn Orr, Jr./(2)/ 54 Chairman Emeritus of the 1982
Corporation; Chairman, Chief
Executive Officer, and President
of the Corporation until
February 1995; Winston-Salem,
N.C.
</TABLE>
NOMINEES FOR ELECTION AS DIRECTORS
FOR TWO-YEAR TERMS EXPIRING IN 1997
<TABLE>
<CAPTION>
Director of
Corporation
Principal Occupation or BB&T
During the Past Financial
Name Age Five Years; Residences Since /(1)/
---- --- ---------------------- -----------
<C> <C> <S> <C>
Paul B. Barringer/(4)/ 64 President and Chief Executive 1975
Officer of Coastal Lumber Company
(dealer in lumber products);
Weldon, N.C.
A. J. Dooley, Sr./(2)/ 64 Partner of Dooley, Dooley, Spence 1994
and Parker, P.A. (attorneys);
Lexington, S.C.
O. William Fenn, 68 Director of Furniture Export 1991
Jr./(2)/ Office, International Trade
Division, North Carolina Department
of Commerce; Vice Chairman of LADD
Furniture Company (furniture
manufacturer) until April 1992;
High Point, N.C.
L. Vincent Hackley/(2)/ 54 As of January 1, 1995, President, 1992
North Carolina System of Community
Colleges; prior to January 1, 1995,
Chancellor; Professor of Political
Science, Fayetteville State
University; Vice President for
Student and Special Programs,
University of North Carolina;
Raleigh, N.C.
A. Winniett Peters/(4)/ 68 Consultant of Government Affairs 1977
for Standard Commercial Tobacco
Company (tobacco processors and
exporters); Chairman of the Board
of Standard Commercial Tobacco
Company until January 1993; Wilson,
N.C.
</TABLE>
I-4
<PAGE>
NOMINEES FOR ELECTION AS DIRECTORS
FOR ONE-YEAR TERMS EXPIRING IN 1996
<TABLE>
<CAPTION>
Director of
Corporation
Principal Occupation or BB&T
During the Past Financial
Name Age Five Years; Residences Since/(1)/
---- --- ---------------------- -----------
<C> <C> <S> <C>
Joe L. Dudley, Sr./(4)/ 57 President and Chief Executive 1992
Officer of Dudley Products, Inc.
(hair care products); Greensboro,
N.C.
Ernest F. Hardee/(4)/ 54 President of Hardee Realty Corp. 1995
(real estate management);
Portsmouth, Va.
J. Ernest Lathem, 61 Personal Investments; Medical 1987
M.D./(3)/ Director of Prostate Diagnostic
Center until April 1994;
Greenville, S.C.
Richard L. Player, 60 President of Player, Inc. 1990
Jr./(3)/ (commercial and industrial general
contractor); Fayetteville, N.C.
</TABLE>
CONTINUING DIRECTORS
<TABLE>
<CAPTION>
Director of
Corporation
Principal Occupation or BB&T
During the Past Financial
Name Age Five Years; Residences Since/(1)/
---- --- ---------------------- -----------
<C> <C> <S> <C>
TERMS EXPIRING IN 1996
Dickson McLean, Jr./(4)/ 67 President of McLean, Stacy, Henry, 1956
McLean, McIntyre & Ramsaur, P.A.,
(attorneys); Lumberton, N.C.
C. Edward Pleasants, 54 President, Chief Executive Officer 1993
Jr./(2)/ and Director, Pleasants Hardware
Company (hardware retailer);
Winston-Salem, N.C.
Nido R. Qubein/(4)/ 46 Chief Executive Officer of Creative 1990
Services, Inc. (international
management consulting); High Point,
N.C.
A. Tab Williams, 67 Chairman and Chief Executive 1982
Jr./(3)/ Officer of A. T. Williams Oil
Company (oil retailer); Winston-
Salem, N.C.
TERMS EXPIRING IN 1997
Paul S. Goldsmith/(3)/ 61 President, William Goldsmith 1970
Company, Inc. (real estate and
insurance); Greenville, S.C.
Joseph A. McAleer/(3)/ 45 Chief Executive Officer, Krispy 1993
Kreme Doughnut Corporation since
1992; prior thereto President and
Chief Operating Officer and
Director, Krispy Kreme Doughnut
Corporation (manufacturer of
doughnuts and doughnut making
equipment); Winston-Salem, N.C.
Charles E. Nichols/(3)/ 67 Of Counsel, Nichols, Caffrey, Hill 1984
& Evans P.L.L.C., (attorneys);
Greensboro, N.C.
</TABLE>
- --------
(1) On February 28, 1995, the BB&T Merger was consummated and certain Directors
of BB&T Financial became Directors of the Corporation.
(2) Member of the Executive Committee.
(3) Member of the Audit Committee.
(4) Member of the Compensation Committee.
I-5
<PAGE>
Certain of the above Directors and nominees are also directors of other
publicly held companies. O. William Fenn, Jr. has been a director of Ladd
Furniture Company since 1982. James H. Maynard has been a director of
Investors Management Corporation since 1972, a director of Golden Corral
Realty Corporation since 1984, and a director of Rose's Stores, Inc. since
1989. A. Winniett Peters was a director of Standard Commercial Corporation
from 1978 until August 1994 when he retired. Each of these companies has
securities registered under the Securities Exchange Act of 1934.
Under the securities laws of the United States, the Corporation's Directors
and executive officers are required to report their ownership of the
Corporation's Common Stock and any changes in that ownership to the Securities
and Exchange Commission. Specific dates have been established and the
Corporation is required to report in this proxy statement any failure to file
by the established dates during 1994. In 1994, all of these filing
requirements were satisfied by the Corporation's Directors and executive
officers. In making this statement, the Corporation has relied on the written
representations of its incumbent Directors and executive officers and copies
of the reports that have been filed with the Commission.
The Board of Directors has established an Executive Committee, an Audit
Committee and a Compensation Committee and has assigned certain
responsibilities to each of these committees.
In 1995, the Board of Directors appointed an Executive Committee. The
Executive Committee consists of eight directors. This Committee is generally
authorized to have and to exercise all of the powers of the Board of Directors
between meetings of the Board. The Executive Committee also serves as the
Nominating Committee.
The Audit Committee recommends engaging and discharging the independent
auditors; directs and supervises special investigations; reviews with the
independent auditors the plan and result of the auditing engagement; reviews
the scope and result of the Corporation's procedures for internal auditing and
loan review; approves each professional service above certain limits provided
by the independent auditors; considers the range of audit and non-audit fees;
and reviews the adequacy of the Corporation's system of internal accounting
controls. The Board of Directors selected Arthur Andersen LLP as the
Corporation's auditors for 1995.
The Compensation Committee recommends to the Board of Directors remuneration
arrangements for senior management and Directors and adoption and
administration of compensation plans in which Officers and Directors are
eligible to participate.
During 1994, the Corporation had a Nominating Committee. The Nominating
Committee recommended to the Board of Directors nominees for election as
Directors and considered the performance of incumbent Directors in determining
whether or not to nominate them for re-election. The Nominating Committee
considered written nominations of candidates for election to the Board of
Directors submitted by shareholders to the Secretary of the Corporation that
were accompanied by biographical material, qualifications and consent of
nominees. Nominations of such candidates must have been received not later
than 60 days prior to one year after the date of the immediately preceding
Annual Meeting of Shareholders, along with such information as was disclosed
in the proxy materials concerning all nominees for Director and the
shareholder's name, address and number of shares owned, in order to be
considered for the slate of nominees for election as Directors at the next
annual meeting. Beginning in 1995, the Executive Committee will serve as the
Nominating Committee.
All members attended at least 75% of the Board of Directors meetings and
assigned committee meetings during 1994. The Board of Directors held eight
meetings during the year (seven regular meetings and one special meeting); its
Nominating Committee held one meeting; its Audit Committee held five meetings;
and its Compensation Committee held seven meetings. During 1994 Directors
received an annual retainer fee of $10,100, Board meeting fees of $600 per
regular meeting attended and $1,000 per special meeting attended and a
committee meeting fee of $600 per meeting attended. Employee Directors do not
receive Director fees. The Chairman of the Audit Committee, in lieu of the
above Audit Committee fee, received $6,000 for 1994 as compensation for his
continuous responsibility and consultation. Following the BB&T Merger,
Director fees have been revised to provide for an annual retainer of $12,000
and meeting fees of $2,000 per regular
I-6
<PAGE>
meeting attended and $2,000 per committee meeting attended. All non-employee
Directors elected prior to June 30, 1991 as Directors of the Corporation
(including Messrs. Deal, McLean, Nichols, A. T. Williams, Jr. and Dr.
Janeway), have executed Consulting Agreements with the Corporation to provide
consulting services for a period of ten years following their retirement.
Directors beginning such service as consultants during 1995, 1996, or 1997,
shall receive $13,200 per year. Directors beginning such service after 1997
shall receive a sum equal to the annual retainer paid to the Corporation's
directors in effect at the time they begin such service. The consultants have
agreed not to serve as directors of, or advisers to, businesses which compete
with the Corporation during the time they serve as consultants to the
Corporation.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The following table presents information relating to total compensation
during the fiscal year ended December 31, 1994 of the Chief Executive Officer
and the four next most highly compensated executive officers of the
Corporation (the "SNC Named Executives"):
SNC SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------- -----------------------------
Awards Payouts
-------------------- --------
Securities LTIP
Other Annual Options/SARs Payouts All Other
Name and Principal Position Year Salary Bonus/(1)/ Compensation/(2)/ (No. of Shares)/(3)/ ($)/(4)/ Compensation/(5)/
- --------------------------- ---- -------- ---------- ----------------- -------------------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
L. Glenn Orr, Jr. 1994 $461,951 $236,100 -- -- $233,300 $93,738
Chairman & Chief 1993 444,184 217,700 -- 22,459 216,500 74,822
Executive Officer/(6)/ 1992 427,100 224,200 -- 25,498 -- 67,953
Gary E. Carlton 1994 220,376 80,400 -- -- 79,500 35,665
Executive Vice 1993 211,900 74,200 -- 8,571 73,000 38,199
President/(6)/ 1992 203,700 76,400 -- 9,728 -- 69,942
John R. Spruill 1994 194,039 70,800 -- 8,447 70,000 59,392
Executive Vice 1993 186,576 65,300 -- 18,867 65,000 55,980
President & Chief 1992 179,400 67,300 -- 8,568 -- 19,813
Financial Officer/(6)/
Michael W. Sperry 1994 188,344 68,700 -- 8,200 67,900 14,606
Executive Vice 1993 181,100 63,400 -- 18,314 62,100 14,100
President 1992 174,100 65,300 -- 8,315 -- 56,838
Morris D. Marley 1994 178,240 59,200 -- 7,760 56,700 12,117
Executive Vice 1993 156,000 54,600 -- 6,310 48,800 46,581
President 1992 143,750 50,600 -- 7,164 -- 10,367
</TABLE>
- --------
(1) Includes payment under the Short-Term Incentive Plan made in 1995 for
service in 1994. Thirty-one officers, including the five executives listed
above, received payouts in 1995 under the Short-Term Incentive Plan of
$1,557,600 for service in 1994. The Executive Group, consisting of 10
executives, including the five executives listed above, received payouts
in 1995 under the Short-Term Incentive Plan totaling $805,800 for service
in 1994. Benefits or amounts for service in 1995 cannot be determined at
this time.
(2) None of the named individuals received perquisites or other personal
benefits in excess of the lesser of $50,000 or 10% of the total of his
salary and bonus for 1994.
(3) Options referred to in this table were granted on December 17, 1992,
December 16, 1993 and December 15, 1994. The option agreement for the 1992
non-qualified, 1993 incentive and 1994 incentive stock options contains an
exercise schedule under which 25% of the options granted becomes
exercisable each year such that at the end of the fourth year following
date of grant, the option becomes fully exercisable. As a result of the
BB&T Merger, vesting of options granted in 1992 and 1993 accelerated with
the result that all of these options are 100% vested. Options granted in
1992 are non-qualified stock options. Options granted in 1993 and 1994 are
incentive stock options granted in a single grant to each named executive
officer except Mr. Sperry, who received a grant of non-qualified stock
options in 1994. The
I-7
<PAGE>
option agreement for 1994 non-qualified stock options contains an exercise
schedule under which 33 1/3% of the options granted becomes exercisable each
year. No restricted stock awards were made to the SNC Named Executives in
1994, 1993 or 1992.
(4) Eight members of the Executive Group consisting of 10 executives, including
the five executives listed above, received payouts in 1994 under the 1992-
1994 Long-Term Cash Incentive Plan totaling $660,300. No non-executive
Director or non-executive officer employee received payouts under the 1991-
1994 Long-Term Cash Incentive Plan.
(5) Components of 1994 "All Other Compensation" consist of the following:
Corporate contributions made in 1994 under the Corporation's 401(k) ESOP
and amounts accrued but not contributed under the Corporation's ESOP Excess
Plan which allows payment of benefits otherwise entitled under the 401(k)
ESOP except for limitations imposed by the Internal Revenue Code of 1986,
as amended (the "Code"), in the amount of $9,240 for Orr; $22,055 for
Carlton; $9,240 for Spruill; $11,300 for Sperry; and $10,295 for Marley.
Amounts accrued under and interest earned on deferred compensation in
excess of 120% of the long-term applicable federal rate in the amount of
$56,422 for Orr; $0 for Carlton; $13,969 for Spruill; $514 for Sperry; and
$101 for Marley. Includes actuarial equivalent of benefit to employee from
payment of annual premiums by the Corporation in 1994 under a split dollar
life insurance program in the amounts of $26,612 for Orr; $13,610 for
Carlton; $3,920 for Spruill; $2,792 for Sperry; and $1,721 for Marley.
Includes term life insurance premiums paid by the Corporation in 1994 in
the amount of $1,464 for Orr. Includes relocation expenses paid by the
Corporation in 1994 in the amount of $32,263 to Spruill.
(6) Messrs. Orr and Carlton will resign their employment with the Corporation
in 1995 as described in "Employment Contracts and Change in Control
Agreement" elsewhere in this Proxy Statement. Mr. Spruill resigned
effective March 1, 1995.
Following the BB&T Merger, certain executive officers of BB&T Financial became
executive officers of the Corporation. The following table presents information
relating to total compensation during the fiscal year ended December 31, 1994
of the Chief Executive Officer of BB&T Financial and the four next most highly
compensated executive officers of BB&T Financial (the "BB&T Named Executives").
BB&T FINANCIAL SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------ -----------------------
Awards Payouts
--------------- -------
Securities LTIP
Name and Other Annual Options/SARs Payouts All Other
Principal Position Year Salary Bonus Compensation (No. of Shares) ($) Compensation/(1)/
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John A. Allison IV 1994 $386,212 $189,244 -- 40,272 $ -- $15,449
Chairman & Chief 1993 370,388 142,599 -- 16,152 88,038 14,816
Executive Officer 1992 352,750 179,021 -- 23,181 59,252 15,299
Henry G. Williamson,
Jr. 1994 $310,000 $151,900 -- 32,329 $ -- 12,400
Chief Administrative 1993 297,413 114,504 -- 12,969 57,565 11,896
Officer 1992 283,237 143,743 -- 16,185 39,428 12,284
Kelly S. King 1994 $227,137 $111,297 -- 23,686 $ -- 9,086
Senior Executive Vice 1993 217,875 83,882 -- 9,502 31,701 8,715
President 1992 189,625 96,235 -- 9,989 21,214 8,185
W. Kendall Chalk 1994 $178,623 $ 87,525 -- 18,785 $ -- 6,160
Senior Executive 1993 165,850 63,852 -- 7,233 29,184 6,634
Vice President 1992 157,950 80,160 -- 9,026 19,751 6,850
Scott E. Reed 1994 $173,750 $ 85,138 -- 18,306 $ -- 6,160
Senior Executive 1993 160,088 61,634 -- 6,983 28,179 6,404
Vice President and
Treasurer 1992 152,512 77,400 -- 8,716 19,385 6,229
</TABLE>
- --------
(1) The compensation shown as "All Other Compensation" for 1994 consisted of
BB&T Financial's matching contribution under the Savings and Thrift Plan
("Thrift Plan"), a qualified defined
I-8
<PAGE>
contribution plan, and BB&T Financial's contribution to the Supplemental
Executive Retirement Plan ("SERP"), a non-qualified excess benefit plan. The
amount of such compensation for each individual shown in the table is as
follows:
<TABLE>
<CAPTION>
Allison Williamson King Chalk Reed
------- ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Thrift Plan Contribution.......... $ 3,749 $4,053 $3,734 $6,160 $6,160
SERP Contribution................. 11,700 8,347 5,352 -- --
</TABLE>
The following table shows all grants of options to each of the SNC Named
Executives in 1994.
SNC OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
- --------------------------------------------------------------------- --------------------
% of Total
Options
Granted to
Option Employees
Grants in Fiscal Exercise Expiration
Name (Shares)/(1)/ Year 1994 Price Date 5% 10%
---- ------------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
L. Glenn Orr, Jr........ -- -- $ -- -- $ -- $ --
Gary E. Carlton......... -- -- -- -- -- --
John R. Spruill......... 8,447 3.91 18.375 12-16-2004 97,784 252,998
Michael W. Sperry....... 8,200 3.79 18.375 12-16-2004 94,925 239,573
Morris D. Marley........ 7,760 3.60 18.375 12-16-2004 89,831 226,718
</TABLE>
- --------
(1) Each option is an incentive stock option, except for options granted to Mr.
Sperry which are non-qualified options. Each incentive and non-qualified
option agreement "vests" or becomes exercisable with respect to 25% and 33
1/3%, respectively, of the shares subject to the option one year from date
of grant (12/16/94) and an additional 25% and 33 1/3%, respectively,
becomes exercisable each additional year thereafter. No options have been
granted which include stock appreciation rights (SARs).
I-9
<PAGE>
The following table shows all grants of options to each of the BB&T Named
Executives in 1994. As a result of the BB&T Merger, all options to purchase
BB&T Financial common stock were converted to options to purchase the
Corporation's Common Stock. The table below reflects this conversion.
BB&T FINANCIAL OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
- ----------------------------------------------------------------------- ---------------------
% of Total
Options
Granted to
Option Employees
Grants in Fiscal Exercise Expiration
Name (Shares)/(1)/ Year 1994 Price Date 5% 10%
---- --------------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
John A. Allison IV...... 3/1/94 18,898 5.64 $20.431 3/1/04 $ 242,820 $ 615,357
12/20/94 21,374 6.03 18.793 12/20/04 252,619 640,173
Henry G. Williamson,
Jr..................... 3/1/94 15,174 4.52 20.431 3/1/04 194,971 494,096
12/20/94 17,155 4.84 18.793 12/20/04 202,755 513,809
Kelly S. King........... 3/1/94 11,116 3.31 20.431 3/1/04 142,829 361,959
12/20/94 12,570 3.55 18.793 12/20/04 148,565 376,484
W. Kendall Chalk........ 3/1/94 8,462 2.52 20.431 3/1/04 108,728 275,540
12/20/94 10,323 2.91 18.793 12/20/04 122,008 309,184
Scott E. Reed........... 3/1/94 8,166 2.43 20.431 3/1/04 104,925 265,901
12/20/94 10,140 2.86 18.793 12/20/04 119,845 303,703
</TABLE>
- --------
(1) All options vest pro rata over five years and are exercisable during the
ten-year period beginning on the date of grant.
The following table provides information concerning stock options exercised by
each of the SNC Named Executives in 1994, and the value of options held by each
at December 31, 1994.
SNC AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at FY- In-the-Money
Shares End (Shares) Options at FY-End/(1)/
Acquired on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
L. Glenn Orr, Jr........ -- -- 77,835 36,877 $486,283 $51,817
Gary E. Carlton......... -- -- 30,089 14,071 189,300 19,769
John R. Spruill......... -- -- 29,817 29,329 169,571 18,212
Michael W. Sperry....... -- -- 28,915 28,468 164,340 17,674
Morris D. Marley........ -- -- 19,359 17,916 115,636 19,465
</TABLE>
- --------
(1) The closing price on December 30, 1994 for Corporation Common Stock was
$19.125 and is used in calculating the value of unexercised options.
I-10
<PAGE>
The following table provides information concerning options for BB&T Financial
Common Stock exercised by each of the BB&T Named Executives in 1994, and the
value of options held by each at December 31, 1994.
BB&T FINANCIAL AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at FY- In-the-Money
Shares End (Shares) Options at FY-End/(1)/
Acquired on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John A. Al-
lison IV.. -- -- 140,417 21,374 $619,165 $7,096
Henry G.
Williamson,
Jr........ -- -- 109,272 17,155 496,203 5,695
Kelly S.
King...... -- -- 69,610 12,570 300,242 4,173
W. Kendall
Chalk..... -- -- 62,761 10,323 295,911 3,427
Scott E.
Reed...... -- -- 60,717 10,140 285,759 3,366
</TABLE>
- --------
(1) The closing price on December 30, 1994 for BB&T Financial Common Stock was
$28.00 and is used in calculating the value of unexercised options.
The following table describes target performance awards planned in 1994 to be
made to the SNC Named Executives in 1997 under the Long-Term Cash Incentive
Plan. Actual payment is dependent upon performance achieved in 1994 to 1996.
LONG-TERM INCENTIVE PLAN AWARDS TABLE
1994-96 LONG-TERM CASH INCENTIVE PLAN
<TABLE>
<CAPTION>
Estimated Future Payouts
Under Non-
Stock Price Based Plans/(1)/
--------------------------------
1994-96
Average Threshold Target Maximum
Name Salary Award/(2)/ Award/(2)/ Award/(2)/
---- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
L. Glenn Orr, Jr./(3)/................ $477,430 $41,775 $167,101 $250,651
Gary E. Carlton/(3)/.................. 224,784 14,049 56,196 84,294
John R. Spruill/(4)/.................. -- -- -- --
Michael W. Sperry..................... 192,111 12,007 48,028 72,042
Morris D. Marley...................... 181,805 11,363 45,451 58,177
</TABLE>
- --------
(1) The Corporation has a Long-Term Cash Incentive Plan that provides for
payments of cash awards to certain key employees of the Corporation and its
subsidiaries who contribute to the success of the Corporation based upon
the achievement over a three-year period of performance goals identified in
the plan. Performance under the Long-Term Cash Incentive Plan is based upon
growth in earnings per share as compared to an earnings per share target
and return on average equity as compared to identified industry standards.
Payment under the 1994-1996 Long-Term Cash Incentive Plan will be made in
1997 and will be reported in the Summary Compensation Table. As a result of
the BB&T Merger, the Compensation Committee will review the Long-Term
Incentive Plan and changes may be made to the Plan which affect estimated
future payouts.
(2) The cash awards payable are based on a percentage of the employees' average
salaries over the three-year performance period. Accordingly, the awards
identified will change to the extent the actual average compensation
differs from the projected average compensation.
(3) Mr. Orr and Mr. Carlton will receive fractional payouts (14/36ths) as a
result of their retirement in 1995.
(4) Mr. Spruill resigned effective March 1, 1995.
There were no grants or awards in 1994 under any BB&T Financial long term
incentive plan.
I-11
<PAGE>
RETIREMENT PLANS
The Corporation has a defined benefit retirement plan, the Southern National
Retirement Plan (the "Retirement Plan"), for eligible employees. All employees
of the Corporation and certain subsidiaries are eligible to participate under
the Retirement Plan after completing one year of service. Contributions to the
Retirement Plan are computed on an actuarial basis. A participant's normal
annual retirement benefit under the Retirement Plan at age 65 is an amount
equal to 1.1% of the first $6,600 of the participant's average compensation,
plus 1.5% of the participant's average compensation in excess of $6,600, times
the number of years of service completed with the Corporation and certain
subsidiaries. A participant's average compensation is his average annual
compensation including salary, wages, overtime, bonuses and incentive
compensation, for the five consecutive years that produce the highest average.
The following table shows the estimated annual benefits payable under the
Retirement Plan upon retirement at age 65 to persons in specified average
compensation and years of service classifications. The amounts shown are based
on a 10 year certain and life annuity and are not subject to offsets based upon
social security amounts or other amounts. As of December 31, 1994, for purposes
of computing benefits under the Retirement Plan, age and years of service of
the SNC Named Executives are as follows: age 54 and 22 years for Mr. Orr; age
54 and 16 years for Mr. Carlton; age 52 and 6 years for Mr. Spruill; age 50 and
5 years for Mr. Sperry; and age 44 and 10 years for Mr. Marley.
ESTIMATED ANNUAL RETIREMENT BENEFITS
BASED ON YEARS OF CREDITED SERVICE/(1)(2)/
<TABLE>
<CAPTION>
Average
Compensation
for
5
Consecutive
Years
of Highest
Compensation 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years 40 Years
- ------------ -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$300,000 $ 44,736 $ 67,104 $ 89,472 $111,840 $134,208 $156,576 $178,944
350,000 52,236 78,354 104,472 130,590 156,708 182,826 208,944
400,000 59,736 89,604 119,472 149,340 179,208 209,076 238,944
450,000 67,236 100,854 134,472 168,090 201,708 235,326 268,944
500,000 74,736 112,104 149,472 186,840 224,208 261,576 298,944
550,000 82,236 123,354 164,472 205,590 246,708 287,826 328,944
600,000 89,736 134,604 179,472 224,340 269,208 314,076 358,944
650,000 97,236 145,854 194,472 243,090 291,708 340,326 388,944
700,000 104,736 157,104 209,472 261,840 314,208 366,576 418,944
750,000 112,236 168,354 224,472 280,590 336,708 392,826 448,944
800,000 119,736 179,604 239,472 299,340 359,208 419,076 478,944
850,000 127,236 190,854 254,472 318,090 381,708 445,326 508,944
900,000 134,736 202,104 269,472 336,840 440,208 471,576 538,944
</TABLE>
- --------
(1) The amounts shown exceed statutory benefit limits and compensation caps
under the Retirement Plan in some instances. To the extent an amount cannot
be earned under the Retirement Plan, it will be earned under the
Corporation's Supplemental Executive Retirement Plan.
(2) If employment date is on or after January 1, 1979, basic benefit is
lifetime annuity. If employment date is prior to January 1, 1979, basic
benefit is 120 months certain and thereafter for participant's lifetime.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS
EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS. In anticipation of the BB&T Merger,
BB&T Financial and the BB&T Bank Subsidiaries and the Corporation and the SNC
Bank Subsidiaries entered into Employment Agreements with 27 of their executive
and other senior officers (15 BB&T Financial officers and 12 officers of the
Corporation (collectively, the "Officers")), including Messrs. Allison, Chalk,
Greene, King, Marley, Reed, Sperry and Williamson, who are currently serving as
executive officers of the Corporation.
I-12
<PAGE>
The Employment Agreements provide for five-year terms that are extended
automatically each month (absent contrary notice by either party to the
Employment Agreement). As a result, five years remain on the term of each
Employment Agreement at any time unless either party elects not to extend the
term. The term of any Employment Agreement may not be extended beyond the month
in which the officer reaches age 65, however. The Employment Agreements provide
that the Officers are guaranteed minimum annual salaries equal to their current
annualized base salaries, and continued participation in specified incentive
compensation plans. During the term of the Employment Agreements, each Officer
will be entitled to receive, on the same basis as other officers, employee
pension and welfare benefits and group employee benefits such as sick leave,
vacation, group disability and health, life and accident insurance and similar
indirect compensation that the Corporation may from time to time extend to its
officers.
The Employment Agreements also provide that under various circumstances an
Officer may continue to receive compensation and health insurance from the
Corporation after the Officer's voluntary termination of employment or after
being terminated by the Corporation other than for cause. At any time after the
first anniversary, and until the sixth anniversary of the BB&T Merger, the
Officer voluntarily may terminate his or her employment with the Corporation
and continue to receive 60% of the Officer's highest annual cash compensation
during any one of the five years preceding termination (such highest annual
cash compensation being referred to herein as the "Termination Compensation")
and health insurance provided by the Corporation until the sixth anniversary of
the BB&T Merger, subject to compliance with non-competition provisions of the
Employment Agreements, described below. In the event the Officer's employment
is terminated by the Corporation other than for "just cause" (as defined in the
Employment Agreements), the Officer will be entitled to receive the Termination
Compensation and health insurance for the remainder of the term of the
Employment Agreement, subject to compliance with the non-competition provisions
of the Employment Agreement. In addition, if an Officer is terminated by the
Corporation other than for just cause, the Corporation will use its best
efforts to accelerate vesting of any unvested benefits to which the Officer may
be entitled under any stock-based or other benefit plan or arrangement to the
extent permitted by the terms of such plan(s). Mr. Spruill resigned effective
March 1, 1995 and is receiving Termination Compensation and health insurance in
accordance with his former employment agreement.
The Employment Agreements also provide that if there is a "Change of Control"
(as hereinafter defined) of the Corporation or certain of its affiliates, the
Officer will be entitled to: (i) terminate his Employment Agreement voluntarily
for "good reason" (generally defined in the Employment Agreements to include a
reduction in the Officer's status, responsibilities and duties or salary
following the Change of Control); and (ii) receive, in a lump sum, an amount
equal to 2.99 times the Termination Compensation. In the event the Officer is
terminated by the Corporation for other than just cause or the Officer
terminates his employment for good reason after a Change of Control, the
Officer would also be entitled to accelerated vesting of unvested benefits
under employee stock and benefit plans to the extent permitted by such plans. A
"Change of Control" is deemed to have occurred under the Employment Agreements
if: (i) any person or group acquires 20% or more of the voting securities of
the Corporation or specified affiliates; (ii) during any two-year period
persons who were directors of such corporation at the beginning of the two-year
period cease to constitute at least two-thirds of the corporation's Board of
Directors; (iii) the shareholders of such corporation approve any merger or
consolidation of such corporation with another company that would result in
less than 80% of the voting securities outstanding after the merger or
consolidation being held by persons who were shareholders of such corporation
immediately prior to the merger or consolidation; (iv) the shareholders of such
corporation approve a plan of complete liquidation or an agreement for the sale
of substantially all of such corporation's assets; or (v) any other event the
Board of Directors of such corporation determines should constitute a Change of
Control.
The Corporation also has the right under the Employment Agreements to
terminate the Officer's employment at any time for just cause. If the
Corporation terminates an Officer's employment for just cause, such Officer
will have no right to receive compensation or other benefits under the
Employment Agreement for any period after such Termination.
I-13
<PAGE>
The Employment Agreements also provide that under certain circumstances upon
leaving the employment of the Corporation, the Officer may not engage directly
or indirectly in the banking, financial services or any other business in which
the Corporation is engaged, in the states of North Carolina and South Carolina
and in any counties contiguous to any counties located in such states, nor may
the Officer solicit or assist in the solicitation of any depositors or
customers of the Corporation or any of the Corporation's affiliates or induce
any employees to terminate their employment with the Corporation or its
affiliates. This non-competition provision will be effective: (i) if the
Officer voluntarily terminates his employment prior to the first anniversary of
the BB&T Merger, until the later of the first anniversary of the BB&T Merger or
the first anniversary of the Officer's termination; (ii) if after the first
anniversary of the BB&T Merger the Officer voluntarily terminates his
employment, for such period of time during which the Officer elects to receive
60% of the Termination Compensation; or (iii) if the Officer is terminated
other than for just cause, until the earlier of the first anniversary of the
Officer's termination or the date as of which the Officer elects to forego
receiving the Termination Compensation.
The Employment Agreement of Mr. Allison provides that he will be Chairman of
the Board and Chief Executive Officer of the Corporation for the term of such
Employment Agreement.
AGREEMENT WITH MR. ORR. The Corporation entered into an Employment Contract
between the Corporation and SNB North Carolina and L. Glenn Orr, Jr., the
former Chairman of the Board, Chief Executive Officer and President of the
Corporation, dated July 16, 1981, as amended by an Amendment to Employment
Contract between the Corporation and SNB North Carolina and Mr. Orr, dated June
15, 1989 (as amended, the "Original Orr Agreement"). The Original Orr Agreement
provided that Mr. Orr would serve as Chairman of the Board, Chief Executive
Officer and President of the Corporation until attaining age 65. In order to
facilitate the transition from the Corporation and BB&T Financial as separate
entities to the Corporation as a single merged entity, Mr. Orr has agreed to
serve as Chairman Emeritus of the Corporation until May 1, 1995, following the
BB&T Merger. Pursuant to a Settlement and Non-Compete Agreement between Mr. Orr
and the Corporation, effective following the BB&T Merger (the "Orr Settlement
Agreement"), Mr. Orr will resign as an employee and officer of the Corporation
and will be retained as a consultant as of May 1, 1995. The Orr Settlement
Agreement provides for the Corporation to pay Mr. Orr an annual amount equal to
the difference between $1,655,000 and the Corporation-provided portion of
certain benefits payable to Mr. Orr under the following plans of the
Corporation: the retirement plan, the supplemental executive retirement plan,
the employee stock ownership plan, the employee stock ownership plan excess
plan, and the non-qualified deferred compensation plan. The Orr Settlement
Agreement also provides that Mr. Orr agrees (i) to settle each of the
Corporation's obligations to him pursuant to the Original Orr Agreement, (ii)
not to engage in competition with the Corporation by (A) engaging directly or
indirectly in the banking or financial services business anywhere in North
Carolina or South Carolina (or in any other state in a county contiguous to
North Carolina or South Carolina) or (B) soliciting any depositors or customers
of the Corporation or its subsidiaries or inducing any employees of the
Corporation or its subsidiaries to terminate their employment with the
Corporation, and (iii) to serve as a consultant to the Corporation for a period
of five years following the BB&T Merger. The Corporation also agrees to provide
certain miscellaneous benefits to Mr. Orr, including the continuation for life
of certain life and medical insurance policies, certain moving expenses and
country club membership dues and the purchase of an automobile. The payments
provided for under the Orr Settlement Agreement will be paid to Mr. Orr in
equal monthly installments and will continue for the life of each of Mr. Orr
and his current wife, but in no event for a period of less than fifteen years.
To the extent that payments under the Orr Settlement Agreement cause a
"parachute payment," as defined in the Internal Revenue Code of 1986 (the
"Code") section 280G(b)(2), the Corporation will indemnify Mr. Orr and hold him
harmless against all claims, expenses and excise taxes relating thereto. The
Corporation has established a rabbi trust to help assure the payment of the
Corporation's obligations to Mr. Orr under the Orr Settlement Agreement. The
Corporation has placed assets in the rabbi trust representing partial funding
of the Corporation's obligations to Mr. Orr under the Orr Settlement Agreement.
In the event of a Change of Control (as defined in the Orr Settlement
Agreement) of the Corporation, the Corporation will be obligated to contribute
additional assets to the rabbi trust to provide
I-14
<PAGE>
full funding, on a actuarial basis, of the Corporation's obligations to Mr. Orr
under the Orr Settlement Agreement. The Orr Settlement Agreement also provides
that the Corporation will use its best efforts, subject to fiduciary duties, to
reelect Mr. Orr to the Corporation Board until his seventieth birthday.
AGREEMENT WITH MR. CARLTON. The Corporation entered into an Employment
Contract between the Corporation and SNB North Carolina and Gary E. Carlton,
Executive Vice President of the Corporation, dated July 17, 1986, as amended by
the Amendment to Employment Contract between the Corporation and SNB North
Carolina and Gary E. Carlton, dated June 15, 1987, and as amended and restated
by the Employment Contract between the Corporation and SNB North Carolina,
dated January 1, 1994 (the "Original Carlton Agreement"). The Original Carlton
Agreement provided that Mr. Carlton would serve as an Executive Officer of the
Corporation until attaining age 65. Pursuant to a Settlement Agreement, Waiver,
and General Release between Mr. Carlton and the Corporation, dated as of the
BB&T Merger (the "Carlton Settlement Agreement"), Mr. Carlton will resign as an
employee and officer of the Corporation as of August 1, 1995. The Carlton
Settlement Agreement provides that Mr. Carlton will agree (i) to settle each of
the Corporation's obligations to him pursuant to the Original Carlton Agreement
and (ii) maintain confidentiality with regard to certain proprietary
information of the Corporation and SNB North Carolina in exchange for an annual
payment of $312,000. The amount of this payment will be reduced by any
compensation earned by Mr. Carlton as a result of employment by another
employer after termination of his employment with the Corporation. The payments
provided for under the Carlton Settlement Agreement will continue until Mr.
Carlton attains age 65 or dies. Finally, the Corporation will provide a
replacement automobile and closing costs on the sale of his residence and will
agree to continue to provide certain miscellaneous benefits to Mr. Carlton,
including the continuation of certain life insurance policies and medical
insurance.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee's report on executive compensation of the Board of
Directors of the Corporation is set forth below. This Committee report
documents the components of the Corporation's executive officer compensation
programs and describes the basis on which 1994 compensation determinations were
made by the Committee with respect to the executive officers of the
Corporation, including the SNC Named Executives. The report also includes the
factors and criteria for compensation of the Chairman and Chief Executive
Officer of the Corporation which are separately set forth below. See
"Discussion of Compensation for the Chairman and Chief Executive Officer"
below.
COMPENSATION PHILOSOPHY AND OVERALL OBJECTIVES OF EXECUTIVE COMPENSATION
PROGRAMS. Components of the Corporation's present compensation program were
designed in 1990. An outside consultant was engaged and prepared an executive
compensation program design. The consultant compared the financial performance
of the Corporation to that of an industry peer group of southeastern banks for
the period 1987 to 1989. The study indicated that for this period, the
Corporation's average return on equity approximated the peer group's median,
return on average assets was somewhat below its peer group at .86%, and its
earnings per share growth was in the top quarter of its peers. Total
compensation of executives in 1990 for the Chief Executive Officer and other
executive officers was at or below the 25th percentile of the peer group. The
study indicated the need to implement an option program to be competitive with
the peer group and link cash incentives to performance measures based on
earnings per share, return on assets and return on equity. Of the peer group,
100% had a long term incentive plan, 80% had a non-qualified stock option plan,
and 93% had an incentive stock option plan. The study recommended stock
incentives to motivate executives to align themselves with shareholders. As set
forth below, these recommendations have been adopted by the Corporation and
form the basis of its compensation philosophy.
It is the philosophy of the Corporation to ensure that executive compensation
be directly linked to continuous improvements in corporate performance which
lead to increases in shareholder value. The following objectives have been
adopted by the Committee as guidelines for compensation decisions.
I-15
<PAGE>
. Provide a competitive total compensation package that enables the
Corporation to attract and retain key executives.
. Integrate bonus programs with the Corporation's annual and long-term
business objectives and strategy, and focus executive behavior on the
fulfillment of those objectives.
. Provide variable compensation opportunities through bonus programs that
align executive remuneration with corporate performance that will serve
the interests of the Corporation's shareholders.
COMPENSATION PROGRAM COMPONENTS. Each year the Committee reviews the
Corporation's compensation program to ensure that pay levels and incentive
opportunities are competitive and reflect the performance of the Corporation.
The particular elements of the compensation program for executive officers are
further explained below.
Base Salary -- Base pay levels are largely determined through comparisons with
corporations of similar size and complexity as the Corporation. As noted above,
base salaries were carefully evaluated in 1990 through use of a peer group
study. Actual salaries are based on individual performance contributions within
a competitive salary range for each position that is established through job
evaluation and market comparisons. Base pay levels for the executive officers
are competitive within a range that the Committee considers to be reasonable
and necessary. A top five executive compensation review by a consulting firm
was commissioned by the Compensation Committee which compared 1992 compensation
of the Named Executives to an industry peer group of 14 southeastern banks. The
study was commissioned by the Committee in 1992 to respond to the Securities
and Exchange Commission's requirements concerning executive compensation and
was designed not only to assist the Committee in setting 1993 compensation but
also to support the Committee's review of compensation decisions made for 1992.
Peer group data were obtained from 1992 proxy statements and increased by 5.8%
to update the peer group data to 1993 levels. The peer group utilized is the
same peer group of bank holding companies utilized on the Performance Graph
which is set forth herein. The study indicated that while compensation of Named
Executives is consistent with the median salaries paid by the peer group, the
Corporation's return on average assets over a three year period has improved
against its peers and its growth in earnings per share and net income growth is
solidly positioned in the top 25% of its peer group. According to the study,
the Corporation's financial performance for the 1990-1992 period was clearly
above average and for fiscal 1992, the Corporation was one of the best
performing companies in the peer group. The Compensation Committee determined
that, based upon the Corporation's performance, the Corporation's compensation
strategy should provide for base salaries and target annual incentives that
approximate the median for the peer group. An early 1994 review of 1993
compensation levels indicated that 1993 base salary and annual bonus (under the
Short-Term Incentive Plan described below) paid to the Chief Executive Officer
and the other Named Executives approximated the 1992 peer group median base
salary and annual bonus for like executives. A four percent (4%) increase in
base salary was recommended by the Compensation Committee in fiscal 1994 for
the Named Executives to ensure that base salaries plus bonuses for the Named
Executives approximated the median base salary plus bonuses for the peer group
(assuming a 4% increase in 1992 base salary paid to executive officers of the
peer group in 1993 and 1994). The Board of Directors acted in accordance with
this recommendation.
Short-Term Incentive Plan -- The Corporation's officers are eligible to
participate in an annual incentive compensation plan with awards based
primarily on the attainment of certain earnings per share and return on assets
goals. Each of these components is given equal weight in the formula to
calculate awards. The objective of this plan is to deliver competitive levels
of compensation for the attainment of financial objectives that the Committee
believes are primary determinants of share price over time. In particular, the
plan aims to focus corporate behavior on consistent and steady earnings growth.
Targeted awards for executive officers of the Corporation are consistent with
targeted awards of peer group companies of similar size and complexity to the
Corporation which are reflected on the Performance Graph. Actual awards are
subject to decrease or increase on the basis of the Corporation's financial
performance and include three point levels of award:
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<PAGE>
Threshold, Target, and Superior levels. The Compensation Committee consulted
with investment bankers and stock analysts to obtain their estimate of core
increases in earnings for southeastern banks which was an increase in the range
of 8% to 10% in 1994 over 1993. The earnings per share Target goal was set at
the Corporation's budgeted earnings. For fiscal year 1994 earnings were
budgeted at $2.27 per share, an 11.8% increase over the 1993 earnings per share
originally reported of $2.03 per share. Originally reported actual earnings for
1994 were $2.27 per share or 11.8% over originally reported earnings per share
for 1993. If budgeted earnings are achieved, a full payout of bonuses is made.
The payout ratio decreases to 25% of full payment based on an incremental
decrease in the earnings per share and return on assets from the Target goal
set for earnings per share and return on assets down to a minimum or Threshold
level. Conversely, the payout ratio increases based on an incremental increase
in the earnings per share and return on assets above the Target goal set for
earnings per share and return on assets up to a Superior level. The Corporation
achieved the Plan's financial performance objectives for the last three years
and awards have been made to the Named Executives during that three-year period
as disclosed in the Bonus column of the Summary Compensation Table.
Long-Term Cash Incentive Plan -- The Board of Directors has adopted a Long-
Term Cash Incentive Plan which provides for payments of cash awards to certain
key employees of the Corporation and its subsidiaries who contribute to the
success of the Corporation based upon the achievement of established
performance goals identified in the plan. Targeted awards for executive
officers of the Corporation are consistent with targeted awards of peer group
companies of similar size and complexity to the Corporation which are reflected
on the Performance Graph. Actual awards are subject to decrease or increase on
the basis of the Corporation's financial performance and include three levels
of award: Threshold, Target and Superior levels. Performance under the Long-
Term Cash Incentive Plan is based upon growth in earnings per share as compared
to an earnings per share target and return on average equity as compared to the
peer group. Each of these components is given equal weight in the formula to
calculate awards. The earnings per share goals for the Long-Term Cash Incentive
Plan cover a performance period of three years. As a result, the earnings per
share goals are not tied directly to budgeted earnings per share, as earnings
per share are budgeted only on an annual basis; however, the earnings per share
goals for the Long-Term Cash Incentive Plan are set at a level which generally
provide for an increase over the Corporation's earnings per share goals in the
prior three year performance period. For example, the 1991-1993 Target goal was
set at cumulative earnings per share of $4.60. The 1992-1994 Target goal was
set at cumulative earnings per share of $5.00 which represented an 8.6%
increase over the prior performance period Target goal. Actual cumulative
earnings per share in the performance period 1992-1994 increased 18% over the
performance period 1991-1993. The second payment under the Long-Term Cash
Incentive Plan was made in 1995 as a result of the Corporation exceeding the
Superior goal of $5.15 cumulative earnings per share and the Superior goal of
14.70% return on common equity during the performance period 1992-1994. This
payment is disclosed in the Long-Term Compensation LTIP Payouts column of the
Summary Compensation Table. The next payment under the Long-Term Cash Incentive
Plan (based on the performance period 1993-1995) will be made in 1996 if target
performance goals are achieved. Performance through the first two year period
of this plan is between Target and Superior goal performance level established
under the plan. Planned awards under the 1994-96 Long-Term Cash Incentive Plan
are described in the Long-Term Incentive Plan Awards Table above. Performance
through the first year of this plan is at the Target goal performance level
established under the plan. Awards actually made under the 1993-1995 Long-Term
Cash Incentive Plan will be dependent upon performance achieved in 1995, the
final performance year of the plan.
Capital Accumulation Plan for Eligible Key Employees -- The Board of Directors
has adopted the Capital Accumulation Plan for Eligible Key Employees of
Southern National Corporation, which allows eligible participants to defer a
stipulated percentage of any incentive compensation to be earned in the
following calendar year. Each year interest will be credited to any amounts
deferred during the following calendar year and to any prior accumulations. The
interest credited to a participant's account will vary annually, and will
generally track market interest rates. The limit for annual deferrals is 100%
of a participant's combined awards under the Short-Term Incentive Plan and the
Long-Term Incentive Plan, or any prior long-term incentive plan then in effect.
The amount deferred must be in 25% increments of a participant's incentive
compensation. Benefits under the Capital Accumulation Plan for Eligible Key
Employees will be paid upon a
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<PAGE>
participant's early or normal retirement, death, disability, hardship or
separation from service. Participants may elect to receive their benefit
payments in a lump sum, or in 180 equal monthly payments.
Stock Option Program -- The Committee strongly believes that by providing
those persons who have substantial responsibility for the management and growth
of the Corporation with an opportunity to increase their ownership of
Corporation stock, the best interests of shareholders and executives will be
closely aligned. Stock options link the executive's rewards directly to
shareholder return. The Committee has awarded options as an incentive for
future performance, the intent of option grant being to motivate those
receiving grants to increase the value of Corporation stock in the future.
Options may be granted to key management employees or contributors who have a
significant effect on the long term strategic success of the Corporation.
Executives are eligible to receive stock options from time to time, giving them
the right to purchase shares of Common Stock of the Corporation at a specified
price in the future. The number of stock options granted to executive officers
is based on competitive practices, including practices of the peer group
described in the Performance Graph. While the Committee reviewed the amount and
value of options currently held by executives, the Committee has not
established a target ownership level for equity holdings by executives and
prior grants and the number of outstanding options is not presently factored
into the grant formula. Target ownership levels for equity holdings by
executives may be studied by the Committee in 1995 and considered in
conjunction with future grants of stock options. Options were granted in 1994
based upon a formula. For Mr. Spruill, Mr. Sperry, and Mr. Marley and executive
officer group, options were granted equal to the product of 80% of salary
divided by the option price of $18.375; the Corporation's Secretary received
options equal to the product of 50% of salary divided by the option price of
$18.375. Mr. Orr and Mr. Carlton were not granted stock options in 1994.
Additional information on options is set forth in the Option Grants Table and
the Fiscal Year End Option Value Table above.
DISCUSSION OF 1994 COMPENSATION FOR THE CHAIRMAN AND CHIEF EXECUTIVE
OFFICER. In considering the compensation for the Chairman and Chief Executive
Officer for fiscal year 1994, the Committee reviewed his existing compensation
arrangements and both corporate and individual performance. The employment
agreement between the Corporation and Mr. Orr was structured to provide him
with a fully competitive base salary and annual incentive opportunity. The
Committee has made the following determinations regarding the compensation of
Mr. Orr.
. Base salary for Orr in 1994 increased from the base salary that was paid
in 1993 by 4% to ensure that his base salary approximated the median
base salary for the peer group.
. A Long-Term Incentive Plan payout of $233,300 was made in 1995 based on
financial performance of the Corporation during the performance period
1992-1994 as a result of the Corporation exceeding the Superior goal of
$5.15 cumulative earnings per share, and exceeding the Superior goal of
14.70% return on common equity during the performance period 1992-1994.
. An incentive award (bonus) was paid in 1995 for fiscal 1994 performance
under the Short-Term Incentive Plan in the amount of $236,100 based on
the Corporation's achieving earnings per share of $2.27, on a fully-
diluted basis (which fell between the Target goal and the Superior goal,
resulting in a payout of 130% of target), and a return on assets of
1.35% which exceeded the Superior goal set under the plan.
. Mr. Orr's combined base salary and annual bonus for 1994 approximates
peer company medians of combined base salary and bonus paid to chief
executive officers of its peer group (assuming 4% annual increases in
1992 compensation paid to chief executive officers of the peer group in
1993 and 1994). This combined amount is consistent with the Committee's
targeted range of compensation for Mr. Orr and is based upon the
Corporation's performance in that 34% of Mr. Orr's combined salary and
annual bonus amount paid for service in 1994 was based upon the
Corporation meeting the Target goal under the Short-Term Incentive Plan
of earnings per share of $2.27 on a fully-diluted basis in 1994. The
Committee determined that Mr. Orr's base salary should be maintained at
a competitive level relative to its peer group and as a result
recommended a 4% increase in base salary. The peer group utilized in
this study is the same peer group utilized in the Performance Graph set
forth herein.
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<PAGE>
SUMMARY. The Corporation's executive compensation programs are based on
financial performance. For fiscal 1994, the Committee's decisions took into
consideration the fact that the Corporation's financial performance, as
measured by earnings per share, was 11.8% above the earnings per share
originally reported for fiscal year 1993. The Committee also notes that the
closing price of the Corporation's Common Stock has increased from $13.875 on
December 31, 1991 to $19.125 on December 31, 1994, a 37.8% increase.
After its review of all existing programs, the Committee continues to believe
that the total compensation program for executives of the Corporation should be
competitive with the compensation programs provided by other corporations with
which the Corporation competes. The Corporation maintains a pay-for-performance
philosophy under which incentive pay is based on obtaining budgeted increases
in earnings over earnings achieved in the prior year. The Committee has relied
upon a study conducted by consulting firm, which determined that the
Corporation's budget process are reasonable and prudent. The Committee noted
that the goals established under the Short-Term Incentive Plan were reasonable
and dictated significant increases in 1994 financial performance over 1993
financial performance. The same reasoning was applied by the Committee in 1993
in setting the goals under the Short-Term Incentive Plan bonus earned in 1994
and paid in 1995, which is reflected in the Summary Compensation Table. The
Committee believes that any amounts paid under the Short-Term Incentive Plan
were appropriately related to corporate and individual performance, yielding
awards that are directly linked to the annual financial and operational results
of the Corporation. The Committee also believes that the stock option program
provides opportunities to participants that are consistent with the returns
that are generated on the behalf of the Corporation's shareholders.
In July 1994, the Committee received a new executive compensation study from
an outside consultant to review its compensation decisions made for 1994. This
study utilized peer group data from the 1993 proxy statements of fifteen bank
holding companies ranging in size from $5.5 billion to $14.7 billion in assets
(the "New Peer Group"). Data from the New Peer Group was reviewed by the
Committee due to the Corporation's growth to $8.3 billion in assets in March of
1994. The study indicated that overall, Southern National's 1993 executive pay
levels continue to appear conservative compared to its performance on key
performance measures. Fiscal year end financial performance for 1993 and its
three year average financial performance as measured by return on average
equity and return on average assets was at the 75th percentile of the New Peer
Group. The study indicated that Southern National's financial performance is
more favorable than the New Peer Group and its cash compensation levels appear
less competitive on both a strategic and actual payout basis than the New Peer
Group. As the Committee relied on the 1992 study in making its compensation
decisions for 1994, the Performance Graph reflects performance of banks'
holding companies utilized in the 1992 study. A New Peer Group performance
graph will be utilized in the 1996 proxy statement.
Currently, the Corporation believes that all compensation paid by the
Corporation to its executives is deductible for federal income tax purposes.
The Long-Term Incentive Plan and Short-Term Incentive Plan were approved by
shareholders at the Corporation's 1994 Annual Meeting of Shareholders to assure
deductibility of compensation paid under such plans as performance based
compensation under Section 162(m) of the Code.
COMPENSATION COMMITTEE
Richard Janeway, M.D. -- Chairman
Nido R. Qubein -- Vice-Chairman
Dickson McLean, Jr.
Ronald E. Deal
E. M. Williams
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Nido R. Qubein, a Director of the Corporation and a member of the Compensation
Committee in 1994, is owner of Creative Services, Inc., an international
management consulting firm. SNB North Carolina has entered into a consulting
services contract with Creative Services, Inc. under which Creative Services,
Inc. is advising management of the Corporation by providing organizational
development expertise, including the
I-19
<PAGE>
conceptualization and creation of integrated corporate employee training
materials and programs. Creative Services, Inc. was paid $391,896 under this
contract in 1994. Management believes this contract is on terms as favorable as
could have been obtained from others.
Dickson McLean, Jr., a Director of the Corporation and a member of the
Compensation Committee in 1994, is President of McLean, Stacy, Henry, McLean,
McIntyre & Ramsaur, P.A., Attorneys-at-Law. The firm is under retainer to
provide legal services to the Corporation and its subsidiaries. The firm was
paid the sum of $90,107 in 1994. Management believes these services were
provided on terms as favorable as could have been obtained from others.
Mr. McLean and Mr. Qubein abstain from voting on matters relating to stock
options and the Long-Term Cash Incentive Plan and Short-Term Incentive Plan.
TRANSACTIONS WITH OFFICERS AND DIRECTORS
A number of the Corporation's Directors and officers and their associates are
customers of the SNC Bank Subsidiaries or the BB&T Bank Subsidiaries. Any
extensions of credit made to them are in the ordinary course of business, are
substantially on the same terms, including interest rates and collateral, as
those prevailing at the same time for comparable transactions with others, and
do not involve more than normal risk of collectibility or present other
unfavorable features. None of such credits are classified as non-accrual, past
due, restructured or potential problem. All outstanding loans to such officers
and Directors and their associates are current as to principal and interest. As
of December 31, 1994, loans in excess of $60,000 to Directors, executive
officers and their interests totaled approximately $48.9 million, or
approximately 7.7% of the Corporation's consolidated shareholders' equity at
such date.
Elizabeth T. Williams, wife of A. Tab Williams, Jr., a Director of the
Corporation and formerly a Director of Forsyth Bank & Trust Co., leased to
Forsyth Bank & Trust Co. the land and building used by it as a branch location
at Corporation Parkway and Peters Creek Parkway in Winston-Salem, North
Carolina, effective November 1, 1979, for a base period of 25 years with
renewal options. The initial monthly rent under the lease is $3,680 with
increases based on the Consumer Price Index at the end of the seventh year and
each five years thereafter. SNB North Carolina assumed this lease upon its
merger with Forsyth Bank & Trust Co. The current rent is $4,732 per month.
Management believes that the lease terms are as favorable as could have been
obtained from a non-affiliated party.
Ted R. Reynolds, a Director of the Corporation in 1994, is a 90% owner of
Raleigh Place Associates, a North Carolina General Partnership that entered
into a 15 year lease with SNB North Carolina, whereby the bank leases office
space for one of its Raleigh bank branches located at 316 West Edenton Street,
Raleigh, North Carolina. The lease has renewal options. For fiscal year 1994,
12 lease payments of $4,798 each month were paid to Raleigh Place Associates
for a total of $57,579. In addition to lease payments, SNB North Carolina is
obligated to share certain lease pass-through expenses of the building for
operating expenses. In 1994, the bank paid approximately $19,653 to Raleigh
Place Associates, which sum represented its share of operating expenses for
calendar year 1994. Management believes this lease contract is on terms that
are as favorable as could have been obtained from a non-affiliated party.
During 1994, BB&T Financial retained the law firm of Dooley, Dooley, Spence
and Parker, P.A., an affiliate of A. J. Dooley, Sr., a nominee for Director of
the Corporation, and the Corporation proposes to continue to retain this firm
during 1995.
During 1994, BB&T Financial paid Player, Inc., an affiliate of Richard L.
Player, Jr., a nominee for Director of the Corporation, the sum of $84,645 for
construction costs of a new main office in Fayetteville, N.C. and paid Tri-
Player Investments (also an affiliate of Mr. Player) the sum of $46,371 as rent
and related occupancy expenses for the Westwood Branch and main office
buildings in Fayetteville. Management believes that the terms of the agreements
with Mr. Player's affiliates are as favorable to BB&T Financial and the
Corporation as could have been obtained from a non-affiliated party.
See "Compensation Committee Interlocks and Insider Participation" above.
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<PAGE>
PERFORMANCE GRAPH
Set forth below is a graph comparing the total returns (assuming reinvestment
of dividends) of Corporation Common Stock, the S&P 500 Index, and an industry
peer group index of 13 southeastern banks. The graph assumes $100 invested on
December 31, 1989 in Corporation Common Stock and each of the indices.
The bank holding companies in the peer group index are BB&T Financial
Corporation, CCB Financial Corporation, South Trust Corporation, AmSouth
Bancorporation, Central Fidelity Banks, Inc., Regions Financial Corporation
(formerly First Alabama Bancshares, Inc.), First Virginia Banks, Inc., Compass
Bancshares, Inc. (formerly Central Bancshares of the South, Inc.), Mercantile
Bancshares Corporation, Bank South Corp., Synovus Financial Corp., Centura
Banks, Inc. and United Carolina Bancshares Corporation.
[GRAPH APPEARS HERE]
<TABLE>
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG SOUTHERN NATIONAL, PEER GROUP INDEX AND S&P 500
<CAPTION>
PEER
Measurement period SOUTHERN GROUP S&P
(Fiscal Year Covered) NATIONAL INDEX 500
- --------------------- -------- -------- --------
<S> <C> <C> <C>
Measurement PT -
1989 $ 100 $ 100 $ 100
1990 $ 77 $ 86 $ 97
1991 $ 111 $ 144 $ 126
1992 $ 162 $ 191 $ 136
1993 $ 168 $ 199 $ 150
1994 $ 169 $ 198 $ 152
</TABLE>
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<PAGE>
PROPOSAL 2:--APPROVAL OF THE SOUTHERN NATIONAL
CORPORATION 1995 OMNIBUS STOCK INCENTIVE PLAN
The Board of Directors proposes that the shareholders approve the Southern
National Corporation 1995 Omnibus Stock Incentive Plan (the "Stock Plan"),
adopted by the Board of Directors on April 10, 1995, subject to the approval of
the Corporation's shareholders. The approval of the Stock Plan requires the
affirmative vote of the holders of a majority of the shares of the
Corporation's Common Stock present or represented by properly executed and
delivered proxies at the meeting. Abstentions and shares held in street name
voted as to any matter at the meeting will be included in determining the
number of votes present or represented at the meeting.
The Stock Plan is intended to provide the Compensation Committee of the Board
of Directors maximum flexibility to meet the evolving needs of the Corporation
in providing stock-based compensation to its key executives over the next ten
years, in order to align more closely the interests of corporate management
with those of shareholders. The Stock Plan may be used to grant stock options
and stock appreciation rights, and to award restricted stock and performance
shares. The Stock Plan may also be used to grant stock options in conjunction
with mergers. The Stock Plan therefore eliminates the need and expense of
registering additional shares of the Corporation's Common Stock each time the
Corporation engages in a merger transaction.
For several years the Corporation has provided stock-based compensation
opportunities to executives and key employees under the Corporation's
Nonqualified Stock Option Plan (the "Nonqualified Plan"), Incentive Stock
Option Plan (the "ISO Plan") and the Corporation's Omnibus Stock Incentive Plan
adopted in 1994 (the "Prior Stock Plan"). The Board of Directors believes that
the Nonqualified Plan and the ISO Plan and the Prior Stock Plan have served
their purpose of promoting a greater identity of interests between participants
and shareholders and that similar opportunities should be continued under the
Stock Plan. However, the number of shares available for issuance under the
existing plans has been depleted largely as a result of the BB&T Merger, which
provided for the grant of replacement options to purchase the Corporation's
Common Stock to holders of options to purchase BB&T Financial Common Stock. If
the shareholders approve the Stock Plan, additional awards may, but are not
required to, be made under the Nonqualified Plan, the ISO Plan and the Prior
Stock Plan, until there are no remaining authorized shares under these plans.
The following paragraphs summarize the principal features of the Stock Plan.
This summary is subject, in all respects, to the terms of the Stock Plan. The
Corporation will provide promptly, upon request and without charge, a copy of
the full text of the Stock Plan to each person to whom a copy of this proxy
statement is delivered. Requests should be directed to: Mr. Jerone C. Herring,
Secretary, Southern National Corporation, 200 West Second Street, Winston-
Salem, North Carolina 27101.
SUMMARY OF THE STOCK PLAN
The Board of Directors believes that the Stock Plan will benefit the
Corporation by (i) assisting it in recruiting and retaining employees with
ability and initiative, (ii) providing greater incentive for employees of the
Corporation or its related entities and (iii) associating the interests of
employees with those of the Corporation, its related entities, and its
shareholders through opportunities for increased stock ownership. A maximum of
2,000,000 shares of Common Stock may be issued under the Stock Plan, subject to
a 3% replenishment percentage. However, in no event shall the number of shares
authorized for issuance under the Stock Plan exceed 10% of authorized and
outstanding Common Stock as of the time of any replenishment adjustment.
The Compensation Committee of the Board of Directors will administer the Stock
Plan. The Compensation Committee may delegate its authority to administer the
Stock Plan to one or more officers of the Corporation. The Compensation
Committee, however, may not delegate its authority with respect to individuals
who are subject to Section 16 of the Securities Exchange Act of 1934 ("Section
16"). As used in this summary, the term "Administrator" means the Compensation
Committee and any delegate, as appropriate.
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Each employee of the Corporation or a related entity is eligible to
participate in the Stock Plan. Certain non-employees are eligible to
participate in the Stock Plan in conjunction with merger and acquisition
transactions. The Administrator will select the individuals who will
participate in the Stock Plan ("Participants") but no person may participate in
the Stock Plan while he is a member of the Compensation Committee. The
Administrator may, from time to time, grant stock options, stock appreciation
rights ("SARs"), stock awards, or performance shares to Participants. Although
the Stock Plan allows several different kinds of awards, the Compensation
Committee intends to continue its past practice of providing stock-based
compensation opportunities in the form of stock options on substantially the
same basis as under the Nonqualified Plan and the ISO Plan.
Options granted under the Stock Plan may be incentive stock options ("ISOs")
or nonqualified stock options. A stock option entitles the Participant to
purchase shares of Common Stock from the Corporation at the option price. The
option price will be fixed by the Administrator at the time the option is
granted, but the price cannot be less than 100% of the shares' fair market
value on the date of grant in the case of ISOs, and not less than 85% of the
shares' fair market value on the date of grant in the case of nonqualified
stock options. The Corporation's existing Nonqualified Plan also permits the
option price of nonqualified stock options to be not less than 85% of the
shares' fair market value on the date of grant. However, in the past no
nonqualified stock options have been granted for less than 100% of the shares'
fair market value on the date of grant, and although available as an option,
the Corporation does not anticipate that this practice will change in the
future. The option price may be paid in cash, with shares of Common Stock, or
with a combination of cash and Common Stock.
SARs generally entitle the Participant to receive the lesser of (i) the excess
of the fair market value of a share of Common Stock on the date of exercise
over the initial value of the SAR or (ii) the initial value. The initial value
of the SAR is determined by the Administrator at the time of the grant. The
amount payable upon the exercise of an SAR may be paid in cash, Common Stock,
or a combination of the two.
SARs may be granted in relation to option grants ("Corresponding SARs") or
independently of option grants. The difference between these two types of SARs
is that to exercise a Corresponding SAR, the Participant must surrender
unexercised that portion of the stock option to which the Corresponding SAR
relates.
Participants may be awarded shares of Common Stock pursuant to a restricted
stock award. The Administrator, in its discretion, may prescribe that a
Participant's rights in a restricted stock award shall be nontransferable or
forfeitable, or both, unless certain conditions are satisfied. These conditions
may include, for example, a requirement that the Participant continue
employment with the Corporation or a related entity for a specified period or
that the Corporation, a related entity, or the Participant achieve stated
objectives. It is anticipated that the vesting period of a restricted stock
award will be no less than three years, or no less than one year in the case of
performance-based restricted stock awards.
The Stock Plan also provides for the award of performance shares. A
performance share award entitles the Participant to receive a payment equal to
the fair market value of a targeted number of shares of Common Stock if certain
performance standards are met. The Administrator will prescribe the
requirements that must be satisfied before a performance share award is earned.
The performance share requirements may include, for example, a requirement that
the Participant continue employment with the Corporation or a related entity
for a specified period or that Corporation, a related entity, or the
Participant achieve stated objectives. A performance share award will be earned
based on the performance share value during each of the five valuation periods
(calendar years) following the date of the award. To the extent that
performance shares are earned, the obligation may be settled in cash, in Common
Stock or by a combination of the two.
All awards made under the Stock Plan will be evidenced by written agreements
between the Corporation and the Participant. A maximum of 30,000 shares may be
granted to a Participant in any calendar year. The share limitation and the
terms of outstanding awards shall be adjusted, as the Compensation Committee
deems appropriate, in the event of a stock dividend, stock split, combination,
reclassification, recapitalization, or other similar events.
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No option, SAR or stock award may be granted and no performance shares may be
awarded under the Stock Plan after April 9, 2005. The Board of Directors may
terminate the Stock Plan sooner without further action by shareholders. The
Board of Directors also may amend the Stock Plan except that no amendment that
increases the number of shares of Common Stock that may be issued under the
Stock Plan or changes the class of individuals who may be selected to
participate in the Stock Plan will become effective until it is approved by
shareholders.
Neither the number of individuals who will be selected to participate in the
Stock Plan nor the type or size of awards that will be approved by the
Administrator can be determined. The Corporation is also unable to determine
the number of individuals who would have participated in the Stock Plan or the
type or size of awards that would have been made under the Stock Plan had it
been in effect in 1994.
FEDERAL INCOME TAX CONSEQUENCES
The Corporation has been advised by counsel regarding the federal income tax
consequences of the Stock Plan. No income is recognized by a Participant at the
time an option is granted. If the option is an ISO, no income will be
recognized upon the Participant's exercise of the option. Income is recognized
by a Participant when he disposes of shares acquired under an ISO. The exercise
of a nonqualified stock option generally is a taxable event that requires the
Participant to recognize, as ordinary income, the difference between the
shares' fair market value and the option price.
No income is recognized upon the grant of an SAR. The exercise of an SAR
generally is a taxable event. The Participant generally must recognize income
equal to any cash that is paid and the fair market value of Common Stock that
is received in settlement of an SAR.
The Participant will recognize income on account of a stock award on the first
day that the shares are either transferable or not subject to a substantial
risk of forfeiture. The amount of income recognized by the Participant is equal
to the fair market value of the Common Stock received on that date.
The Participant will recognize income on account of the settlement of a
performance share award. The Participant will recognize income equal to any
cash that is paid and the fair market value of Common Stock (on the date that
the shares are first transferable or not subject to a substantial risk of
forfeiture) that is received in settlement of the award.
The employer (either the Corporation or a related entity) will be entitled to
claim a federal income tax deduction on account of the exercise of a
nonqualified option or SAR, the vesting of a stock award, and the settlement of
a performance share award. The amount of the deduction is equal to the ordinary
income recognized by the Participant. The employer will not be entitled to a
federal income tax deduction on account of the grant or the exercise of an ISO.
The employer may claim a federal income tax deduction on account of certain
dispositions of Common Stock acquired upon the exercise of an ISO.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE SOUTHERN
NATIONAL CORPORATION 1995 OMNIBUS STOCK INCENTIVE PLAN.
PROPOSAL 3--APPROVAL OF THE SAVINGS AND THRIFT PLAN FOR EMPLOYEES OF BRANCH
BANKING AND TRUST COMPANY
The Board of Directors proposes that the shareholders approve the Savings and
Thrift Plan for Employees of Branch Banking and Trust Company ("Thrift Plan"),
adopted by the Board of Directors on February 16, 1995, subject to the approval
of the Corporation's shareholders. The approval of the Thrift Plan requires the
affirmative vote of the holders of a majority of the shares of the
Corporation's Common Stock present or represented by properly executed proxies
at the meeting. Abstentions and shares held in street name voted as to any
matter at the meeting will be included in determining the number of votes
present or represented at the meeting.
I-24
<PAGE>
The Board of Directors allocated 3,000,000 shares of the Corporation's common
stock to be issued pursuant to the provisions of the Thrift Plan. The Thrift
Plan was adopted in anticipation of the BB&T Merger which occurred on February
28, 1995. As a result of the BB&T Merger, the Corporation has employed KPMG
Peat Marwick LLP to conduct a study of all compensation plans and systems of
the Corporation, which study will be completed in the second quarter of 1995.
Pending completion of that study and implementation of the recommendations, the
Corporation anticipates that for the balance of 1995 former employees of the
BB&T Bank Subsidiaries will participate in the Thrift Plan, which is a plan
identical to the primary employee benefit plan of BB&T prior to the BB&T
Merger. Employees of the Corporation, who were employees of the Corporation or
the SNC Bank Subsidiaries prior to the BB&T Merger, will participate in the
Southern National Corporation Employee Stock Ownership Plan ("ESOP") for the
balance of 1995. Beginning in January of 1996, all employees of the Corporation
will participate in the same employee benefit plans, which may be the Thrift
Plan, the ESOP, or a new plan to be adopted during 1995. The directors
allocated sufficient shares to be utilized pursuant to the Thrift Plan in the
event it is selected as the continuing employee benefit plan for the
Corporation.
The Thrift Plan is being submitted to shareholders for approval in order to
enable participants to avail themselves of an exemption from the short-swing
profit liability provisions under Section 16(b) of the Exchange Act and
therefore to avoid liability to the Corporation for profits earned in
transactions involving stock purchased pursuant to the Thrift Plan for such
officer's account. This exemption for certain shareholder-approved employee
benefit plans also requires that certain amendments to such plans be approved
by shareholders in order for the exemption to remain applicable. Any such
future amendments will be submitted to the shareholders of the Corporation in
order that participants will be able to continue to avail themselves of the
exemption.
The Thrift Plan is designed to assist the Corporation in attracting and
retaining qualified officers and employees and to assist the officers and
employees of the Corporation in accumulating funds that will supplement their
retirement income. The Thrift Plan is intended to qualify as a tax deferred
plan under Section 401(k) of the Code. The assets of the Thrift Plan are
administered by Branch Banking and Trust Company, as Trustee ("Trustee"),
pursuant to a trust agreement with the Corporation.
The following paragraphs summarize the material features of the Thrift Plan
and federal income tax consequences to participants under the Thrift Plan. This
summary is not intended to be a complete description of the Thrift Plan, and is
subject, in all respects to the terms of the Thrift Plan. The Corporation will
provide promptly, upon request and without charge, a copy of the full text of
the Thrift Plan to each person to whom a copy of this proxy statement is
delivered. Requests should be directed to: Jerone C. Herring, Secretary,
Southern National Corporation, 200 West Second Street, Winston-Salem, North
Carolina 27101.
The following table presents information relating to contributions in 1994 by
BB&T Financial to the Thrift Plan Accounts of the BB&T Named Executives and
groups of persons identified:
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
Savings and Thrift Plan for Employees of BB&T
----------------------------------------------------
Name and Position Dollar Value ($) Number of Units
- ----------------- ------------------------ ----------------------
<S> <C> <C>
John A. Allison IV, $ 15,449 --
Chairman & Chief
Executive Officer
Henry G. Williamson, Jr. 12,400 --
Chief Administrative
Officer
Kelly S. King, 9,086 --
Senior Executive Vice
President
</TABLE>
I-25
<PAGE>
<TABLE>
<CAPTION>
Savings and Thrift Plan for Employees of BB&T
----------------------------------------------------
Name and Position Dollar Value ($) Number of Units
- ----------------- ------------------------- ----------------------
<S> <C> <C>
W. Kendall Chalk 6,160 --
Senior Executive Vice
President
Scott E. Reed 6,160 --
Senior Executive
Vice President and
Treasurer
Executive Group 49,255 --
Non-Executive Director 13,791 --
Group
Non-Executive Officer 3,126,311 --
Employee Group
</TABLE>
SUMMARY OF THE THRIFT PLAN
The Board of Directors believes that the Thrift Plan will benefit the
Corporation by (i) assisting it in recruiting and retaining employees with
ability and initiative, (ii) providing greater incentive for employees of the
Corporation or its related entities and (iii) associating the interests of
employees with those of the Corporation, its related entities, and its
shareholders by providing participants with an opportunity to contribute funds
on a tax deferred basis for purposes of supplementing retirement income and
providing additional contributions from the Corporation on a matching basis.
Participants may defer from 1% to 16% of base salary in whole percentage
increments, up to a maximum dollar amount established each year by the
Internal Revenue Service. Participants may change the percentage of salary
which is being deferred by written notice to the Plan Administrator and at the
option of the participant may stop participating. The Corporation will match a
percentage of each participant's contributions. The Corporation will
contribute 100% of the first 2% of a participant's contribution and 50% of the
next 4% of a participant's contribution. The Corporation does not match any
contributions over 6% of a participant's salary. The Corporation's matching
contributions will be deposited in a separate account in the participant's
name and will be invested in the same manner as participant's contributions.
The Thrift Plan is administered by the Compensation Committee ("Committee")
of the Board of Directors of the Corporation. The Committee has full authority
and sole discretion to administer, interpret and construe the Thrift Plan,
including setting rules and regulations relating to the Thrift Plan and making
determinations and taking actions necessary for the administration of the
Thrift Plan. The Corporation has entered into a trust agreement with Branch
Banking and Trust Company as Trustee for purposes of administering all funds
held pursuant to the Thrift Plan and providing and administering investment
alternatives available under the Thrift Plan.
An employee of Branch Banking and Trust Company or any related employer that
has adopted the Thrift Plan, with the written consent of the Directors of the
Corporation is eligible to participate in the Thrift Plan following the
completion of one year of service and attainment of age 21. Special rules are
contained in the Thrift Plan for rollover contributions and certain money
transferred into the Thrift Plan from other qualified plans. The Thrift Plan
contains definitions for determining a year of service, beginning dates of
participation, and other terms related to determination of eligibility. All
participants in the Thrift Plan are 100% vested at all times in funds
contributed by the participant. In general, participants are 100% vested in
matching funds provided by the Corporation unless the participant has engaged
in misconduct (as defined in the Thrift Plan) toward the Corporation.
Participants may choose to have their contributions and matching
contributions invested among five funds, in increments of 5%. The available
funds are:
MONEY MARKET FUND. This fund consists of short-term fixed income investments
such as U.S. Treasury Bills, Certificates of Deposit and Money Market Funds.
This fund is intended to protect investment funds and produce a competitive
return.
I-26
<PAGE>
FIXED INCOME FUND. This fund is invested in securities that have a fixed rate
of return for a specified period of time and includes bonds, debentures,
mortgages, preferred stock, and other type investments. The fund is intended
to protect invested funds, produce a competitive return and experience some
principal gains or losses.
EQUITY FUND. This fund is invested mainly in common or capital stocks and in
preferred stocks or bonds that can be converted into common or capital stock.
This fund is designed for investment growth over the long term.
SOUTHERN NATIONAL CORPORATION COMMON STOCK FUND. This fund is invested solely
in the common stock of Southern National Corporation. The fund is intended to
produce investment growth over the long term.
BANK INVESTMENT CONTRACT. This fund offers a fixed rate of return for a
specified period of time. The objective of the fund is to protect invested
funds and provide an established rate of return.
If the Thrift Plan is approved by shareholders, the Corporation will be
authorized to issue up to 3,000,000 shares of its common stock pursuant to the
provisions of the Thrift Plan. Such stock may be increased by proportionate
and equal adjustments to be made by the Committee upon a reorganization,
recapitalization, stock split, stock dividend, merger, consolidation, sale of
assets or certain similar events affecting the Corporation or its
subsidiaries. The Corporation's common stock made available pursuant to the
Thrift Plan is from the authorized and unissued shares of the Corporation.
The Thrift Plan is intended to give participants the opportunity of saving
for retirement, therefore payment of a participant's account generally begins
at normal retirement age, which is defined as age 65. A participant may elect
to retire early, which is defined as between age 55 and 65. A participant may
also elect to delay retirement beyond normal retirement age, but must begin to
receive benefits by age 70. Upon attaining normal, early or delayed
retirement, a participant may elect to receive payments in installments over a
period of up to 15 years, a lump sum or a combination of these alternatives.
If a participant terminates employment before attaining retirement age, the
value of the vested account may be paid and if the value is less than
$3,500.00 will be paid. If a participant dies prior to retirement or receipt
of all monies in their account, the balance of the account will be paid to the
participant's named beneficiary or estate. While the Thrift Plan is designed
as a retirement plan, certain withdrawals can be made during employment such
as hardship distributions and loans.
The Thrift Plan will continue in effect until terminated by the Corporation
(as provided in the Thrift Plan). The Corporation may amend the Thrift Plan,
but such amendment may not cause any part of the trust fund to be used for
purposes other than the exclusive benefit of participants and beneficiaries.
If the Thrift Plan is terminated by the Corporation, participants will receive
full payment of account balances. Any amendment to the Thrift Plan will be
submitted to the shareholders of the Corporation for ratification if such
ratification is necessary to comply with the requirements of Section 16 of the
Exchange Act.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the federal income tax treatment under the Code
as of the date of this Proxy Statement. The federal income tax laws pertaining
to the Thrift Plan are highly technical and such laws are subject to change at
any time. The following summary is not intended to be exhaustive and does not
discuss any state and local taxes that may be relevant to the Thrift Plan.
All funds contributed by a participant and matching contributions from the
Corporation are not subject to federal income tax so long as the funds are
held by the trustee of the Thrift Plan, up to a maximum dollar amount
established each year by the Internal Revenue Service. As long as the funds
remain invested pursuant to the terms of the Thrift Plan, no federal income
tax is imposed on the funds or the earnings thereon. When a participant
receives a distribution from their account, generally the amount received is
then subject to federal income taxes. If a distribution is received prior to a
participant attaining age 59, the distribution may be subject to an additional
surtax. In addition, when a participant attains age 70, at least a minimum
amount of benefits must be distributed and accordingly will become subject to
federal income taxes at that time.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE SAVINGS AND
THRIFT PLAN FOR EMPLOYEES OF BRANCH BANKING AND TRUST COMPANY.
I-27
<PAGE>
PROPOSAL 4--APPROVAL OF THE SPECIAL NON-EMPLOYEE
DIRECTORS STOCK OPTION PLAN
GENERAL
The Board of Directors proposes that the shareholders approve the Special
Non-Employee Directors Stock Option Plan ("Director Plan"), adopted by the
Board of Directors on February 16, 1995, subject to the approval of the
Corporation's shareholders. The approval of the Director Plan requires the
affirmative vote of the holders of a majority of the shares of the
Corporation's Common Stock present and represented by properly executed
proxies at the meeting. Abstentions and shares held in street name voted as to
any matter at the meeting will be included in determining the number of votes
present or represented at the meeting.
The Director Plan was initially adopted by the Board of Directors of BB&T
Financial on February 25, 1992 and by the shareholders of BB&T Financial on
April 28, 1992. Prior to the BB&T Merger, the Corporation adopted the Director
Plan so that existing grants of options to purchase BB&T Financial common
stock held by BB&T Financial non-employee directors could be converted into
options to purchase the Corporation's Common Stock pursuant to the Director
Plan.
The Director Plan includes (a) authorizing the use of 73,247 shares of the
Corporation's Common Stock to cover options granted pursuant to the Director
Plan, and (b) permitting non-employee directors to elect to receive stock
options in lieu of cash compensation. The Board of Directors believes that
stock options provide a valuable incentive for attracting, retaining, and
motivating capable non-employee directors and encouraging them to acquire a
proprietary and vested interest in the growth and performance of the
Corporation. The Director Plan should also generate an increased incentive for
directors to contribute to the Corporation's future success and prosperity,
thereby enhancing the value of the Corporation for its shareholders.
The following paragraphs summarize the principal features of the Director
Plan, as approved by the Board of Directors of the Corporation, and as adopted
and administered by BB&T Financial. This summary is subject, in all respects,
to the terms of the Director Plan. The Corporation will provide promptly, upon
request and without charge, a copy of the full text of the Director Plan to
each person to whom a copy of this proxy statement is delivered. Requests
should be directed to: Mr. Jerone C. Herring, Secretary, Southern National
Corporation, 200 West Second Street, Winston-Salem, North Carolina 27101.
SUMMARY OF THE DIRECTOR PLAN
The Director Plan authorizes the grant of nonqualified stock options.
"Nonqualified" stock options are not intended to qualify as "incentive" stock
options under Section 422 of the Code. Stock options entitle the holder to
purchase the Corporation's Common Stock at an exercise price and subject to
such other terms as are set forth in the option agreement.
The Director Plan authorizes 73,247 shares of the Corporation's Common Stock
for grant pursuant to options. If a stock option is terminated without
issuance of shares, the unissued shares subject to such award shall then be
available for grant under the Director Plan. The number and kind of shares
authorized under the Director Plan and the number and kind of shares and
exercise prices of outstanding options shall be appropriately adjusted for any
increase or decrease in the number of outstanding shares resulting for certain
corporate events, such as a stock dividend or a subdivision, combination, or
reclassification of shares, as may be necessary to maintain the proportionate
interest of the option holder.
The award of options under the Director Plan is limited to non-employee
directors of the Corporation. The following former BB&T Financial Directors
who have become Corporation Directors have had options to purchase BB&T
Financial common stock converted into options to purchase the indicated number
of shares of the Corporation's Common Stock pursuant to the Director Plan: Mr.
Barringer (4,685 shares), Mr. Dudley (3,812 shares), Mr. Efird (4,685 shares),
Mr. Fenn (4,685 shares), Dr. Lathem (4,685 shares), Mr. Maynard (4,685
shares), Mr. Peters (4,685 shares) and Mr. Player (4,685 shares).
I-28
<PAGE>
The Director Plan has been administered by a committee of the BB&T Financial
Board of Directors and will be administered by a committee of the Corporation's
Board of Directors ("Committee"). The Committee has no discretion in
determining who will receive an option or the number of shares allocated to a
participating director under the Director Plan or the terms of any such option.
The terms are set forth in the Director Plan and are summarized below.
The Director Plan provides that payment of the exercise price of options will
be made in cash or, with the consent of the Committee, shares of the
Corporation's Common Stock surrendered at its market value as of the date of
exercise.
Existing grants of options under the Director Plan were granted to any non-
employee director who filed with BB&T Financial an election to receive stock
options in lieu of all or a portion of the annual retainer to be earned by him.
Such election was to be made at the time of election for new directors and
prior to December 31 each year for current directors.
If a director's service is terminated for any reason other than death or
disability, the director will have the right to exercise any option to the
extent it was exercisable at the date of such termination of service. If a
director's service is terminated by death or disability, the director or his
representative will have the right to exercise any option to the extent it was
exercisable at the date of such termination of service and with respect to any
option or portion thereof that was not exercisable, the director will have the
right to exercise a prorated number of shares. The right to exercise an option
to such extent will continue for the earlier of three years from the date of
the director's termination or the expiration of the original option term.
The Director Plan provides that upon a change of control, as defined below,
all outstanding options shall become immediately exercisable. A "change of
control" shall be deemed to have occurred if (i) any person is or becomes the
beneficial owner directly or indirectly of securities of the Corporation
representing 51% or more of the combined voting power of the Corporation's then
outstanding securities; (ii) a change in the composition of the majority of the
Board of Directors; or (iii) the shareholders of the Corporation approve a
merger, consolidation or sale of substantially all of the assets of the
Corporation.
The Board of Directors may amend or discontinue the Director Plan at any time,
provided that no amendment may impair the rights of an option holder without
his consent, and further provided that any amendment shall be subject to
approval of shareholders if such approval is necessary to comply with any tax
or regulatory requirement.
FEDERAL INCOME TAX CONSEQUENCES
The following are the federal tax consequences generally arising with respect
to awards granted under the Director Plan. With respect to options granted in
lieu of cash compensation under the Directors Plan, it is intended that neither
the election to receive such an option nor the grant of such an option will
create any immediate tax consequences for the recipient or the Corporation.
Upon exercise of an option, if the optionee makes a special election under
Section 83(b) of the Code, the optionee will recognize ordinary income in the
amount by which the market value of the common stock purchased, valued on the
date of exercise, exceeds the exercise price, and the Corporation will be
entitled to a deduction of the same amount. If the optionee does not make such
an election, the optionee will recognize ordinary income on the first date
following exercise of such option on which the sale of the Common Stock
acquired thereby is deemed not to be subject to the "short swing profit"
recovery provisions of Section 16(b) of the Exchange Act. On such date, the
optionee will recognize ordinary income in the amount by which the market value
of the common stock purchased, valued on such date, exceeds the exercise price,
and the Corporation will be entitled to a deduction of the same amount.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE SPECIAL NON-
EMPLOYEE DIRECTORS STOCK OPTION PLAN.
PROPOSAL 5--RATIFICATION OF ARTHUR ANDERSEN LLP AS
AUDITORS FOR 1995
The Board of Directors has selected the firm of Arthur Andersen LLP as
independent auditors to examine the books of the Corporation and subsidiaries
for the year 1995, and to report on the consolidated balance
I-29
<PAGE>
sheets, statements of income and other related statements of the Corporation
and subsidiaries. Arthur Andersen LLP has served as independent auditors for
the Corporation continuously since 1966. Representatives of Arthur Andersen LLP
are expected to be present at the Annual Meeting and will be available to
respond to questions posed by the shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE PROPOSAL TO
RATIFY ARTHUR ANDERSEN LLP AS THE CORPORATION'S AUDITORS FOR 1995.
ANNUAL REPORT ON FORM 10-K
The Corporation is furnishing to each person solicited a copy of its annual
report on form 10-K for the year ended December 31, 1994, as filed with the
Securities and Exchange Commission. Exhibits to such Form 10-K are not
included, but the exhibits may be requested and a reasonable expense may be
charged for the furnishing of exhibits to the Form 10-K. Such request should be
addressed to Scott E. Reed, Executive Vice President--Chief Financial Officer,
200 West Second Street, Winston Salem, North Carolina 27101.
PROPOSALS FOR 1996 ANNUAL MEETING
Under regulations of the Securities and Exchange Commission, any shareholder
desiring to make a proposal to be acted upon at the 1996 annual meeting of
shareholders must present such proposal to the Corporation at its principal
office in Winston-Salem, North Carolina by December 22, 1995 for the proposal
to be considered for inclusion in the Corporation's proxy statement.
In addition to any other applicable requirements, for business to be properly
brought before the annual meeting by a shareholder even if the proposal is not
to be included in the Corporation's proxy statement, the Corporation's bylaws
provide that the shareholder must give timely notice in writing to the
Secretary of the Company at least 60 days prior to the date one year from the
date of the immediately preceding annual meeting. As to each matter, the notice
must contain (i) a brief description of the business desired to be brought
before the annual meeting, (ii) the name, record address of, and class and
number of shares beneficially owned by, the shareholder proposing such business
and (iii) any material interest of the shareholder in such business.
OTHER BUSINESS
The Board of Directors knows of no other matter to come before the Annual
Meeting of Shareholders. However, if any other matter requiring a vote of the
shareholders should arise, it is the intention of the persons named in the
accompanying proxy to vote such proxy in accordance with their best judgment.
By Order of the Board of Directors
/s/ John A. Allison IV
John A. Allison IV
Chairman and Chief Executive Officer
Dated: April 21, 1995
I-30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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, 1994
COMMISSION FILE NUMBER: 1-10853
----------------
SOUTHERN NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NORTH CAROLINA 56-0939887
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
200 WEST SECOND STREET 27101
WINSTON-SALEM, NORTH CAROLINA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
----------------
(910) 773-7500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
------------------- ------------------------------
COMMON STOCK, $5 PAR VALUE NEW YORK STOCK EXCHANGE
DEPOSITARY SHARES, STATED VALUE $25 NEW YORK STOCK EXCHANGE
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this
Form 10-K X
-----
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 Southern National Corporation voting common
stock held by non-affiliates as of March 1, 1995 was $2.2 billion and the
number of shares outstanding at March 1, 1995 was 102,114,848.
Portions of the Proxy Statement for the 1995 Annual Meeting of Shareholders
are incorporated by reference into Part III of this Form 10-K.
This Form 10-K has 80 pages. The "Exhibit Index" begins on page 75 of the
sequential numbering system.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE INDEX
<TABLE>
<CAPTION>
PAGE
--------------
<C> <C> <S> <C>
PART I Item 1 Business...................................... II-4
Item 2 Properties.................................... II-17,II-55
Item 3 Legal Proceedings............................. II-64
Item 4 Submission of Matters to a Vote of
Shareholders.................................
A special meeting of the shareholders of
Southern National Corporation was held on De-
cember 15, 1994 to consider and vote upon the
following matters:
To approve an Agreement and Plan of
Reorganization between Southern National
Corporation ("Southern National") and BB&T
Financial Corporation ("BB&T"), dated as of
July 29, 1994, and amended and restated as of
October 22, 1994, and a related Plan of
Merger, dated as of July 29, 1994, and
amended and restated as of October 22, 1994,
pursuant to which: (i) BB&T would merge with
and into Southern National (the "Merger");
(ii) each outstanding share of BB&T common
stock, $2.50 par value per share, would be
converted into the right to receive 1.45
shares of Southern National common stock,
$5.00 par value per share ("Southern National
Common Stock"), with cash in lieu of the
issuance of any fractional share interest;
(iii) each outstanding stock option granted
by BB&T under one of its benefit plans,
whether or not exercisable, would be
converted into and become a right with
respect to Southern National Common Stock;
(iv) the Amended and Restated Articles of
Incorporation of Southern National would be
amended to increase the number of authorized
shares of Southern National Common Stock from
120,000,000 shares to 300,000,000 shares; and
(v) the Board of Directors of Southern
National would be increased from 23 to 24
members and 12 persons designated by BB&T
would become members of the Board of
Directors of Southern National (replacing 11
of the current members who would resign upon
consummation of the Merger and filling the
one seat created by the increase in the size
of the Southern National Board).
Of shares represented by proxy there were:
Votes for 31,292,024 (88.79%); Votes against
3,123,232 (8.96%); Abstain 826,782 (2.35%) as
a percentage of the shares represented by
proxy at the meeting. There were 43,488,593
shares eligible to vote.
PART II Item 5 Market for the Registrant's Common Stock and
Related Shareholder Matters.................. II-36
Item 6 Selected Financial Data....................... II-39
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... II-18
Item 8 Financial Statements and Supplementary Data... II-40
Consolidated Statements of Condition at
December 31, 1994 and 1993................... II-42
Consolidated Statements of Operations for each
of the years in the three-year period ended
December 31, 1994............................ II-43
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
December 31, 1994............................ II-45
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<C> <C> <S> <C>
Notes to Consolidated Financial Statements....... II-46
Report of Independent Public Accountants......... II-41
Quarterly Financial Summary of 1994 and 1993..... II-38
Item 9 There have been no disagreements with accountants
on accounting and financial disclosures
PART III Item 10 Directors and Executive Officers of the
Registrant...................................... *
Item 11 Executive Compensation........................... *
Item 12 Security Ownership of Certain Beneficial Owners
and Management.................................. *
Item 13 Certain Relationships and Related Transactions... *
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 filed a Form 8-K under Item 5
on February 24, 1995 which included consolidated
financial statements for BB&T and proforma
condensed financial information relating to
Southern National's proposed merger with BB&T.
Southern National filed a Form 8-K under Item 2
on March 14, 1995 to report the completion of
the merger of the bank holding companies of BB&T
and Southern National, effective February 28,
1995.
* Information is incorporated by reference to
Registrant's Proxy Statement for the 1995 Annual
Meeting of Shareholders filed as an exhibit to
this Form 10-K.
</TABLE>
II-3
<PAGE>
BUSINESS
GENERAL
Southern National Corporation ("Southern National" or "SNC" or the
"Corporation") is a multi-bank holding company headquartered in Winston-Salem,
North Carolina. Southern National conducts its operations in North Carolina
primarily through its commercial bank subsidiaries and, to a lesser extent,
through its savings bank and other subsidiaries. Substantially all of Southern
National's loans are to businesses and individuals in the Carolinas. Southern
National has no foreign loans and no loans that can be defined as highly-
leveraged transactions.
Subsidiaries
Southern National Bank of North Carolina ("SNBNC"), Southern National's
largest subsidiary, was founded in 1897 and currently operates through 155
banking offices in 77 cities and towns throughout North Carolina. SNBNC focuses
on providing a wide range of banking services in its local market for retail
and commercial customers, including small and mid-size businesses, public
agencies and local governments, trust customers and individuals. Southern
National Leasing Corp., a wholly-owned subsidiary of SNBNC, offers lease
financing to commercial businesses and municipal governments. Southern National
Investment Services, Inc., also a wholly-owned subsidiary of SNBNC, offers
customers investment alternatives, including discount brokerage services,
fixed-rate and variable-rate annuities, mutual funds and government and
municipal bonds.
Southern National Bank of South Carolina ("SNBSC") entered the South Carolina
banking market in 1986. SNBSC serves South Carolina through 78 banking offices
in 39 cities and towns. SNBSC focuses on providing a wide range of banking
services in its local market for retail and commercial customers, including
small and mid-size businesses, public agencies, local governments, trust
customers and individuals.
Southern National operates a savings bank in North Carolina, SNB Savings
Bank, Inc., SSB ("SSB"), which is engaged primarily in the origination of
mortgage loans on residential real estate and, to a lesser degree, other
consumer and commercial loans. SSB has two subsidiaries, Southern National
Insurance Services, Inc., which offers credit life, credit accident and health,
life, and property and casualty insurance on an agency basis, and Prime Rate
Premium Finance Corporation, Inc., which was acquired in November 1994, and
provides insurance premium financing and services to customers in Virginia and
the Carolinas.
Southern National has another active subsidiary, Unified Investors Life
Insurance Company ("Unified"), which is a reinsurer and underwriter of certain
credit life and accident and health insurance policies written by a non-
affiliated insurance company in connection with certain loans made by the bank
and savings bank subsidiaries.
II-4
<PAGE>
As demonstrated in the following table, total assets at SNBNC have grown from
$4.5 billion at December 31, 1992 to $5.7 billion at December 31, 1994 on a
restated basis, which is a 27% increase. As originally reported, total assets
for SNBNC at December 31, 1992 were $3.8 billion. Total asset growth for SNBSC
was $246 million, or 10%. At December 31, 1992, originally reported total
assets for SNBSC were $596 million. SSB's total assets have grown $76.1 million
since December 31, 1992.
- --------------------------------------------------------------------------------
TABLE S-1
SELECTED FINANCIAL DATA OF SUBSIDIARIES
<TABLE>
<CAPTION>
SNBNC SNBSC SSB
-------------------------------- --------------------------------- --------------------------
1994 1993 1992 1994 1993 1992 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $5,747,856 $5,272,766 $4,542,361 $2,833,287 $2,828,278 $2,587,234 $314,420 $235,954 $238,349
Securities.............. 1,874,251 1,722,040 1,432,548 770,438 651,064 197,290 38,344 31,344 24,209
Loans and leases, net of
unearned income*....... 3,299,931 3,107,299 2,674,897 1,907,880 1,884,394 2,154,728 248,531 189,739 180,625
Deposits................ 4,040,241 4,109,218 3,792,976 1,935,985 2,019,479 2,002,120 198,354 196,559 199,169
Shareholder's equity.... 358,333 353,998 339,774 201,450 192,489 163,120 40,499 26,925 33,686
Net interest income..... 206,580 196,676 181,739 103,651 101,376 83,992 11,818 10,746 10,707
Provision for loan and
lease losses........... 2,057 8,780 11,857 4,062 22,353 13,680 1,126 305 134
Noninterest income...... 58,069 62,701 38,620 29,692 24,778 34,852 4,165 1,227 984
Noninterest expense..... 155,386 161,847 142,020 78,152 170,724 81,619 8,221 5,407 5,163
Net income (loss)....... 72,485 52,582 38,433 31,691 (76,703) 14,779 4,042 3,443 4,105
========== ========== ========== ========== ========== ========== ======== ======== ========
</TABLE>
- --------
* Includes loans held for sale.
- --------------------------------------------------------------------------------
Acquisitions
Profitability and market share have been enhanced through both internal
growth and acquisitions during recent years. Specifically, expansion has been
enhanced both by the acquisition of financial institutions (including thrift
institutions) and the purchase of deposits and assets from the Resolution Trust
Corporation ("RTC") in federally-assisted transactions.
During the three years ended December 31, 1994, Southern National completed
11 mergers and acquisitions of thrift institutions and financial services
companies. On February 28, 1995, Southern National merged with BB&T Financial
Corporation ("BB&T"), a multi-bank holding company with $11.0 billion in total
assets. Each BB&T shareholder received 1.45 shares of Southern National common
stock for each share of BB&T common stock. A total of 57.9 million shares of
Southern National common stock was issued in conjunction with the merger.
Competition
The banking business is highly competitive. 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.
MARKET AREA
Southern National's primary market area consists of North and South Carolina.
These states continue to support one of the most dynamic and fastest growing
economies in the nation. The area's employment base is diverse, consisting of
manufacturing industries, service, wholesale/retail, strong financial centers
and agricultural enterprises. With modern infrastructures and extensive
educational systems, Southern National's current market area is adequate to
support consistent growth in assets and deposits in the future. Even so,
management expects to continue aggressive growth strategies, including possible
expansion into neighboring
II-5
<PAGE>
states. The current market area includes numerous small communities that
Southern National seeks to serve. Management believes that maintaining a
community bank approach as asset size and available services grow will
strengthen the Corporation's ability to successfully move into new states and
communities and successfully be the bank of choice for small to mid-sized
commercial customers.
LENDING ACTIVITIES
Southern National focuses lending efforts on small to intermediate commercial
and industrial loans, one-to-four family residential mortgage loans and other
consumer loans. Typically, fixed-rate mortgage loans are sold in the secondary
mortgage market and adjustable-rate mortgages are retained for the portfolio.
Loan growth typically follows economic cycles and has been strong during 1994,
primarily in the commercial, financial and agricultural category. Management's
lending strategy is to establish market share in strategic cities and develop
customer relationships by providing quality products and services to the
customer base. Once the position is established, management focuses on small
business lending and retail banking through the branches to generate additional
growth.
- --------------------------------------------------------------------------------
TABLE S-2
COMPOSITION OF LOAN AND LEASE PORTFOLIO*
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans--
Commercial, financial
and agricultural..... $1,301,504 $ 804,281 $ 765,475 $ 731,508 $ 710,733
Real estate--
construction and land
development.......... 121,561 248,253 198,075 235,508 338,666
Real estate--mortgage. 3,055,865 2,904,525 2,667,561 2,328,827 2,305,139
Consumer.............. 701,862 692,848 825,761 840,408 808,975
---------- ---------- ---------- ---------- ----------
Loans held for
investment......... 5,180,792 4,649,907 4,456,872 4,136,251 4,163,513
Loans held for sale. 21,968 316,544 174,321 117,216 56,800
---------- ---------- ---------- ---------- ----------
Total loans....... 5,202,760 4,966,451 4,631,193 4,253,467 4,220,313
Leases.................. 304,544 225,312 170,358 122,394 115,473
---------- ---------- ---------- ---------- ----------
Total loans and
leases............. $5,507,304 $5,191,763 $4,801,551 $4,375,861 $4,335,786
========== ========== ========== ========== ==========
</TABLE>
- --------
* Balances are gross of unearned income.
- --------------------------------------------------------------------------------
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. Such loans
composed 33% of total loans and leases, excluding loans held for sale, at
December 31, 1994. 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" 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 all fixed-rate loans, and default risk by the
borrower, which is lessened through underwriting procedures and private
mortgage
II-6
<PAGE>
insurance. Southern National also purchases mortgage loans through various
correspondents and subjects them to the same underwriting and investment
strategies as loans originated in-house.
The Corporation also offers, as part of its Community Reinvestment Act
("CRA") program, more flexible underwriting criteria to broaden the
availability of mortgage loans in the communities Southern National serves. CRA
loans are available at loan-to-value ratios up to 98% for households with
incomes up to $40,000 and such loans do not require private mortgage insurance.
These loans are retained in the portfolio since they do not meet the
requirements to be sold in the secondary mortgage market.
Commercial Lending
Southern National's commercial lending program is generally targeted to serve
small to middle-market businesses with sales of $50 million or less, although
in-house limits do allow lending to larger customers. 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 with current yields including loan fees approaching prime plus
1%.
Construction Lending
Real estate construction loans composed 2% of the total portfolio at December
31, 1994. Such loans primarily reflect 12 month contract housing loans which
are intended to convert to permanent one-to-four family residential mortgage
loans upon completion of the construction. These loans have terms and options
similar to residential mortgage loans and allow a rate to be "locked in" by the
borrower during the 12 month construction period. The loans also allow a "float
down" option once during the term of the construction loan. Such loans are
priced higher than other residential mortgage loans because of the added float
down risk and the shorter term of the loan. Southern National also originates
commercial construction loans. These loans are usually to in-market developers,
businesses, individuals or real estate investors for the construction of
commercial structures in the Corporation's market area, including, but not
limited to, industrial facilities, apartments, shopping centers, office
buildings, hotels and warehouses. The properties may be for sale, lease or
owner-occupancy. The Corporation generally requires the borrower to make a
commitment to "take-out" the construction loan and typically requires the
property to be presold, preleased 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 customers and to any other
creditworthy candidates. Home equity loans are underwritten in amounts which
assure that the total loan-to-value ratio does not exceed 80%. Numerous forms
of unsecured loans, including revolving credits, are provided and various
installment loan products, including vehicle loans, are offered. Pricing of
such loans is strongly influenced by local competition. These loans are usually
priced as fixed-rate simple interest loans with variable rates on revolving
credits.
Leasing
Southern National provides leasing products and services in North and South
Carolina through Southern National Leasing Corp. ("Leasing"). Since Leasing is
a separate subsidiary, it is not restricted to North and South Carolina to
obtain business. Leases accounted for 6% of total loans and leases at December
31, 1994. 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 and tangible personal property. Leasing also solicits
business from municipal customers and is seeking to augment the existing
customer base with larger commercial customers.
II-7
<PAGE>
TABLE S-3
SELECTED LOAN MATURITIES AND INTEREST SENSITIVITY*
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------
COMMERCIAL,
FINANCIAL
AND REAL ESTATE:
AGRICULTURAL CONSTRUCTION TOTAL
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed rate:
1 year or less (2)...................... $ 138,481 $ 12,934 $ 151,415
1-5 years............................... 306,634 28,640 335,274
After 5 years........................... 49,457 4,619 54,076
---------- -------- ----------
Total................................. 494,572 46,193 540,765
---------- -------- ----------
Variable rate:
1 year or less (2)...................... 225,941 21,103 247,044
1-5 years............................... 500,298 46,728 547,026
After 5 years........................... 80,693 7,537 88,230
---------- -------- ----------
Total................................. 806,932 75,368 882,300
---------- -------- ----------
Total loans and leases (1).......... $1,301,504 $121,561 $1,423,065
========== ======== ==========
</TABLE>
- --------
* Balances are gross of unearned income.
(1) The table excludes:
<TABLE>
<C> <S> <C>
(i) consumer loans to individuals for household, family and
other personal expenditures........................... $ 701,862
(ii) real estate mortgage loans............................. 3,055,865
(iii) loans held for sale.................................... 21,968
(iv) leases................................................. 304,544
----------
$4,084,239
==========
</TABLE>
(2) Includes demand loans.
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, or rollovers, 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.
- --------------------------------------------------------------------------------
NONACCRUAL LOANS AND LEASES
It is Southern National's policy to place loans and leases on nonaccrual
status when full collection of principal and interest becomes doubtful, or when
any portion of principal or interest becomes 90 days past due, whichever occurs
first. When loans are placed on nonaccrual status, interest receivable is
reversed against interest income in the current period. Interest payments
received thereafter are applied as a reduction to the remaining principal
balance 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 the collectibility of principal or
interest is no longer doubtful.
II-8
<PAGE>
TABLE S-4
LOANS AND LEASES 90 DAYS PAST DUE AND STILL ACCRUING
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural....... $ 567 $ 130 $ 220 $ 311 $ 563
Real estate--all
categories............. 611 1,333 2,640 4,805 6,891
Consumer................ 2 652 622 601 604
Leases.................. -- -- -- -- 545
---------- ---------- ---------- ---------- ----------
Total................. $ 1,180 $ 2,115 $ 3,482 $ 5,717 $ 8,603
========== ========== ========== ========== ==========
Ratio of loans and
leases 90 days or more
past due and still
accruing to outstanding
loans and leases....... .02% .04% .07% .13% .20%
========== ========== ========== ========== ==========
Nonaccrual loans and
leases................. $ 22,194 $ 28,372 $ 60,430 $ 61,232 $ 51,870
========== ========== ========== ========== ==========
Total outstanding loans
and leases*............ $5,507,304 $5,191,763 $4,801,551 $4,375,861 $4,335,786
========== ========== ========== ========== ==========
</TABLE>
- --------
* Balances are gross of unearned income and include loans held for sale.
- --------------------------------------------------------------------------------
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 its loan portfolio and changes in the nature and volume of its loan
activity. This evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers the loan's risk rating,
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'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 S-5
ALLOCATION OF RESERVE BY CATEGORY
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
---------------- ---------------- ---------------- ---------------- ----------------
% 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Commercial, financial
and agricultural....... $10,959 24% $19,221 16% $11,835 16% $11,709 17% $ 8,036 17%
Real estate:
Construction and land
development........... 1,024 2 2,492 5 2,070 4 2,088 5 399 8
Mortgage............... 24,684 55 26,640 62 18,580 59 11,334 56 11,862 53
------- --- ------- --- ------- --- ------- --- ------- ---
Real estate--total..... 25,708 57 29,132 67 20,650 63 13,422 61 12,261 61
------- --- ------- --- ------- --- ------- --- ------- ---
Consumer................ 7,556 13 7,738 13 8,075 17 11,114 19 12,132 19
Leases.................. 906 6 1,218 4 1,313 4 1,610 3 1,021 3
Unallocated............. 25,444 -- 12,194 -- 10,151 -- 6,811 -- 2,897 --
------- --- ------- --- ------- --- ------- --- ------- ---
Total.................. $70,573 100% $69,503 100% $52,024 100% $44,666 100% $36,347 100%
======= === ======= === ======= === ======= === ======= ===
</TABLE>
II-9
<PAGE>
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 S-6
COMPOSITION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period................. $ 69,503 $ 53,840 $ 44,918 $ 36,347 $ 28,228
Charge-offs:
Commercial,
financial and
agricultural....... (3,279) (11,653) (8,168) (8,855) (7,971)
---------- ---------- ---------- ---------- ----------
Real estate--
construction and
land development... (165) (435) (706) (1,196) (283)
Real estate--
mortgage........... (4,690) (4,867) (8,218) (6,845) (7,463)
---------- ---------- ---------- ---------- ----------
Real estate--total.. (4,855) (5,302) (8,924) (8,041) (7,746)
---------- ---------- ---------- ---------- ----------
Consumer............ (4,625) (5,396) (8,627) (7,878) (7,678)
Lease receivables... (646) (771) (1,428) (1,308) (419)
---------- ---------- ---------- ---------- ----------
Total charge-offs. (13,405) (23,122) (27,147) (26,082) (23,814)
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial,
financial and
agricultural....... 2,373 1,728 1,154 1,028 798
---------- ---------- ---------- ---------- ----------
Real estate--
construction and
land development... 582 184 275 248 --
Real estate--
mortgage........... 1,529 994 2,907 513 225
---------- ---------- ---------- ---------- ----------
Real estate--total.. 2,111 1,178 3,182 761 225
---------- ---------- ---------- ---------- ----------
Consumer............ 1,332 1,542 1,208 1,044 1,091
Lease receivables... 294 149 188 116 126
---------- ---------- ---------- ---------- ----------
Total recoveries.. 6,110 4,597 5,732 2,949 2,240
---------- ---------- ---------- ---------- ----------
Net charge-offs......... (7,295) (18,525) (21,415) (23,133) (21,574)
---------- ---------- ---------- ---------- ----------
Provision charged to
expense.............. 7,246 31,438 25,671 30,602 29,693
---------- ---------- ---------- ---------- ----------
Allowance of loans
acquired in purchase
transactions......... 1,119 2,750 2,850 850 --
---------- ---------- ---------- ---------- ----------
Balance, end of period.. $ 70,573 $ 69,503 $ 52,024 $ 44,666 $ 36,347
========== ========== ========== ========== ==========
Average loans and
leases*................ $5,064,136 $4,750,218 $4,494,244 $4,258,462 $4,273,567
Net charge-offs as a
percentage of average
loans and leases....... .14% .39% .48% .54% .50%
========== ========== ========== ========== ==========
</TABLE>
- --------
* Loans and leases are net of unearned income and loans held for sale.
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS AND CLASSIFIED ASSETS
Nonperforming assets include nonaccrual loans and leases and foreclosed
property. Southern National directs significant energy to maintain low levels
of nonperforming assets and works quickly with delinquent borrowers to resolve
problems. Loans are considered delinquent in most cases the first day after
payment was due. After a loan has been delinquent 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
II-10
<PAGE>
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
loan becomes 90 days past due, the loan is placed on nonaccrual status. In some
cases, a loan may be placed on nonaccrual status earlier based on specific
circumstances surrounding the loan. If the collection of principal and/or
interest becomes doubtful at any time during the collection process, the loan
is placed on nonaccrual status. Every effort is made to reach an agreement on
payment with the borrower. If it becomes necessary to foreclose on loans,
acquired assets are quickly sold to minimize the cost of carrying such assets.
INVESTMENT ACTIVITIES
Southern National maintains a portion of its assets as investment securities.
National banks are allowed to purchase, sell, deal in, underwrite, and hold
certain investment securities as prescribed by the United States Code and
regulated by the Comptroller of the Currency (the "Comptroller"). Securities
ruled eligible by the Comptroller generally 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 weekly to
review the economic environment, assess current activities for appropriateness
and establish investment strategies. The ALCO also has much broader
responsibilities which are discussed in the section, Asset/Liability
Management, of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Corporation maintains its investment portfolio in accordance with the
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." This statement established accounting procedures consistent
with the intent to hold securities until maturity, to hold securities in an
available for sale capacity or to trade securities. As of January 1, 1994,
management designated specific securities to be held in all three categories.
Investment strategies are established by the ALCO in consideration of the
interest rate cycle, mix of the balance sheet, actual and anticipated loan
demand, funding opportunities and the overall interest rate sensitivity of the
Corporation. In general, the investment portfolio is managed in a manner
appropriate to the attainment of the following purposes: (i) to provide a
sufficient margin of liquidity of 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 1994 was established and continually
adjusted within an environment of rising interest rates precipitated by a more
restrictive monetary policy, as set by the Federal Reserve's Open Market
Committee.
At December 31, 1994, the investment portfolio represented 32% of the total
assets of the Corporation. That percentage is somewhat higher than historical
norms for the Corporation because continued attractive investment returns were
made possible by a steeply sloped yield curve and advantageous funding
opportunities. During the past four years, investment securities have increased
from 27% of assets in 1991 to 32% in 1994. Management has judged overall
liquidity and interest rate sensitivity to be adequate to allow the growth of
both the investment and loan portfolios during that time. It is anticipated
that the opportunities that permitted the growth of both portfolios will not be
present in coming months, and, as a result, the investment portfolio will
likely decline as a percentage of total assets toward more historical norms.
The investment portfolio will continue to add increasing benefit to the
Corporation, however, as proceeds from lower-yielding maturing securities are
reinvested at higher rates.
II-11
<PAGE>
As has been the case for the past several years, investment activity during
1994 was centered on obligations of the U.S. Treasury and Federal agencies.
Treasuries and Federal agencies comprised 96% of the total amortized cost of
the portfolio at year end. The value of these securities from return and
quality perspectives made them relatively more attractive than other types of
investments. Emphasis continued to be placed on short and intermediate-term
maturities, balancing reasonable stability between liquidity and yield. The
average maturity of the entire portfolio at December 31, 1994 was 4 years
compared to 3 years 5 months at December 31, 1993. The small maturity extension
was a result of management's strategy to begin to lock in attractive yields in
anticipation of a levelling of rates during 1995. Table 3--"Securities" shows
the maturity distribution by category of Southern National's investment
portfolio at December 31, 1994.
At December 31, 1994, the balance in the Corporation's available-for-sale
category was $992 million, which represents approximately 36% of the entire
investment portfolio. This amount was less than the December 31, 1993 balance
because of sales of $283.1 million and maturities of $178.1 million of
securities available for sale offset by purchases of such securities of $296.5
million. It is anticipated that the available-for-sale category will, through
purchases of new securities, grow as a percentage of the total because of the
flexibility this designation brings to the investment management process.
During the past year, the Federal Reserve's more restrictive monetary policy
drove short-term interest rates up 250 basis points. Fixed income securities,
by nature of their structure, decline in value as interest rates rise. As a
result, Southern National's entire investment portfolio market value moved from
a position of net unrealized gains of $42.0 million at December 31, 1993, to a
position of net unrealized losses, before tax, of $120.5 million at December
31, 1994. The decline in market value represents a depreciation of
approximately 4%, which management expected in 1994's interest rate
environment. A decline of this magnitude is manageable and will not adversely
affect the safety and soundness of the Corporation.
Unrealized market valuation losses in the Corporation's held-to-maturity
category affect neither earnings nor capital since these securities are carried
at amortized cost. The Corporation's held-to-maturity securities totaled $1.8
billion at December 31, 1994, and the net unrealized market valuation losses,
net of tax, totaled $44.5 million.
Unrealized market valuation losses in the available-for-sale category have
been reported, net of tax, as a separate component of equity. The available-
for-sale portfolio totaled $992 million at December 31, 1994, and the net
market valuation losses totaled $28.1 million, net of tax. Equity adjustments
resulting from market valuation losses do not represent permanent reductions in
equity and are not considered for purposes of calculating actual levels of
risk-based capital. If securities that are categorized as available for sale
are held to maturity for strategic reasons, or if market values improve during
the period of time held, equity will be positively adjusted. If securities so
designated are sold, then the actual gains or losses realized are reported in
current period earnings.
Management expects interest rates to increase further in early 1995, until
the Federal Reserve's more restrictive monetary policy begins to dampen
economic activity. At that time, rates should begin to level off, easing the
decline in market value of the Corporation's investment portfolio. Anticipated
investment strategies include continued emphasis on high quality U.S. Treasury
and Federal agency securities, investment in short and intermediate maturities,
and a slight decline in the portion of assets held as investment securities.
The Corporation's ALCO will continually evaluate such strategies in
consideration of actual economic and balance sheet developments.
II-12
<PAGE>
TABLE S-7
COMPOSITION OF SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1994 1993 1992
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury, government agencies and
corporations................................ $1,710,084 $1,254,602 $1,549,256
States and political subdivisions............ 63,453 54,047 57,680
Equity securities............................ -- 46,820 45,682
Other securities............................. 665 633 25,640
---------- ---------- ----------
Total securities held to maturity.......... 1,774,202 1,356,102 1,678,258
Securities available for sale (1994 at
market, 1993 and 1992 at lower of amortized
cost or market):
U.S. Treasury, government agencies and
corporations............................ 992,016 1,194,230 278,127
---------- ---------- ----------
Total securities............................. $2,766,218 $2,550,332 $1,956,385
========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
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. FHLB advances, federal
funds purchased and short-term borrowings 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 negotiable order of withdrawal accounts and other demand deposits,
passbook and statement savings accounts, money market deposits, certificates of
deposit and individual retirement accounts. Deposit account terms vary with
respect to the minimum balance required, the time period the funds must remain
on deposit and the interest rate. Interest rates paid on specific deposits are
set by the ALCO and are determined based on (i) the interest rates offered by
competitors, (ii) anticipated needs for cash and the timing of the cash flow
needs offset by the availability of more cost-effective funding sources and
(iii) anticipated future economic conditions and interest rates. Customer
deposits are attractive sources of liquidity because of stability, pricing
control and the ability to generate fee income through the cross-sale of
deposit-related services.
- --------------------------------------------------------------------------------
TABLE S-8
TIME DEPOSITS $100,000 AND OVER
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Maturity
Less than three months................................. $430,839
Four through six months................................ 141,468
Seven through twelve months............................ 108,759
Over twelve months..................................... 94,440
--------
BALANCE AT DECEMBER 31, 1994............................. $775,506
========
</TABLE>
- --------------------------------------------------------------------------------
Short-term Borrowings
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.
II-13
<PAGE>
Southern National has done this in the past primarily through securities sold
under repurchase agreements, which composed 70% of total short-term borrowings
at December 31, 1994. Other components of short-term borrowings at year end
were master notes, federal funds purchased and U.S. Treasury tax and loan
deposit notes payable.
- --------------------------------------------------------------------------------
TABLE S-9
SHORT-TERM BORROWINGS
The following information summarizes certain pertinent information for the
past three years on securities sold under agreement to repurchase, federal
funds purchased, master notes, Federal Reserve discount window borrowings and
U.S. Treasury tax and loan deposit notes payable.
<TABLE>
<CAPTION>
1994 1993 1992
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Maximum outstanding at any month end during the
year.......................................... $1,654,465 $776,512 $504,439
Average outstanding during the year............ 1,129,989 514,611 416,647
Average interest rate during the year.......... 4.33% 3.66% 3.59%
Average interest rate at end of year........... 5.89 2.92 3.75
</TABLE>
- --------------------------------------------------------------------------------
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 Tier 1 leverage ratio, as well as such amounts for the separate
subsidiary banks as of December 31, 1994.
- --------------------------------------------------------------------------------
TABLE S-10
CAPITAL ADEQUACY
<TABLE>
<CAPTION>
REGULATORY SOUTHERN
MINIMUMS (1) NATIONAL SNBNC SNBSC SSB
------------ -------- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Risk-based capital ratios:
Tier 1 capital (2).................... 4.0% 12.8% 12.1% 11.7% 15.5%
Total risk-based capital (3).......... 8.0 14.1 13.3 12.9 16.7
Tier 1 leverage ratio (4)............... 3.0 7.5 6.7 7.3 10.5
</TABLE>
- --------
(1) Regulatory minimums are based upon fully phased-in requirements effective
at December 31, 1992.
(2) Shareholders' equity less non-qualifying intangible assets; computed as a
ratio of risk-weighted assets, as defined in the risk-based capital
guidelines.
(3) 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.
(4) Tier 1 capital computed as a ratio of fourth quarter average assets less
goodwill.
- --------------------------------------------------------------------------------
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both federal
and state law. To the extent that the following information describes statutory
or regulatory provisions, it is qualified in its entirety by reference to the
particular statutory provisions. Any change in applicable law or regulation may
have a material effect on the business and prospects of Southern National and
the Subsidiaries.
II-14
<PAGE>
Southern National is a legal entity separate and distinct from its subsidiary
banks. Most of Southern National's revenues result from dividends paid to
Southern National by the Subsidiaries. The ability of Southern National, and
consequently the right of creditors and shareholders of Southern National, to
participate in any distribution of the assets or earnings of any Subsidiary
through the payment of such dividends or otherwise is necessarily subject to
the prior claims of creditors of the Subsidiary, except to the extent that
claims of Southern National in its capacity as a creditor may be recognized.
Under federal law, the Subsidiaries may not, subject to certain limited
exceptions, make loans or extensions of credit to, or investments in the
securities of, Southern National or take securities of Southern National as
collateral for loans to any borrower. The Subsidiaries are also subject to
collateral security requirements for any loans or extensions of credit
permitted by such exceptions.
The Subsidiaries are subject to various statutory restrictions on their
ability to pay dividends to Southern National. Under current supervisory
practices of the Subsidiaries' regulatory agencies, prior approval from these
agencies is required if cash dividends declared in any given year exceed net
income for that year plus retained earnings of the two preceding years. SSB, in
accordance with Title IV of North Carolina general statutes, Chapter 16A.0105,
can make capital distributions, including cash dividends, to Southern National
with prior approval of the Administrator of the North Carolina Savings
Institutions Division, (the "Administrator"), in an amount less than the
greater of one-half of net income for the most recent fiscal year or the
average of net income for the most recent three years. The payment of dividends
by Southern National and the Subsidiaries may also be limited by other factors,
such as requirements to maintain adequate capital above regulatory guidelines.
The Comptroller, in the case of national bank subsidiaries, and the
Administrator, in the case of savings bank subsidiaries, have authority to
prohibit any bank subsidiaries from engaging in an unsafe or unsound practice
in conducting their business. The payment of dividends, depending upon the
financial condition of the Subsidiary in question, could be deemed to
constitute such an unsafe and unsound practice to pay dividends except out of
current operating earnings. The ability of the Subsidiaries to pay dividends in
the future is, and is expected to continue to be, influenced by regulatory
policies and by capital guidelines.
As a bank holding company, Southern National is subject to regulation by the
Federal Reserve Board ("FRB") under the Bank Holding Company Act of 1956 (the
"BHCA"). The FRB, the Comptroller and the Federal Deposit Insurance Corporation
(the "FDIC") have issued substantially similar risk-based and leverage capital
requirements applicable to United States banking organizations. In addition,
those regulatory agencies may require that a bank organization maintain capital
above the minimum levels, whether because of its financial condition or actual
or anticipated growth.
The FRB's risk-based guidelines define a two-tier capital framework. Tier 1
capital consists of common and qualifying preferred shareholders' equity, less
certain intangibles and other adjustments. Tier 2 capital consists of
subordinated and other qualifying debt, and the allowance for credit losses up
to 1.25% of risk-weighted assets. The sum of Tier 1 and Tier 2 capital
represents qualifying total capital, at least 50% of which must consist of Tier
1 capital. Risk-based capital ratios are calculated by dividing Tier 1 and
total capital by risk-weighted assets. Risk-weighted assets are determined by
assigning assets and off-balance sheet exposures to one of four categories of
risk-weights, based primarily on relative credit risk. The minimum Tier 1
capital ratio is 4% and the minimum total capital ratio is 8%. Southern
National's Tier 1 and total capital to risk-weighted asset ratios as of
December 31, 1994 were 12.8% and 14.1%, respectively, exceeding the required
minimums.
In addition, the FRB has established minimum leverage ratio (Tier 1 capital
to quarterly average tangible assets) guidelines for bank holding companies.
These guidelines provide for a minimum ratio of 3% for bank holding companies
that meet certain specified criteria, including that they have the highest
regulatory rating. All other bank holding companies will be required to
maintain a leverage ratio of 3% plus an additional cushion of at least 100 to
200 basis points. Southern National's leverage ratio as of December 31, 1994
was 7.5%. The guidelines also provide that banking organizations experiencing
internal growth or making acquisitions will be expected to maintain capital
positions substantially above the minimum supervisory levels.
II-15
<PAGE>
As a result of the enactment of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA"), a depository institution insured by the
FDIC can be held liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC after August 9, 1989 in connection with (i) the default
of a commonly controlled FDIC-insured depository institution or (ii) any
assistance provided by the FDIC to a commonly controlled FDIC-insured
depository institution in danger of default. "Default" is defined generally as
the existence of certain conditions indicating that "default" is likely to
occur in the absence of regulatory assistance. Liability of any Subsidiary
under this "cross-guarantee" provision could have a material adverse effect on
the financial condition of any assessed Subsidiary and Southern National.
The BHCA requires the prior approval of the FRB in any case where a bank
holding company proposes to acquire direct or indirect ownership or control of
more than 5% of the voting shares of any bank that is not already majority
owned by it or to merge or consolidate with any other bank holding company. The
BHCA prohibits the FRB from approving an application from a bank holding
company to acquire shares of a bank located outside the state in which the
operations of the holding company's banking subsidiaries are principally
conducted, unless such an acquisition is specifically authorized by statute of
the state in which the bank whose shares are to be acquired is located. North
Carolina has adopted legislation permitting such acquisitions by bank holding
companies located in certain states that have reciprocal agreements with North
Carolina.
The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring more than 5% of the voting shares of any company that is not a bank
and from engaging in any business other than banking or managing or controlling
banks. Under the BHCA, the FRB is authorized to approve the ownership of shares
by a bank holding company in any company the activities of which the FRB has
determined to be so closely related to banking or to managing or controlling
banks as to be a proper incident thereto. The FRB has by regulation determined
that certain activities are closely related to banking within the meaning of
the BHCA. These activities include: operating a mortgage company, finance
company, credit card company or factoring company; performing certain data
processing operations; providing investment and financial advice; and acting as
an insurance agent for certain types of credit-related insurance.
The Subsidiaries are supervised and regularly examined by various federal and
state regulatory agencies. The laws and regulations administered by the
regulatory agencies affect corporate practices, such as payment of dividends,
incurring debt and acquisition of financial institutions and other companies,
and affect business practices, such as payment of interest on deposits, the
charging of interest on loans, types of business conducted and location of
offices.
The Subsidiaries are subject to FDIC deposit insurance assessments. As
mandated by the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the FDIC adopted regulations effective January 1, 1993 for the
transition from a flat-rate insurance assessment system to a risk-based system
by January 1, 1994. Pursuant to these regulations, each of the Subsidiaries
deposit insurance assessment will be individually set within a range of $.23 to
$.31 per $100 of deposits and will depend on the institution's risk
classification. The FDIC has proposed a reduction in insurance premiums on
deposits insured by the Bank Insurance Fund from $.23 to $.04. This premium
reduction, expected to be implemented by year-end 1995, will have a favorable
impact on all well-managed banks, including Southern National.
Among other things, FDICIA identifies five capital categories for insured
depository institutions: well- capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. FDICIA requires the federal banking regulators to take prompt
corrective action with respect to insured depository institutions that do not
meet minimum capital requirements.
The FRB has adopted regulations establishing relevant capital requirements
for banks. Under the regulations, a well-capitalized institution must have a
Tier 1 risk-based capital ratio of at least 6%, a total risk-based capital
ratio of at least 10% and a leverage ratio of at least 5% and not be subject to
a capital directive order. An adequately capitalized institution must have a
Tier 1 risk-based capital ratio of at least
II-16
<PAGE>
4%, a total risk-based capital ratio of at least 8% and a leverage ratio of at
least 4% or, in some cases, 3%. Under these guidelines, at December 31, 1994,
Southern National and each of the Subsidiaries were considered well-
capitalized.
In addition, undercapitalized depository institutions are required to submit
capital restoration plans. In order to obtain acceptance of a capital
restoration plan, a depository institution's holding company must guarantee the
capital plan up to an amount equal to the lesser of 5% of the depository
institution's assets at the time it becomes undercapitalized or the amount of
the capital deficiency at the time the institution fails to comply with the
plan. The federal banking agencies may not accept a capital restoration plan
without determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed. If an institution fails to submit an
acceptable plan, it is treated as if it is significantly undercapitalized. In
the event of bankruptcy of the parent holding company, such guarantee would
have priority over the parent's general unsecured creditors.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if, after making the distribution or paying the fee, the
depository institution would be undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of
restrictions, including prohibition of capital distributions to its holding
company without prior approval of the FRB, orders to sell sufficient voting
stock to become adequately capitalized, requirements to reduce total assets and
cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to the appointment of a
conservator or receiver.
The operations of Southern National and its subsidiaries are affected not
only by general economic conditions, but also by the policies of various
regulatory authorities. In particular, the FRB regulates money and credit and
interest rates in order to influence general economic conditions. These
policies have significant influence on overall growth and distribution of
loans, investments and deposits and affect interest rates charged on loans or
paid on time and savings deposits. FRB monetary policies have had a significant
effect on the operating results of commercial banks and thrifts in the past and
are expected to continue to do so in the future.
During 1994, Congress passed the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Act"). The Act will permit banks or bank holding
companies to acquire banks, establish branches, or merge with banks in other
states. Under the provisions of the Act, effective September 29, 1995, a bank
holding company that is adequately capitalized and managed may acquire an
existing bank in another state provided the resulting entity would not control
greater than 10% of total U.S. insured depository institution deposits, or 30%
or more of such deposits in the state in which the bank is located. The law
will also allow interstate bank mergers and interstate branching subject to the
above-mentioned restrictions and regulatory approval.
Various legislation, including proposals to overhaul the banking regulatory
system and to limit the investment that a depository institution may make with
insured funds are from time to time introduced in Congress. Southern National
cannot determine the ultimate effect that FDICIA and the implementing
regulations thereunder, or any potential legislation, if enacted, would have
upon its financial condition or operations.
EMPLOYEES
At December 31, 1994, Southern National had approximately 3,609 full-time
employees, an increase of 42% over the prior year originally-reported balance
of 2,549.
PROPERTIES
Southern National and its significant subsidiaries occupy their headquarters
offices under long-term leases and also own free-standing operations centers in
Charlotte and Lumberton. Branch office locations are variously owned or leased.
The premises occupied by Southern National and its subsidiaries are considered
to be well-located and suitably equipped to serve as financial service
facilities.
II-17
<PAGE>
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 for each of the three years in the period
ended December 31, 1994 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 1994 performance.
1994 was a year of significant growth and achievement for the Corporation. On
January 28, 1994, Southern National completed its acquisition of The First
Savings Bank, FSB ("The First") of Greenville, South Carolina in a transaction
accounted for as a pooling of interests. The First was merged into SNBSC,
thereby improving SNBSC's ranking by deposits to third in South Carolina. The
First had total assets of $2.0 billion and deposits of $1.6 billion at December
31, 1993.
On January 31, 1994, Southern National acquired Regency Bancshares Inc.
("Regency") of Hickory, North Carolina in a transaction accounted for as a
pooling of interests. Regency, a bank holding company whose principal
subsidiaries were First Savings Bank, SSB of Hickory, North Carolina and
Davidson Savings Bank, SSB of Lexington, North Carolina, had total consolidated
assets of $263 million and total consolidated deposits of $210 million at
December 31, 1993.
On February 24, 1994, Southern National acquired Home Federal Savings Bank
("Home") of Statesville, North Carolina in a transaction accounted for as a
pooling of interests. At year-end 1993, Home had total assets of $98 million
and total deposits of $90 million.
The acquisitions above were accounted for as poolings of interests.
Accordingly, this discussion and analysis reflects balances restated to include
the results of Regency, Home and The First.
On June 1, 1994, Southern National completed an acquisition of McLean, Brady
& McLean Agency, Inc. ("McLean") of Lumberton, North Carolina in a transaction
accounted for as a purchase. McLean, which had total assets of $571,000 at June
1, 1994, and other insurance subsidiaries acquired in mergers with The First
and East Coast Savings Bank, SSB ("East Coast") were combined to form Southern
National Insurance Services, Inc., a wholly-owned subsidiary of SSB, allowing
Southern National to offer a full line of insurance products to its customers.
The Corporation completed its acquisition of Leasing Associates, Inc. of
Anderson, South Carolina on June 6, 1994 in a transaction accounted for as a
purchase. The Leasing Associates, Inc. merger with Southern National Leasing
Corp. gives Southern National a direct leasing presence in South Carolina.
Leasing Associates, Inc. had total assets of $9 million at June 30, 1994.
On August 1, 1994, Southern National and BB&T jointly announced the signing
of a definitive agreement to merge. This transaction, which was consummated on
February 28, 1995, and was accounted for under the pooling-of-interests method
of accounting, has created the sixth largest bank holding company in the
Southeast and the 36th largest in the U.S.
On November 1, 1994, Southern National completed its acquisition of Prime
Rate Premium Finance Corporation, Inc. ("Prime Rate") and related interests,
Agency Technologies, Inc. and IFCO, Inc. These companies, which had combined
assets of $7.6 million at November 1, 1994, provide financing for automobile
insurance by offering such products directly to various insurance agents. The
transaction was accounted for under the purchase method of accounting.
SNBNC, the Corporation's lead bank, was formed in 1897 while SNBSC was
organized in 1986 as Southern National's entry into the South Carolina banking
market. SSB, a state-chartered savings bank, is the resulting entity which
evolved from the 1993 merger of two former savings and loan institutions
acquired by Southern National in 1990, Western Carolina Savings and Loan
Association, Inc. and Mutual Federal Savings and Loan Association, A Stock
Corporation.
II-18
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
Southern National's total assets at December 31, 1994 were $8.8 billion, a 6%
increase from the prior year-end balance of $8.3 billion. The increase in total
assets was fueled by increases in net loans, leases and securities. Loans and
leases, excluding loans held for sale, increased $597 million and securities
held to maturity increased $418 million. These increases were offset by
declines in loans held for sale of $295 million and securities available for
sale of $202 million. Other interest-earning assets, composed of federal funds
sold, securities purchased under resale agreements and similar arrangements and
interest-bearing bank balances, decreased $68 million over the prior year-end
balance. The composition of average total assets was as follows:
- --------------------------------------------------------------------------------
TABLE 1
COMPOSITION OF AVERAGE TOTAL ASSETS
<TABLE>
<CAPTION>
% CHANGE
---------------
1994 V. 1993 V.
1994 1993 1992 1993 1992
---------- ----------- ----------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Securities*.............. $2,613,314 $ 2,258,193 $ 1,846,703 16% 22%
Federal funds sold and
other earning assets.... 64,162 81,744 137,532 (22) (41)
Loans and leases, net of
unearned income**....... 5,164,357 4,914,343 4,640,013 5 6
---------- ----------- -----------
Average earning assets... 7,841,833 7,254,280 6,624,248 8 10
Non-earning assets....... 446,432 470,439 500,062 (5) (6)
---------- ----------- -----------
Average total assets..... $8,288,265 $ 7,724,719 $ 7,124,310 7% 8%
========== =========== =========== === ===
Average earning assets as
a percentage of average
total assets............ 94.6% 93.9% 93.0%
========== =========== ===========
</TABLE>
- --------
*Based on amortized cost.
** Includes loans held for sale based on lower of amortized cost or market.
- --------------------------------------------------------------------------------
SECURITIES
The securities portfolio is a primary focus of management's efforts to manage
interest rate risk and liquidity. Management has shifted the mix of the
portfolio as needed during the past three years to manage the balance sheet as
other less-manageable areas of the balance sheet have fluctuated. Investment
securities produce a substantial portion of Southern National's interest income
and provide vital flexibility in addressing liquidity needs or excesses.
Management has continued to emphasize investments with a maturity of five years
or less because of the changing interest rate environment and the strong
economy of the last two years. Southern National is strategically positioned to
meet the additional loan demand produced by this economic growth. 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. The average maturity of Southern National's portfolio at
December 31, 1994, based upon final stated maturity dates, was 4 years compared
to 3 years 5 months at December 31, 1993. Table 3--"Securities" discloses the
maturity distribution by category of Southern National's securities portfolio
at December 31, 1994.
During 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement, which was adopted
by Southern National as of January 1, 1994, addresses the accounting and
reporting of investments in equity securities that have readily determinable
fair values and all investments in debt securities. These investments are
classified in one of three categories: held to maturity, trading and available
for sale. Securities classified as available for sale are carried at estimated
fair value with unrealized depreciation or appreciation, net of tax, reported
as a separate component of shareholders' equity. Securities classified as held
to maturity are carried in the financial statements at amortized cost.
Securities classified as trading are carried at estimated fair value with gains
and losses resulting from market fluctuations
II-19
<PAGE>
recognized in current period earnings. Southern National engages in securities
trading transactions as a normal course of business, but had no securities
held in a trading classification at year end.
At December 31, 1994, Southern National had net unrealized depreciation, net
of tax, of $28.1 million which is reported as a separate component of equity.
The market value of the available-for-sale portfolio was $46.4 million less
than the amortized cost of these securities.
The fully taxable equivalent ("FTE") yield on the complete portfolio was
6.17% for the year ended December 31, 1994, compared to 6.53% for 1993.
Securities have grown 8% during the current year. As a percentage of earning
assets, securities have increased slightly, comprising 34% of total earning
assets at December 31, 1994, compared to 33% at December 31, 1993.
- -------------------------------------------------------------------------------
TABLE 2
AVERAGE SECURITIES*
<TABLE>
<CAPTION>
% CHANGE
---------------
1994 V. 1993 V.
1994 1993 1992 1993 1992
-------------- -------------- -------------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury........... $1,615,378 62% $1,177,353 53% $ 842,219 46% 37% 40%
U.S. Government agencies
and corporations....... 882,084 34 976,376 43 915,165 49 (10) 7
States and political
subdivisions........... 53,667 2 51,454 2 53,522 3 4 (4)
Other securities........ 51,568 2 53,010 2 35,797 2 (3) 48
---------- --- ---------- --- ---------- --- --- ---
Average total
securities............. $2,602,697 100% $2,258,193 100% $1,846,703 100% 15% 22%
========== === ========== === ========== === === ===
</TABLE>
- --------
* Includes securities available for sale based on fair value in 1994 and lower
of amortized cost or market in 1993 and 1992.
- -------------------------------------------------------------------------------
TABLE 3
SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------
AVERAGE
CARRYING VALUE AVERAGE YIELD (3) MATURITY (4)
-------------- ----------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury, government
agencies and corporations (1)
Within one year............... $ 336,094 6.08%
One to five years............. 1,581,363 6.15
Five to ten years............. 626,064 6.72
After ten years............... 113,724 7.95
---------- ---- ----
Total....................... 2,657,245 6.35 3.99
---------- ---- ----
States and political
subdivisions
Within one year............... 7,571 8.67
One to five years............. 39,820 7.85
Five to ten years............. 16,062 7.87
After ten years............... -- --
---------- ---- ----
Total....................... 63,453 7.96 3.33
---------- ---- ----
Other securities
Within one year............... 10 6.12
One to five years............. -- --
Five to ten years............. 655 7.46
After ten years............... -- --
---------- ---- ----
Total....................... 665 7.44 7.17
---------- ---- ----
Total securities (2)(5)..... $2,721,363 6.39% 3.98
========== ==== ====
</TABLE>
- --------
(1) Included in U.S. Treasury, government agencies and corporations are
mortgage-backed securities totaling $577,932,000 classified as held to
maturity and $239,146,000 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 $1,774,202,000 and securities
available for sale of $947,161,000 at estimated fair value.
(3) Taxable equivalent basis as applied to amortized cost.
(4) Weighted average in years.
(5) Excludes Federal Reserve Bank stock, Federal Home Loan Bank stock and
other equity securities totaling $44,855,000.
- -------------------------------------------------------------------------------
II-20
<PAGE>
LOANS AND LEASES
Loans and leases, net of unearned income and loans held for sale, totaled
$5.4 billion at year end, an increase of $597 million, or 12%, over the balance
at the end of the prior year. The increase was driven by growth in commercial,
financial and agricultural loans which grew $497 million, or 62%. Mortgage
loans, including unearned income, grew during 1994 at a rate of 5%, or $151
million. Southern National has also had success developing tax advantage
lending products which have resulted in consumer loan growth during 1994.
During 1994, interest rates increased creating some urgency on the part of
mortgage borrowers. Originations actually improved during the second quarter
when the rate increases were most significant. In many cases, the strong
overall economic environment outweighed increased interest rates in driving
commercial and mortgage loan growth. 1994 was also a strong year for Southern
National's market area, as North and South Carolina benefited from strength in
real estate, agribusiness and a resurgence in wholesale/retail businesses.
Mortgage loan refinancing, which had characterized the prior two years, slowed
significantly after the first quarter of 1994. Growth in mortgage loans shifted
to purchase mortgages. Southern National typically sells fixed-rate mortgage
loans in the secondary mortgage market while retaining servicing and retains
adjustable-rate loans for the portfolio. This strategy has the effect of
reducing portfolio interest rate risk and increasing fee income.
Southern National has concentrated efforts on expanding the leasing function
throughout 1994. Commercial leasing, primarily tax-exempt leases with counties
and municipalities, was stronger than in the prior year. The leasing function
has developed numerous lease-based products and services that have been
effectively marketed to current Southern National customers and noncustomers.
The leasing subsidiary provides a quality stream of earnings and tax deferrals.
Lease receivables, including unearned income, grew $79 million, or 35%, during
1994, aided by Southern National's acquisition of Leasing Associates, Inc.
The Corporation was successful in liquidating loans held for sale which were
acquired through the merger with The First. The balance of loans held for sale,
gross of unearned income, decreased from $316.5 million at December 31, 1993 to
$22.0 million at year-end 1994 because of the liquidation of these loans and
the shift in mortgage loan volume from fixed-rate mortgages, which are usually
sold in the secondary market to adjustable-rate loans, which are retained in
the portfolio.
II-21
<PAGE>
TABLE 4
LOAN AND LEASE PORTFOLIO MIX*
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
COMMERCIAL AND INDUSTRIAL
Commercial and industrial secured by real estate....... $ 639,866
Other commercial and industrial........................ 661,985
Leases................................................. 257,554
----------
Total commercial and industrial...................... 1,559,405
----------
COMMERCIAL REAL ESTATE
Land acquisition, construction and development......... 121,561
Term................................................... 810,218
----------
Total commercial real estate......................... 931,779
----------
CONSUMER
Mortgages (1-4 family residential)..................... 1,818,003
Other installment...................................... 567,650
Home equity............................................ 423,829
Revolving credit....................................... 134,212
----------
Total consumer....................................... 2,943,694
----------
Total loan and lease portfolio....................... $5,434,878
==========
</TABLE>
- --------
* Net of unearned income and loans held for sale.
- --------------------------------------------------------------------------------
ASSET QUALITY
The quality of the loan and lease portfolio improved significantly during
1994, continuing favorable trends in asset quality ratios since 1991. The
primary concerns for 1994 were related to the three acquisitions which took
place in the first quarter of the year. Some of the purchased assets were not
underwritten in accordance with Southern National's normal policies creating a
minor, but adverse, impact on the Corporation's asset quality ratios during the
early quarters of 1994.
As reflected in Table 5--"Asset Quality," nonperforming assets ("NPA's") were
$24.0 million at year end, down $10.7 million or 31% for the year. As a
percentage of total assets, NPA's declined from .42% at December 31, 1993 to
.27% at current year end. As a percentage of loans plus foreclosed properties,
NPA's decreased from .72% to .44%. Risk assets, which include NPA's and loans
over 90 days past due and still accruing interest, were $25.2 million at year
end, down from $36.8 million a year earlier, a 32% decrease. As a percentage of
loans and foreclosed properties, risk assets fell from .76% to .46% during the
year. The improved asset quality trends reflect efforts during 1994 to sell
assets acquired through the merger with The First which were underwritten with
different objectives than loans acquired through internal growth. Southern
National, through a bulk asset sale early in 1994, significantly improved asset
quality levels over the prior year.
The Corporation also experienced an unusually low level of net charge-offs.
Net charge-offs fell 61% from $18.5 million in 1993 to $7.3 million in 1994, or
from .39% to .14% of average loans and leases. It is unlikely that net charge-
offs will continue at such a low level in the future. The allowance for loan
and lease losses totaled $70.6 million at December 31, 1994, or 1.30% of loans
and leases, compared to $69.5 million, or 1.44% at the end of the prior year.
Southern National assigns risk ratings to all commercial loans in the
portfolio. This assignment of loans to one of seven categories is based upon
the relative strength of the repayment source. All significant loans in
II-22
<PAGE>
the four lowest risk ratings are reviewed monthly by Southern National credit
management for appropriateness of risk rating, accrual status and loss
reserves. Loans are categorized as nonaccrual as soon as full collectibility of
principal and interest is deemed doubtful. This policy contributes to a
constant inflow of loans into risk assets, as well as an outflow of loans being
written off, upgraded or otherwise resolved. Southern National management
believes that potential problem loans will not have a material effect on total
risk assets.
- --------------------------------------------------------------------------------
TABLE 5
ASSET QUALITY*
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1993 1992
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
RISK ASSETS
Nonaccrual loans and leases....................... $22,194 $28,372 $ 60,430
Foreclosed property............................... 1,850 6,356 36,778
------- ------- --------
Nonperforming assets............................. 24,044 34,728 97,208
Loans 90 days or more past due and still accruing. 1,180 2,115 3,482
------- ------- --------
Total risk assets.............................. $25,224 $36,843 $100,690
======= ======= ========
ASSET QUALITY RATIOS
Nonaccrual loans and leases as a percentage of
loans and leases................................. .41% .59% 1.31%
Nonperforming assets as a percentage of:
Total assets..................................... .27 .42 1.32
Loans and leases plus foreclosed property........ .44 .72 2.10
Risk assets as a percentage of loans and leases
plus foreclosed property......................... .46 .76 2.17
Net charge-offs as a percentage of average loans
and leases....................................... .14 .39 .48
Allowance for losses as a percentage of loans and
leases........................................... 1.30 1.44 1.13
Ratio of allowance for losses to:
Net charge-offs.................................. 9.67X 3.75x 2.43x
Nonaccrual loans and leases...................... 3.18 2.45 .86
</TABLE>
- --------
* All line items referring to loans and leases reflect loans and leases, net of
unearned income and loans held for sale.
- --------------------------------------------------------------------------------
DEPOSITS AND OTHER BORROWINGS
Average total deposits and other borrowings increased from $7.1 billion at
the end of 1993 to $7.6 billion at December 31, 1994, a growth rate of 8%
compared to the prior year. Average core deposits, Southern National's largest
and most important funding source, decreased $59 million, or 1% compared to the
prior year. Southern National will emphasize core deposit growth, especially in
the current operating environment.
In addition to utilizing core deposits as the primary funding source,
management has also increased the use of short-term borrowings, primarily
repurchase agreements, to provide a cost-effective supplement for liquidity
needs. Management has also utilized long-term debt to a lesser degree to
supplement funding needs. The increase in short-term borrowings was necessary
because of strong loan demand and a slight decrease in deposits during the
year. The rates on these borrowings are primarily floating and typically
indexed to the federal funds rate compared to the loans which are largely based
on the prime rate. The increased short-term borrowings were also used to reduce
long-term debt by $282 million. Remaining short-term borrowings and sales of
available-for-sale securities were used to increase holdings of investment
securities.
Deposits acquired through the three acquisitions in the first quarter
provided a good mix of various consumer products, and Southern National was
able to retain a good percentage of these funds by offering
II-23
<PAGE>
incentives for depositors to remain with the Corporation after the mergers.
Such incentives decrease fee income in the short term with the goal of
providing a lower cost of funds, thereby increasing interest income and
noninterest income in the future.
It is anticipated that core deposits will continue to provide the subsidiary
banks with the majority of their funding needs. Any additional funding
requirements will be provided by short and long-term borrowings in
consideration of balance sheet composition and interest rate sensitivity.
Management faces an ongoing challenge in attracting new deposits as
competition from both financial and non-financial institutions continues to
increase. Southern National continually evaluates liquidity needs versus
funding sources and growth in deposit funds. Any indication of slow or flat
deposit growth is managed through enhanced or new products which are evaluated
against those of competitors.
The ultimate goal in managing funding sources is to maintain funding
flexibility, which will allow Southern National to react rapidly to
opportunities brought about by growth and market volatility.
- --------------------------------------------------------------------------------
TABLE 6
COMPOSITION OF AVERAGE DEPOSITS AND OTHER BORROWINGS
<TABLE>
<CAPTION>
% CHANGE
--------------
1994 V 1993 V.
1994 1993 1992 1993 1992
-------------- -------------- -------------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings deposits........ $1,369,765 18% $1,263,029 18% $ 965,448 15% 8% 31%
Money market deposits... 976,886 13 988,700 14 945,203 15 (1) 5
Time deposits........... 3,099,525 41 3,206,761 45 3,322,061 51 (3) (3)
---------- --- ---------- --- ---------- ---
Total interest-bearing
deposits............... 5,446,176 72 5,458,490 77 5,232,712 81 -- 4
Demand deposits......... 802,335 10 696,095 10 552,413 9 15 26
---------- --- ---------- --- ---------- ---
Total deposits.......... 6,248,511 82 6,154,585 87 5,785,125 90 2 6
Short-term borrowings... 1,129,989 15 514,611 7 416,647 6 120 24
Long-term debt.......... 237,705 3 385,135 6 288,530 4 (38) 33
---------- --- ---------- --- ---------- ---
Total deposits and other
borrowings............. $7,616,205 100% $7,054,331 100% $6,490,302 100% 8% 9%
========== === ========== === ========== === === ===
- ----------------------------------------------------------------------------------------
</TABLE>
ANALYSIS OF RESULTS OF OPERATIONS
Southern National's consolidated earnings are presented and analyzed in the
following narrative and tables. All financial data reflect the acquisitions of
Regency, Home and The First during the first quarter of 1994. These
transactions were accounted for as poolings of interests. In addition, results
of McLean, Leasing Associates, Inc., and Prime Rate are included since the
dates of acquisitions in accordance with the purchase method of accounting.
Net income in 1994 was $109.6 million compared to a net loss of $19.0 million
in 1993 after restatement for the poolings of interest in the first quarter of
1994. Net income for the year ended December 31, 1992 was $59.2 million. On a
per share basis, primary earnings were $2.38 in 1994, compared to a loss of
$.57 in the prior year and earnings of $1.34 in 1992, while fully diluted
earnings per share were $2.27 in the current year compared to a loss of $.57 in
1993 and earnings of $1.31 in 1992.
Net interest income on an FTE basis for 1994 was $335.3 million, a 4%
increase over the prior year's level of $321.3 million. The net yield FTE on
earning assets decreased from 4.43% in 1993 to 4.28% in the current year. The
net yield FTE in 1992 was 4.35%, producing $287.9 million in net interest
income FTE.
II-24
<PAGE>
The provision for loan and lease losses increased from $25.7 million in 1992
to $31.4 million in 1993 and declined during the current year to $7.2 million.
The increased provision in 1993 related to certain loans at The First. The
decline in the 1994 provision reflected the unusually low level of net charge-
offs and the improvement in asset quality partly because of the disposition of
problem assets in the bulk asset sale. It is likely that the provision in
future years will be higher than the 1994 provision. See the discussion of
"Asset Quality" elsewhere in this report for additional information.
Southern National continues to emphasize goals to increase fee-based areas of
income. The purchase during 1994 of McLean and Leasing Associates, Inc. will
directly impact the Corporation's fee income.
NET INTEREST INCOME
Net interest income is Southern National's primary source of revenue. The
amount of net interest income is determined based on a number of factors,
including the volume of interest-earning assets and interest-bearing
liabilities and the interest rates which can be earned on the assets and must
be paid to obtain the asset-generating funds. The difference between rates
earned on interest-earning assets (with an adjustment made to tax-exempt income
to provide comparability with taxable income) and the cost of supporting funds
is measured by the net yield on earning assets. The accompanying table presents
the dollar amount of changes in interest income and interest expense and
distinguishes between the changes related to average outstanding balances of
interest-earning assets and interest-bearing liabilities and the changes
related to average interest rates on such assets and liabilities. Changes
attributable to both volume and rate have been allocated proportionately.
During 1994, net interest income FTE improved by $14.1 million while the net
yield FTE on earning assets decreased by 15 basis points. The Federal Reserve
increased short-term interest rates six times during 1994. Each increase by the
Federal Reserve generated a repricing of Southern National's assets and
liabilities. The overall improvement in net interest income FTE was
attributable to increases in average interest-earning assets, primarily loans
and securities.
II-25
<PAGE>
TABLE 7
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 V. 1993
----------------------------
AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE CHANGE DUE TO
-------------------------------- ---------------- -------------------------- INCREASE -----------------
1994 1993 1992 1994 1993 1992 1994 1993 1992 (DECREASE) RATE VOLUME
---------- ---------- ---------- ---- ---- ---- -------- -------- -------- ---------- -------- -------
FULLY TAXABLE EQUIVALENT--(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Securities (1):
U.S. Treasury,
government and
other (5)......... $2,559,647 $2,206,739 $1,793,181 6.14% 6.49% 7.73% $157,061 $143,303 $138,644 $13,758 $ (7,615) $21,373
States and
political
subdivisions...... 53,667 51,454 53,522 7.64 8.21 8.59 4,098 4,226 4,596 (128) (305) 177
---------- ---------- ---------- ---- ---- ---- -------- -------- -------- ------- -------- -------
Total securities
(5).............. 2,613,314 2,258,193 1,846,703 6.17 6.53 7.76 161,159 147,529 143,240 13,630 (7,920) 21,550
Other earning as-
sets (2)........... 64,162 81,744 137,532 3.83 2.96 3.99 2,456 2,421 5,486 35 620 (585)
Loans and leases,
net of unearned
income
(1)(3)(4)(5)....... 5,164,357 4,914,343 4,640,013 8.28 8.31 9.29 427,376 408,165 430,961 19,211 (1,484) 20,695
---------- ---------- ---------- ---- ---- ---- -------- -------- -------- ------- -------- -------
Total earning
assets........... 7,841,833 7,254,280 6,624,248 7.54 7.69 8.75 590,991 558,115 579,687 32,876 (8,784) 41,660
---------- ---------- ---------- ---- ---- ---- -------- -------- -------- ------- -------- -------
Non-earning as-
sets............. 446,432 470,439 500,062
---------- ---------- ----------
Total assets.... $8,288,265 $7,724,719 $7,124,310
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQ-
UITY
Interest-bearing
deposits:
Savings deposits.. $1,369,765 $1,263,029 $ 965,448 2.08 2.45 2.78 28,501 30,924 26,877 (2,423) (4,895) 2,472
Money market de-
posits............ 976,886 988,700 945,203 2.66 2.60 4.02 26,029 25,677 37,978 352 661 (309)
Time deposits..... 3,099,525 3,206,761 3,322,061 4.40 4.32 5.61 136,475 138,603 186,317 (2,128) 2,563 (4,691)
---------- ---------- ---------- ---- ---- ---- -------- -------- -------- ------- -------- -------
Total interest-
bearing
deposits......... 5,446,176 5,458,490 5,232,712 3.51 3.58 4.80 191,005 195,204 251,172 (4,199) (1,671) (2,528)
Short-term
borrowings......... 1,129,989 514,611 416,647 4.33 3.66 3.59 48,938 18,849 14,964 30,089 3,982 26,107
Long-term debt..... 237,705 385,135 288,530 6.62 5.92 8.89 15,728 22,794 25,652 (7,066) 2,446 (9,512)
---------- ---------- ---------- ---- ---- ---- -------- -------- -------- ------- -------- -------
Total interest-
bearing
liabilities...... 6,813,870 6,358,236 5,937,889 3.75 3.73 4.91 255,671 236,847 291,788 18,824 4,757 14,067
---------- ---------- ---------- ---- ---- ---- -------- -------- -------- ------- -------- -------
Demand deposits.. 802,335 696,095 552,413
Other liabili-
ties............. 74,434 73,484 92,697
Shareholders'
equity........... 597,626 596,904 541,311
---------- ---------- ----------
Total
liabilities and
shareholders'
equity........... $8,288,265 $7,724,719 $7,124,310
========== ========== ==========
Average interest
rate spread........ 3.79 3.96 3.84
Net yield on earn-
ing assets......... 4.28% 4.43% 4.35% $335,320 $321,268 $287,899 $14,052 $(13,541) $27,593
==== ==== ==== ======== ======== ======== ======= ======== =======
Taxable equivalent
adjustment......... $ 12,603 $ 10,805 $ 8,253
======== ======== ========
<CAPTION>
1993 V. 1992
----------------------------
CHANGE DUE TO
INCREASE -----------------
(DECREASE) RATE VOLUME
---------- -------- -------
<S> <C> <C> <C>
ASSETS
Securities (1):
U.S. Treasury,
government and
other (5)......... $ 4,659 $(24,516) $29,175
States and
political
subdivisions...... (370) (199) (171)
-------- -------- -------
Total securities
(5).............. 4,289 (24,715) 29,004
Other earning as-
sets (2)........... (3,065) (1,130) (1,935)
Loans and leases,
net of unearned
income
(1)(3)(4)(5)....... (22,796) (47,195) 24,399
-------- -------- -------
Total earning
assets........... (21,572) (73,040) 51,468
-------- -------- -------
Non-earning as-
sets.............
Total assets....
LIABILITIES AND
SHAREHOLDERS' EQ-
UITY
Interest-bearing
deposits:
Savings deposits.. 4,047 (3,459) 7,506
Money market de-
posits............ (12,301) (13,969) 1,668
Time deposits..... (47,714) (41,563) (6,151)
-------- -------- -------
Total interest-
bearing
deposits......... (55,968) (58,991) 3,023
Short-term
borrowings......... 3,885 297 3,588
Long-term debt..... (2,858) (10,002) 7,144
-------- -------- -------
Total interest-
bearing
liabilities...... (54,941) (68,696) 13,755
-------- -------- -------
Demand deposits..
Other liabili-
ties.............
Shareholders'
equity...........
Total
liabilities and
shareholders'
equity...........
Average interest
rate spread........
Net yield on earn-
ing assets......... $ 33,369 $ (4,344) $37,713
======== ======== =======
Taxable equivalent
adjustment.........
</TABLE>
- ----
(1) Yields related to investment securities, loans and leases exempt from both
federal and state income taxes, federal income taxes only or state income
taxes only are stated on a taxable equivalent basis assuming tax rates in
effect for the periods presented.
(2) Includes federal funds sold and securities purchased under resale
agreements or similar arrangements.
(3) Loan fees, which are not material for either of the periods shown, have
been included for rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans has been included as income.
(5) Includes assets which were held for sale or available for sale at
amortized cost.
26
<PAGE>
The net yield FTE on earning assets declined from 4.43% in 1993 to 4.28% in
1994. Several factors, including the impact of the overall interest rate
environment, contributed to this decline: (i) prepayments on higher yielding
mortgage loans continued in the first quarter as consumers refinanced at lower
rates, (ii) the acquisition of thrift assets and liabilities with historically
narrower spreads and (iii) the utilization of overnight short-term borrowings,
which reprice constantly compared to more stable deposits, to fund loan growth
and securities growth. The 1994 mergers with The First, Regency and Home
totaled more than $2.4 billion in thrift assets which had an initial negative
impact of approximately 30 basis points on Southern National's net yield FTE,
as originally reported.
For several years, financial institutions have been hampered by fluctuating
interest rate spreads and margins as a result of deregulation and increased
competition, particularly from non-financial institution competitors that are
not subject to the same regulatory burdens imposed upon federally-insured
institutions. Southern National has addressed environmental impacts on interest
rate spreads through careful and timely monitoring of these percentage
fluctuations and taking a proactive approach in pricing loan and deposit
products to protect and enhance these margins while remaining competitive.
Repricing of deposits, on- and off-balance sheet hedging and other active
asset/liability management techniques will continue to be utilized in 1995, as
they were in 1994, to effectively manage the net yield. See additional
discussion of hedging strategies in the Asset/Liability Management section of
this report.
NONINTEREST INCOME
The highly competitive environment in which financial institutions operate
continues to raise the importance of recognizing and pursuing opportunities to
expand noninterest income. The primary components of noninterest income are
service charges on deposit accounts and fees from bank and bank-related
services.
Noninterest income for the year ended December 31, 1994 was $83.0 million,
compared to $87.7 million for the same period in 1993 and $78.8 million in
1992. Securities gains were the primary factor contributing to the decline in
1994 and the increase in 1993 over 1992. Securities gains decreased from $13.7
million in 1993 to $906,000 for 1994. Securities gains were $2.0 million in
1992. The percentage of total revenues, calculated as net interest income plus
noninterest income excluding securities gains, derived from noninterest (fee-
based) income for the year ended December 31, 1994 was 20%, up slightly from
19% last year and down from 22% in 1992.
Service charges on deposit accounts decreased by $1.6 million, or 4%, during
1994. The 1993 balance was only $383,000 higher than the 1992 balance of $36.5
million. Several factors accounted for this scenario. First, Southern National
has been very successful in promoting the "Select Banking" program,
particularly to new customers acquired through mergers. Many service fees are
waived for "Select Banking" customers. Second, because of competitive
considerations, Southern National decreased the percentage of deposit insurance
expense passed through to customers during the first quarter of 1994. Third, in
an effort to develop customer loyalty, in the first quarter of 1994 Southern
National waived certain service charges for customers acquired through the
mergers with Regency, Home and The First. Fourth, rising interest rates during
1994 have negatively affected service charges on deposit accounts by increasing
the earnings credit used in service charge computations. Also, there has been a
slight decrease in the number of accounts subject to service charges during
1994.
Nondeposit fees and commissions increased in 1994, to $32.0 million versus
$22.5 million in 1993 and $20.5 million in 1992. The increase in fee income
during the current year was caused by an increase in mortgage banking fees of
$7.6 million. In 1993, the amortization of purchased mortgage servicing rights
and excess servicing rights, included in mortgage banking fees, was accelerated
by The First in light of rapid prepayment speeds. In addition, bankcard-related
fees in 1994 increased $1.5 million over 1993.
II-27
<PAGE>
As previously mentioned, Southern National sells most of its fixed-rate
mortgage loan production while retaining adjustable-rate loans in the
portfolio. With the rise in interest rates during 1994, mortgage originations
have shifted to adjustable-rate mortgage loans and refinancings have been
reduced significantly. As a result of the lower production as well as rising
interest rates, gains on sales of mortgage loans declined from $5.8 million in
1993 to $1.0 million for 1994, an 83% decrease. Gains on sales in 1992 were
$11.7 million. The decrease in other noninterest income was offset by income
from operating leases of $1.5 million and option income of $1.6 million.
The expanding and highly competitive environment in which financial
institutions operate has elevated the importance of developing new sources of
noninterest income. Management is placing renewed emphasis on the
identification and implementation of other fee-based initiatives which are
expected to add to earnings in future quarters.
- --------------------------------------------------------------------------------
TABLE 8
NONINTEREST INCOME
<TABLE>
<CAPTION>
% CHANGE
---------------
1994 V. 1993 V.
1994 1993 1992 1993 1992
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts.... $35,222 $36,838 $36,455 (4)% 1%
------- ------- -------
Insurance fees and commissions......... 5,930 6,569 3,447 (10) 91
Trust fees............................. 3,613 3,000 2,688 20 12
Bankcard-related fees.................. 9,099 7,567 5,526 20 37
Other fees and commissions............. 13,362 5,354 8,793 150 (39)
------- ------- -------
Total nondeposit fees and
commissions......................... 32,004 22,490 20,454 42 10
------- ------- -------
Securities gains, net.................. 906 13,714 1,972 NM NM
------- ------- -------
Other income........................... 14,914 14,630 19,871 2 (26)
------- ------- -------
Total noninterest income............. $83,046 $87,672 $78,752 (5)% 11%
======= ======= ======= === ===
</TABLE>
- --------
NM--not meaningful
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
Noninterest expense was $231.2 million for 1994, compared to $336.1 million
for the same period a year ago and $233.6 million in 1992. Special accruals and
expenses related to mergers led to an elevated level of noninterest expense in
1993. Corporate expansion during last year also had an impact on 1994
noninterest expense. On October 7, 1993, Southern National acquired East Coast
in a transaction accounted for as a purchase. Consequently, 1994 reflects the
impact of the operating costs associated with this institution, whereas 1993
did not include a full year's expense related to this acquisition.
Total personnel expense, the largest component of noninterest expense, was
$119.0 million in 1994, a $12.7 million, or 10%, decrease over the same period
in 1993. Personnel expense totalled $114.3 million in 1992. Costs were down
somewhat because of the realization of synergies from the acquisitions
completed in the first quarter of 1994 and vacant positions which have not been
filled in anticipation of the pending merger with BB&T. Full-time-equivalent
employees decreased by approximately 200 during 1994, a reflection of these
factors. 1993 also included $7.0 million in merger related accruals for
severance, buyout of employment contracts, deferred compensation and associated
fringe benefits.
Occupancy and equipment expense for the year ended December 31, 1994 declined
$2.0 million, or 5%, compared to 1993. A $1.4 million charge related to the
accelerated depreciation of technology-related
II-28
<PAGE>
equipment to facilitate future upgrading is included in the 1993 amount and
mitigates the normal increases in this area. Occupancy and equipment expense
for 1992 was $33.2 million, demonstrating a 15% increase in 1993.
FDIC expense increased $327,000, or 2%, for the year ended December 31, 1994
as a result of deposit growth through acquisitions. The FDIC has approved the
implementation of a risk-related insurance system that places each financial
institution in one of nine risk categories based on their level of capital and
supervisory rating. There is an eight basis point spread between the highest
and lowest premium rates where well-capitalized institutions with the highest
supervisory rating pay .23% of deposits and under capitalized institutions with
the lowest supervisory rating pay .31%. Southern National is a well capitalized
institution, and management expects to maintain this position in 1995. The
First was not considered a well-capitalized institution, and, as a result, 1993
FDIC expense was elevated because it reflected the impact of a full year of The
First's higher premiums. 1994 includes the effect of only a half year's higher
premiums associated with The First. FDIC expense during 1992 was $12.8 million,
10% less than the 1993 balance.
Foreclosed property expense, including net losses on sales and write-downs,
amounted to $1.4 million during 1994, compared to $22.6 million in 1993 and
$11.4 million during 1992. The primary reason for the elevated foreclosed
property expense in 1993 was the writedown by The First of foreclosed property
and real estate acquired for development and resale to reflect management's
expectations of net realizable value given the intent to aggressively dispose
of these properties. In early February, Southern National completed the sale of
$109 million of loan-related assets including $20 million of properties and $79
million of loans belonging to the First. The $49.1 million loss on this bulk
asset sale was recorded in 1993.
Other expense decreased $20.1 million from 1993 to 1994 primarily as a result
of merger-related expenses recorded last year. Direct merger expenses
(attorneys, accountants, printers, filing fees, etc.) accrued by The First,
Regency and Home exceeded $3 million. During 1993, The First shortened the
estimated useful lives of core deposit intangibles, which resulted in
accelerated amortization during that year. In addition, The First adopted SFAS
No. 72, "Accounting for Certain Adjustments of Banking or Thrift Institutions,"
and wrote off existing goodwill through a cumulative "catch-up" adjustment.
Consequently, 1994 had no amortization related to The First's goodwill and core
deposit intangibles. Primarily as a result of this, amortization expense in
1994 was $7.6 million less than in the prior year. Data processing expense was
also substantially affected by merger activity. The 1993 increase over 1992
included accruals for prepayment penalties for the early termination of
equipment leases and software maintenance contracts of $2.6 million were
accrued in 1993, while 1994 benefited from the synergies associated with the
consolidation of data processing operations. Other merger-related activities
and expenditures contributing to the heightened 1993 expense were advertising,
travel, corporate dues, directors' fees and education.
II-29
<PAGE>
TABLE 9
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
% CHANGE
---------------
1994 V. 1993 V.
1994 1993 1992 1993 1992
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries............................ $ 97,105 $107,052 $ 92,907 (9)% 15%
Employee benefits................... 21,918 24,629 21,351 (11) 15
-------- -------- --------
Total personnel expense........... 119,023 131,681 114,258 (10) 15
-------- -------- --------
Net occupancy expense............... 17,313 17,383 16,323 -- 6
Furniture and equipment expense..... 18,830 20,770 16,861 (9) 23
-------- -------- --------
Total occupancy and equipment
expense.......................... 36,143 38,153 33,184 (5) 15
-------- -------- --------
Federal deposit insurance expense... 14,401 14,074 12,826 2 10
-------- -------- --------
Foreclosed property expense......... 1,374 22,601 11,355 (94) 99
-------- -------- --------
Loss on bulk sale of assets......... -- 49,147 -- NM NM
-------- -------- --------
Amortization of intangibles......... 1,913 9,527 5,411 (80) 76
Stationery and printing............. 5,649 5,034 4,433 12 14
Advertising......................... 4,813 7,000 6,439 (31) 9
Data processing expense............. 2,498 7,374 4,279 (66) 72
Credit card expense (processing,
etc.).............................. 7,027 5,680 4,453 24 28
Communications...................... 5,719 5,575 4,400 3 27
Postage and freight................. 3,941 3,988 3,856 (1) 3
Charitable contributions............ 1,331 1,263 972 5 30
Other expense....................... 27,397 34,962 27,706 (22) 26
-------- -------- --------
Total other expense............... 60,288 80,403 61,949 (25) 30
-------- -------- --------
Total noninterest expense....... $231,229 $336,059 $233,572 (31)% 44%
======== ======== ======== === ===
</TABLE>
- --------
NM--not meaningful
- --------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES
Federal income taxes increased from $22.4 million for the year ended December
31, 1993 to $57.6 million for the same period in 1994 because of higher pretax
income. The effective tax rate decreased from 73.3% in 1993 to 34.5% in 1994.
The high effective tax rate in 1993 reflects substantially lower taxable income
because of losses, including the loss on bulk sale of assets, incurred during
the acquisition of The First and $9.4 million of additional tax related to the
tax bad debt reserves of savings institutions which converted to commercial
banks during the year. The effective tax rate for 1994 was less than the
statutory federal income tax rate primarily because of tax-exempt income
derived from obligations of states and political subdivisions. Income tax
expense during 1992 was $40.0 million, reflecting an effective tax rate of 40%.
In 1993, Southern National adopted SFAS No. 109, "Accounting for Income Taxes,"
which supersedes Accounting Principles Board Opinion No. 11 and SFAS No. 96.
SFAS No. 109 requires that the net deferred tax assets and liabilities on the
Consolidated Statements of Condition be recorded at current tax rates. The net
change for the year in the deferred tax accounts on the Consolidated Statements
of Condition is recorded as deferred taxes in the provision for income taxes on
the Consolidated Statements of Operations. See Note L--"Income Taxes" for a
detailed analysis of the components of income tax expense.
II-30
<PAGE>
ASSET/LIABILITY MANAGEMENT
Asset/liability management activities are designed to assure liquidity and,
through the management of Southern National's interest sensitivity position, to
achieve relatively stable net interest margins. It is the responsibility of the
ALCO to set policy guidelines and to establish long-term strategies with
respect to interest rate exposure and liquidity. The ALCO, which is composed
primarily of executive management, meets regularly to review Southern
National's interest rate and liquidity risk exposures in relation to present
and prospective market and business conditions, and adopts funding and balance
sheet management strategies that are intended to assure that the potential
impact on earnings and liquidity is within conservative standards.
A prime objective in interest rate risk management is the avoidance of wide
fluctuations in net interest income through balancing the impact of changes in
interest rates on interest-sensitive assets and interest-sensitive liabilities.
Management uses Interest Sensitivity Simulation Analysis ("Simulation") to
measure the interest rate sensitivity of earnings. This method of analysis is
discussed in Inflation and Changing Interest Rates.
Balance sheet repositioning is the most efficient and cost-effective means of
managing interest rate risk and is accomplished through strategic pricing of
asset and liability accounts. The expected result of strategic pricing is the
development of appropriate maturity and repricing streams in those accounts to
produce consistent net income during adverse interest rate environments. The
ALCO monitors loan, investment and liability portfolios to ensure comprehensive
management of interest rate risk on the balance sheet. These portfolios are
analyzed for proper fixed-rate and variable-rate "mixes" given a specific
interest rate outlook.
LIQUIDITY
Liquidity represents a bank's continuing ability to meet its funding needs,
primarily deposit withdrawals, timely repayment of borrowings and other
liabilities and funding of loan commitments. In addition to its level of liquid
assets, many other factors affect a bank's ability to meet liquidity needs,
including access to additional funding sources, total capital position and
general market conditions.
Traditional sources of liquidity include proceeds from maturity of investment
securities, repayment of loans and growth in core deposits. Federal funds
purchased, repurchase agreements and other short-term borrowings supplement
these traditional sources. Management believes liquidity obtainable from these
sources will be adequate to meet current requirements.
Total cash and cash equivalents decreased to $274.6 million at December 31,
1994 compared to $362.3 million in 1993 and $372.8 in 1992. Net cash provided
by operating activities for the year increased from $255.6 million to $443.5
million. Cash provided by operating activities in 1992 was $7.8 million. The
1994 increase was primarily the result of significantly higher net income
versus a prior year loss and a decrease of $479.8 million in net originations
of loans held for sale. Southern National traditionally sells its fixed-rate
mortgage loan production and retains adjustable-rate mortgage loans in the
portfolio. Because of rising interest rates during the current year, mortgage
origination volumes have shifted from fixed-rate to adjustable-rate loans and
mortgage refinancing has been substantially reduced. Sales of loans resulted in
a source of funds of $596.2 million during the current year compared to $986.3
million during the same period last year. Net cash flows used in investing
activities decreased from $865.9 million in 1993 to $847.8 million in 1994.
These balances were significantly higher than the cash used in investing
activities during 1992 of $377.4 million. The primary factor creating the $18.2
million net decline during 1994 was a $304.3 million decrease in purchases of
securities offset by a $183.0 million increase in net loan originations. Cash
flows provided by financing activities decreased from $599.8 million to $316.6
million because of a $229.8 million net decrease in deposits compared to 1993
and a net $415.7 million decrease in cash flows related to long-term debt.
These decreases were offset by a $510.6 million increase in cash flows from
short-term borrowings. In 1992, Southern National's net cash flows provided
from financing activities were $408.9 million.
II-31
<PAGE>
BALANCE SHEET REPOSITIONING
During 1994, management utilized strategies that effectively added fixed-rate
assets and variable-rate liabilities to the balance sheet. These strategies
were employed as rising interest rates created attractive investment rates of
return and spreads over appropriate funding sources. Conservative interest rate
sensitivity standards were followed as management instituted these strategies.
U.S. Treasury and mortgage-backed agency securities, which were funded through
dealer repurchase agreements ("repos") and dollar repurchase agreements
("dollar rolls"), were added to the balance sheet. Repos are agreements to sell
and repurchase identical or substantially identical securities at a specified
date and price. Dollar rolls are agreements to sell and repurchase similar but
not identical securities. Such agreements are attractive because the term may
be tailored to the specific funding strategies of Southern National and the
rates are more favorable than other funding sources.
As discussed in Note R--"Derivatives and Off-Balance Sheet Financial
Instruments," interest rate volatility often increases to the point that
balance sheet repositioning through on-balance sheet strategies cannot occur
rapidly enough to avoid adverse net income effects. Off-balance sheet
strategies and synthetic hedges must be utilized to supplement balance sheet
repositioning under these conditions.
As a result of Southern National's on-balance sheet repositioning and off-
balance sheet hedging, the negative impact of a gradual, historically-
influenced 200 basis point rise over 12 months in interest rates is projected
to be only 2.57% of net income. Stated in terms of earnings per share, a
gradual, historically-influenced 200 basis points increase in interest rates is
projected to decrease earnings by less than one cent per share by December 31,
1995. Conversely, if interest rates were to decline 200 basis points based on a
gradual-historical interest rate scenario, given Southern National's balance
sheet position at year end, the impact on net income over a 12 month period
would be an increase of approximately 2.37% compared to a flat interest rate
scenario.
Southern National's interest rate sensitivity is illustrated in the following
interest rate gap table. The table reflects rate-sensitive positions at
December 31, 1994 (abbreviated) 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 summed to show the interest rate sensitivity
gap. To reflect anticipated prepayments, certain asset and liability categories
are included in the table based on estimated rather than contractual maturity
dates.
II-32
<PAGE>
TABLE 10
EXPECTED REPRICING OR MATURITY DATE
DECEMBER 31, 1994
<TABLE>
<CAPTION>
WITHIN ONE TO TWO TO AFTER FIVE
ONE YEAR TWO YEARS FIVE YEARS YEARS TOTAL
----------------- ----------------- ---------------- ----------------- ---------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- ---- ----------- ---- ---------- ---- ---------- ----- ---------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Securities and other
assets................ $ 420,736 6.16% $ 690,210 6.29% $1,235,928 6.20% $ 420,307 7.32% $2,767,200 6.39%
Federal funds sold..... 9,010 5.50 -- -- -- -- -- -- 9,010 5.50
Interest-earning loans. 2,935,288 8.62 491,897 8.13 1,277,959 7.85 751,154 10.06 5,456,323 8.59
----------- ---- ----------- ---- ---------- ---- ---------- ----- ---------- ----
TOTAL INTEREST-EARNING
ASSETS................. 3,365,034 1,182,107 2,513,887 1,171,461 8,232,532
----------- ----------- ---------- ---------- ----------
LIABILITIES
Deposits............... 4,269,005 3.88 473,502 4.93 301,014 4.73 339,385 2.72 5,382,920 3.95
Borrowings............. 1,330,959 5.49 59,425 5.69 77,208 7.39 18,335 7.74 1,485,946 5.63
Federal funds
purchased............. 366,032 5.50 -- -- -- -- -- -- 366,038 5.50
----------- ---- ----------- ---- ---------- ---- ---------- ----- ---------- ----
TOTAL INTEREST-BEARING
LIABILITIES............ 5,965,996 532,927 378,222 357,720 7,234,903
----------- ----------- ---------- ---------- ----------
ASSET-LIABILITY GAP..... (2,600,962) 649,180 2,135,665 813,741
----------- ----------- ---------- ----------
DERIVATIVES AFFECTING
INTEREST RATE
SENSITIVITY
Pay-fixed interest rate
swaps................. 59,062 5.18 (3,094) 4.98 (33,678) 5.17 (22,290) 5.23
Receive-fixed interest
rate swaps............ (550,000) 5.95 -- -- 550,000 5.98 -- --
----------- ----------- ---------- ----------
INTEREST RATE
SENSITIVITY GAP........ $(3,091,900) $ 646,086 $2,651,987 $ 791,451
=========== =========== ========== ==========
CUMULATIVE INTEREST RATE
SENSITIVITY GAP........ $(3,091,900) $(2,445,814) $ 206,173 $ 997,624
=========== =========== ========== ==========
</TABLE>
INFLATION AND CHANGING INTEREST RATES
The majority of assets and liabilities of financial institutions are monetary
in nature and, therefore, differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories.
Fluctuations in interest rates and the efforts of the FRB to regulate money and
credit conditions have a greater effect on a financial institution's
profitability than do the effects of higher costs for goods and services.
Through its balance sheet management function, Southern National is positioned
to respond to changing interest rates and inflationary trends.
Simulation Analysis takes into account the current contractual agreements
that Southern National has made with its customers on deposits, borrowings,
loans, investments and any commitments to enter into those transactions.
Management monitors Southern National's interest sensitivity by means of a
computer-based asset/liability model that incorporates current volumes and
rates, maturity streams, repricing opportunities and anticipated growth. The
model calculates an earnings estimate based on current portfolio balances and
rates, less any balances that are scheduled to reprice or mature. Balances and
rates that will replace the previous balances and any anticipated growth are
added. This level of detail is needed to correctly simulate the effect that
changes in interest rates and anticipated balances will have on the earnings of
Southern National. This method is subject to the assumptions that underlie the
process, but it provides a better illustration of true earnings potential than
other analyses such as static or dynamic gap.
II-33
<PAGE>
The following table represents the sensitivity position as of a point in
time, and the position can be modified significantly by management within a
short time period. This tabular data does not reflect the impact of a change in
the credit quality of Southern National's assets and liabilities. To attempt to
quantify the potential change in net income, given a change in interest rates,
various interest rate scenarios are applied to the projected balances,
maturities and repricing opportunities. The resulting change in net income
reflects the level of sensitivity that net income has in relation to changing
interest rates. The Instantaneous Parallel rate shocks assume that all
interest-bearing assets and liabilities move simultaneously and instantaneously
in magnitude and direction. The Gradual, Historical rate shocks assume that
individual interest-bearing assets and liabilities move gradually over a
twelve-month time period in correlation to historical relationships with the
assumed change in the prime rate. For example, Southern National's Money Market
Account rate has historically changed only one-third as much as the prime rate.
The following table reflects the impact on net income of certain interest rate
scenarios.
- --------------------------------------------------------------------------------
TABLE 11
INTEREST SENSITIVITY SIMULATION ANALYSIS
<TABLE>
<CAPTION>
INTEREST
RATE
SCENARIO REFERENCE RATE
-------- -------------------------------------------- ANNUALIZED
MONEY PERCENT
INSTANTANEOUS MARKET CHANGE IN
PARALLEL PRIME ACCOUNT NET INCOME
------------- ------- -------- ----------
<S> <C> <C> <C>
+4.00% 12.50% 6.84% -47.5%
+3.00 11.50 5.84 -35.5
+2.00 10.50 4.84 -23.5
+1.00 9.50 3.84 -11.6
No change 8.50 2.84 --
-1.00 7.50 1.84 11.3
-2.00 6.50 .84 22.1
-3.00 5.50 -- 29.2
-4.00 4.50 -- 31.3
<CAPTION>
GRADUAL
HISTORICAL
----------
<S> <C> <C> <C>
+2.00% 10.50 3.78 -2.6
-2.00 6.50 2.46 2.4
- -----------------------------------------------------------------------------------------------
</TABLE>
A comprehensive policy has been developed for setting parameters for the
management of interest rate risk as defined by the results of the model's
output. Management has established that earnings should not fluctuate more than
5% up or down given each gradual 1% change in rates over a 12-month period. To
control that variance, and to manage the balance sheet consistently with any
projected interest rate environment, management uses a number of natural or on-
balance sheet strategies as well as off-balance sheet strategies as discussed
in Asset/Liability Management and in Note R--"Derivatives and Off-Balance Sheet
Financial Instruments.
CAPITAL ADEQUACY AND RESOURCES
The maintenance of appropriate levels of capital is a management priority.
Overall capital adequacy is monitored on an ongoing basis by management and
reviewed regularly by the Board of Directors. Southern National's principal
capital planning goals are to provide an adequate return to shareholders while
retaining a sufficient base from which to provide future growth and compliance
with all regulatory standards.
Shareholders' equity at December 31, 1994 was $632.3 million versus $564.9
million at December 31, 1993. As a percentage of total assets, total
shareholders' equity was 7.2% at December 31, 1994, compared to 6.8% at the
prior year end. Southern National's book value per common share at December 31,
1994 was $12.64, versus $11.42 at December 31, 1993.
II-34
<PAGE>
Southern National's internal capital formation rate (net income less
dividends as a percentage of average equity) was 12.4% during 1994. Average
shareholders' equity as a percentage of average assets was 7.2% and 7.7% for
the years ended December 31, 1994 and 1993, respectively.
Tier 1 and total risk-based capital ratios at December 31, 1994 were 12.8%
and 14.1%, respectively. The Tier 1 leverage ratio was 7.5% at December 31,
1994. These capital ratios measure the capital to risk-weighted assets and off-
balance sheet items as defined by FRB guidelines. An 8% minimum of total
capital to risk-weighted assets is required. One-half of the 8% minimum must
consist of tangible common shareholders' equity under regulatory guidelines.
The leverage ratio, established by the FRB, measures Tier 1 capital to average
total assets less goodwill and must be maintained in conjunction with the risk-
based capital standards. The regulatory minimum for the leverage ratio is 3%.
- --------------------------------------------------------------------------------
TABLE 12
CAPITAL--COMPONENTS AND RATIOS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1993
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Tier 1 capital............................................. $641,699 $524,902
Tier 2 capital............................................. 62,440 69,273
-------- --------
Total capital.............................................. $704,139 $594,175
======== ========
Risk-based capital ratios:
Tier 1 capital........................................... 12.8% 10.9%
Total capital............................................ 14.1 12.4
Tier 1 leverage ratio.................................... 7.5 6.4
</TABLE>
- --------------------------------------------------------------------------------
Southern National's long-term debt to debt and equity ratio at December 31,
1994 was 23.8% compared to a prior year balance of 45.9%. This decline was
caused by a decrease in the level of advances from the Federal Home Loan Bank
as well as by an increase in equity.
- --------------------------------------------------------------------------------
TABLE 13
SELECTED EQUITY DATA AND RATIOS
<TABLE>
<CAPTION>
1994 1993 1992
------ ------- ------
<S> <C> <C> <C>
Book value per common share at year end.............. $12.64 $ 11.42 $13.16
Book value per common share percentage increase over
prior year end...................................... 10.68% (13.22)% 8.31%
Common dividends per share as a percentage increase
over prior year end................................. 15.63 28.00 8.70
Equity at year end to year end:
Total assets....................................... 7.2 6.8 7.8
Net loans and leases*.............................. 11.8 11.8 12.7
Deposits........................................... 10.3 8.8 9.5
Equity and long-term debt.......................... 76.2 54.1 66.4
</TABLE>
- --------
* Amounts net of unearned income, loans held for sale and allowance for loan
and lease losses.
II-35
<PAGE>
STOCK AND DIVIDENDS
The management of Southern National continually monitors capital adequacy to
provide a foundation for future asset growth and to promote investor and
depositor confidence. At the end of 1994, Southern National had 44.2 million
shares of common stock issued and outstanding compared to 43.0 million shares
outstanding at the previous year end. The principal reason for the increase in
common shares was the issuance of 727,000 shares relating to the acquisitions
of McLean, Leasing Associates, Inc. and Prime Rate. At December 31, 1994, the
total market capitalization of Southern National's common stock was $844.5
million.
Southern National's ability to pay dividends is primarily dependent on
earnings from operations, the adequacy of capital and the availability of
liquid assets for distribution. The Parent Company's ability to replenish
liquid assets available for distribution is primarily dependent on the ability
of the banking subsidiaries (SNBNC, SNBSC and SSB) to pay dividends to the
Parent Company. Historically, Southern National's cash dividends have been
approximately one third of earnings resulting from management's goal to retain
sufficient capital to support future growth and to meet regulatory requirements
while providing a competitive return on investment to shareholders. Southern
National's common dividend payout ratio, computed by dividing dividends per
common share by earnings available per common share, was 31.0% in 1994.
Southern National's quarterly cash dividend per common share was increased 18%
after the second quarter to $.20 per common share. This increase marked the
22nd consecutive year that cash dividends have been increased. A discussion of
dividend restrictions is included in Note O--"Regulatory Requirements and Other
Restrictions."
Southern National's common stock is traded on the New York Stock Exchange
("NYSE") under the symbol "SNB." The accompanying table, "Quarterly Common
Stock Summary," sets forth the high, low and last sales prices for the common
stock on the NYSE as reported on the NYSE Composite Tape and the cash dividends
paid per share of common stock for each of the last eight quarters.
At December 31, 1994, Southern National had 770,000 shares of 6.75%
Cumulative Convertible Preferred Stock, Series A issued and outstanding in the
form of 3,080,000 depositary shares, at a stated value of $25 per depositary
share. Each depositary share represents a one-quarter interest in a preferred
share and is convertible at the option of the holder into 1.4767 shares of
common stock. Accordingly, 4,548,236 shares of common stock have been reserved
for conversion of the preferred stock. The preferred stock will be redeemable
at the option of Southern National, in whole or in part, or from time to time,
on or after March 1, 1996 at $26.0125 per depositary share through February 28,
1997, with prices decreasing annually thereafter to $25 per depositary share on
and after March 1, 2002, plus, in each case, dividends accrued and accumulated
but unpaid to the redemption date. The depositary shares have a liquidation
value of $25 per share, or $77 million in the aggregate, plus accrued but
unpaid dividends to, but excluding, the date of final distribution.
TABLE 14
QUARTERLY COMMON STOCK SUMMARY
<TABLE>
<CAPTION>
1994 1993
------------------------------ ------------------------------
SALES PRICES SALES PRICES
-------------------- --------------------
DIVIDENDS DIVIDENDS
HIGH LOW LAST PAID HIGH LOW LAST PAID
------ ------ ------ --------- ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarter Ended
March 31....... $20.50 $18.38 $19.13 $0.17 $22.50 $19.63 $21.88 $0.15
June 30........ 21.88 18.88 20.00 0.17 23.38 19.25 21.88 0.15
September 30... 21.88 20.00 20.75 0.20 23.38 19.75 20.50 0.17
December 31.... 21.13 17.13 19.13 0.20 21.88 18.88 19.75 0.17
Year......... 21.88 17.13 19.13 0.74 23.38 18.88 19.75 0.64
</TABLE>
II-36
<PAGE>
FOURTH QUARTER RESULTS
Net income for the fourth quarter of 1994 was $28.7 million, compared to a
loss of $61.4 million for the prior year. On a per share basis, fully diluted
net income was $.59 for the current quarter compared to a loss of $1.44 a year
ago. Annualized returns on average assets and average common equity were 1.34%
and 19.72%, respectively, for the fourth quarter compared to losses of 2.98%
and 44.76% in the fourth quarter of the prior year.
Certain material, non-recurring adjustments were recorded by The First,
Regency and Home in the fourth quarter 1993 in connection with the mergers with
Southern National in early 1994. These adjustments resulted in the substantial
loss reflected in the final quarter of the prior year. The provision was $16.4
million higher in the fourth quarter 1993 than in the fourth quarter 1994;
noninterest expense was $90.8 million higher; and noninterest income was $8.2
million lower. Management's plans for the ultimate recovery of The First's
loans, foreclosed property and real estate acquired for development and resale
were demonstrably different from the plans that served as the basis for The
First's estimate of losses. This situation necessitated the significantly
higher provision in 1993 and accounted for foreclosed property expense,
included in noninterest expense, of $14.9 million, which was $14.8 million
higher than the 1994 amount. Noninterest expense was also affected by a $49.1
million loss on the bulk sale of $109 million in loan-related assets. Personnel
costs in fourth quarter 1993 were $11.8 million higher than the same quarter in
1994 primarily because of severance pay and the buyout of employment contracts,
deferred compensation and related fringe benefits. Amortization of intangibles
was $6.8 million greater principally as a result of the write-off of core
deposit intangibles in conjunction with the shortening of estimated useful
lives. Noninterest income in 1993 was negatively affected by the acceleration
of the amortization of purchased mortgage servicing rights and excess servicing
rights in light of the heightened prepayment speeds. In addition, fourth
quarter 1994 included $2.8 million in gains on the sale of servicing rights.
In the fourth quarter, net interest income FTE was $86.5 million. Growth in
average earning assets offset by a decrease in the net yield FTE resulted in
the increase.
The accompanying table, "Quarterly Financial Summary--Unaudited," presents
condensed information relating to eight quarters in the period ended December
31, 1994.
II-37
<PAGE>
TABLE 15
QUARTERLY FINANCIAL SUMMARY--UNAUDITED
<TABLE>
<CAPTION>
1994 1993
-------------------------------------------- --------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARY OF
OPERATIONS
Net interest income
FTE................... $ 86,499 $ 84,978 $ 82,327 $ 81,516 $ 83,727 $ 80,758 $ 79,470 $ 77,313
FTE adjustment......... 3,305 3,136 3,204 2,958 2,822 2,880 2,583 2,520
Provision for loan and
lease losses.......... 3,554 989 1,532 1,171 19,945 3,540 4,291 3,662
Securities (losses)
gains, net............ -- (48) 239 715 (483) 170 9 14,018
Noninterest income..... 22,319 19,273 18,886 21,662 14,607 19,757 21,358 18,236
Noninterest expense.... 58,738 56,976 55,958 59,557 149,582 61,100 61,286 64,091
Provision for income
taxes................. 14,521 15,089 13,874 14,160 (13,094) 11,436 10,049 14,054
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
cumulative effect..... 28,700 28,013 26,884 26,047 (61,404) 21,729 22,628 25,240
Less: Cumulative effect
*..................... -- -- -- -- -- -- -- 27,217
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)...... $ 28,700 $ 28,013 $ 26,884 $ 26,047 $ (61,404) $ 21,729 $ 22,628 $ (1,977)
========== ========== ========== ========== ========== ========== ========== ==========
Fully diluted income
(loss) per share
before cumulative
effect................ $ .59 $ .58 $ .56 $ .54 $ (1.44) $ .47 $ .49 $ .57
Less: Cumulative effect
*..................... -- -- -- -- -- -- -- .65
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Fully diluted net
income (loss) per
share................. $ .59 $ .58 $ .56 $ .54 $ (1.44) $ .47 $ .49 $ (.08)
========== ========== ========== ========== ========== ========== ========== ==========
SELECTED AVERAGE
BALANCES
Assets................. $8,572,255 $8,384,741 $8,145,851 $8,040,570 $8,230,886 $7,722,452 $7,584,037 $7,351,738
Securities............. 2,700,863 2,624,122 2,592,079 2,491,192 2,499,473 2,278,694 2,203,004 2,042,545
Loans and leases **.... 5,311,018 5,147,569 4,963,107 4,834,330 4,936,427 4,725,734 4,666,481 4,671,212
Total earning assets... 8,094,623 7,928,645 7,694,832 7,600,265 7,724,299 7,271,089 7,110,863 6,904,781
Deposits............... 6,235,708 6,246,837 6,231,836 6,279,505 6,375,157 6,118,118 6,108,962 6,012,947
Short-term borrowings.. 1,425,828 1,251,607 1,031,499 802,841 655,249 564,289 460,474 407,434
Long-term debt......... 206,120 213,774 228,524 303,958 463,127 371,005 371,808 301,427
Total interest-bearing
liabilities........... 7,093,354 6,951,593 6,721,291 6,472,544 6,697,541 6,344,155 6,267,370 6,118,355
Shareholders' equity... $ 629,978 $ 598,868 $ 582,118 $ 578,961 $ 634,471 $ 602,291 $ 582,571 $ 567,399
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
- --------
* Cumulative effect of changes in accounting principles, net of income taxes.
** Loans and leases are net of unearned income and loans held for sale.
II-38
<PAGE>
SIX-YEAR FINANCIAL SUMMARY AND SELECTED RATIOS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIVE-YEAR
COMPOUND
1994 1993 1992 1991 1990 1989 GROWTH RATE
---------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income........ $ 578,388 $ 547,310 $ 571,434 $ 590,944 $ 604,592 $ 579,809 -- %
Interest expense....... 255,671 236,847 291,788 368,598 406,453 397,164 (8.4)
---------- ---------- ---------- ---------- ---------- ----------
Net interest income.... 322,717 310,463 279,646 222,346 198,139 182,645 12.1
Provision for loan and
lease losses.......... 7,246 31,438 25,671 30,602 29,693 17,019 (15.7)
---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan and lease losses. 315,471 279,025 253,975 191,744 168,446 165,626 13.8
Noninterest income..... 83,046 87,672 78,752 81,368 65,665 60,588 6.5
Noninterest expense.... 231,229 336,059 233,572 204,601 188,742 171,106 6.2
---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes................. 167,288 30,638 99,155 68,511 45,369 55,108 24.9
Provision for income
taxes................. 57,644 22,445 39,992 23,902 14,500 18,692 25.3
---------- ---------- ---------- ---------- ---------- ----------
Income before
cumulative effect of
changes in accounting
principles............ 109,644 8,193 59,163 44,609 30,869 36,416 24.7
Less: cumulative effect
of changes in
accounting principles,
net of income taxes... -- 27,217 -- -- -- -- NM
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)...... $ 109,644 $ (19,024) $ 59,163 $ 44,609 $ 30,869 $ 36,416 24.7
========== ========== ========== ========== ========== ==========
EARNINGS PER COMMON
SHARE
Average shares
outstanding (000's)
Primary................ 43,829 42,331 40,778 38,079 37,461 37,375 3.2
Fully diluted.......... 48,379 46,889 44,994 38,112 37,461 37,375 5.3
Primary earnings
Income before
cumulative effect..... $ 2.38 $ .07 $ 1.34 $ 1.17 $ .82 $ .97 19.7
Less: cumulative
effect................ -- .64 -- -- -- -- NM
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)..... $ 2.38 $ (.57) $ 1.34 $ 1.17 $ .82 $ .97 19.7
========== ========== ========== ========== ========== ==========
Fully diluted
Income before
cumulative effect..... $ 2.27 $ NM $ 1.31 $ 1.17 $ .82 $ .97 NM
Less: cumulative
effect................ -- NM -- -- -- -- NM
---------- ---------- ---------- ---------- ---------- ----------
Net income............ $ 2.27 $ NM $ 1.31 $ 1.17 $ .82 $ .97 NM
========== ========== ========== ========== ========== ==========
Cash dividends......... $ .74 $ .64 $ .50 $ .46 $ .42 $ .39 13.7
Shareholders' equity... 12.64 11.42 13.16 12.15 10.96 10.34 4.1
AVERAGE BALANCE SHEETS
Cash and due from
depository
institutions.......... $ 270,249 $ 277,407 $ 259,593 $ 275,337 $ 279,825 $ 288,063 (1.3)
Securities............. 2,602,697 2,258,193 1,846,703 1,509,452 1,324,806 1,339,813 14.2
Loans and leases *..... 5,094,745 4,854,399 4,590,733 4,304,820 4,330,103 4,078,831 4.5
Other assets........... 320,574 334,720 427,281 360,940 338,450 303,795 1.1
---------- ---------- ---------- ---------- ---------- ----------
Total assets........... $8,288,265 $7,724,719 $7,124,310 $6,450,549 $6,273,184 $6,010,502 6.6
========== ========== ========== ========== ========== ==========
Deposits............... $6,248,511 $6,154,585 $5,785,125 $5,246,168 $5,001,077 $4,779,490 5.5
Other liabilities...... 1,432,153 952,267 774,108 785,612 881,013 858,267 10.8
Capital debt........... 9,975 20,963 23,766 25,924 28,944 37,427 (23.2)
Common shareholders'
equity................ 523,483 522,761 475,506 392,845 362,150 335,318 9.3
Preferred shareholders'
equity................ 74,143 74,143 65,805 -- -- -- NM
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity. $8,288,265 $7,724,719 $7,124,310 $6,450,549 $6,273,184 $6,010,502 6.6
========== ========== ========== ========== ========== ==========
PERIOD END BALANCES
Total assets........... $8,756,140 $8,274,470 $7,379,988 $6,567,309 $6,403,362 $6,147,689 7.3
Deposits............... 6,165,080 6,394,871 6,040,928 5,503,886 5,148,605 4,980,788 4.4
Long-term debt......... 197,530 479,677 290,143 293,250 388,750 309,059 (8.6)
SELECTED PERFORMANCE
RATIOS
Rate of return on:
Average total assets... 1.32% (.25)% .83% .69% .49% .61%
Average common
shareholders' equity.. 19.95 (4.63) 11.47 11.36 8.52 10.86
Dividend payout........ 31.09 NM 37.31 39.32 51.22 40.21
Average equity to
average assets........ 7.21 7.73 7.60 6.09 5.77 5.58
</TABLE>
- --------
* Loans and leases are net of unearned income and the allowance for losses.
Amounts include loans held for sale.
NM--Not meaningful
II-39
<PAGE>
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 certified public accountants, who render an independent
professional opinion on management's financial statements. Their appointment
was recommended by the Audit Committee and approved by the Board of Directors.
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 Chief Sherry A. Kellett
Chairman, President Financial Officer Controller
and Chief Executive
Officer
II-40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Southern National Corporation:
We have audited the accompanying consolidated statements of condition of
Southern National Corporation (a North Carolina corporation) and subsidiaries
as of December 31, 1994 and 1993, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southern
National Corporation and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As explained in Note A to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for investments
in debt and equity securities. As explained in Notes A and M to the
consolidated financial statements, effective January 1, 1993, the Company
changed its method of accounting for acquisitions of thrift institutions,
income taxes and postretirement benefits other than pensions.
Arthur Andersen LLP
Charlotte, North Carolina,
February 28, 1995.
II-41
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from depository institutions............. $ 264,664 $ 283,909
Interest-bearing bank balances........................ 962 64,954
Federal funds sold and securities purchased under
resale agreements or similar arrangements............ 9,010 13,438
Securities available for sale (1994 at market, 1993 at
amortized cost)...................................... 992,016 1,194,230
Loans held for sale................................... 21,464 316,544
Securities held to maturity (market value: $1,700,074
in 1994 and $1,381,371 in 1993)...................... 1,774,202 1,356,102
Loans and leases, net of unearned income of $50,962 in
1994 and $36,945 in 1993............................. 5,434,878 4,838,274
Allowance for losses................................ (70,573) (69,503)
---------- ----------
Net loans and leases............................... 5,364,305 4,768,771
---------- ----------
Premises and equipment, net........................... 165,068 136,228
Other assets.......................................... 164,449 140,294
---------- ----------
Total assets........................................ $8,756,140 $8,274,470
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing.................................. $ 782,172 $ 820,177
Interest-bearing..................................... 5,382,908 5,574,694
---------- ----------
Total deposits...................................... 6,165,080 6,394,871
Short-term borrowings................................. 1,654,465 756,343
Accounts payable and other liabilities................ 106,721 78,715
Long-term debt........................................ 197,530 479,677
---------- ----------
Total liabilities................................... 8,123,796 7,709,606
---------- ----------
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares authorized,
issued and outstanding 770,000 in 1994 and 1993..... 3,850 3,850
Common stock, $5 par, 300,000,000 shares authorized,
issued and outstanding 44,158,751 in 1994 and
42,961,214 in 1993.................................. 220,794 214,806
Paid-in capital...................................... 164,934 151,186
Retained earnings.................................... 273,480 199,383
Unearned compensation................................ (2,650) (4,361)
Net unrealized depreciation on securities available
for sale............................................ (28,064) --
---------- ----------
Total shareholders' equity.......................... 632,344 564,864
---------- ----------
Total liabilities and shareholders' equity.......... $8,756,140 $8,274,470
========== ==========
</TABLE>
See notes to consolidated financial statements.
II-42
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases............. $423,461 $405,121 $428,923
Interest and dividends on securities.............. 152,471 139,768 137,025
Interest on temporary investments................. 2,456 2,421 5,486
-------- -------- --------
Total interest income............................ 578,388 547,310 571,434
-------- -------- --------
INTEREST EXPENSE
Interest on deposits.............................. 191,005 195,204 251,172
Interest on short-term borrowings................. 48,938 18,849 14,964
Interest on long-term debt........................ 15,728 22,794 25,652
-------- -------- --------
Total interest expense........................... 255,671 236,847 291,788
-------- -------- --------
NET INTEREST INCOME................................ 322,717 310,463 279,646
Provision for loan and lease losses............... 7,246 31,438 25,671
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND
LEASE LOSSES...................................... 315,471 279,025 253,975
NONINTEREST INCOME
Service charges on deposit accounts............... 35,222 36,838 36,455
Nondeposit fees and commissions................... 32,004 22,490 20,454
Securities gains, net............................. 906 13,714 1,972
Other income...................................... 14,914 14,630 19,871
-------- -------- --------
Total noninterest income......................... 83,046 87,672 78,752
-------- -------- --------
NONINTEREST EXPENSE
Personnel expense................................. 119,023 131,681 114,258
Occupancy and equipment expense................... 36,143 38,153 33,184
Federal deposit insurance expense................. 14,401 14,074 12,826
Foreclosed property expense....................... 1,374 22,601 11,355
Loss on bulk sale of assets....................... -- 49,147 --
Other expense..................................... 60,288 80,403 61,949
-------- -------- --------
Total noninterest expense........................ 231,229 336,059 233,572
-------- -------- --------
EARNINGS
Income before income taxes........................ 167,288 30,638 99,155
Provision for income taxes........................ 57,644 22,445 39,992
-------- -------- --------
Income before cumulative effect of changes in
accounting principles............................ 109,644 8,193 59,163
Less: cumulative effect of changes in accounting
principles, net of income taxes.................. -- 27,217 --
-------- -------- --------
NET INCOME (LOSS)................................. 109,644 (19,024) 59,163
Preferred dividend requirements................... 5,198 5,198 4,605
-------- -------- --------
Income (loss) applicable to common shares......... $104,446 $(24,222) $ 54,558
======== ======== ========
PER COMMON SHARE
Net income (loss):
Primary
Income before cumulative effect.................. $ 2.38 $ .07 $ 1.34
Less: cumulative effect.......................... -- .64 --
-------- -------- --------
Net income (loss)............................... $ 2.38 $ (.57) $ 1.34
======== ======== ========
Fully diluted
Income before cumulative effect.................. $ 2.27 $ NM $ 1.31
Less: cumulative effect -- NM --
-------- -------- --------
Net income...................................... $ 2.27 $ NM $ 1.31
======== ======== ========
Cash dividends paid per common share.............. $ .74 $ .64 $ .50
======== ======== ========
</TABLE>
- --------
NM--not meaningful
See notes to consolidated financial statements.
II-43
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SHARES OF RETAINED
COMMON PREFERRED COMMON PAID-IN EARNINGS
STOCK STOCK STOCK CAPITAL AND OTHER* TOTAL
---------- --------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1991................... 34,992,867 $ -- $174,964 $ 49,608 $200,742 $425,314
ADD (DEDUCT)
Net income............. -- -- -- -- 59,163 59,163
Common stock dividend
by merged companies... 919,519 -- 4,598 1,439 (6,037) --
Common stock issued.... 182,430 -- 911 312 (12) 1,211
Preferred stock issued. -- 3,850 -- 70,292 -- 74,142
Common stock acquired
and retired........... (213,332) -- (1,067) -- (778) (1,845)
Acquisition of
Workmen's Bancorp,
Inc. accounted for
under the purchase
method................ 2,466,798 -- 12,335 21,516 -- 33,851
Reconciliation of
fiscal year of merged
companies to calendar
year.................. (257,873) -- (1,289) -- 1,370 81
Cash dividends declared
by merged companies... -- -- -- -- (1,570) (1,570)
Cash dividends
declared/accrued by
Southern National:
Common stock........... -- -- -- -- (12,306) (12,306)
Preferred stock........ -- -- -- -- (4,605) (4,605)
Other.................. -- -- -- -- 2,019 2,019
---------- ------ -------- -------- -------- --------
BALANCE, DECEMBER 31,
1992................... 38,090,409 3,850 190,452 143,167 237,986 575,455
ADD (DEDUCT)
Net loss............... -- -- -- -- (19,024) (19,024)
Three-for-two stock
split by merged
company............... 2,528,560 -- 12,643 (9,685) (2,958) --
Common stock issued.... 1,106,131 -- 5,530 2,773 (5,140) 3,163
Acquisition of East
Coast Savings Bank,
SSB accounted for
under the purchase
method................ 1,172,475 -- 5,862 13,970 -- 19,832
Reconciliation of
fiscal year of merged
companies to calendar
year.................. 63,927 -- 320 191 6,749 7,260
Cash dividends declared
by merged companies... -- -- -- -- (535) (535)
Cash dividends
declared/accrued by
Southern National:
Common stock........... -- -- -- -- (18,921) (18,921)
Preferred stock........ -- -- -- -- (5,198) (5,198)
Other.................. (288) -- (1) 770 2,063 2,832
---------- ------ -------- -------- -------- --------
BALANCE, DECEMBER 31,
1993................... 42,961,214 3,850 214,806 151,186 195,022 564,864
ADD (DEDUCT)
Net income............. -- -- -- -- 109,644 109,644
Common stock issued.... 470,432 -- 2,353 355 (36) 2,672
Net unrealized
depreciation on
securities available
for sale.............. -- -- -- -- (28,064) (28,064)
Mergers accounted for
under the purchase
method................ 727,105 -- 3,635 11,228 -- 14,863
Cash dividends declared
by merged companies... -- -- -- -- (157) (157)
Cash dividends
declared/accrued by
Southern National:
Common stock........... -- -- -- -- (30,156) (30,156)
Preferred stock........ -- -- -- -- (5,198) (5,198)
Other.................. -- -- -- 2,165 1,711 3,876
---------- ------ -------- -------- -------- --------
BALANCE, DECEMBER 31,
1994................... 44,158,751 $3,850 $220,794 $164,934 $242,766 $632,344
========== ====== ======== ======== ======== ========
</TABLE>
- --------
* Other includes unrealized losses on equity securities, net unrealized
depreciation on securities available for sale, unamortized ESOP compensation
and unearned compensation.
See notes to consolidated financial statements.
II-44
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ 109,644 $ (19,024) $ 59,163
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Cumulative effect of changes in accounting
principles, net of taxes.................. -- 27,217 --
Provision for loan and lease losses........ 7,246 31,438 25,671
Depreciation of premises and equipment..... 13,884 22,929 12,448
Amortization of intangibles................ 1,913 9,527 5,411
Accretion of negative goodwill............. (1,114) (279) --
Amortization of unearned stock
compensation.............................. 1,711 730 --
Discount accretion and premium
amortization on securities, net........... 3,141 4,376 1,389
Net (gain) loss on trading account
securities, net........................... (769) (1,441) 1,632
Gain on sales of securities, net........... (906) (13,714) (1,972)
Gain on sales of loans and mortgage loan
servicing rights.......................... (705) (7,866) (15,876)
Net (gain) loss on disposals of premises
and equipment............................. (1,710) 1,120 (551)
Loss on foreclosed property and other real
estate, net............................... 169 4,743 8,054
Loss on bulk sale of assets................ -- 49,147 --
Proceeds from sales of trading account
securities, net of purchases.............. 769 1,441 2,312
Proceeds from sales of loans held for
sale...................................... 596,249 986,343 652,943
Purchases of loans held for sale........... (33,351) (97,619) (75,900)
Origination of loans held for sale, net of
principal collected....................... (272,115) (751,936) (652,806)
Reconciliation of fiscal year of merged
companies to calendar year................ -- 5,267 (18,997)
Decrease (increase):
Accrued interest receivable............... (8,178) (1,707) 1,141
Other assets.............................. (19,497) (18,755) 12,778
Increase (decrease) in:
Accrued interest payable.................. 2,874 27 (4,635)
Accounts payable and other liabilities.... 44,196 23,622 (4,370)
--------- ---------- ---------
Net cash provided by operating
activities.............................. 443,451 255,586 7,835
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available for sale
securities................................ 283,059 280,460 99,581
Proceeds from sales of held to maturity
securities................................ -- 26,695 84,281
Maturities of available for sale
securities................................ 178,144 -- --
Maturities of held to maturity securities.. 427,076 622,700 521,559
Purchases of available for sale
securities................................ (296,537) -- --
Purchases of held to maturity securities... (850,959) (1,451,759) (910,414)
Leases made to customers................... (44,379) (43,034) (41,589)
Principal collected on leases.............. 52,070 34,750 33,849
Loan originations, net of principal
collected................................. (552,174) (369,131) (228,610)
Purchases of loans......................... (27,864) (3,907) (6,685)
Net cash acquired in transactions
accounted for under the purchase method
of accounting............................. 2,262 32,221 56,796
Proceeds from disposals of premises and
equipment................................. 4,305 1,367 3,713
Purchases of premises and equipment........ (45,137) (36,054) (20,109)
Proceeds from sales of foreclosed
property.................................. 12,861 43,896 33,420
Investment in other real estate held for
development or sale....................... -- (4,139) (3,230)
Proceeds from sales of other real estate
held for development or sale.............. 9,519 -- --
--------- ---------- ---------
Net cash used in investing activities.... (847,754) (865,935) (377,438)
--------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits........ (229,791) 136,998 183,469
Net increase in short-term borrowings...... 861,415 350,821 149,875
Proceeds from long-term debt............... 704 364,148 149,945
Repayment of long-term debt................ (282,851) (230,641) (129,460)
Net proceeds from preferred stock issued... -- -- 74,142
Net proceeds from common stock issued...... 2,672 3,163 1,211
Common stock acquired and retired.......... -- (5) (1,845)
Cash dividends paid on common and
preferred stock........................... (35,511) (24,654) (18,481)
--------- ---------- ---------
Net cash provided by financing
activities.............................. 316,638 599,830 408,856
--------- ---------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................. (87,665) (10,519) 39,253
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR........................................ 362,301 372,820 333,567
--------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR..... $ 274,636 $ 362,301 $ 372,820
========= ========== =========
</TABLE>
See notes to consolidated financial statements.
II-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Southern National Corporation ("Parent Company" or "Southern National" or the
"Corporation") 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. Southern National Bank of North
Carolina ("SNBNC"), Southern National Bank of South Carolina ("SNBSC") (the
"Banks") and SNB Savings Bank, Inc., SSB ("SSB") comprise the Parent Company's
principal subsidiaries.
The accounting and reporting policies of Southern National Corporation and
Subsidiaries ("Southern National" or the "Corporation") 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, all of which are wholly-
owned. In consolidation, all significant intercompany accounts and transactions
have been eliminated. Prior period financial statements have been restated to
include the accounts of companies acquired in transactions accounted for as
poolings of interests. 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 1994. The reclassifications have no effect on
shareholders' equity or net income as previously reported.
Securities
On January 1, 1994, Southern National adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." SFAS No. 115 addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. These investments are
to be classified in three categories: held to maturity, trading and available
for sale.
Debt securities acquired with both the intent and ability to hold to maturity
are classified as held to maturity and reported at amortized cost. Gains or
losses from the sale of securities held to maturity are determined from
specific cost-basis identification.
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 excluded from earnings and reported as a
separate component of shareholders' equity, net of tax. Realized gains or
losses are determined by specific identification and are included in
noninterest income.
Trading account securities, of which none were held on December 31, 1994, are
selected according to fundamental and technical analyses that identify
potential market movements. Trading account securities are positioned to take
advantage of such movements and are reported at fair value. Market adjustments,
fees, gains or losses and income earned on trading account securities are
included in noninterest income. Gains or losses from the sale of securities are
determined by specific cost-basis identification and are included in
noninterest income.
II-46
<PAGE>
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
Commercial loans and substantially all installment loans accrue interest on
the unpaid balance of the loans. The net amount of nonrefundable loan
origination fees and direct costs associated with the lending process is
deferred and amortized to interest income over the contractual lives of the
loans using the level-yield method. If the commitment expires unexercised, the
income is recognized upon expiration of the commitment.
Lease receivables consist primarily of direct financing leases on rolling
stock, equipment and real property. Lease receivables are stated as the total
amount of lease payments receivable plus guaranteed residual values, less
unearned income. Recognition of income over the lives of the lease contracts
approximates the level-yield method.
Allowance for Losses
The provision for loan and lease losses charged to noninterest expense is the
estimated amount required to maintain the allowance for loan and lease losses
at a level adequate to cover estimated incurred losses related to loans and
leases currently outstanding. The primary factors considered in determining the
allowance are the distribution of loans by risk class, the amount of the
allowance specifically allocated to nonperforming loans and other problem
loans, prior years' loan loss experience, economic conditions in Southern
National's market areas and the growth of the credit portfolio. Ultimate losses
may vary from original estimates and adjustments, as necessary, are made in the
period in which these factors and other relevant considerations indicate that
loss levels may vary from those previously estimated.
Nonperforming Assets
Nonperforming assets include loans and leases on which interest is not being
accrued and foreclosed property.
Loans and leases are 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. 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 collectibility of
principal or interest.
Assets acquired as a result of foreclosure are valued at the lower of cost or
fair value, and carried thereafter at the lower of cost or fair value less
estimated costs to sell the asset. Cost is the sum of unpaid
II-47
<PAGE>
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 and equipment are stated at cost less accumulated depreciation.
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 shorter 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 shorter. The related obligations under capital
leases are amortized using the interest method to allocate payments between
principal reduction and interest expense. Amortization of capital lease assets
and rent expense of operating leases are included in occupancy and equipment
expense, depending on the nature of the asset. Additions, major replacements or
improvements are added to premises and equipment accounts at cost. Expenditures
for maintenance, repairs and minor replacements are charged to expense as
incurred. Gains or losses on the disposal of premises and equipment are
included in results of current operations.
Income Taxes
The operating results of the Parent Company and its subsidiaries are included
in a consolidated federal income tax return. Each subsidiary pays its
calculated portion of federal income taxes to the Parent Company, or receives
payment from the Parent Company to the extent that tax benefits are realized.
Deferred income taxes have been provided where different accounting methods
have been used for reporting for income tax purposes and for financial
reporting purposes. As of January 1, 1993, Southern National adopted SFAS No.
109, "Accounting for Income Taxes," which changes the method of accounting for
income taxes under generally accepted accounting principles. As a result of
adopting SFAS 109, Southern National recognized a cumulative benefit of the
change in accounting principle of $6,368,000, or $.14 per fully diluted share.
The benefit is included under the caption "Cumulative effect of changes in
accounting principles, net of income taxes" in the Consolidated Statements of
Operations. The effect of this change, excluding the cumulative benefit, for
the year ended December 31, 1993, had no incremental effect on net income or
fully diluted earnings per share. The operating results of acquired
institutions were included in their respective income tax returns prior to
consummation of the acquisitions.
Off-Balance Sheet Instruments
Southern National utilizes financial forward and futures contracts, options
written, interest rate caps and floors written and interest rate swaps to hedge
interest rate risk associated with the asset/liability management, investment
and trading account functions. These represent future commitments to purchase
or sell financial instruments and, accordingly, the related notional values are
not reflected in the Consolidated Statements of Condition.
Amounts receivable or payable under derivative financial instruments used to
manage interest rate risks arising from Southern National's financial assets
and financial liabilities are recognized as income or expense unless the
instrument qualifies for hedge accounting. Gains and losses on qualifying
hedges of existing assets or liabilities are included in the carrying amounts
of those assets or liabilities and are ultimately recognized in income as part
of those carrying amounts. Gains and losses on early terminations of
derivatives are included in the carrying amount of the related loans or debt
and amortized as yield adjustments over the remaining terms of the loans or
debt.
II-48
<PAGE>
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.
Fully diluted net income per common share has been computed by dividing net
income 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:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Primary........................................ 43,829,321 42,331,126 40,777,780
Fully diluted.................................. 48,378,969 46,889,289 44,993,809
</TABLE>
Intangible Assets
The cost in excess of the fair value of net assets acquired in transactions
accounted for as purchases, premiums paid on acquisitions of deposits and other
identifiable intangible assets are included in other assets in the
"Consolidated Statements of Condition." Such assets are being amortized on
straight-line or accelerated bases over periods ranging from 5 to 15 years. The
excess of the fair value of the net assets related to the East Coast Savings
Bank, SSB ("East Coast") transaction, reflected as negative goodwill in other
liabilities in the "Consolidated Statements of Condition," amounted to
approximately $15.3 million at December 31, 1994 and is being amortized over 15
years.
Purchased Mortgage Servicing Rights
Amounts paid to acquire the right to service certain mortgage loans are
capitalized. These rights are then amortized over the estimated lives of the
loans to which they relate. The carrying amount, if greater than fair value (as
measured by expected net cash flows on a discounted, disaggregated method) is
adjusted by a charge to income. The 1993 results of operations include the
amortization of $3.9 million of servicing rights to conform the accounting
policies of the acquired entities to those of Southern National.
Changes in Accounting Principles
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." SFAS No. 112 establishes accounting standards for
employers who provide benefits to former or inactive employees after employment
but before retirement. The statement requires employers to recognize the
obligation to provide benefits if the obligation is attributable to employees'
services already rendered, employees' rights to those benefits accumulate or
vest, payment of the benefits is probable and the amount can be reasonably
estimated. SFAS No. 112 was effective for fiscal years beginning after December
15, 1993. Southern National adopted SFAS No. 112 as of January 1, 1994 and the
implementation did not have a material impact on the consolidated financial
position or consolidated results of operations.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which was amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS
No. 114 requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Southern National
adopted SFAS No. 114 effective January 1, 1995, and the implementation did not
have a material impact on Southern National's consolidated financial position
or consolidated results of operations. SFAS No. 114 is effective for fiscal
years beginning after December 15, 1994.
II-49
<PAGE>
In October 1994, the FASB issued SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." SFAS No. 119
requires disclosures about amounts, nature and terms of derivative financial
instruments that are not otherwise disclosed. It requires that a distinction be
made between financial instruments held or issued for trading purposes
(including dealing and other trading activities measured at fair value with
gains and losses recognized in earnings) and financial instruments held or
issued for purposes other than trading. See Note R of the Notes to Consolidated
Financial Statements for disclosures in compliance with this standard.
Effective January 1, 1993, The First Savings Bank, FSB ("The First") adopted
SFAS No. 72, "Accounting for Certain Adjustments of Banking or Thrift
Institutions." As a result of adopting SFAS No. 72, Southern National
recognized a cumulative charge for this change in accounting principle of
$28,019,000 or $.60 per share. The charge is included under the caption
"Cumulative effect of changes in accounting principle, net of income taxes" in
the "Consolidated Statements 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 value of the assets acquired
and liabilities assumed, at acquisition, were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FAIR VALUE OF NET ASSETS ACQUIRED:
Fair value of assets acquired.................... $ 45,469 $282,076 $314,531
Fair value of liabilities assumed................ 39,266 244,277 279,370
-------- -------- --------
Fair value of net assets acquired................ 6,203 37,799 35,161
-------- -------- --------
PURCHASE PRICE:
Fair value of common shares and options issued... 14,863 20,839 33,947
Cash premium paid................................ 87 -- 3,751
Capitalized acquisition costs.................... 66 220 217
-------- -------- --------
Total purchase price............................ 15,016 21,059 37,915
-------- -------- --------
Excess of net assets acquired over purchase price
(purchase price over net assets acquired)........ $ (8,813) $ 16,740 $ (2,754)
======== ======== ========
CASH PAID DURING THE YEAR FOR:
Interest......................................... $252,797 $233,175 $302,064
Income taxes..................................... 55,135 57,031 35,907
TRANSFER OF LOANS TO OTHER REAL ESTATE ACQUIRED IN
FORECLOSURE...................................... 8,829 17,333 37,690
NON-CASH SECURITIZATION OF LOANS.................. 7,497 4,311 83,748
</TABLE>
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from depository institutions,
interest-bearing bank balances, federal funds sold and securities purchased
under resale agreements or similar arrangements. Generally, both cash and cash
equivalents are considered to have maturities of three months or less.
Income and Expense Recognition
Items of income and expense are recognized using the accrual basis of
accounting, except for some immaterial amounts.
II-50
<PAGE>
NOTE B. ACQUISITIONS AND MERGERS
Completed Acquisitions
On January 28, 1994, Southern National completed its acquisition of The First
by the issuance of 8,052,860 shares of Southern National common stock, or
0.854815 share of Southern National common stock in exchange for each share of
The First's common stock outstanding. Options to purchase shares of The First's
common stock were converted into options to purchase Southern National common
stock at the agreed-upon exchange rate of .855. The First, headquartered in
Greenville, South Carolina, operated 57 offices throughout South Carolina and
five out-of-state mortgage loan production offices in Georgia, North Carolina
and Virginia. The First was merged into SNBSC.
On January 31, 1994, Southern National completed its acquisition of Regency
Bancshares Inc. ("Regency") by the issuance of 2,437,498 shares of Southern
National common stock, or 1.8117 shares of Southern National common stock in
exchange for each share of Regency's common stock outstanding. Options to
purchase shares of Regency's common stock were converted into options to
purchase Southern National common stock at the agreed-upon exchange rate of
1.81197. Regency was a multi-thrift holding company operating First Savings
Bank, Inc., SSB in Hickory, North Carolina, and Davidson Savings Bank, Inc.,
SSB, in Lexington, North Carolina. Regency was merged into SNBNC.
On February 24, 1994, Southern National completed its acquisition of Home
Federal Savings Bank ("Home") by the issuance of 824,601 shares of Southern
National common stock, or 2.576878 shares of Southern National common stock in
exchange for each share of Home's common stock outstanding. Options to purchase
shares of Home's common stock were converted into options to purchase Southern
National common stock at the agreed-upon exchange rate of 2.57717. Home,
headquartered in Statesville, North Carolina, operated three branches in North
Carolina. Home was merged into SNBNC.
The acquisitions discussed above were accounted for under the pooling-of-
interests method of accounting. Accordingly, all financial information
presented herein has been restated to include the results of The First, Regency
and Home.
On June 1, 1994, Southern National completed its acquisition of McLean, Brady
& McLean Agency, Inc. ("McLean") by the issuance of 38,823 shares of Southern
National common stock. In conjunction with the acquisition of McLean, Southern
National recorded $1.1 million of expiration rights which are being amortized
over 10 years.
On June 6, 1994, Southern National completed its acquisition of Leasing
Associates, Inc. ("Leasing") by the issuance of 97,876 shares of Southern
National common stock.
On November 1, 1994, Southern National completed its acquisition of Prime
Rate Premium Finance Corporation, Inc. and related interests, Agency
Technologies, Inc. and IFCO, Inc. ("Prime Rate") by the issuance of 590,406
shares of Southern National common stock. In conjunction with the acquisition
of Prime Rate, Southern National recorded $8.8 million of goodwill which is
being amortized over 15 years.
These acquisitions were accounted for under the purchase method of
accounting, and, therefore, the financial information contained herein includes
data relevant to the acquiree since the date of acquisition. The following
unaudited presentation reflects key line items on a proforma basis as if
McLean, Leasing and Prime Rate had been acquired as of the beginning of the
years presented:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Net interest income..................................... $325,260 $311,408
======== ========
Net income (loss)....................................... $112,766 $(17,028)
======== ========
Earnings (loss) per share
Primary............................................... $ 2.42 $ (.52)
======== ========
Fully diluted......................................... $ 2.30 $ NM
======== ========
</TABLE>
- --------
NM--not meaningful
II-51
<PAGE>
Pending Merger
On August 1, 1994, Southern National and BB&T Financial Corporation ("BB&T")
jointly announced the signing of a definitive agreement to merge. The
transaction had an indicated total market value of $2.1 billion based on
November 8, 1994 closing prices of the stock of both institutions. The merger
of the bank holding companies was completed on February 28, 1995 and the merger
of the banks is expected to be completed during May of 1995. BB&T completed an
acquisition of Commerce Bank of Virginia Beach, Virginia ("Commerce") on
January 10, 1995. The transaction was accounted for as a pooling of interests.
Several adjustments were required to restate Southern National and BB&T. Among
these were adjustments necessary to implement SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions." SFAS No. 106
allowed employers to recognize the transition obligation immediately, subject
to certain limitations, or on a delayed basis over the plan participants'
future service periods. Southern National and BB&T elected to treat the
transition obligation differently, and these adjustments reflect a "catch-up"
to a consistent treatment.
In conjunction with the merger, certain material, non-recurring adjustments
of approximately $80 million will be recorded. These adjustments include
approximately $57 million for settlement of obligations under existing
employment contracts, severance pay, early retirement and related employee
benefits, approximately $9 million associated with branch closings and
divestitures, approximately $6 million associated with consolidation of bank
operations and systems and approximately $10 million of expenses related to
effecting the merger.
The following unaudited presentation reflects key line items on an historical
basis for Southern National, BB&T and Commerce and on a proforma combined basis
assuming the merger with BB&T was effective as of and for the periods
presented.
<TABLE>
<CAPTION>
HISTORICAL BASIS SOUTHERN
SOUTHERN NATIONAL -------------------- NATIONAL
AS ORIGINALLY REPORTED BB&T COMMERCE RESTATED
---------------------- ----------- -------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1994
Net interest income... $ 322,717 $ 385,186 $ 28,863 $ 736,766
Net income............ 109,644 119,882 7,011 236,872
Earnings per share
Primary............. 2.38 3.27 2.48 2.26
Fully diluted....... 2.27 3.27 2.37 2.21
Assets................ 8,756,140 10,394,330 700,343 19,855,062
Deposits.............. 6,165,080 7,520,324 628,750 14,314,154
Shareholders' equity.. 632,344 822,644 47,865 1,496,477
1993
Net interest income... 310,463 356,789 26,264 693,516
Net (loss) income..... (19,024) 105,012 6,551 85,828
Earnings (loss) per
share
Primary............. (.57) 2.95 2.38 .81
Fully diluted....... NM 2.91 2.28 .81
Assets................ 8,274,470 9,867,398 689,630 18,858,370
Deposits.............. 6,394,871 7,565,940 634,141 14,594,952
Shareholders' equity.. 564,864 796,984 43,589 1,398,726
1992
Net interest income... 279,646 316,033 22,525 618,204
Net income............ 59,163 82,621 4,942 146,726
Earnings per share
Primary............. 1.34 2.53 2.05 1.53
Fully diluted....... 1.31 2.43 1.97 1.48
Assets................ 7,379,988 7,931,660 644,849 15,966,986
Deposits.............. 6,040,928 6,405,261 597,984 13,044,173
Shareholders' equity.. 575,455 654,030 37,413 1,266,898
</TABLE>
- --------
NM--not meaningful
52
<PAGE>
NOTE C. SECURITIES
The amortized costs and approximate fair value of securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
--------------------------------------- --------------------------------------
GROSS UNREALIZED ESTIMATED GROSS UNREALIZED
AMORTIZED ----------------- FAIR AMORTIZED -----------------ESTIMATED
COST GAINS LOSSES VALUE COST GAINS LOSSES FAIR VALUE
---------- ------- --------- ---------- ---------- -------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to
maturity:
U.S. Treasury,
government and agency
obligations........... $1,132,152 $ 360 $ 42,244 $1,090,268 $ 780,646 $16,683 $1,024 $ 796,305
States and political
subdivisions.......... 63,453 94 1,462 62,085 54,047 1,517 131 55,433
Mortgage-backed
securities............ 577,932 12 30,868 547,076 473,956 8,420 204 482,172
Other debt securities.. 665 5 25 645 633 10 2 641
---------- ------- --------- ---------- ---------- -------- ------- ----------
Total debt securities.. 1,774,202 471 74,599 1,700,074 1,309,282 26,630 1,361 1,334,551
Equity securities...... -- -- -- -- 46,820 -- -- 46,820
---------- ------- --------- ---------- ---------- -------- ------- ----------
Total securities held
to maturity........... 1,774,202 471 74,599 1,700,074 1,356,102 26,630 1,361 1,381,371
---------- ------- --------- ---------- ---------- -------- ------- ----------
Securities available for
sale:
Mortgage-backed
securities............ 248,286 400 9,540 239,146 447,032 8,963 579 455,416
Equity securities...... 44,855 -- -- 44,855 -- -- -- --
U.S. Treasury,
government and agency
obligations........... 745,282 571 37,838 708,015 747,198 10,902 2,521 755,579
---------- ------- --------- ---------- ---------- -------- ------- ----------
Total securities
available for sale.... 1,038,423 971 47,378 992,016 1,194,230 19,865 3,100 1,210,995
---------- ------- --------- ---------- ---------- -------- ------- ----------
Total securities....... $2,812,625 $1,442 $121,977 $2,692,090 $2,550,332 $46,495 $4,461 $2,592,366
========== ======= ========= ========== ========== ======== ======= ==========
</TABLE>
Securities with a book value of approximately $1,851,793,000 and
$1,098,086,000 at December 31, 1994 and 1993, 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, 1994 and 1993, 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 debt securities during 1994, 1993 and 1992 were
$283,059,000, $307,155,000 and $183,862,000, respectively. Gross gains of
$1,057,000, $14,794,000 and $2,239,000 and gross losses of $151,000, $1,080,000
and $267,000 were realized on those sales in 1994, 1993 and 1992, respectively.
The amortized cost and estimated fair value of debt securities at December
31, 1994 and 1993, 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.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1994 1993
--------------------- ---------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
DEBT SECURITIES COST VALUE COST VALUE
--------------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less............ $ 184,169 $ 182,726 $ 309,855 $ 315,735
Due after one year through five
years............................. 994,384 953,426 511,804 522,717
Due after five years through ten
years............................. 17,717 16,846 13,667 13,927
---------- ---------- ---------- ----------
1,196,270 1,152,998 835,326 852,379
Mortgage-backed securities......... 577,932 547,076 473,956 482,172
---------- ---------- ---------- ----------
Debt securities held to maturity... 1,774,202 1,700,074 1,309,282 1,334,551
Debt securities available for sale. 993,568 947,161 1,194,230 1,210,995
---------- ---------- ---------- ----------
Total debt securities............ $2,767,770 $2,647,235 $2,503,512 $2,545,546
========== ========== ========== ==========
</TABLE>
II-53
<PAGE>
NOTE D. LOANS AND LEASES*
Loans and leases were composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans--
Commercial, financial and agricultural................ $1,301,504 $ 804,281
Real estate--construction and land development........ 121,561 248,253
Real estate--mortgage................................. 3,055,865 2,904,525
Consumer.............................................. 701,862 692,848
----------- -----------
Loans held for investment........................... 5,180,792 4,649,907
Loans held for sale................................. 21,968 316,544
----------- -----------
Total loans....................................... 5,202,760 4,966,451
Leases.................................................. 304,544 225,312
----------- -----------
Total loans and leases............................ $5,507,304 $5,191,763
=========== ===========
</TABLE>
- --------
* Balances are gross of unearned income.
The net investment in direct financing leases was $257,554,000 and
$192,442,000 at December 31, 1994 and 1993, respectively.
Southern National's only significant concentration of credit at December 31,
1994 occurred in real estate loans, which totaled $3.2 billion. However, this
amount was not concentrated in any specific market or geographic area. The
distribution of real estate loans in North and South Carolina is comparable to
the distribution of total loans in the two-state area. While real estate loans
accounted for 58% of loans and leases at December 31, 1994, only 2% of loans
and leases were for construction, land acquisition and development. Another
$2.2 billion consisted of mortgage loans for 1-4 family dwellings, including
$424 million in home equity loans.
NOTE E. ALLOWANCE FOR LOSSES
An analysis of the allowance for losses is presented in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, January 1............................... $ 69,503 $ 53,840 $ 44,918
Provision for losses charged to expense.......... 7,246 31,438 25,671
Charge-offs...................................... (13,405) (23,122) (27,147)
Recoveries....................................... 6,110 4,597 5,732
Allowance of loans acquired in purchase
transactions.................................... 1,119 2,750 2,850
-------- -------- --------
Balance, December 31............................. $ 70,573 $ 69,503 $ 52,024
======== ======== ========
</TABLE>
At December 31, 1994, 1993 and 1992, the amount of loans not currently
accruing interest was $22,194,000, $28,372,000 and $60,430,000, respectively.
The gross interest income that would have been earned during 1994 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 $1.5 million.
Interest earned and included in interest income during 1994 on such loans and
leases amounted to approximately $779,000. Transfer of loans to other real
estate owned, a non-cash transaction, amounted to $8,829,000, $17,333,000 and
$37,690,000 in 1994, 1993 and 1992, respectively. Foreclosed property was
$1,850,000, $6,356,000 and $36,778,000 at December 31, 1994, 1993 and 1992,
respectively.
II-54
<PAGE>
NOTE F. PREMISES AND EQUIPMENT
Following is a summary of premises and equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land and land improvements............................. $ 30,755 $ 25,596
Buildings and building improvements.................... 102,962 93,207
Furniture and equipment................................ 115,314 98,933
Capitalized leases on premises and equipment........... 4,930 5,054
----------- -----------
253,961 222,790
Less--accumulated depreciation and amortization........ 88,893 86,562
----------- -----------
Net premises and equipment........................... $165,068 $136,228
=========== ===========
</TABLE>
Depreciation expense, which is included in occupancy and equipment expense,
was $13,884,000, $22,929,000 and $12,448,000 in 1994, 1993 and 1992,
respectively.
Southern National has noncancellable leases covering certain premises and
equipment. Total rent expense applicable to operating leases was $8,762,000,
$8,502,000 and $7,299,000 for 1994, 1993 and 1992, respectively. Future minimum
lease payments for operating and capitalized leases for years subsequent to
1994 are as follows:
<TABLE>
<CAPTION>
LEASES
-------------------------
OPERATING CAPITALIZED
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Year ended December 31:
1995.............................................. $ 5,791 $ 470
1996.............................................. 5,471 470
1997.............................................. 5,170 470
1998.............................................. 3,621 469
1999.............................................. 3,427 469
2000 and later years.............................. 39,438 10,554
----------- -----------
Total minimum lease payments........................ $62,918 12,902
===========
Less--amount representing interest.................. 8,509
-----------
Present value of net minimum payments on capitalized
leases (Note I).................................... $ 4,393
===========
</TABLE>
NOTE G. DEPOSITS
The composition of deposits at December 31 is presented in the following
table:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Demand deposits........................................ $ 782,172 $ 820,177
Savings deposits....................................... 1,254,860 1,380,241
Money market deposits.................................. 955,548 1,005,356
Certificates of deposit $100,000 and over.............. 775,506 843,848
Other certificates of deposit.......................... 2,396,994 2,345,249
----------- -----------
Total deposits....................................... $ 6,165,080 $ 6,394,871
=========== ===========
</TABLE>
II-55
<PAGE>
NOTE H. SHORT-TERM BORROWINGS
The composition of short-term borrowings is presented in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Securities sold under agreements to repurchase.......... $ 1,164,080 $ 565,291
Master notes............................................ 101,602 25,539
Federal Reserve discount window borrowings.............. -- 65,000
Federal funds purchased................................. 366,070 58,890
U.S. Treasury tax and loan deposit notes payable........ 22,713 41,623
------------ ----------
Total short-term borrowings........................... $ 1,654,465 $ 756,343
============ ==========
</TABLE>
Federal funds purchased represent unsecured borrowings from other banks and
generally mature daily. 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).
NOTE I. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
PARENT COMPANY:
9.28%, $20 million senior capital notes, dated 1986,
due in annual installments of amounts ranging from
$3,000,000 in 1995 to $4,000,000 in 1996............ $ 7,000 $ 10,000
$5 million Industrial Revenue Bond, dated 1984,
secured by premises with a net book value of
$6,158,359 at December 31, 1994, due in quarterly
installments of $83,340 through the second quarter
1999, and one final installment of $82,940 in 1999.
Interest rate is variable--76.99% of prime--6.544%
at December 31, 1994................................ 1,583 1,916
SNBNC:
Capitalized leases, varying maturities to 2028 with
rates from 8.11% to 15.42%. This represents the
unamortized balances due on leases of various
facilities.......................................... 4,393 4,573
Advances from Federal Home Loan Bank, varying
maturities to 2014 with rates from 4.41% to 7.97%... 81,561 103,800
Other mortgage indebtedness.......................... 306 312
SNBSC:
Advances from Federal Home Loan Bank, varying
maturities to 2009 with rates from 1.00% to 8.75%... 102,687 350,920
Unsecured subordinated capital notes, weighted
average rate of 11.13% which were paid in full in
1994................................................ -- 8,156
----------- -----------
$ 197,530 $ 479,677
=========== ===========
</TABLE>
Excluding the capitalized leases set forth in Note F, future debt maturities
total $193,137,000 and are $26,035,000, $64,935,000, $20,902,000, $35,233,000
and $14,183,000 for the next five years. The maturities for 2000 and later
years are $31,849,000.
II-56
<PAGE>
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, 1994, 44,158,751 shares of common stock and
770,000 shares of preferred stock were issued and outstanding. The preferred
stock is convertible at any time into 5.9068 shares of common stock. Although
not subject to any mandatory redemption or sinking fund requirement, the
preferred stock is redeemable at the option of Southern National after March 1,
1996.
Stock Option Plans
The Non-Employee Directors' Stock Option Plan ("Directors' Plan") is intended
to provide incentives to non-employee directors to remain on the Board of
Directors and share in the profitability of Southern National and creates a
deferred compensation system for participating non-employee directors. Each
non-employee director may elect to defer 0%, 50% or 100% of the annual retainer
fee and meeting fees 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, 1994, options to
purchase 152,734 shares of common stock at prices ranging from $12.7155 to
$15.6344 were outstanding pursuant to the Directors' Plan. Compensation expense
recognized under the Directors' Plan was $265,000, $257,000 and $236,000 for
the years ended December 31, 1994, 1993 and 1992, respectively.
The incentive stock option plan ("ISOP") and the non-qualified stock option
plan ("NQSOP") were established to retain key officers and key management
employees and to offer them the incentive to use their best efforts on behalf
of Southern National. The plans, which expire on December 19, 2000, further
provide for up to 1,101,000 shares of common stock to be reserved for the
granting of options, which have a four year vesting schedule and must be
exercised within ten years from the date granted. Incentive stock options
granted must have an exercise price equal to at least 100% of the fair market
value of common stock on the date granted, and the non-qualified stock options
must have an exercise price equal to at least 85% of the fair market value on
the date granted. At December 31, 1994, options to purchase 512,358 shares of
common stock at prices ranging from $9.50 to $16.75 were outstanding pursuant
to the NQSOP. At December 31, 1994, options to purchase 258,847 shares of
common stock at an exercise price of $19.77 were outstanding pursuant to the
ISOP.
In April 1994, the shareholders approved an Omnibus Stock Incentive Plan
("Omnibus Plan") which covers the award of incentive stock options, non-
qualified stock options, shares of restricted stock, performance shares and
stock appreciation rights. The Omnibus Plan is intended to allow Southern
National to recruit and retain employees with ability and initiative. The
maximum number of shares that can be issued is 4,000,000. In December 1994,
189,731 incentive stock options and 26,087 non-qualified stock options were
issued at an exercise price of $18.375. The incentive stock options vest over
four years and the non-qualified stock options vest over three years. Both
types of options have a ten year term.
The terms of these option plans provided for the immediate vesting of all
outstanding shares upon a change of control, as defined. The merger with BB&T
qualified as a change in control; accordingly, at February 28, 1995, options
outstanding at December 31, 1994, of 511,157 became exercisable. The shares
relating to the Omnibus Plan were excluded from the change in control
provisions and did not vest in conjunction with merger.
At the time of acquisition by Southern National, The First had two incentive
stock option plans which provided for the granting of options to purchase
shares of The First common stock to directors, officers and other key
employees. At merger date, each option was converted into an option to purchase
.855 shares of Southern National common stock.
II-57
<PAGE>
Regency had an incentive stock option plan for the granting of options to
purchase shares of Regency common stock to certain full-time officers and
employees. On the date of grant, the option exercise period was limited to ten
years. Regency also had a non-qualified directors' stock option plan. At merger
date, each Regency option was converted into an option to purchase 1.81197
shares of Southern National common stock.
Home also had an incentive stock option plan which provided for the granting
of options to key employees to purchase shares of Home common stock. Under the
terms of the plan, the options were exercisable over a ten year period. Each
option to purchase Home common stock was converted into an option to purchase
2.57717 shares of Southern National common stock.
<TABLE>
<CAPTION>
1994 1993 1992
------------------- ------------------- -------------------
AGGREGATE AGGREGATE AGGREGATE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPTION ACTIVITY
Outstanding January 1... 1,721,936 $20,970 2,162,221 $15,793 1,703,729 $ 9,316
Granted ($6.67 to
$21.06)................ 317,180 5,684 464,073 9,152 450,301 5,697
Exercised ($2.67 to
$16.88)................ 470,432 2,729 904,358 3,975 150,352 821
Expired or forfeited
($2.67 to $16.75)...... 9,959 166 -- -- 7,208 26
--------- ------- --------- ------- --------- -------
Outstanding December 31
($2.67 to $21.06)...... 1,558,725 $23,759 1,721,936 $20,970 1,996,470 $14,166
========= ======= ========= ======= ========= =======
Options exercisable at
December 31, 1994
($2.67 to $21.06 per
share)................. 831,750 $10,330
========= =======
</TABLE>
NOTE K. SUPPLEMENTAL INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST ON DEPOSITS
Savings deposits.................................. $ 28,501 $ 30,924 $ 26,877
Money market deposits............................. 26,029 25,677 37,978
Certificates of deposit $100,000 and over......... 26,923 16,498 22,474
Other certificates of deposit..................... 109,552 122,105 163,843
-------- -------- --------
$191,005 $195,204 $251,172
======== ======== ========
NONINTEREST INCOME
Nondeposit fees and commissions:
Insurance fees and commissions.................. $ 5,930 $ 6,569 $ 3,447
Trust fees...................................... 3,613 3,000 2,688
Bankcard related fees........................... 9,099 7,567 5,526
Other fees and commissions...................... 13,362 5,354 8,793
-------- -------- --------
$ 32,004 $ 22,490 $ 20,454
======== ======== ========
Other income
Gain on sales of loans, net..................... $ 1,006 $ 5,849 $ 11,672
Other........................................... 13,908 8,781 8,199
-------- -------- --------
$ 14,914 $ 14,630 $ 19,871
======== ======== ========
NONINTEREST EXPENSE
Personnel expense:
Salaries........................................ $ 97,105 $107,052 $ 92,907
Employee benefits............................... 21,918 24,629 21,351
-------- -------- --------
$119,023 $131,681 $114,258
======== ======== ========
Other expense:
Credit card..................................... $ 7,027 $ 5,680 $ 4,453
Data processing................................. 2,498 7,374 4,279
Advertising..................................... 4,813 7,000 6,439
Amortization of intangibles..................... 1,913 9,527 5,411
Other........................................... 44,037 50,822 41,367
-------- -------- --------
$ 60,288 $ 80,403 $ 61,949
======== ======== ========
</TABLE>
II-58
<PAGE>
NOTE L. INCOME TAXES
The total provision for income taxes was allocated as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income from operations.............................. $57,644 $ 22,445 $39,992
Cumulative effect of changes in accounting
principles......................................... -- (2,897) --
------- -------- -------
Total provision for income taxes.................. $57,644 $ 19,548 $39,992
======= ======== =======
The provision for income taxes attributable to operations was composed of the
following:
<CAPTION>
1994 1993 1992
------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal........................................... $70,030 $ 31,965 $34,824
State............................................. 3,640 1,732 1,590
------- -------- -------
73,670 33,697 36,414
Deferred (benefit) expense.......................... (16,026) (11,252) 3,578
------- -------- -------
Provision for income taxes.......................... $57,644 $ 22,445 $39,992
======= ======== =======
</TABLE>
Deferred (benefit) expense results from timing differences in the accounting
for certain income and expense items for financial reporting purposes and for
income tax purposes. The book and tax accounting difference related to changes
in the tax accounting method for bad debts of savings institutions converting
to a commercial bank resulted in a deferred tax expense of $3,823,000 for 1992.
There were no other significant book and tax accounting differences in 1992.
The reasons for the difference between the provision for income taxes
attributable to operations and the amount computed by applying the statutory
federal income tax rate to the income before income taxes were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes at statutory rates of 35% for
1994 and 1993 and 34% for 1992..................... $58,551 $10,723 $33,713
Tax-exempt income from securities, loans and leases
less related non-deductible interest expense....... (2,793) (2,399) (1,963)
Changes in tax accounting method for bad debts of
savings institutions converting to a commercial
bank............................................... -- 9,389 5,190
Other, net.......................................... 1,886 4,732 3,052
------- ------- -------
Provision for income taxes.......................... $57,644 $22,445 $39,992
======= ======= =======
Effective income tax rate........................... 34.5% 73.3% 40.3%
======= ======= =======
</TABLE>
Income taxes (benefits) related to securities gains (losses) for 1994, 1993
and 1992 were $351,000, $5,219,000 and $(30,000), respectively.
II-59
<PAGE>
The tax effects of temporary differences that gave rise to significant
portions of the net deferred tax assets (liabilities) in the "Consolidated
Statements of Condition" at December 31, 1994 and 1993, as adjusted for the
adoption of SFAS No. 109 were:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for losses............................... $ 26,419 $ 25,498
Postretirement and postemployment benefits......... 4,798 4,017
Unrealized depreciation on securities available for
sale.............................................. 18,343 --
Tax deferred loss on sale of loans................. 8,552 506
Other.............................................. 18,899 10,717
----------- -----------
Total tax deferred assets............................ 77,011 40,738
----------- -----------
Deferred tax liabilities:
Tax accounting method changes...................... (8,113) (10,811)
Lease financing.................................... (12,270) (9,833)
Dividends on FHLB stock............................ (4,681) (4,574)
Prepaid pension plan contribution.................. (3,885) (3,128)
Other.............................................. (5,626) (4,326)
----------- -----------
Total tax deferred liabilities....................... (34,575) (32,672)
----------- -----------
Net deferred tax assets.............................. $ 42,436 $ 8,066
=========== ===========
</TABLE>
The deferred tax assets have been determined to be realizable as called for
by SFAS No. 109, and, accordingly, a valuation allowance was not required. At
December 31, 1994 and 1993, there were no operating losses, income tax credits
or alternative minimum tax credit carryforwards.
Retained earnings at December 31, 1994 included $7,411,000 of tax bad debt
reserves accumulated prior to October 1, 1988 which were applicable to SSB for
which no provision for income taxes has been made. If, in the future, this
portion of retained earnings is used for any purpose other than to absorb tax
bad debt losses of SSB, income taxes will be imposed at the then applicable
rates. Deferred income taxes have been provided on the tax bad debt reserves of
the acquired entities and SSB's tax bad debt reserves accumulated after
September 30, 1988.
NOTE M. BENEFIT PLANS
Southern National has various employee benefit plans and arrangements.
Employees of acquired entities participate in existing Southern National plans
upon consummation of the acquisition. Credit is given to these employees for
the 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 will be
superseded by the benefits offered in the Southern National plans and the
assumptions used in the Southern National calculations. Accordingly, the 1993
and 1992 actuarial information presented for retirement plans is that of
Southern National as originally presented.
Retirement Plans
Southern National has a non-contributory defined benefit pension plan ("Basic
Plan") covering substantially all employees. The benefits are based on years of
service and the employee's compensation during the five consecutive years of
employment that will produce the highest average pay. Southern National's
contributions to the plan are in amounts between the minimum required for
funding standard account purposes and the maximum deductible for Internal
Revenue Service purposes. Contributions to the plan of $5,173,000, $3,089,000
and $4,229,000 were made in 1994, 1993 and 1992, respectively.
II-60
<PAGE>
Supplemental retirement benefits are provided to certain key officers under
Southern National's Supplemental Executive Retirement Plan ("SERP"), effective
January 1, 1989. This plan is not qualified under the Internal Revenue Code.
Although technically an unfunded plan, insurance policies on the lives of the
covered employees are intended to be adequate to fund future benefits.
Net periodic pension cost, which is included in personnel expense, consisted
of the following components in 1994, 1993 and 1992.
<TABLE>
<CAPTION>
1994 1993* 1992*
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Defined benefit plans................................... $2,870 $3,705 $3,499
Employee stock ownership plans (ESOP)................... 4,023 3,010 2,567
Defined contribution plans.............................. 77 255 259
------- ------- -------
Total expense related to benefit plans................ $6,970 $6,970 $6,325
======= ======= =======
</TABLE>
* Amounts restated for acquisitions accounted for as poolings of interests.
<TABLE>
<CAPTION>
BASIC PLAN SERP
------------------------- --------------
1994 1993 1992 1994 1993 1992
------- ------- ------- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service cost.......................... $ 3,872 $ 2,708 $ 2,183 $248 $275 $112
Interest cost......................... 4,539 3,577 3,173 178 129 64
Actual return on assets............... (968) (3,512) (2,634) -- -- --
Net amortization and deferral......... (4,573) (525) (895) 78 62 27
Early retirement...................... -- -- 557 -- -- --
------- ------- ------- ---- ---- ----
Net periodic pension cost........... $ 2,870 $ 2,248 $ 2,384 $504 $466 $203
======= ======= ======= ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
BASIC PLAN SERP
------------------ ------------------
1994 1993 1994 1993
-------- -------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit ob-
ligations:
Accumulated benefit obligation, in-
cluding vested benefits of $48,599
in 1994 and $37,119 in 1993......... $(49,599) $(37,838) $ -- $ --
======== ======== ======= =========
Projected benefit obligation at De-
cember 31........................... $(57,916) $(49,472) $(2,721) $(2,009)
Plan assets at fair value, primarily
obligations of the U.S. Treasury and
Federal agencies and corporations..... $ 59,186 $ 50,438 -- --
======== ======== ======= =========
Plan assets in excess of (less than)
projected benefit obligation.. $ 1,270 $ 966 $(2,721) $. (2,009)
Unrecognized transition amount......... (666) (154) 245 271
Unrecognized prior service cost........ (1,637) 1,217 -- --
Unrecognized net loss.................. 10,096 2,866 933 691
======== ======== ======= =========
Prepaid (accrued) pension cost......... $ 9,063 $ 4,895 $(1,543) $(1,047)
======== ======== ======= =========
</TABLE>
The rate of increase in future compensation used in determining the actuarial
present value of the projected benefit obligation was 4.75% for 1994 and 6.0%
for 1993 and 1992. The weighted average assumed discount rate was 7.75% for
1994 and 8.0% for 1993 and 1992. The weighted average expected long-term rate
of return on assets used was 9.0% for 1994, 1993 and 1992.
Postretirement Benefits
Effective December 31, 1992, Southern National adopted a revised retiree
medical program ("Plan") in preparation for the implementation of SFAS No. 106,
"Accounting for Postretirement Benefits Other Than
II-61
<PAGE>
Pensions." The Plan covers employees retiring after January 1, 1993 who are
eligible for participation in the Basic Plan and have at least ten years of
service. The Plan requires retiree contributions, with a subsidy by Southern
National based upon years of service of the employee at the time of retirement.
The subsidy is adjusted each year for movement of the Consumer Price Index.
There is no employer subsidy for dependent benefits. Employees who retired
prior to January 1, 1993 are grandfathered and may choose from three
comprehensive medical options with varying deductibles.
Southern National adopted SFAS No. 106 as of January 1, 1993. As a result of
adopting SFAS No. 106, Southern National recognized a cumulative charge for
this change in accounting principle of $5,566,000 (net of $2,897,000 of
deferred income tax benefits), or $.15 per fully diluted share. The charge is
included under the caption "Cumulative effect of changes in accounting
principles, net of income taxes" in the "Consolidated Statements of
Operations." The effect of this change, net of income taxes and excluding the
cumulative charge, for the year ended December 31, 1993 was to decrease net
income by $628,000 or approximately $.01 per fully diluted share.
The accumulated postretirement benefit retirement obligation was $11,727,000
and $7,469,000 at December 31, 1994 and 1993, respectively.
Net postretirement health care cost includes the following components:
<TABLE>
<CAPTION>
1994 1993
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Service cost--benefits attributed to service during the
period................................................. $ 501 $300
Interest cost on accumulated postretirement benefit ob-
ligation............................................... 731 539
------------ ----------
Net periodic postretirement benefit costs............. $1,232 $839
============ ==========
</TABLE>
For measurement purposes, a 10.0% annual rate of increase in the per capita
cost of health care claims was assumed for 1994; the rate was assumed to
decline by 1.0% each year until reaching 5.0% in 1999 and remain constant
thereafter. Medical costs were assumed to increase from 14.0% of the gross
domestic product in 1992 to 17.0% in 1999 and remain constant thereafter. A
1.0% increase in the assumed long-term health care trend rate would increase
the net periodic benefit cost by 1.0% and the expected postretirement benefit
obligation by 1.1%. Other actuarial assumptions were a 7.75% discount rate and
a 4.0% assumed annual increase in all other items. Although technically an
unfunded plan, corporate-owned life insurance policies are intended to
partially fund future benefits.
Employee Stock Ownership Plan
Southern National's Employee Stock Ownership Plan allows all employees to
acquire common stock in SNC by contributing up to 15% of their salaries to the
plan. Southern National matches 100% of each employee's contributions, up to a
maximum of 6% of the employee's salary.
Settlement Agreements
In connection with the merger of Southern National and BB&T, two executive
officers of Southern National have agreed to retire during 1995. The merged
company has 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 will 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.
II-62
<PAGE>
Other
There are various other employment contracts, deferred compensation
arrangements and covenants not to compete with selected members of management
and certain retirees.
NOTE N. COMMITMENTS AND CONTINGENCIES
Financial Instruments
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.
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT AT
DECEMBER 31,
------------------------
1994 1993
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amounts
represents credit risk:
Commitments to extend, originate or purchase credit. $1,278,533 $874,064
Standby letters of credit and financial guarantees
written............................................ 36,457 167,933
Financial instruments whose notional or contract
amounts exceed the amount of credit risk:
Commitments to sell mortgage loans and mortgage-
backed securities.................................. 11,392 367,381
</TABLE>
Commitments to extend credit are arrangements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Southern National evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by Southern National upon extension of
credit is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment and income-producing commercial properties.
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. Southern National holds first deeds of trust, certificates of
deposit and/or marketable securities as collateral supporting those commitments
for which collateral is deemed necessary. The extent of collateral held for
those commitments at December 31, 1994 was approximately $11.6 million.
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.
II-63
<PAGE>
Litigation
In June 1991, the trustee in bankruptcy for Kenyon Home Furnishings, Ltd.
("Kenyon") filed an adversary proceeding against SNBNC in the United States
Bankruptcy Court for the Middle District of North Carolina. The trustee alleges
that American Bank and Trust Company ("American"), which was acquired by SNBNC
in October 1989, aided and abetted Kenyon's officers in defrauding Kenyon's
creditors and others. The trustee seeks to recover more than $40 million in
damages. The trustee also filed separate proceedings against a number of other
persons, corporations and financial institutions seeking identical damages. In
these actions, the trustee is seeking to recover attorney's fees and treble
damages. The claim addresses events and circumstances occurring on or before
October 31, 1989, the date SNBNC acquired American. The trustee and SNBNC have
agreed to settle the adversary proceeding. The settlement is subject to court
approval which is anticipated in the next ninety days. During 1994, management
accrued reserves which are sufficient to cover the liability represented by the
settlement. Based on information presently available to Southern National,
management believes that the ultimate outcome of this matter will not have a
material impact on the consolidated financial condition or consolidated results
of operations of Southern National.
In July 1993, the trustee in bankruptcy for Florida Hotel Properties Limited
Partnership ("Florida") filed an adversary proceeding against SNBNC in the
United States Bankruptcy Court for the Western District of North Carolina. In
August 1993, the trustee for Southeast Hotel Properties Limited Partnership
Claims Liquidating Trust ("Southeast") filed an action against SNBNC in the
United States District Court for the Western District of North Carolina. In
both cases, the trustee alleges that SNBNC aided and abetted Florida's and
Southeast's officers in defrauding Florida and Southeast through SNBNC's
handling of deposit accounts from which Florida and Southeast allegedly made
fraudulent transfers to third parties by check and/or wire transfer. The cases
have been consolidated for trial as the allegations refer to related entities.
The amounts allegedly misappropriated are approximately $14,000,000 in the
Florida action and approximately $7,500,000 in the Southeast action. The
trustee is seeking to recover from Southern National the value of the funds
misappropriated, less a credit for other recoveries by the trustee from Florida
and Southeast officers and other third parties. The value of this credit is
approximately $7,000,000 at present. The trustee and SNBNC have agreed to
settle both cases. The settlement is subject to court approval which is
anticipated in the next ninety days. Based on information presently available
to Southern National concerning coverage of these cases by its insurance
carriers, management believes that the ultimate outcome of this matter will not
have a material impact on the consolidated financial condition or consolidated
results of operations of Southern National.
SNBSC, as successor in interest by merger to The First, is a defendant in a
lawsuit filed in 1991 in the Court of Common Pleas, Thirteenth Judicial
Circuit, State of South Carolina against The First. On May 21, 1993, a jury
awarded the plaintiffs a $4.1 million judgment against The First consisting of
$500,000 in actual damages and $3.6 million in punitive damages for allegedly
acting as a control person and aiding and abetting a state securities law
violation. The plaintiffs, limited partners in a failed venture to construct
and operate a residential health care facility for senior citizens, alleged
that The First, as an escrow agent and lender for the project, knew, or should
have known, that its loan commitment was insufficient and that The First was
therefore responsible for the losses suffered by the limited partners resulting
from the actions of the general partners. Prior to this case going to jury, The
First made a motion for directed verdict which was not granted. Rule 50(b) of
the South Carolina Rules of Civil Procedure states that when a motion for
directed verdict is not granted, the Court is deemed to have submitted the
action to the jury subject to a later determination of the legal question
raised in the motion. After the jury verdict, The First renewed that motion in
the form of a motion for judgment not withstanding the verdict, as well as an
alternative motion for a new trial. This motion and the plaintiff's petition
for legal fees, costs and interest were argued before Circuit Judge on June 22,
1993. The First's motion was granted as to plaintiff's "control person" theory
of liability, but denied as to plaintiff's aiding and abetting violations of
securities laws theory of liability. The request for a new trial was also
denied. As a result, the judgment remains in effect but has been appealed. It
is the opinion of Southern National's legal counsel that it is not probable
that a loss in the amount of the present jury verdict will be incurred by
SNBSC. Furthermore, if a loss ultimately is incurred following appeals, it is
not probable that the loss would exceed $750,000. Therefore, it is management's
opinion, based upon counsel's analysis of the
II-64
<PAGE>
outcome of the suit, that any future liability arising from this suit will not
have a material adverse effect on the consolidated financial condition or
consolidated results of operations of Southern National.
The nature of the business of Southern National's banking subsidiaries
ordinarily results in a certain amount of litigation. The subsidiaries of
Southern National are involved in various other claims and lawsuits, all of
which are considered incidental to the conduct of its business.
NOTE O. REGULATORY REQUIREMENTS AND OTHER RESTRICTIONS
Southern National, the Banks and SSB are required by the Board of Governors
of the Federal Reserve System ("Board"), the Office of the Comptroller of the
Currency ("OCC") and the North Carolina Savings Institution Division to
maintain certain capital-to-assets ratios. At December 31, 1994, these ratios
were above the minimums prescribed for bank holding companies, national banks
and state savings banks.
The Banks and SSB are required by the Board to maintain reserve balances
based on certain percentages of deposit types. At December 31, 1994, these
reserves amounted to $133 million and were satisfied by vault cash and
noninterest-bearing deposits with the Federal Reserve Bank.
Under the regulations of the OCC, at December 31, 1994, SNBNC and SNBSC could
have paid additional dividends to Southern National of $52.6 million and $42.4
million, respectively, without obtaining prior approval of the OCC. SSB, in
accordance with Title IV of North Carolina general statutes, Chapter 16A.0105,
can make capital distributions, including cash dividends, to Southern National
with prior approval of the Administrator, in an amount less than the greater of
one-half of net income for the most recent fiscal year or the average of net
income for the most recent three years.
The terms of the capital note agreement (Note I) provide for various
restrictions on Southern National, including restrictions on the payment of
dividends and incurrence of additional debt. Under these covenants, as of
December 31, 1994, approximately $260.5 million was available for payment of
cash dividends by Southern National out of its retained eanings.
The following table provides an analysis of loans made to directors,
executive officers and their interests, which in the aggregate exceeded $60,000
at any time during 1994. 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:
<TABLE>
<CAPTION>
(DOLLARS
IN THOUSANDS)
-------------
<S> <C>
Balance, December 31, 1993........................................ $35,714
Additions......................................................... 87,012
Repayments........................................................ 78,800
-------
BALANCE, DECEMBER 31, 1994........................................ $43,926
=======
</TABLE>
II-65
<PAGE>
NOTE P. PARENT COMPANY FINANCIAL STATEMENTS
STATEMENTS OF CONDITION
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
ASSETS
Cash..................................................... $ 1,319 $ 1,699
Securities............................................... 78,010 108,041
Receivables from subsidiaries............................ 51,561 8,232
Investment in bank subsidiaries, at equity............... 600,280 411,537
Investment in other subsidiaries, at equity.............. 4,373 65,906
Premises................................................. 6,158 6,330
Other assets............................................. 1,321 1,849
-------- --------
Total assets........................................... $743,022 $603,594
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings.................................... $101,602 $ 25,540
Accounts payable and accrued liabilities................. 493 1,274
Capital notes and mortgages.............................. 8,583 11,916
-------- --------
Total liabilities...................................... 110,678 38,730
-------- --------
Shareholders' equity:
Preferred stock........................................ 3,850 3,850
Common stock........................................... 220,794 214,806
Paid-in capital........................................ 164,934 151,186
Retained earnings...................................... 245,794 199,383
Unearned compensation.................................. (2,650) (4,361)
Net unrealized depreciation on securities available for
sale.................................................. (378) --
-------- --------
Total shareholders' equity........................... 632,344 564,864
-------- --------
Total liabilities and shareholders' equity........... $743,022 $603,594
======== ========
</TABLE>
II-66
<PAGE>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- -------
<S> <C> <C> <C>
INCOME
Dividend income from bank subsidiaries............ $ 53,365 $ 66,449 $17,849
Interest income from subsidiaries................. 3,775 619 4,612
Interest on securities............................ 1,560 2,295 1,123
Rental income..................................... 1,292 1,292 1,292
Other income...................................... 810 897 102
-------- -------- -------
Total income.................................... 60,802 71,552 24,978
-------- -------- -------
EXPENSES
Interest expense.................................. 4,987 1,636 1,512
Occupancy expense................................. 172 450 182
Other expenses.................................... 314 2,631 2,228
-------- -------- -------
Total expenses.................................. 5,473 4,717 3,922
-------- -------- -------
Income before income tax provision and equity in
undistributed earnings of subsidiaries........... 55,329 66,835 21,056
Income tax provision.............................. 716 365 958
-------- -------- -------
Income before equity in undistributed earnings of
subsidiaries..................................... 54,613 66,470 20,098
Equity in undistributed earnings (losses) of
subsidiaries..................................... 55,031 (85,494) 39,065
-------- -------- -------
NET INCOME (LOSS)................................... $109,644 $(19,024) $59,163
======== ======== =======
</TABLE>
II-67
<PAGE>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $109,644 $(19,024) $ 59,163
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Equity in undistributed losses (earnings) of
subsidiaries.................................. (55,031) 85,494 (39,065)
Depreciation of premises....................... 172 1,041 361
Discount accretion and premium amortization on
securities.................................... 83 126 --
Amortization of unearned compensation.......... 1,711 730 --
Securities gains, net.......................... (78) -- --
Reconciliation of fiscal year of merged
companies to calendar year.................... -- (51) 2,257
(Increase) decrease in receivables from
subsidiaries.................................. (43,329) (7,384) 2,225
Decrease (increase) in other assets............ 2,943 (2,117) (160)
Decrease in accounts payable and accrued
liabilities................................... (781) (557) (203)
-------- -------- --------
Net cash provided by operating activities.... 15,334 58,258 24,578
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in merger accounted for as
purchase....................................... -- -- 311
Proceeds from sales of securities............... 10,063 -- --
Proceeds from maturities of securities.......... 65,002 5,000 35,000
Purchases of securities......................... (63,177) (65,154) (77,739)
Investment in subsidiaries...................... (67,492) (116) (32,500)
-------- -------- --------
Net cash used in investing activities........ (55,604) (60,270) (74,928)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt..................... (3,333) (3,334) (2,333)
Proceeds from common stock issued............... 2,672 3,163 1,211
Common stock acquired and retired............... -- (5) (1,845)
Net proceeds from sale of preferred stock....... -- -- 74,142
Net increase in short-term borrowings........... 76,062 25,540 --
Cash dividends paid on common and preferred
stock.......................................... (35,511) (24,654) (18,481)
-------- -------- --------
Net cash provided by financing activities.... 39,890 710 52,694
-------- -------- --------
Net (Decrease) Increase in Cash.................. (380) (1,302) 2,344
Cash at Beginning of Year........................ 1,699 3,001 657
-------- -------- --------
Cash at End of Year.............................. $ 1,319 $ 1,699 $ 3,001
======== ======== ========
</TABLE>
During the years ended December 31, 1994, 1993 and 1992, Parent Company paid
$1.0 million, $1.3 million and $1.5 million, respectively, for interest on
long-term debt.
NOTE Q. 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
II-68
<PAGE>
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 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, 1994 and
1993.
Cash and cash equivalents: For these short-term instruments, the carrying
amounts are a reasonable estimate of fair values.
Securities: Fair values for securities are based on quoted market prices, if
available. If quoted market prices are not available, fair values are based on
quoted market prices for similar securities.
Loans receivable: The fair values for certain mortgage loans and credit card
loans are based on quoted prices of similar loans, adjusted for differences in
loan characteristics. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms and credit quality. The carrying amounts of accrued
interest approximate fair values.
Deposit liabilities: The fair values for demand deposits, interest-checking
accounts, savings accounts and certain money market accounts are, by
definition, equal to the amount payable on demand at the reporting date, i.e.,
their carrying amounts. Fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies current interest rates to
aggregate expected maturities.
Short-term borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, master notes and other short-term
borrowings approximate their fair values.
Long-term debt: The fair values of long-term debt are estimated based on
quoted market prices for similar instruments or by using discounted cash flow
analyses, based on Southern National's current incremental borrowing rates for
similar types of instruments.
Interest rate swap agreements: The fair values of interest rate swaps (used
for hedging purposes) are the estimated amounts that the Corporation would
receive or pay to terminate the swap agreements at the reporting date, taking
into account current interest rates and the current creditworthiness of the
swap counterparties.
Commitments to extend credit, standby letters of credit and financial
guarantees written: The fair values of commitments are estimated using the fees
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed rate loan commitments, fair values also consider the difference
between current levels of interest rates and the committed rates. The fair
values of guarantees and letters of credit are estimated based on fees
currently charged for similar agreements.
Other off-balance sheet instruments: The fair values for off-balance sheet
instruments (futures, forwards, options, and commitments to sell or purchase
financial instruments) are estimated based on quoted prices, if available. For
instruments for which there are no quoted prices, fair values are estimated
using current settlement values or pricing models.
II-69
<PAGE>
The estimated fair values of Southern National's financial instruments are as
follows:
<TABLE>
<CAPTION>
1994 1993
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents.... $ 274,636 $ 274,636 $ 362,301 $ 362,301
Securities available for
sale........................ 992,016 992,016 1,194,230 1,210,995
Securities held to maturity.. 1,774,202 1,700,074 1,356,102 1,381,371
Loans and leases
Loans...................... 5,198,788 5,129,497 4,962,376 4,958,948
Leases(1).................. 257,554 N/A 192,442 N/A
Allowance for losses....... (70,573) N/A (69,503) N/A
---------- ----------
Net loans and leases..... 5,385,769 5,085,315
========== ==========
FINANCIAL LIABILITIES:
Deposits..................... $6,165,080 $6,167,262 $6,394,871 $6,423,807
Short-term borrowings........ 1,654,465 1,654,465 756,343 756,343
Long-term debt............... 193,137 186,920 475,104 486,415
Capitalized leases(1)........ 4,393 N/A 4,573 N/A
- -------------------------------------------------------------------------------
<CAPTION>
NOTIONAL/ NOTIONAL/
CONTRACT FAIR CONTRACT FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
UNRECOGNIZED FINANCIAL INSTRU-
MENTS:
Interest rate swaps:
In a net receivable posi-
tion...................... $ 550,000 $ (22,470) $ 50,000 $ 19
In a net payable position.. 61,325 3,312 163,094 (1,029)
Interest rate caps and
floors...................... -- -- 400,000 90
Commitments to extend, origi-
nate or purchase credit..... 1,278,533 (12,993) 874,064 (2,051)
Standby letters of credit and
financial guarantees writ-
ten......................... 36,457 (238) 167,933 (655)
Commitments to sell loans and
securities.................. 11,392 29 367,381 (287)
</TABLE>
- --------
(1) SFAS No. 107 does not require disclosures about fair value for lease
contracts as defined in SFAS No. 113, "Accounting for Leases."
N/A Not applicable
NOTE R. 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 1994,
management used interest rate swaps, caps and floors to supplement balance
sheet repositioning. Such actions were designed to lower the interest
sensitivity of the Corporation toward a neutral position.
Interest rate swaps are contractual agreements between two parties to
exchange a series of cash flows representing interest payments. A swap allows
both parties to transform the repricing characteristics of an asset or
liability from a fixed to a floating rate, a floating rate to a fixed rate, or
one floating rate to another floating rate. The underlying principal positions
are not affected. Swap terms generally range from one year to ten years
depending on the need. At December 31, 1994, interest rate swaps with a total
notional value of $611 million, with terms ranging up to seven years, were
outstanding.
II-70
<PAGE>
The following tables set forth certain information concerning Southern
National's interest rate swaps at December 31, 1994:
INTEREST RATE SWAPS
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTIONAL RECEIVE FAIR
TYPE AMOUNT RATE PAY RATE VALUE
---- ----------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Receive fixed swaps............... $ 550,000 5.98% 5.95% $ (22,470)
Pay fixed swaps................... 61,325 5.44 5.18 3,312
--------- -------- --------- ---------
Total............................. $ 611,325 5.92% 5.87% $ (19,158)
========= ======== ========= =========
<CAPTION>
PAY
RECEIVE FIXED BASIS
YEAR-TO-DATE ACTIVITY FIXED SWAPS SWAPS PROTECTION TOTAL
--------------------- ----------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1993........ $ 150,000 $ 63,094 $ 400,000 $ 613,094
Additions......................... 550,000 9,000 -- 559,000
Maturities/amortizations.......... (50,000) (10,769) (100,000) (160,769)
Terminations...................... (100,000) -- (300,000) (400,000)
--------- -------- --------- ---------
Balance, December 31, 1994........ $ 550,000 $ 61,325 $ -- $ 611,325
========= ======== ========= =========
<CAPTION>
ONE TO
ONE YEAR OR FIVE FIVE TO 10
MATURITY SCHEDULE LESS YEARS YEARS TOTAL
----------------- ----------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Receive fixed swaps............... $ -- $550,000 $ -- $ 550,000
Pay fixed swaps................... 2,263 36,772 22,290 61,325
--------- -------- --------- ---------
Total............................. $ 2,263 $586,772 $ 22,290 $ 611,325
========= ======== ========= =========
</TABLE>
As of December 31, 1994, unamortized deferred premiums from new swap
transactions and deferred realized losses from terminated swap transactions
were $1.6 million and $122,000, respectively. The unamortized deferred premiums
will be recognized over the next three years and the realized deferred losses
will be recognized in the next year. For the year ended December 31, 1994, the
combination of active and terminated transactions resulted in income of
$866,000.
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 1994, options were
written on securities totaling $531 million, and premiums included in other
income totaled $1.6 million. There were no unexercised options outstanding at
December 31, 1994.
Southern National also utilizes purchased over-the-counter put options in its
mortgage banking activities to hedge the mortgage pipeline. During 1994,
options on $6.0 million of securities were purchased and $3.0 million remained
outstanding at December 31, 1994.
The $611 million of interest rate swaps outstanding at December 31, 1994
include $550 million of indexed amortizing swaps which are used to hedge
variable-rate commercial loans and $61 million swaps which are used to hedge
fixed-rate commercial loans and leases.
Although off-balance sheet derivative financial instruments do not expose
Southern National to credit risk equal to the notional amount, such agreements
generate credit risk to the extent of the fair value gain in an off-balance
sheet derivative financial instrument if the counterparty fails to perform.
Such risk is minimized based on the quality of the counterparties and the
consistent monitoring of these agreements. The counterparties to these
transactions were large commercial banks and investment banks, all of which
were approved by the Asset and Liability committee ("ALCO"). Annually, the
counterparties are reviewed for creditworthiness by Southern National's credit
policy group. Where appropriate, master netting agreements are arranged or
collateral is obtained in the form of rights to securities.
Other risks associated with interest-sensitive derivatives include the impact
on fixed positions during periods of changing interest rates. Indexed
amortizing swaps' notional amounts and maturities change based on certain
interest rate indices. Generally, as rates fall the notional amounts decline
more rapidly, and as rates increase notional amounts decline more slowly. Under
unusual circumstances, financial derivatives also increase liquidity risk,
which could result from an environment of rising interest rates in which
derivatives produce negative cash flows while being offset by increased cash
flows from variable rate loans. Such risk is considered insignificant due to
the relatively small derivative positions held by Southern National.
II-71
<PAGE>
SOUTHERN NATIONAL CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING OF SHAREHOLDERS TO BE HELD MAY 23, 1995
PROXY PROXY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned shareholder of Southern
National Corporation (the "Corporation"), a North Carolina corporation, hereby
constitutes and appoints John A. Allison IV and Jerone C. Herring, and each of
them, attorneys and proxies, with full power of substitution, for and on behalf
of the undersigned to act and vote, as indicated below, according to the number
of shares of the Corporation's common stock held of record by the undersigned
on April 7, 1995, and as fully as the undersigned would be entitled to act and
vote if personally present, at the Annual Meeting of Shareholders to be held at
the University Corporate Center Auditorium, located at 1100 Reynolds Boulevard,
Winston-Salem, North Carolina on May 23, 1995, at 11:00 a.m. and at any
adjournment or adjournments thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF PROPERLY EXECUTED AND NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED IN FAVOR OF PROPOSALS 1, 2, 3, 4 AND 5.
1. Proposal to Elect as Directors the 17 Nominees Listed Below:
[_] FOR electing all 17 nominees listed below (except as marked to the
contrary below)
[_] AGAINST electing all 17 nominees listed below
[_] ABSTAIN
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)
John A. Allison IV Joe L. Dudley, Sr. Ernest F. Hardee
Paul B. Barringer Tom D. Efird Richard Janeway, M.D.
W. R. Cuthbertson, Jr. O. William Fenn, Jr. J. Ernest Lathem, M.D.
Ronald E. Deal L. Vincent Hackley James H. Maynard
A.J. Dooley, Sr.
Albert O. McCauley
L. Glenn Orr, Jr.
A. Winniett Peters
Richard L. Player, Jr.
2. Proposal to Approve the Corporation's 1995 Omnibus Stock Incentive Plan.
[_] For [_] Against [_] Abstain
3. Proposal to Approve the Corporation's Savings and Thrift Plan for the
Employees of Branch Banking & Trust Company.
[_] For [_] Against [_] Abstain
(Continued and to be signed on reverse side)
<PAGE>
(Continued from other side)
4. Proposal to Approve the Corporation's Special Non-Employee Directors Stock
Option Plan.
[_] For [_] Against [_] Abstain
5. Proposal to Ratify the Board of Directors' Appointment of Arthur Andersen
LLP as the Corporation's Auditors for 1995.
[_] For [_] Against [_] Abstain
6. In their discretion, the proxies are authorized to act and vote upon any
other business which may properly be brought before the meeting or any
adjournment thereof.
THE UNDERSIGNED HEREBY RATIFIES AND CONFIRMS ALL THAT SAID ATTORNEYS AND
PROXIES OR ANY OF THEM LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. EACH
OF SAID ATTORNEYS AND PROXIES WHO SHALL BE PRESENT AND ACTING AS SUCH AT THE
ANNUAL MEETING OF SHAREHOLDERS OR ANY ADJOURNMENT THEREOF SHALL HAVE AND MAY
EXERCISE ALL THE POWERS HEREBY CONFERRED.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS, DATED APRIL 21, 1995, THE PROXY STATEMENT AND ANNUAL REPORT ON
FORM 10-K FURNISHED THEREWITH.
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PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY PROMPTLY.THANK YOU.
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Place
Label
Here
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Dated this day of , 1995.
__________________________ (SEAL)
__________________________ (SEAL)
NOTE: Please sign exactly as name appears on stock certificate. When shares are
held by joint tenants, both should sign. Executors, administrators, trustees and
other fiduciaries, and persons signing on behalf of corporations or
partnerships, should so indicate when signing.
