<PAGE>
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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.
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<PAGE>
CROSS REFERENCE INDEX
<TABLE>
<CAPTION>
PAGE
--------------
<C> <C> <S> <C>
PART I Item 1 Business...................................... 4-14
Item 2 Properties.................................... 17,55
Item 3 Legal Proceedings............................. 64-65
Item 4 Submission of Matters to a Vote of 2
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.................. 14,34,36,39,44
Item 6 Selected Financial Data....................... 39
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 18-39
Item 8 Financial Statements and Supplementary Data... 38
Consolidated Statements of Condition at 42
December 31, 1994 and 1993...................
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------------
<C> <C> <S> <C>
Consolidated Statements of Operations for
each of the years in the three-year period
ended December 31, 1994.................... 43
Consolidated Statements of Cash Flows for
each of the years in the three-year period
ended December 31, 1994.................... 45
Notes to Consolidated Financial Statements.. 45-71
Report of Independent Public Accountants.... 41
Quarterly Financial Summary of 1994 and 38
1993.......................................
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>
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.
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
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
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.
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.
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>
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
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.
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.
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.
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.
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.
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
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.
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.
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
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.
-------------------------------------------------------------------------------
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.
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
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
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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>
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.
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.
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
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
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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
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>
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.
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>
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.
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.
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>
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.
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.
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
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.
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.
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
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>
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>
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>
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
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.
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.
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.
71
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED HEREUNTO DULY AUTHORIZED, IN THE CITY OF WINSTON-SALEM, STATE OF
NORTH CAROLINA, ON MARCH 30, 1995.
Southern National Corporation
(Registrant)
By: /s/ John A. Allison IV
---------------------------------
JOHN A. ALLISON,
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES INDICATED ON MARCH 30, 1995.
/s/ John A. Allison IV
-------------------------------------
JOHN A. ALLISON,
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
/s/ Scott E. Reed
-------------------------------------
SCOTT E. REED,
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
/s/ Sherry A. Kellett
-------------------------------------
SHERRY A. KELLETT,
EXECUTIVE VICE PRESIDENT AND
CONTROLLER
A Majority of the Directors of the Registrant are included.
/s/ Paul B. Barringer
-------------------------------------
PAUL B. BARRINGER
DIRECTOR
/s/ W. R. Cuthbertson, Jr.
-------------------------------------
W. R. CUTHBERTSON, JR.
DIRECTOR
/s/ Ronald E. Deal
-------------------------------------
RONALD E. DEAL
DIRECTOR
72
<PAGE>
/s/ A. J. Dooley, Sr.
-------------------------------------
A. J. DOOLEY, SR.
DIRECTOR
/s/ Joe L. Dudley, Sr.
-------------------------------------
JOE L. DUDLEY, SR.
DIRECTOR
/s/ Tom D. Efird
-------------------------------------
TOM D. EFIRD
DIRECTOR
/s/ O. William Fenn, Jr.
-------------------------------------
O. WILLIAM FENN, JR.
DIRECTOR
/s/ Ernest F. Hardee
-------------------------------------
ERNEST F. HARDEE
DIRECTOR
/s/ Richard Janeway, M.D.
-------------------------------------
RICHARD JANEWAY, M.D.
DIRECTOR
/s/ J. Ernest Lathem, M.D.
-------------------------------------
J. ERNEST LATHEM, M.D.
DIRECTOR
/s/ Albert O. McCauley
-------------------------------------
ALBERT O. MCCAULEY
DIRECTOR
/s/ Dickson McLean, Jr.
-------------------------------------
DICKSON MCLEAN, JR.
DIRECTOR
/s/ Charles E. Nichols
-------------------------------------
CHARLES E. NICHOLS
DIRECTOR
/s/ L. Glenn Orr, Jr.
-------------------------------------
L. GLENN ORR, JR.
DIRECTOR
73
<PAGE>
/s/ A. Winniett Peters
_____________________________________
A. WINNIETT PETERS
DIRECTOR
/s/ Richard L. Player, Jr.
_____________________________________
RICHARD L. PLAYER, JR.
DIRECTOR
/s/ Nido R. Qubein
_____________________________________
NIDO R. QUBEIN
DIRECTOR
/s/ A. Tab Williams, Jr.
_____________________________________
A. TAB WILLIAMS, JR.
DIRECTOR
/s/ Paul S. Goldsmith
_____________________________________
PAUL S. GOLDSMITH
DIRECTOR
_____________________________________
JAMES H. MAYNARD
DIRECTOR
_____________________________________
JOSEPH A. MCALEER, JR.
DIRECTOR
_____________________________________
C. EDWARD PLEASANTS, JR.
DIRECTOR
_____________________________________
LLOYD VINCENT HACKLEY
DIRECTOR
74
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
------- ----------- --------
<C> <S> <C>
2(a) Agreement and Plan of Reorganization dated as of Incorporated herein
July 29, 1994 and amended and restated as of by reference to Registration
October 22, 1994 between Southern National and No. 33-57861.
BB&T.
2(b) Plan of Merger as of July 29, 1994 as amended Incorporated herein by
and restated on October 22, 1994 between reference to Registration
Southern National and BB&T. No. 33-57861.
3(a) Articles of Incorporation of Southern National Incorporated herein by
Corporation, as amended. reference to Registration
No. 33-29586.
3(c) Bylaws of Southern National Corporation, as Incorporated herein by
amended. reference to Registration
No. 33-29586.
4(a) Form of Articles of Amendment to Articles of Incorporated herein by
Incorporation of Southern National Corporation reference to Registration
relating to Cumulative Convertible Preferred No. 33-44557.
Stock, Series A.
4(b) Agreement to furnish copies of documents Filed with December 31,
defining the rights of the holders of the 1993 Form 10-K Exhibits.
Capital Notes of Southern National Corporation.
10(c)* Employment Contract dated July 16, 1981, by and Incorporated herein by
between Southern National Bank of North reference to Registration
Carolina, Southern National Corporation and L. No. 33-29586.
Glenn Orr, Jr.
10(j)* Employment Contract dated July 17, 1986, by and Incorporated herein by
between Southern National Corporation, Southern reference to Registration
National Bank of North Carolina and Gary E. No. 33-8137.
Carlton.
10(k)* Amendment to Employment Contract dated June 15, Incorporated herein by
1987, by and between Southern National reference to Registration
Corporation, Southern National Bank of North No. 33-29586.
Carolina and Gary E. Carlton.
10(l)* Employee Stock Ownership Plan, as amended, of Incorporated herein by
Southern National Corporation. reference to Southern
National Corporation's
Annual Report on Form 10-K
for the year ended December
31, 1988.
10(n)* Amendment to Employment Contract dated June 15, Incorporated herein by
1989, by and between Southern National reference to Registration
Corporation, Southern National Bank of North No. 33-29586.
Carolina and L. Glenn Orr, Jr.
10(r)* Death Benefit Only Plan, Dated April 23, 1990, Incorporated herein by
by and between Southern National Bank of North reference to Registration
Carolina and L. Glenn Orr, Jr. No. 33-33984.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10(s)* Non-Employee Directors' Stock Option Plan of Incorporated herein by
Southern National Corporation. reference to Southern
National Corporation's
definitive Proxy
Statement for the 1992
Annual Meeting of
Shareholders, dated
March 25, 1992.
10(t)* Southern National Corporation Omnius Stock Incorporated herein by
Incentive Plan reference to
Registration No. 33-
57865.
10(u)* Settlement Agreement, Waiver, and General Incorporated herein by
Release dated September 19, 1994, by and reference to
between Southern National Corporation, Southern Registration No. 33-
National Bank of North Carolina and Gary E. 56437.
Carlton.
10(v)* Settlement and Non-compete Agreement, dated Incorporated herein by
February 28, 1995, by and between Southern reference to
National Corporation and L. Glenn Orr, Jr. Registration No. 33-
56437.
11 Statement re computation of earnings per share. Filed herewith.
21 Subsidiaries of the Registrant. Filed herewith.
22(a) Published report regarding matters submitted to Incorporated herein by
vote of security holders. reference to
Registration No. 33-
57861.
23(a) Report of Independent Public Accountants Filed herewith.
23(b) Consent of Independent Public Accountants. Filed herewith.
22(b) Proxy Statement of the 1995 Annual Meeting of Future filing
Shareholders, dated May 23, 1995. incorporated by
reference pursuant to
the General
Instructions to Form
10-K Section 33,251
G(3).
27 Financial Data Schedule. Filed as an exhibit to
the electronically-
filed document as
required.
</TABLE>
--------
* Management compensary plan or arrangement.
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
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>
PRIMARY EARNINGS PER SHARE:
Weighted average number of common shares
outstanding during the period............ 43,453,926 41,940,757 40,243,678
Add--
Dilutive effect of outstanding options
(as determined by application of
treasury stock method).................. 375,395 390,369 534,102
----------- ----------- -----------
Weighted average number of common shares,
as adjusted.............................. 43,829,321 42,331,126 40,777,780
=========== =========== ===========
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
Less--
Preferred dividend requirements.......... 5,198 5,198 4,605
----------- ----------- -----------
Income (loss) available for common shares. $ 104,446 $ (24,222) $ 54,558
=========== =========== ===========
Primary earnings (loss) per share
Income before cumulative effect of
changes in accounting principles........ $ 2.38 $ .07 $ 1.34
Less: cumulative effect of changes in
accounting principles, net of income
taxes............................... -- .64 --
----------- ----------- -----------
Net income (loss)........................ $ 2.38 $ (.57) $ 1.34
=========== =========== ===========
FULLY DILUTED EARNINGS PER SHARE:
Weighted average number of common shares
outstanding during the period............ 43,453,926 41,940,757 40,243,678
Add--
Shares issuable assuming conversion of
convertible preferred stock............. 4,548,236 4,548,236 4,125,722
Dilutive effect of outstanding options
(as determined by application of
treasury stock method).................. 376,807 400,296 624,409
----------- ----------- -----------
Weighted average number of common shares,
as adjusted.............................. 48,378,969 46,889,289 44,993,809
=========== =========== ===========
Net income (loss)......................... $ 109,644 $ (19,024) $ 59,163
=========== =========== ===========
Fully diluted earnings per share
Income before cumulative effect of
changes in accounting principles........ $ 2.27 $ NM $ 1.31
Less: cumulative effect of changes in
accounting principles, net of income
taxes............................... -- NM --
----------- ----------- -----------
Net income............................... $ 2.27 $ NM $ 1.31
=========== =========== ===========
</TABLE>
--------
NM--not meaningful
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Southern National Corporation, a North Carolina corporation, is the parent
company. The table below sets forth all Southern National's subsidiaries at
December 31, 1994 as to State or Jurisdiction of Organization and Percentage of
Voting Securities Owned as well as their relationship to Southern National. All
of the subsidiaries listed below are included in the consolidated financial
statements, and no separate financial statements are submitted for any
subsidiary.
<TABLE>
<CAPTION>
PERCENTAGE
STATE OR OF VOTING
JURISDICTION SECURITIES
OF ORGANIZATION OWNED
--------------- ----------
<S> <C> <C>
Southern National Bank of North Carolina........... United States 100%
Southern National Leasing Corp..................... North Carolina 100%(1)
Southern National Mortgage Company................. North Carolina 100%(1)
Southern National Investment Services, Inc......... North Carolina 100%(1)
Fay-Charl Corporation.............................. North Carolina 100%(1,4)
Workmen's Service Corp. ........................... North Carolina 100%(1,4)
First Savings Service Corp......................... North Carolina 100%(1,4)
Citizens Service Corp.............................. North Carolina 100%(1,4)
Grey Eagle, Inc.................................... Delaware 100%(1)
Southern National Bank of South Carolina........... United States 100%
Southern National Realty Corporation............... North Carolina 100%(2,4)
First Capital Corporation.......................... South Carolina 100%(2)
First Real Estate Group............................ South Carolina 100%(2,4)
FI Corporation..................................... South Carolina 100%(2,4)
Academy Mortgage/First Class Ins................... South Carolina 100%(2,4)
SNB Savings Bank, Inc., SSB........................ North Carolina 100%
People's Service Corp.............................. North Carolina 100%(3,4)
Unified Investors Life Insurance Co................ Arizona 100%
Southern International Corp. ...................... North Carolina 100%(4)
Southern National Savings Corp..................... North Carolina 100%
Southern National Insurance Services............... North Carolina 100%(3)
Prime Rate Premium Finance Corporation, Inc. ...... North Carolina 100%(3)
Agency Technologies, Inc. ......................... North Carolina 100%(3)
</TABLE>
--------
(1) Owned by Southern National Bank of North Carolina
(2) Owned by Southern National Bank of South Carolina
(3) Owned by SNB Savings Bank, Inc., SSB
(4) Inactive
<PAGE>
EXHIBIT 23(A)
Report of Independent Public Accountants
To the Board of Directors of
Southern National Corporation:
We have audited in accordance with generally accepted auditing standards the
consolidated financial statements of Southern National Corporation and
subsidiaries as of December 31, 1994, and 1993, and for each of the three years
in the period ended December 31, 1994, which financial statements are included
in this Form 10-K, and have issued our report thereon dated February 28, 1995.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Exhibit 11 is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the
basic financial statements. Exhibit 11 has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Charlotte, North Carolina,
February 28, 1995.
<PAGE>
EXHIBIT 23(B)
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into Southern National Corporation's
previously filed Registration Statement File Nos. 33-52367, 33-57865 and 33-
57867 filed on Form S-8 and Registration Statement File Nos. 33-57859, 33-
57861, and 33-57871 filed on Form S-3.
Arthur Andersen LLP
Charlotte, North Carolina,
February 28, 1995.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 264,664
<INT-BEARING-DEPOSITS> 962
<FED-FUNDS-SOLD> 9,010
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 992,016
<INVESTMENTS-CARRYING> 1,774,202
<INVESTMENTS-MARKET> 1,700,074
<LOANS> 5,434,878
<ALLOWANCE> 70,573
<TOTAL-ASSETS> 8,756,140
<DEPOSITS> 6,165,080
<SHORT-TERM> 1,654,465
<LIABILITIES-OTHER> 106,721
<LONG-TERM> 197,530
<COMMON> 0
3,850
220,794
<OTHER-SE> 407,700
<TOTAL-LIABILITIES-AND-EQUITY> 8,756,140
<INTEREST-LOAN> 423,461
<INTEREST-INVEST> 152,471
<INTEREST-OTHER> 2,456
<INTEREST-TOTAL> 578,388
<INTEREST-DEPOSIT> 191,005
<INTEREST-EXPENSE> 255,671
<INTEREST-INCOME-NET> 322,717
<LOAN-LOSSES> 7,246
<SECURITIES-GAINS> 906
<EXPENSE-OTHER> 231,229
<INCOME-PRETAX> 167,288
<INCOME-PRE-EXTRAORDINARY> 109,644
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,644
<EPS-PRIMARY> 2.38
<EPS-DILUTED> 2.27
<YIELD-ACTUAL> 4.28
<LOANS-NON> 22,194
<LOANS-PAST> 1,180
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 69,503
<CHARGE-OFFS> 13,405
<RECOVERIES> 6,110
<ALLOWANCE-CLOSE> 70,573
<ALLOWANCE-DOMESTIC> 70,573
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 25,444
</TABLE>
