<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
JUNE 30, 1995
SOUTHERN NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COMMISSION FILE NUMBER : 1-10853
NORTH CAROLINA 56-0939887
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
200 WEST SECOND STREET
WINSTON-SALEM, NORTH CAROLINA 27101
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(910) 773-7200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
This Form 8-K has 60 pages. The sequential numbering of the pages is indicated
in the lower right corner.
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<PAGE>
ITEM 5. OTHER EVENTS
On February 29, 1995, Southern National Corporation ("Southern National")
and BB&T Financial Corporation ("BB&T") consummated a merger which was
accounted for as a pooling-of-interests. BB&T shareholders received 1.45
shares of $5 par value Southern National common stock for each share of BB&T
common stock. Southern National issued 57.9 million shares of its common stock
in consummating the transaction. Prior to the merger, BB&T completed an
acquisition of Commerce Bank of Virginia Beach, Virginia ("Commerce") on
January 10, 1995. This transaction was also accounted for as a pooling-of-
interests. Accordingly, the consolidated financial statements (including notes
to consolidated financial statements), management's discussion and analysis
and supplemental financial information contained in Southern National's Annual
Report on Form 10-K for the year ended December 31, 1994, restated for the
above-mentioned transactions, are included in this report.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION LOCATION
------- ----------- --------
<C> <S> <C>
23 Consent of Arthur Andersen LLP Filed herewith on page 4.
27 Financial Data Schedule. Filed herewith as exhibit to
electronically filed
document as required.
99.1 Southern National's restated Filed herewith beginning on
Management's Discussion and Analysis page 5.
and Guide 3 statistical disclosures,
including BB&T and Commerce.
99.2 Report of Independent Public Filed herewith on page 23.
Accountants.
99.3 Southern National's restated audited Filed herewith beginning on
financial statements and notes thereto, page 24.
including BB&T and Commerce.
</TABLE>
2
<PAGE>
SIGNATURE
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.
Southern National Corporation
(Registrant)
/s/ Sherry A. Kellett
By: _________________________________
Sherry A. Kellett
Executive Vice President and
Controller (Principal Accounting
Officer)
Date: June 30, 1995
3
<PAGE>
EXHIBIT 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 8-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,
June 30, 1995.
4
<PAGE>
EXHIBIT 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of the financial condition and results
of operations of Southern National Corporation ("Southern National") 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.
On August 1, 1994, Southern National and BB&T Financial Corporation ("BB&T")
jointly announced the signing of a definitive agreement to merge. This
transaction, which was consummated on February 28, 1995, was accounted for
under the pooling-of-interests method of accounting. It has created the sixth
largest bank holding company in the Southeast and the 36th largest in the U.S.
BB&T's acquisition of Commerce Bank of Virginia Beach, Virginia ("Commerce")
on January 10, 1995, was also accounted for as a pooling-of-interests.
Accordingly, all discussion of prior results and future prospects is presented
as if Southern National, BB&T and Commerce were combined at the beginning of
each period presented herein. The results might have been different had the
companies actually been combined throughout the periods presented, and the
financial results presented are not necessarily indicative of future
performance.
Certain adjustments have been made to conform accounting methodology, and
certain amounts for prior years have been reclassified to conform the
statement presentations. The primary adjustment required was to conform BB&T's
accounting for postretirement benefits other than pensions to that of Southern
National. In adopting the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 106, "Accounting for Postretirement Benefits Other Than
Pensions," in 1993, BB&T elected to amortize the accumulated postretirement
obligation related to the adoption over a period of 21 years, while Southern
National elected to reflect the adoption through the recording of a cumulative
charge for this change in accounting principle. In conforming BB&T's
transition methodology to that elected by Southern National, the cumulative
charge resulting from a change in accounting principle recorded in 1993 was
increased by $7.0 million, net of related income taxes, while noninterest
expenses were reduced by $559,000 for both 1994 and 1993.
In conjunction with the merger and subsequent consolidation of operations
and systems, certain material, nonrecurring charges of approximately $88
million were recorded in the first quarter of 1995. These adjustments include
approximately $50 million for settlement of obligations under existing
employment contracts, severance pay, early retirement and related employee
benefits; approximately $12 million associated with branch closings and
divestitures; approximately $6 million associated with consolidation of bank
operations and systems; and approximately $13 million of expenses related to
effecting the merger.
ANALYSIS OF FINANCIAL CONDITION
Average assets totaled approximately $19.0 billion in 1994, an increase of
approximately 11.1% over the average of $17.1 billion in 1993. Average assets
also grew 11.1% in 1993 compared to 1992. At the end of 1994, assets totaled
approximately $19.9 billion.
The five-year compound rate of growth in average assets was 9.1%. Over the
same five-year period, the compound annual growth rates based on average
balances have been 9.3% for earning assets, 7.8% for loans, 14.2% for
securities and 7.8% for deposits. All growth rates have been enhanced by the
effects of acquisitions accounted for as purchases.
5
<PAGE>
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*................. $ 5,350,982 4,670,213 3,998,587 15% 17
Federal funds sold and other
earning assets............. 130,670 152,370 204,496 (14) (25)
Loans and leases, net of
unearned income**.......... 12,360,633 11,177,299 10,149,563 11 10
----------- ---------- ----------
Average earning assets...... 17,842,285 15,999,882 14,352,646 12 11
Non-earning assets.......... 1,121,734 1,067,159 1,010,206 5 6
----------- ---------- ----------
Average total assets........ $18,964,019 17,067,041 15,362,852 11% 11
=========== ========== ========== === ===
Average earning assets as
percent of average total
assets..................... 94.1% 93.7 93.4
=========== ========== ==========
</TABLE>
- --------
* Based on amortized cost.
** Includes loans held for sale based on lower of amortized cost or market.
Amounts are gross of the allowance for loan and lease losses.
SECURITIES
The securities portfolios provide earnings and liquidity, as well as
providing an effective tool in managing interest rate risk. Management has
continued to emphasize investments with a maturity of five years or less
because of the changing interest rate environment and the strong economy of
the last two years. U.S. Treasury securities, which continue to comprise the
majority of the portfolio, provide adequate current yields with minimal risk
and maturities structured to address liquidity concerns.
During 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement, which was adopted
by Southern National as of January 1, 1994, addresses the accounting and
reporting of investments in equity securities that have readily determinable
fair values and all investments in debt securities. These investments are
classified in one of three categories: held to maturity, trading and available
for sale. Securities classified as available for sale are carried at estimated
fair value with unrealized depreciation or appreciation, net of tax, reported
as a separate component of shareholders' equity. Securities classified as held
to maturity are carried in the financial statements at amortized cost.
Securities classified as trading are carried at estimated fair value with
gains and losses resulting from market fluctuations recognized in current
period earnings. Southern National engages in securities trading transactions
in the normal course of business, but had no securities classified as trading
at year end.
Securities increased 3.8% in 1994 to a total of $5.4 billion at the end of
the year. This followed an increase of 24.2% in 1993.
Southern National historically has maintained a securities portfolio of 21-
25% of total assets. However, securities have been 25-28% of assets in recent
years because of reduced demand for loans. At the end of 1994, securities
represented 27.3% of assets. Over the long term, Southern National expects the
securities portfolio to return to historic levels of 21-25% of total assets.
The market value of the available-for-sale portfolio was $119.8 million less
than the amortized cost of these securities. At December 31, 1994, Southern
National's available-for-sale portfolio had net unrealized depreciation, net
of tax, of $72.6 million which is reported as a separate component of equity.
6
<PAGE>
The fully taxable equivalent ("FTE") yield on the total securities portfolio
was 5.88% at December 31, 1994, compared to an average yield of 5.85% for the
year ended December 31, 1994 and 6.43% for 1993.
TABLE 2--SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------
CARRYING VALUE AVERAGE YIELD (3)
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Treasury, government agencies and corpo-
rations (1)
Within one year............................ $1,216,580 5.09%
One to five years.......................... 3,073,089 5.94
Five to ten years.......................... 650,690 6.73
After ten years............................ 161,156 7.28
---------- ----
Total.................................... 5,101,515 5.88
---------- ----
States and political subdivisions
Within one year............................ 19,343 9.44
One to five years.......................... 82,360 8.90
Five to ten years.......................... 77,577 9.14
After ten years............................ 3,158 8.28
---------- ----
Total.................................... 182,438 9.05
---------- ----
Other securities
Within one year............................ 60 7.27
One to five years.......................... 508 6.25
Five to ten years.......................... 655 7.46
After ten years............................ -- --
---------- ----
Total.................................... 1,223 6.95
---------- ----
Securities with no stated maturity (4)....... 139,941 1.62
---------- ----
Total securities (2)..................... $5,425,117 5.88%
========== ====
</TABLE>
- --------
(1) Included in U.S. Treasury, government agencies and corporations are
mortgage-backed securities totaling $608.7 million classified as held to
maturity and carried at amortized cost and $277.5 million classified as
available for sale and carried 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 $2.0 billion carried at amortized
cost and securities available for sale of $3.4 billion carried at
estimated fair value.
(3) Taxable equivalent basis as applied to amortized cost.
(4) Amount includes mortgage-backed securities of $32.8 million classified as
available for sale and carried at estimated fair value and $107.1 million
of other securities classified as available for sale and carried at
estimated fair value.
LOANS AND LEASES
Net loans and leases totaled approximately $12.9 billion at the end of 1994.
This represented an increase of approximately $872 million in 1994, following
an increase of approximately $1.7 billion in 1993. While the economy has
expanded at a moderate rate over the past two years, loan demand has not been
as strong as might historically be expected in a growing economy. The long-
range objective of Southern National is to maintain a rate of internal growth
which approximates that of its markets in the Carolinas and Virginia. Southern
National believes that this will result in a rate of increase which will be
sustainable and profitable.
7
<PAGE>
During 1994, interest rates increased which led to increased mortgage
originations from borrowers who feared rates would continue to climb. Total
mortgage loan 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, as growth in mortgage loans
shifted to mortgages for new home purchases. Southern National typically sells
fixed-rate mortgage loans in the secondary mortgage market, while retaining
servicing, and retains adjustable-rate loans for its own portfolio. This
strategy has the effect of reducing portfolio interest rate risk while
increasing future servicing revenues.
Southern National concentrated efforts on expanding the leasing function
throughout 1994. Municipal leasing, primarily tax-exempt leases with counties
and municipalities, was stronger than in the prior year. The leasing function
has developed numerous lease-based products and services that have been
marketed to current Southern National customers and noncustomers. The leasing
subsidiary provides a stream of earnings. Lease receivables, including
unearned income, grew $79 million, or 35%, during 1994, aided by Southern
National's acquisition of Leasing Associates, Inc., which provided $10 million
of lease receivables.
ASSET QUALITY
The credit quality of the loan and lease portfolio improved during 1994,
continuing favorable trends in asset quality ratios since 1991. As reflected
in Table 3--"Asset Quality," nonperforming assets ("NPA's") were $59.6 million
at year end, down $27.0 million or 31% for the year. As a percentage of total
assets, NPA's declined from .46% at December 31, 1993 to .30% at current year
end. As a percentage of loans plus foreclosed properties, NPA's decreased from
.71% to .45%.
The Corporation also experienced an unusually low level of net charge-offs
during 1994. Net charge-offs fell 52% from $34.7 million in 1993 to $16.6
million in 1994, or from .31% to .13% of average loans and leases. The higher
level of net charge-offs in 1993 was the result of loans acquired through the
merger with The First Savings Bank, FSB ("The First"). The allowance for loan
and lease losses totaled $171.7 million at December 31, 1994, or 1.31% of
loans and leases, compared to $169.3 million, or 1.38%, at the end of the
prior year.
Southern National assigns risk grades to all commercial loans in the
portfolio. This assignment of loans to one of ten categories is based upon the
relative strength of the repayment source. All significant loans in the four
highest risk grades are reviewed monthly for appropriateness of risk grade,
accrual status and loss reserves.
8
<PAGE>
TABLE 3--ASSET QUALITY
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993 1992
------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans and leases............................ $47,039 61,737 90,711
Foreclosed property.................................... 12,153 23,510 65,364
Restructured loans..................................... 402 1,303 945
------- ------ -------
Nonperforming assets................................. $59,594 86,550 157,020
======= ====== =======
Loans 90 days or more past due and still accruing...... $24,224 21,741 18,851
======= ====== =======
ASSET QUALITY RATIOS
Nonaccrual loans and leases as a percentage of loans
and loans and leases.................................. 0.36% 0.50 0.87
Nonperforming assets as a percentage of:
Total assets......................................... 0.30 0.46 0.98
Loans and leases plus foreclosed property............ 0.45 0.71 1.50
Net charge-offs as a percentage of average loans and
lease................................................. 0.13 0.31 0.46
Allowance for losses as a percentage of loans and
leases................................................ 1.31 1.38 1.30
Ratio of allowance for losses to:
Net charge-offs...................................... 10.36x 4.88 2.87
Nonaccrual loans and leases.......................... 3.65 2.74 1.49
</TABLE>
- --------
NOTE: Items referring to loans and leases are net of unearned income, gross of
the allowance and include loans held for sale.
DEPOSITS AND OTHER BORROWINGS
Average deposits increased 5.6% in 1994, following an increase of
approximately 7.5% in 1993. End of period interest-bearing deposits decreased
approximately $339 million in 1994.
Core deposits are the primary funding source, but management also uses
short-term borrowed funds, primarily federal funds purchased and repurchase
agreements, to meet funding needs. Management also employs long-term debt for
additional funding. The increase in short-term borrowed funds during 1994 was
necessary because of strong loan demand and only moderate growth in average
deposits. The rates on these borrowings are primarily floating and typically
indexed to the federal funds rate compared to loans which are largely based on
the prime rate. Remaining short-term borrowed funds and sales of available-
for-sale securities were used to increase holdings of investment securities.
Southern National faces an ongoing challenge in attracting new deposits and
other core funds as competition from both financial and non-financial
institutions continues to increase. Southern National continually considers
liquidity needs in evaluating funding sources. The ultimate goal is to
maintain funding flexibility, which will allow Southern National to react
rapidly to opportunities brought about by growth and market volatility.
9
<PAGE>
TABLE 4--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........ $ 3,433,750 20% 2,908,944 19 2,229,148 16 18% 30
Money market deposits... 1,971,263 11 2,039,937 13 1,996,480 14 (3) 2
Time deposits........... 7,155,207 42 7,040,758 45 7,102,822 51 2 (1)
----------- --- ---------- --- ---------- ---
Total interest-bearing
deposits............... 12,560,220 73 11,989,639 77 11,328,450 81 5 6
Demand deposits......... 1,738,508 10 1,556,411 10 1,273,140 9 12 22
----------- --- ---------- --- ---------- ---
Total deposits.......... 14,298,728 83 13,546,050 87 12,601,590 90 6 7
Short-term borrowed
funds.................. 2,321,379 13 1,349,156 9 935,642 7 72 44
Long-term debt.......... 677,227 4 597,519 4 417,828 3 13 43
----------- --- ---------- --- ---------- ---
Total deposits and other
borrowings............. $17,297,334 100% 15,492,725 100 13,955,060 100 12% 11
=========== === ========== === ========== === === ===
</TABLE>
ANALYSIS OF RESULTS OF OPERATIONS
Consolidated net income for 1994 totaled $237 million, which produced
primary net income per share of $2.26 and fully diluted net income per share
of $2.21. Net income was $86 million in 1993 and $147 million in 1992. In
1993, income before the cumulative effect of changes in accounting principles,
net of income taxes, totaled $120 million. Primary net income per share was
$.81 in 1993 and $1.53 in 1992, while fully diluted per share earnings were
$.81 and $1.48, respectively. Before the cumulative effect of changes in
accounting principles in 1993, both primary and fully diluted per share
earnings were $1.16.
The cumulative effect of changes in accounting principles, net of related
income taxes, recorded in 1993 included $12.6 million to record the
accumulated postretirement obligation related to the adoption of SFAS No. 106,
and $28.0 million as a result of the adoption of SFAS No. 72, "Accounting For
Certain Acquisitions of Banking and Thrift Institutions" by a merged company,
less a $6.4 million benefit resulting from the adoption of SFAS No. 109,
"Accounting for Income Taxes," implemented as of January 1, 1993.
The returns on average assets were 1.25% for 1994, .50% for 1993 and .96%
for 1992. For the same years, the returns on average common equity were 16.8%,
6.2% and 12.6%, respectively.
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 interest rates earned and paid to obtain the asset-generating
funds. The difference between rates earned on interest-earning assets (with an
adjustment made to tax-exempt income to provide comparability with taxable
income) and the cost of supporting funds is measured by the taxable equivalent
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.
10
<PAGE>
TABLE 5--NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
AVERAGE BALANCES YIELD / RATE INCOME / EXPENSE
FULY TAXABLE EQUIVALENT--L --------------------------------- ---------------- --------------------------------
(OLLARS IN THOUSANDS)D 1994 1993 1992 1994 1993 1992 1994 1993 1992
---------------- ----------- ---------- ---------- ---- ---- ----- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Securities (1):
U.S. Treasury,
government and
other (5)..... . $ 5,171,260 4,469,880 3,759,520 5.74% 6.28 7.49 $ 296,933 280,541 281,463
States and
political
subdivisions.. . 179,722 200,333 239,067 9.08 9.97 10.67 16,323 19,978 25,504
----------- ---------- ---------- ---- ---- ----- ---------- ---------- ----------
Total
securities
(5).......... . 5,350,982 4,670,213 3,998,587 5.85 6.43 7.68 313,256 300,519 306,967
Other earning
assets (2)...... 130,670 152,370 204,496 3.97 2.89 3.99 5,184 4,410 8,153
Loans and
leases, net of
unearned income
(1)(3)(4)(5).... 12,360,633 11,177,299 10,149,563 8.31 8.24 9.05 1,027,693 921,235 918,931
----------- ---------- ---------- ---- ---- ----- ---------- ---------- ----------
Total earning
assets....... . 17,842,285 15,999,882 14,352,646 7.54 7.66 8.60 1,346,133 1,226,164 1,234,051
----------- ---------- ---------- ---- ---- ----- ---------- ---------- ----------
Non-earning
assets....... . 1,121,734 1,067,159 1,010,206
----------- ---------- ----------
Total assets.. $18,964,019 17,067,041 15,362,852
=========== ========== ==========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-bearing
deposits:
Savings
deposits...... . $ 3,433,750 2,908,944 2,229,148 2.19 2.42 2.91 75,125 70,507 64,881
Money market
deposits...... . 1,971,263 2,039,937 1,996,480 2.73 2.65 3.69 53,874 54,028 73,591
Time deposits. . 7,155,207 7,040,758 7,102,822 4.37 4.31 5.41 312,877 303,659 384,421
----------- ---------- ---------- ---- ---- ----- ---------- ---------- ----------
Total
interest-
bearing
deposits..... . 12,560,220 11,989,639 11,328,450 3.52 3.57 4.62 441,876 428,194 522,893
Short-term
borrowed funds.. 2,321,379 1,349,156 935,642 4.24 3.23 3.42 98,476 43,608 31,979
Long-term debt.. 677,227 597,519 417,828 6.04 5.76 8.36 40,927 34,390 34,913
----------- ---------- ---------- ---- ---- ----- ---------- ---------- ----------
Total
interest-
bearing
liabilities.. . 15,558,826 13,936,314 12,681,920 3.74 3.63 4.65 581,279 506,192 589,785
----------- ---------- ---------- ---- ---- ----- ---------- ---------- ----------
Demand deposits. 1,738,508 1,556,411 1,273,140
Other
liabilities..... 213,531 197,370 216,517
Shareholders'
equity.......... 1,453,154 1,376,946 1,191,275
----------- ---------- ----------
Total
liabilities
and
shareholders'
equity........ $18,964,019 17,067,041 15,362,852
=========== ========== ==========
Average interest
rate spread..... 3.80 4.03 3.95
Net yield on
earning assets.. 4.29% 4.50 4.49 $ 764,854 719,972 644,266
==== ==== ===== ========== ========== ==========
Taxable
equivalent
adjustment...... $ 28,088 26,456 26,062
<CAPTION>
1994 V. 1993 1993 V. 1992
----------------------------- ------------------------------
CHANGE DUE TO CHANGE DUE TO
FULY TAXABLE EQUIVALENT--L INCREASE ------------------ INCREASE -------------------
(OLLARS IN THOUSANDS)D (DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
---------------------------- ---------- -------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities (1):
U.S. Treasury,
government and
other (5)..... . $ 16,392 (25,199) 41,591 $ (922) (49,471) 48,549
States and
political
subdivisions.. . (3,655) (1,698) (1,957) (5,526) (1,586) (3,940)
---------- -------- --------- ---------- --------- ---------
Total
securities
(5).......... . 12,737 (26,897) 39,634 (6,448) (51,057) 44,609
Other earning
assets (2)...... 774 1,467 (693) (3,743) (1,951) (1,792)
Loans and
leases, net of
unearned income
(1)(3)(4)(5).... 106,458 8,138 98,320 2,304 (86,117) 88,421
---------- -------- --------- ---------- --------- ---------
Total earning
assets....... . 119,969 (17,292) 137,261 (7,887) (139,125) 131,238
---------- -------- --------- ---------- --------- ---------
Non-earning
assets....... .
Total assets..
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-bearing
deposits:
Savings
deposits...... . 4,618 (7,298) 11,916 5,626 (12,108) 17,734
Money market
deposits...... . (154) 1,695 (1,849) (19,563) (21,183) 1,620
Time deposits. . 9,218 4,245 4,973 (80,762) (77,476) (3,286)
---------- -------- --------- ---------- --------- ---------
Total
interest-
bearing
deposits..... . 13,682 (1,358) 15,040 (94,699) (110,767) 16,068
Short-term
borrowed funds.. 54,868 16,595 38,273 11,629 (1,866) 13,495
Long-term debt.. 6,537 1,783 4,754 (523) (12,825) 12,302
---------- -------- --------- ---------- --------- ---------
Total
interest-
bearing
liabilities.. . 75,087 17,020 58,067 (83,593) (125,458) 41,865
---------- -------- --------- ---------- --------- ---------
Demand deposits.
Other
liabilities.....
Shareholders'
equity..........
Total
liabilities
and
shareholders'
equity........
Average interest
rate spread.....
Net yield on
earning assets.. $ 44,882 (34,312) 79,194 $75,706 (13,667) 89,373
========== ======== ========= ========== ========= =========
Taxable
equivalent
adjustment......
</TABLE>
- ----
(1) Yields related to securities, loans and leases exempt from both federal
and state income taxes, federal income taxes only or state income taxes
only are stated on a taxable equivalent basis using statutory 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 considered material for the periods presented are
included for rate calculation purposes.
(4) Nonaccrual loans are included in the average balances. Only the interest
collected on such loans is included as income.
(5) Includes assets either held for sale or available for sale at amortized
cost.
11
<PAGE>
For 1994, net interest income represented 76.5% of net revenues (net
interest income plus noninterest income), compared with 75.9% in 1993 and
76.9% in 1992.
Net interest income totaled $737 million in 1994, compared with $694 million
in 1993 and $618 million in 1992. There was compression in both the interest
rate spread and margin in 1994. The growth in net interest income in 1994 and
1993 was primarily a result of growth in average earning assets.
The taxable equivalent net yield on average earning assets is a primary
measure used in evaluating the effectiveness of the management of earning
assets and funding liabilities. The net yield on average earning assets was
4.29% in 1994, 4.50% in 1993 and 4.49% in 1992. The margin decline during the
past year was caused by higher interest rates combined with Southern
National's liability-sensitive balance sheet during 1994. Accordingly,
Southern National's liabilities repriced within specified periods faster than
assets and, as market rates of interest rose, increases in the average cost of
funds were more pronounced than increases in the average yields on earning
assets.
Southern National uses synthetic instruments commonly known as derivatives
to hedge specified assets and liabilities. These hedges contributed $900,000
to net interest income in 1994, compared with $17.1 million in 1993 and $23.7
million in 1992. See "Balance Sheet Management" for additional discussion of
hedging activities.
PROVISION FOR LOAN AND LEASE LOSSES
An annual provision for loan and lease losses is charged against earnings in
order to maintain the allowance for loan and lease losses at a level
considered adequate by management to absorb potential losses existing in the
loan portfolio. As a result of improved asset quality, the provision recorded
by Southern National in 1994 was $17.8 million, compared with $53.3 million in
1993 and $62.9 million in 1992.
Southern National has experienced steady and significant improvements in
asset quality and steady declines in net charge-offs. As a result, Southern
National has been able to significantly lower its provisions for loan and
lease losses. Still, the allowance for loan and lease losses was 1.31% of
loans and leases outstanding at the end of 1994 and was 3.65 times
nonperforming loans and leases at the end of the year, compared to 1993
amounts of 1.38% and 2.74 times, respectively.
NONINTEREST INCOME
Noninterest income includes service charges on deposit accounts, trust
revenues, mortgage banking revenues, insurance commissions, gains and losses
on securities transactions, and other commissions and fees derived from
banking and bank-related activities. Noninterest income for 1994 totaled
$226.0 million, compared with $220.3 million in 1993 and $185.9 million in
1992. Over the past five years, noninterest income has grown at a compound
annual rate of 12.6%.
Service charges on deposit accounts still represent the largest single
source of noninterest revenue. Such revenues totaled $82.8 million in 1994, an
increase of $3.1 million or 3.9% from 1993, which in turn represented an
increase of $8.0 million or 11.2% from 1992. Deposit services are repriced
annually to reflect current costs and competitive factors.
The ability to generate significant additional amounts of noninterest
revenues in the future will be a requisite to the ultimate success of Southern
National. Through its subsidiaries, Southern National will focus on four
primary areas--mortgage banking, trust, insurance and investment brokerage
activities. A primary element of the merger of Southern National and BB&T was
the additional marketing capability provided by merging the aforementioned
operations of the banks. Southern National and BB&T both had mortgage banking,
trust, insurance and broker dealer offices strategically placed throughout
their networks, but the operations often were not of such a magnitude as to
allow either to achieve its full potential. By combining these operations,
Southern National will have a greater concentration of offices closer to a
larger number of customers.
12
<PAGE>
Mortgage banking income (which includes servicing fees and profits and
losses from the origination and sale of loans reduced by amortization of
purchased mortgage servicing rights) decreased $3.0 million or 11.8% to a
total of $22.1 million for 1994. Mortgage banking income totaled $25.1 million
in 1993 and $30.1 million in 1992. Home mortgage interest rates were unusually
low in 1993 and 1992, and, as a result, originations were heavy as homeowners
prepaid existing mortgages and refinanced with new mortgages. Southern
National recorded losses from the origination and sale of mortgages totaling
approximately $1.0 million in 1994 and gains of $13.0 million in 1993. Because
of the increase in interest rates in 1994, the rate of prepayment slowed and
the volume of new loans was not as great as in the previous two years. This
resulted in the losses from the origination and sale of home mortgage loans.
The 1993 results of operations include the amortization of $3.9 million of
mortgage servicing rights to conform the accounting policies of certain
acquired entities to those of Southern National. Southern National originated
approximately $2.0 billion in home mortgage loans in 1994, $3.0 billion in
1993 and $2.0 billion in 1992. Southern National was servicing mortgage loans
for investors with principal balances of approximately $4.9 billion at the end
of 1994.
Insurance agency commissions increased approximately $3.4 million or 29% in
1994 to a total of $14.9 million. Insurance agency commissions totaled $11.5
million in 1993 and $7.4 million in 1992. The insurance agencies have become
an increasingly important source of noninterest revenue, and this trend is
expected to accelerate in the future. The network of insurance agencies has
been expanded through acquisitions in recent years. Southern National intends
to continue to expand its insurance agency operations through both
acquisitions and internally generated growth.
The offering of trust services has been a traditional service of both
Southern National and BB&T. Both have had trust departments for many years.
Trust revenues from corporate and personal trust services totaled $17.2
million in 1994. This was an increase of $2.1 million or 14.3% over the
revenues of $15.1 million in 1993, which in turn was an increase of $2.2
million or 16.7% over the $12.9 million earned in 1992. Managed assets totaled
$2.9 billion at the end of 1994. A strong effort is being made to expand the
corporate trust business, particularly employee benefit plans. Southern
National also offers its own family of mutual funds. Southern National now
manages seven mutual funds, which provide investment alternatives both for
trust clients and for other customers. The funds totaled $395 million at the
end of 1994. The broker dealer subsidiaries will be the principal marketing
agents of Southern National's proprietary mutual funds.
In recent years both Southern National and BB&T established broker dealer
subsidiary corporations. Both began to take a more active role in selling
various securities to their customers, with an emphasis being placed on the
sale of fixed-rate debt securities, shares of BB&T's proprietary mutual funds
and annuities. Investment sales commissions totaled $7.3 million in 1994,
compared with $5.5 million in 1993 and $802,000 in 1992.
13
<PAGE>
TABLE 6--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... $ 82,755 79,670 71,668 4% 11
-------- ------- -------
Insurance fees and commissions........ 14,879 11,527 7,400 29 56
Trust fees............................ 17,180 15,034 12,880 14 17
Other fees and commissions............ 68,217 65,219 58,856 5 11
-------- ------- -------
Total nondeposit fees and
commissions........................ 100,276 91,780 79,136 9 16
-------- ------- -------
Securities gains, net................. 3,074 16,841 9,338 NM NM
Other income.......................... 39,942 32,027 25,731 25 24
-------- ------- -------
Total noninterest income............ $226,047 220,318 185,873 3% 19
======== ======= ======= === ===
</TABLE>
- --------
NM--not meaningful
NONINTEREST EXPENSE
Noninterest expense for 1994 decreased $79.9 million or 12.0% to a total of
$583.3 million. This followed an increase of 30.0% in 1993. The acquisitions
of seven savings associations in 1993 and two in 1992 were accounted for as
purchases, and, accordingly, prior period history was not restated. The growth
in expenses for 1993 included the incremental cost of operations related to
these acquisitions and the cost of conforming their operating systems and
procedures to those of Southern National. In addition, certain material
nonrecurring costs and expenses related to mergers were recorded in 1993.
Salaries and wages increased only .6% in 1994 , after an increase of 16.7%
in 1993. The increase in 1993 included compensation of employees who were
added with the consummation of the aforementioned thrift acquisitions. Other
personnel expense increased 4.9% from $53.5 million in 1993 to $56.1 million
in 1994. The increase was 19.7% in 1993. Factors contributing to the increases
in other personnel expense include the increased cost of providing employee
health insurance and retirement benefits. 1993 also included $7.0 million in
accruals for severance payments, buyout of employment contracts, deferred
compensation and associated fringe benefits.
Premiums paid to the FDIC for deposit insurance increased $2.0 million or
6.4% to a total of $32.7 million for 1994. For 1993 the increase was $3.3
million or 12.2%. The rate increased from an annual rate of $.12 per $100 of
deposits in 1990 to $.23 per $100 of deposits for the period beginning July 1,
1991. Southern National has not experienced any additional rate increases in
its deposit insurance premium rates for 1994. Further, the bank insurance fund
of the FDIC is expected to become fully funded in 1995, and it is anticipated
that the rate will be reduced in the second half of 1995 to a rate of $.04 per
$100 of deposits.
Net occupancy expense totaled $43.8 million in 1994. This represented an
increase of only $1.2 million or 2.8% over the expense of $42.6 million in
1993, which in turn was 11.5% greater than the expense of $38.2 million in
1992.
Furniture and equipment expense totaled $47.2 million in 1994, compared with
$49.0 million in 1993 and $38.9 million in 1992. Much of the increase in 1993
furniture and equipment expense provided improved technological capabilities.
Loan platform automation for the retail lending function was completed in
1993, and platform automation for the commercial lending function was
completed in 1994. Capital expenditures totaled approximately $71 million in
1994 and $101 million in 1993. Capital expenditures for 1995 are expected to
include $27 million related to the consolidation of more than 70 branches in
the bank mergers and the purchase of equipment necessary to conform
operations.
14
<PAGE>
Other expense decreased $36.0 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 Bancshares Inc. ("Regency") and Home Federal Savings Bank ("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 substantially
less than in the prior year. Other merger-related activities and expenditures
contributing to the heightened 1993 expense were advertising, travel,
corporate dues, directors' fees and education.
TABLE 7--NONINTEREST EXPENSE
<TABLE>
<CAPTION>
% CHANGE
---------------
1994 V. 1993 V.
1994 1993 1992 1993 1992
-------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries.............................. $237,356 236,034 202,328 1% 17
Employee benefits..................... 56,077 53,453 44,670 5 20
-------- ------- -------
Total personnel expense............. 293,433 289,487 246,998 1 17
-------- ------- -------
Net occupancy expense................. 43,775 42,597 38,198 3 12
Furniture and equipment expense....... 47,208 49,034 38,926 (4) 26
-------- ------- -------
Total occupancy and equipment
expense............................ 90,983 91,631 77,124 (1) 19
-------- ------- -------
Federal deposit insurance expense..... 32,697 30,730 27,384 6 12
Loss on bulk sale of assets........... -- 49,147 -- NM NM
Other expense......................... 166,223 202,249 158,652 (18) 27
-------- ------- -------
Total noninterest expense........... $583,336 663,244 510,158 (12)% 30
======== ======= ======= === ===
</TABLE>
- --------
NM--not meaningful
PROVISION FOR INCOME TAXES
The maximum combined incremental federal and state statutory tax rate for
Southern National was 40.04%. Because of its investments in tax-exempt loans
and securities, the effective tax rates were 34.5% in 1994, 39.1% in 1993 and
36.5% in 1992. The effective tax rate was higher in 1993 due to the recapture
of tax bad debt reserves by merged savings institutions.
Southern National adopted the provisions of SFAS No. 109 in 1993. The
adoption of the provisions of this statement necessitated a change from the
deferral method of accounting for income taxes to the asset and liability
method. The objective of the asset and liability method is to establish
deferred tax assets and liabilities for the temporary differences between the
financial reporting basis and the tax basis of pretax income at enacted tax
rates expected to be in effect when such amounts are realized or settled. The
change in accounting method enabled Southern National to record a tax benefit
of approximately $6.4 million as the cumulative effect of changes in
accounting principles. The increase in the federal tax rate from 34% to 35% in
1993 had no material impact on Southern National.
ASSET/LIABILITY MANAGEMENT
Asset/liability management activities are designed to achieve relatively
stable net interest margins and assure liquidity. It is the responsibility of
the Asset/Liability Management Committee ("ALCO") to set policy guidelines and
to establish long-term strategies with respect to interest rate exposure and
liquidity. The ALCO
15
<PAGE>
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
securities, repayment of loans and growth in core deposits. Federal funds
purchased, repurchase agreements and other short-term borrowed funds
supplement these traditional sources. Management believes liquidity obtainable
from these sources is adequate to meet current requirements.
Total cash and cash equivalents decreased to $671.8 million at December 31,
1994 compared to $859.6 million in 1993 and $801.8 million in 1992. Net cash
provided by operating activities for the year increased from $339.8 million to
$500.7 million. Cash provided by operating activities in 1992 was $133.9
million. The 1994 increase was primarily the result of significantly higher
net income versus the prior year and increases in cash flows from mortgage
banking activities. Proceeds from sales of loans held for sale declined $390
million, which was offset by a $479.8 million decline 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 shifted from fixed-rate to adjustable-rate loans and
mortgage refinancing was substantially reduced. Net cash flows used in
investing activities decreased from $1.7 billion in 1993 to $1.5 billion in
1994. Cash used in investing activities during 1992 was $926.5 million. The
primary factor creating the $200.0 million decline in cash flows used in
investing activities during 1994 was a $485.8 million decrease in purchases of
securities offset by a $191.2 million increase in net loan originations. Cash
flows provided by financing activities decreased from $1.4 billion to $814.0
million because of a $570.8 million net decrease in the cash provided by
deposits compared to 1993 and a net $283.8 million decrease in cash flows
related to long-term debt. These decreases were offset by a $346.7 million net
increase in cash flows from short-term borrowed funds. In 1992, Southern
National's net cash flows provided from financing activities were $907.1
million.
BALANCE SHEET MANAGEMENT
Southern National uses off-balance sheet financial instruments to manage
interest rate sensitivity and net interest income. These instruments, commonly
referred to as derivatives, primarily consist of interest rate swaps and
collars, floors and ceilings.
16
<PAGE>
Derivatives contracts are written in amounts referred to as notional
amounts. Notional amounts do not represent amounts to be exchanged between
parties and are not a measure of financial risks, but only provide the basis
for calculating payments between the counterparties. On December 31, 1994,
Southern National had outstanding derivatives contracts with notional amounts
totaling approximately $2.4 billion.
The derivatives used at Southern National provide for the exchange of
interest payments between counterparties--either variable for fixed or fixed
for variable. Thus, credit risk arises when amounts receivable from a
counterparty exceed those payable. The risk of loss with any counterparty is
limited to a small fraction of the notional amount. Southern National deals
only with national market makers with strong credit ratings in its derivatives
activities. Southern National further controls the risk of loss by subjecting
counterparties to credit reviews and approvals similar to those used in making
loans and other extensions of credit. All of the derivatives contracts to
which Southern National is a party settle monthly, quarterly or semiannually.
Accordingly, the amount of off-balance sheet credit exposure to which Southern
National is exposed at any time is immaterial. Further, Southern National has
netting agreements with the dealers with which it does business. Because of
these netting agreements, Southern National had a minimal amount of off-
balance sheet credit exposure at December 31, 1994.
The fair value of derivatives contracts is equal to the difference between
the amounts to be received over the lives of the contracts and the amounts to
be paid. The estimated fair value of open contracts used for asset/liability
management purposes at December 31, 1994, reflected net unrealized losses of
$73.8 million. Increases in interest rates resulted in the unrealized loss in
1994. The unrealized loss does not include the impact of changes in interest
rates, either favorable or unfavorable, on the values of assets and
liabilities being hedged.
Southern National's interest rate sensitivity is illustrated in the
following interest rate sensitivity gap table. The table reflects rate-
sensitive positions at December 31, 1994, and is not necessarily reflective of
positions throughout each year. The carrying amounts of interest-rate-
sensitive assets and liabilities and the notional amounts of swaps and other
derivative financial instruments are presented in the periods in which they
next reprice to market rates or mature and are aggregated to show the interest
rate sensitivity gap. To reflect anticipated prepayments, certain asset and
liability categories are included in the table based on estimated rather than
contractual maturity dates.
17
<PAGE>
TABLE 8--INTEREST RATE SENSITIVITY GAP TABLE
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
interest-earning
assets................ $ 1,404,227 5.23% 1,818,386 5.84 1,743,934 6.23 599,295 7.28 5,565,842 5.96
Federal funds sold..... 13,021 5.22 -- -- -- -- -- -- 13,021 5.22
Loans and leases....... 8,110,313 8.77 954,568 8.47 2,056,493 8.10 1,986,728 9.18 13,108,102 8.71
----------- ---- --------- ---- --------- ---- --------- ---- ----------- ----
Total interest-earning
assets................. 9,527,561 2,772,954 3,800,427 2,586,023 18,686,965
----------- --------- --------- --------- -----------
Liabilities
Interest-bearing
deposits.............. 7,428,809 4.12 1,330,440 5.20 733,866 5.18 2,978,020 2.55 12,471,135 3.93
Federal funds
purchased............. 1,381,610 5.51 -- -- -- -- -- -- 1,381,610 5.51
Other borrowings....... 2,037,364 5.44 273,414 5.08 96,000 7.27 24,895 7.70 2,431,673 5.49
----------- ---- --------- ---- --------- ---- --------- ---- ----------- ----
Total interest-bearing
liabilities............ 10,847,783 1,603,854 829,866 3,002,915 16,284,418
----------- --------- --------- --------- -----------
Asset-liability gap..... (1,320,222) 1,169,100 2,970,561 (416,892)
----------- --------- --------- ---------
Derivatives affecting
interest rate
sensitivity
Pay fixed interest rate
swaps................. 109,062 5.72 (53,094) 9.20 (33,678) 5.17 (22,290) 5.23
Receive fixed interest
rate swaps............ (1,100,000) 6.71 450,000 5.67 650,000 5.06 -- --
----------- --------- --------- ---------
Interest rate
sensitivity gap........ $(2,311,160) 1,566,006 3,586,883 (439,182)
=========== ========= ========= =========
Cumulative interest rate
sensitivity gap........ $(2,311,160) (745,154) 2,841,729 2,402,547
=========== ========= ========= =========
</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 Board of
Governors of the Federal Reserve ("FRB") to regulate money and credit
conditions have a greater effect on a financial institution's profitability
than do the effects of higher costs for goods and services. Through its
balance sheet management function, Southern National is positioned to respond
to changing interest rates and inflationary trends.
Simulation Analysis takes into account the current contractual agreements
that Southern National has made with its customers on deposits, borrowings,
loans, investments and any commitments to enter into those transactions.
Management monitors Southern National's interest sensitivity by means of a
computer-based asset/liability model that incorporates current volumes and
rates, maturity streams, repricing opportunities and anticipated growth. The
model calculates an earnings estimate based on current portfolio balances and
rates, less any balances that are scheduled to reprice or mature. Balances and
rates that will replace the previous balances and any anticipated growth are
added. This level of detail is needed to correctly simulate the effect that
changes in interest rates and anticipated balances will have on the earnings
of Southern National. This method is subject to the assumptions that underlie
the process, but it provides a better illustration of true earnings potential
than other analyses such as static or dynamic gap.
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.
18
<PAGE>
Shareholders' equity grew 7.0% in 1994 and 10.4% in 1993. Shares issued in
acquisitions accounted for under the purchase method contributed $14.9
million, $19.8 million and $33.9 million during 1994, 1993 and 1992,
respectively. Additional equity has come from the retention of earnings and
from new shares of stock issued under employee benefit and stock option plans
and the dividend reinvestment plan. The conversion of convertible debentures
to common stock generated an additional $33.3 million in 1993. Southern
National adopted SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," in 1994. The provisions of this statement require
securities classified as available for sale be carried at estimated fair value
with net unrealized appreciation or depreciation recorded as an adjustment to
shareholders' equity. At the end of 1994, Southern National had recorded net
unrealized depreciation of $72.6 million, net of tax.
TABLE 9--CAPITAL--COMPONENTS AND RATIOS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tier 1 capital.......................................... $ 1,513,090 1,321,762
Tier 2 capital.......................................... 158,484 192,689
----------- ----------
Total regulatory capital................................ $ 1,671,574 1,514,451
=========== ==========
Risk-based capital ratios:
Tier 1 capital........................................ 12.3% 11.4
Total regulatory capital.............................. 13.6 13.1
Tier 1 leverage ratio................................. 7.8 7.2
</TABLE>
Traditionally, Southern National has been considered to be strongly
capitalized. The ratio of shareholders' equity to year-end assets was 7.5% at
the end of 1994, compared with 7.4% a year earlier. While management views the
equity-to-assets ratio as the principal indicator of capital strength,
additional measures are used by regulators. Bank holding companies and their
subsidiaries are subject to risk-based capital measures. The risk-based
capital ratios measure the relationship of capital to a combination of balance
sheet and off-balance sheet credit risk. The values of both balance sheet and
off-balance sheet items are adjusted to reflect credit risk.
Tier 1 capital is required to be at least 4% of risk-weighted assets, and
total capital must be at least 8% of risk-weighted assets. The Tier 1 capital
ratio for Southern National at the end of 1994 was 12.3%, and the total
capital ratio was 13.6%. At the end of 1993, those ratios were 11.4% and
13.1%, respectively.
Another measure used by regulators is the leverage ratio which is the ratio
of tangible equity to tangible assets. The minimum required leverage ratio for
a well-capitalized bank is 3%, while the leverage ratio for Southern National
was 7.8% at the end of 1994 and 7.2% at the end of 1993.
TABLE 10--SELECTED EQUITY DATA AND RATIOS
<TABLE>
<CAPTION>
1994 1993 1992
------ ----- -----
<S> <C> <C> <C>
Book value per common share at year end................... $13.92 13.14 13.22
Book value per common share percentage increase (decrease)
over prior year end...................................... 5.94% (0.61) 8.63
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............................................ 7.54 7.42 7.93
Net loans and leases*................................... 11.57 11.59 12.30
Deposits................................................ 10.45 9.58 9.71
Equity and long-term debt............................... 62.17 62.56 74.96
</TABLE>
- --------
* Amounts are net of unearned income and the allowance for loan and lease
losses and include loans held for sale.
19
<PAGE>
STOCK AND DIVIDENDS
The management of Southern National continually monitors capital for
adequacy to provide a foundation for future asset growth and to promote
investor and depositor confidence. At the end of 1994, Southern National had
102.2 million shares of common stock issued and outstanding compared to 100.8
million shares outstanding at the previous year end.
Southern National's ability to pay dividends is primarily dependent on
earnings from operations, the adequacy of capital and the availability of
liquid assets for distribution. The Parent Company's ability to replenish
liquid assets available for distribution is primarily dependent on the ability
of the banking subsidiaries to pay dividends to the Parent Company.
Historically, Southern National's cash dividends have been approximately one
third of earnings resulting from management's goal to retain sufficient
capital to support future growth and to meet regulatory requirements while
providing a competitive return on investment to shareholders. Southern
National's common dividend payout ratio, computed by dividing dividends per
common share by earnings available per common share, was 32.7% 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 M--"Regulatory Requirements and
Other Restrictions."
Southern National's common stock is traded on the New York Stock Exchange
("NYSE") under the symbol "SNB." The accompanying table, "Quarterly Common
Stock Summary," sets forth the high, low and last sales prices for the common
stock as reported on the NYSE Composite Tape and the cash dividends paid per
share of common stock for each of the last eight quarters.
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 up to, but excluding, the date of final
distribution.
TABLE 11--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>
FOURTH QUARTER RESULTS
Net income for the fourth quarter of 1994 was $62.6 million, compared to a
loss of $32.6 million for the prior year. On a per share basis, fully diluted
net income was $.58 for the current quarter compared to a loss of $.30 a year
ago. Annualized returns on average assets and average common equity were 1.27%
and 17.09%, respectively, for the fourth quarter.
20
<PAGE>
Certain material, nonrecurring 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 for loan and lease losses was $17.7 million higher in the fourth
quarter 1993 than in the fourth quarter 1994 and noninterest expense was $91.6
million higher. 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. Noninterest expense was also affected by a $49.1
million loss on the bulk sale of $109 million in loan-related assets.
In the fourth quarter of 1994, net interest income FTE was $197.5 million
compared to a 1993 fourth quarter balance of $187.9 million. This increase
resulted from growth in average earning assets, offset by a decrease in the
net yield FTE.
The accompanying table, "Quarterly Financial Summary--Unaudited," presents
condensed information relating to eight quarters in the period ended December
31, 1994.
TABLE 12--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................... $ 197,512 193,577 188,327 185,438 $ 187,853 183,008 178,727 170,384
FTE adjustment......... 7,248 7,001 7,061 6,778 6,704 6,785 6,635 6,332
Provision for loan and
lease losses.......... 7,104 2,339 2,902 5,501 24,824 8,603 9,679 10,205
Securities gains
(losses), net......... 7 919 627 1,521 (186) 1,652 156 15,219
Noninterest income..... 58,264 54,841 52,618 57,250 50,779 53,455 52,189 47,054
Noninterest expense.... 146,138 144,080 145,140 147,978 237,697 146,090 141,122 138,335
Provision for income
taxes................. 32,651 33,766 29,361 28,981 1,800 26,090 22,886 26,412
----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Income (loss) before
cumulative effect..... 62,642 62,151 57,108 54,971 (32,579) 50,547 50,750 51,373
Less: Cumulative
effect*............... -- -- -- -- -- -- -- 34,263
----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Net income (loss)...... $ 62,642 62,151 57,108 54,971 $ (32,579) 50,547 50,750 17,110
=========== ========== ========== ========== =========== ========== ========== ==========
Fully diluted income
(loss) per share
before cumulative
effect................ $ 0.58 0.58 0.53 0.52 $ (0.30) 0.48 0.49 0.49
Less: Cumulative
effect*............... -- -- -- -- -- -- -- 0.35
----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Fully diluted net
income (loss) per
share................. $ 0.58 0.58 0.53 0.52 $ (0.30) 0.48 0.49 0.14
=========== ========== ========== ========== =========== ========== ========== ==========
SELECTED AVERAGE
BALANCES
Assets................. $19,524,878 19,071,278 18,712,128 18,550,660 $18,326,983 17,290,249 16,715,793 15,924,912
Securities, at
amortized cost........ 5,449,499 5,350,772 5,410,458 5,218,880 5,133,512 4,733,063 4,570,733 4,229,539
Loans and leases**..... 12,865,637 12,424,214 12,082,232 12,060,904 11,853,573 11,366,519 10,931,565 10,486,812
Total earning assets... 18,389,384 17,958,437 17,601,661 17,436,117 17,177,017 16,239,638 15,654,362 14,911,279
Deposits............... 14,334,248 14,330,620 14,221,620 14,307,119 14,126,998 13,558,342 13,457,849 13,029,872
Short-term borrowed
funds................. 2,643,910 2,445,588 2,232,787 1,954,290 1,688,897 1,525,498 1,229,478 975,240
Long-term debt......... 807,457 610,943 630,600 659,225 811,811 602,433 495,602 444,591
Total interest-bearing
liabilities........... 16,029,882 15,683,955 15,385,668 15,116,022 14,877,796 14,090,548 13,659,982 13,095,440
Shareholders' equity... $ 1,498,350 1,452,916 1,416,683 1,417,537 $ 1,461,436 1,407,087 1,354,493 1,282,785
=========== ========== ========== ========== =========== ========== ========== ==========
</TABLE>
- --------
* Cumulative effect of changes in accounting principles, net of income taxes.
** Loans and leases are net of unearned income and include loans held for
sale.
21
<PAGE>
SIX-YEAR FINANCIAL SUMMARY AND SELECTED RATIOS
<TABLE>
<CAPTION>
FIVE-YEAR
COMPOUND
1994 1993 1992 1991 1990 1989 GROWTH RATE
----------- ---------- ---------- ---------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income........ $ 1,318,045 1,199,708 1,207,989 1,243,470 1,238,433 1,202,048 1.9%
Interest expense....... 581,279 506,192 589,785 743,322 801,650 807,290 (6.4)
----------- ---------- ---------- ---------- ---------- ----------
Net interest income.... 736,766 693,516 618,204 500,148 436,783 394,758 13.3
Provision for loan and
lease losses.......... 17,846 53,311 62,871 75,844 54,106 32,354 (11.2)
----------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan and lease losses. 718,920 640,205 555,333 424,304 382,677 362,404 14.7
Noninterest income..... 226,047 220,318 185,873 178,016 137,555 124,768 12.6
Noninterest expense.... 583,336 663,244 510,158 435,184 391,978 360,311 10.1
----------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes................. 361,631 197,279 231,048 167,136 128,254 126,861 23.3
Provision for income
taxes................. 124,759 77,188 84,322 51,593 35,529 35,743 28.4
----------- ---------- ---------- ---------- ---------- ----------
Income before
cumulative effect of
changes in accounting
principles............ 236,872 120,091 146,726 115,543 92,725 91,118 21.1
Less: cumulative effect
of changes in
accounting principles,
net of income taxes... -- 34,263 -- -- -- -- NM
----------- ---------- ---------- ---------- ---------- ----------
Net income............. $ 236,872 85,828 146,726 115,543 92,725 91,118 21.1
=========== ========== ========== ========== ========== ==========
EARNINGS PER COMMON
SHARE
Average shares out-
standing (000's)
Primary................ 102,349 99,180 92,766 84,851 81,501 79,204 5.3
Fully diluted.......... 107,399 105,064 100,433 88,276 84,311 82,021 5.5
Primary
Income before
cumulative effect..... $ 2.26 1.16 1.53 1.36 1.14 1.15 14.5
Less: cumulative
effect................ -- 0.35 -- -- -- -- NM
----------- ---------- ---------- ---------- ---------- ----------
Net income............ $ 2.26 0.81 1.53 1.36 1.14 1.15 14.5
=========== ========== ========== ========== ========== ==========
Fully diluted
Income before
cumulative effect..... $ 2.21 1.16 1.48 1.33 1.12 1.14 14.2
Less: cumulative
effect................ -- 0.35 -- -- -- -- NM
----------- ---------- ---------- ---------- ---------- ----------
Net income............ $ 2.21 0.81 1.48 1.33 1.12 1.14 14.2
=========== ========== ========== ========== ========== ==========
Cash dividends......... 0.74 0.64 0.50 0.46 0.42 0.39 13.7
Shareholders' equity... 13.92 13.14 13.22 12.17 11.03 10.36 6.1
AVERAGE BALANCE SHEETS
Securities at carrying
value................. $ 5,340,070 4,670,213 3,998,587 3,336,542 2,825,787 2,748,801 14.2
Loans and leases*...... 12,195,004 11,029,260 10,024,523 9,087,120 8,732,557 8,381,603 7.8
Other assets........... 1,428,945 1,367,568 1,339,742 1,252,057 1,206,474 1,129,810 4.8
----------- ---------- ---------- ---------- ---------- ----------
Total assets........... $18,964,019 17,067,041 15,362,852 13,675,719 12,764,818 12,260,214 9.1
=========== ========== ========== ========== ========== ==========
Deposits............... $14,298,728 13,546,050 12,601,590 11,398,365 10,364,697 9,809,920 7.8
Other liabilities...... 2,762,640 1,910,698 1,416,923 1,206,790 1,438,077 1,552,521 12.2
Capital debt........... 449,497 233,347 153,064 142,359 144,738 153,860 23.9
Common shareholders'
equity................ 1,379,011 1,302,803 1,125,470 928,205 817,306 743,913 13.1
Preferred shareholders'
equity................ 74,143 74,143 65,805 -- -- -- NM
----------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity. $18,964,019 17,067,041 15,362,852 13,675,719 12,764,818 12,260,214 9.1
=========== ========== ========== ========== ========== ==========
PERIOD END BALANCES
Total assets........... $19,855,063 18,858,370 15,966,986 14,436,338 13,012,846 12,654,833 9.4
Deposits............... 14,314,154 14,594,952 13,044,173 12,166,090 10,847,996 10,377,636 6.6
Long-term debt......... 910,755 837,241 423,211 417,050 499,187 425,191 16.5
Shareholders' equity... 1,496,477 1,398,726 1,266,898 1,024,546 848,763 777,064 14.0
SELECTED PERFORMANCE
RATIOS
Rate of return on:
Average total assets... 1.25% 0.50 0.96 0.84 0.73 0.74
Average common
shareholders' equity.. 16.80 6.19 12.63 12.45 11.35 12.25
Dividend payout........ 32.74 79.01 32.68 33.82 36.84 33.91
Average equity to
average assets........ 7.66 8.07 7.75 6.79 6.40 6.07
</TABLE>
- --------
* Loans and leases are net of unearned income and the allowance for losses.
Amounts include loans held for sale.
NM--Not meaningful
22
<PAGE>
EXHIBIT 99.2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Southern National Corporation:
We have audited the accompanying consolidated balance sheets of Southern
National Corporation (a North Carolina corporation) and subsidiaries as of
December 31, 1994 and 1993, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 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 K 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.
23
<PAGE>
EXHIBIT 99.3
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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,
noninterest-bearing.................................. $ 637,794 665,527
Interest-bearing bank balances........................ 20,962 145,617
Federal funds sold and securities purchased under
resale agreements or similar arrangements............ 13,021 48,488
Securities available for sale (1994 at fair value,
fair value in 1993 of $1,948,606).................... 3,459,698 1,920,888
Loans held for sale................................... 136,351 682,097
Securities held to maturity (fair value: $1,889,911 in
1994 and $3,355,251 in 1993)......................... 1,965,419 3,304,594
Loans and leases...................................... 12,971,751 11,551,742
Allowance for loan and lease losses................. (171,734) (169,345)
----------- ----------
Net loans and leases................................ 12,800,017 11,382,397
----------- ----------
Premises and equipment, net........................... 333,069 302,278
Other assets.......................................... 488,732 406,484
----------- ----------
Total assets...................................... $19,855,063 18,858,370
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing................................. $ 1,843,019 1,785,160
Interest-bearing.................................... 12,471,135 12,809,792
----------- ----------
Total deposits.................................... 14,314,154 14,594,952
Short-term borrowed funds............................. 2,902,528 1,804,532
Long-term debt........................................ 910,755 837,241
Accounts payable and other liabilities................ 231,149 222,919
----------- ----------
Total liabilities................................. 18,358,586 17,459,644
----------- ----------
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 102,215,032 in 1994 and
100,823,294 in 1993................................ 511,075 504,116
Paid-in capital..................................... 285,599 275,426
Retained earnings................................... 775,979 626,149
Loan to employee stock ownership plan and unvested
restricted stock................................... (7,442) (10,815)
Net unrealized depreciation on securities available
for sale........................................... (72,584) --
----------- ----------
Total shareholders' equity........................ 1,496,477 1,398,726
----------- ----------
Total liabilities and shareholders' equity........ $19,855,063 18,858,370
=========== ==========
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
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....... $1,021,056 915,570 913,593
Interest and dividends on securities........ 291,805 279,728 286,243
Interest on short-term investments.......... 5,184 4,410 8,153
---------- ---------- ----------
Total interest income..................... 1,318,045 1,199,708 1,207,989
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits........................ 441,876 428,194 522,893
Interest on short-term borrowed funds....... 98,476 43,608 31,979
Interest on long-term debt.................. 40,927 34,390 34,913
---------- ---------- ----------
Total interest expense.................... 581,279 506,192 589,785
---------- ---------- ----------
NET INTEREST INCOME........................... 736,766 693,516 618,204
Provision for loan and lease losses......... 17,846 53,311 62,871
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
AND LEASE LOSSES............................. 718,920 640,205 555,333
NONINTEREST INCOME
Service charges on deposit accounts......... 82,755 79,670 71,668
Nondeposit fees and commissions............. 100,276 91,780 79,136
Securities gains, net....................... 3,074 16,841 9,338
Other income................................ 39,942 32,027 25,731
---------- ---------- ----------
Total noninterest income.................. 226,047 220,318 185,873
---------- ---------- ----------
NONINTEREST EXPENSE
Personnel expense........................... 293,433 289,487 246,998
Occupancy and equipment expense............. 90,983 91,631 77,124
Federal deposit insurance expense........... 32,697 30,730 27,384
Loss on bulk sale of assets................. -- 49,147 --
Other expense............................... 166,223 202,249 158,652
---------- ---------- ----------
Total noninterest expense................. 583,336 663,244 510,158
---------- ---------- ----------
EARNINGS
Income before income taxes.................. 361,631 197,279 231,048
Provision for income taxes.................. 124,759 77,188 84,322
---------- ---------- ----------
Income before cumulative effect of changes
in accounting principles................... 236,872 120,091 146,726
Less: cumulative effect of changes in
accounting principles, net of income
taxes.................................. -- 34,263 --
---------- ---------- ----------
Net Income.................................. 236,872 85,828 146,726
Preferred dividend requirements............. 5,198 5,198 4,605
---------- ---------- ----------
Income applicable to common shares.......... $ 231,674 80,630 142,121
========== ========== ==========
PER COMMON SHARE
Net income:
Primary
Income before cumulative effect......... $ 2.26 1.16 1.53
Less: cumulative effect................. -- 0.35 --
---------- ---------- ----------
Net income............................ $ 2.26 0.81 1.53
========== ========== ==========
Fully diluted
Income before cumulative effect......... $ 2.21 1.16 1.48
Less: cumulative effect................. -- 0.35 --
---------- ---------- ----------
Net income.............................. $ 2.21 0.81 1.48
========== ========== ==========
Cash dividends paid per common share........ $ 0.74 0.64 0.50
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
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, AS PREVIOUSLY
REPORTED............... 34,992,867 $ -- 174,964 49,608 200,742 425,314
Merger with BB&T
Financial Corporation
accounted for under
the pooling-of-
interests method...... 49,189,204 -- 245,946 50,336 302,950 599,232
----------- ------ ------- ------- ------- ---------
BALANCE, DECEMBER 31,
1991, AS RESTATED...... 84,182,071 -- 420,910 99,944 503,692 1,024,546
Add (Deduct)
Net income............. -- -- -- -- 146,726 146,726
Common stock issued.... 4,391,452 -- 21,957 26,462 (8,411) 40,008
Preferred stock issued. -- 3,850 -- 70,292 -- 74,142
Redemption of common
stock................. (546,832) -- (2,735) (5,099) (778) (8,612)
Acquisition accounted
for under the purchase
method................ 2,466,798 -- 12,335 21,516 -- 33,851
Reconciliation of
fiscal year to
calendar year for
merged company........ (257,873) -- (1,289) -- 1,370 81
Cash dividends declared
by merged companies... -- -- -- -- (28,876) (28,876)
Cash dividends declared
by Southern National:
Common stock........... -- -- -- -- (12,306) (12,306)
Preferred stock........ -- -- -- -- (4,605) (4,605)
Other.................. -- -- -- -- 1,943 1,943
----------- ------ ------- ------- ------- ---------
BALANCE, DECEMBER 31,
1992................... 90,235,616 3,850 451,178 213,115 598,755 1,266,898
Add (Deduct)
Net income............. -- -- -- -- 85,828 85,828
Common stock issued.... 10,691,364 -- 53,456 70,951 (11,247) 113,160
Redemption of common
stock................. (1,340,088) -- (6,700) (23,571) (4) (30,275)
Acquisition accounted
for under the purchase
method................ 1,172,475 -- 5,862 13,970 -- 19,832
Reconciliation of
fiscal year to
calendar year for
merged company........ 63,927 -- 320 191 4,641 5,152
Cash dividends declared
by merged companies... -- -- -- -- (37,101) (37,101)
Cash dividends declared
by Southern National:
Common stock........... -- -- -- -- (18,921) (18,921)
Preferred stock........ -- -- -- -- (5,198) (5,198)
Other.................. -- -- -- 770 (1,419) (649)
----------- ------ ------- ------- ------- ---------
BALANCE, DECEMBER 31,
1993................... 100,823,294 3,850 504,116 275,426 615,334 1,398,726
Add (Deduct)
Net income............. -- -- -- -- 236,872 236,872
Common stock issued.... 1,751,118 -- 8,756 14,910 (36) 23,630
Redemption of common
stock................. (1,086,485) -- (5,432) (18,130) -- (23,562)
Acquisitions accounted
for under the purchase
method................ 727,105 -- 3,635 11,228 -- 14,863
Net unrealized
depreciation on
securities available
for sale.............. -- -- -- -- (72,584) (72,584)
Cash dividends declared
by merged companies... -- -- -- -- (51,652) (51,652)
Cash dividends declared
by Southern National:
Common stock........... -- -- -- -- (30,156) (30,156)
Preferred stock........ -- -- -- -- (5,198) (5,198)
Other.................. -- -- -- 2,165 3,373 5,538
----------- ------ ------- ------- ------- ---------
BALANCE, DECEMBER 31,
1994................... 102,215,032 $3,850 511,075 285,599 695,953 1,496,477
=========== ====== ======= ======= ======= =========
</TABLE>
- --------
* Other includes unrealized losses on equity securities, net unrealized
depreciation on securities available for sale, unamortized ESOP
compensation, unvested restricted stock, loan to employee stock ownership
plan and unearned compensation.
See notes to consolidated financial statements.
26
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED 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............................. $ 236,872 85,828 146,726
Adjustments to reconcile net income to
net cash provided by operating
activities:
Cumulative effect of changes in
accounting principles, net of taxes.. -- 34,263 --
Provision for loan and lease losses... 17,846 53,311 62,871
Depreciation of premises and
equipment............................ 35,531 41,014 26,050
Amortization of intangibles........... 2,184 10,741 5,792
Accretion of negative goodwill........ (1,114) (279) --
Amortization of unearned stock
compensation......................... 1,711 730 --
Discount accretion and premium
amortization on securities, net...... (571) 12,328 11,284
Net (gain) loss on trading account
securities, net...................... (769) (1,441) 1,632
Gain on sales of securities, net...... (3,074) (16,841) (9,338)
Loss (gain) on sales of loans and
mortgage loan servicing rights, net.. 1,327 (15,013) (17,217)
Net (gain) loss on disposals of
premises and equipment, net.......... (1,746) 1,040 (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.......... (24,207) (791) 9,316
Other assets......................... (76,910) (84,256) 7,164
Increase (decrease) in:
Accrued interest payable............. 2,880 (4,313) (12,950)
Accounts payable and other
liabilities......................... 19,008 26,114 (12,465)
----------- ----------- -----------
Net cash provided by operating
activities......................... 500,689 339,821 133,920
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities
available for sale.................... 772,597 445,099 99,581
Proceeds from sales of securities...... -- 88,845 787,303
Maturities of securities............... 1,253,577 1,556,204 1,287,910
Purchases of securities................ (2,352,434) (2,838,211) (2,609,002)
Leases made to customers............... (44,379) (43,034) (41,589)
Principal collected on leases.......... 41,661 34,750 33,849
Loan originations, net of principal
collected............................. (1,143,769) (952,556) (547,063)
Purchases of loans..................... (27,864) (3,907) (6,685)
Net cash acquired in transactions
accounted for under the purchase
method of accounting.................. 2,262 72,939 59,173
Proceeds from disposals of premises
and equipment......................... 6,897 4,507 5,376
Purchases of premises and equipment.... (70,695) (101,347) (54,644)
Proceeds from sales of foreclosed
property.............................. 27,413 69,968 60,292
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 -- --
Other.................................. 22,696 (31,677) 2,217
----------- ----------- -----------
Net cash used in investing
activities......................... (1,502,519) (1,702,559) (926,512)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits.... (280,798) 290,050 392,859
Net increase in short-term borrowed
funds................................. 1,097,996 751,329 426,589
Increase in long-term debt............. 73,514 357,358 27,805
Net proceeds from preferred stock
issued................................ -- -- 74,142
Net proceeds from common stock issued.. 23,630 113,160 40,008
Common stock acquired and retired...... (23,562) (30,275) (8,612)
Cash dividends paid on common and
preferred stock....................... (76,805) (61,056) (45,679)
----------- ----------- -----------
Net cash provided by financing
activities......................... 813,975 1,420,566 907,112
----------- ----------- -----------
Net (Decrease) Increase in Cash and
Cash Equivalents...................... (187,855) 57,828 114,520
Cash and Cash Equivalents at Beginning
of Year............................... 859,632 801,804 687,284
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR.................................. $ 671,777 859,632 801,804
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest.............................. $ 579,180 506,839 607,224
Income taxes.......................... 143,416 119,880 91,941
Noncash financing and investing
activities:
Transfer of loans to (from)
foreclosed property.................. 20,358 32,112 65,205
Capital lease obligation.............. -- 1,285 --
Securitization of mortgage loans...... 7,497 4,311 92,523
Loan to employee stock ownership
plan................................. -- -- 664
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Southern National Corporation ("Southern National") is a multi-bank holding
company organized under the laws of North Carolina and registered with the
Federal Reserve Board under the Bank Holding Company Act of 1956, as amended.
Branch Banking and Trust Company ("BB&T-NC"), Branch Banking and Trust Company
of South Carolina ("BB&T-SC"), The Lexington State Bank ("LSB"), The Community
Bank of South Carolina ("Community"), and Commerce Bank ("Commerce") (the
"Banks") comprise the Parent Company's principal subsidiaries.
The accounting and reporting policies of Southern National Corporation and
Subsidiaries are in accordance with generally accepted accounting principles
and conform to general practices within the banking industry. The following is
a summary of the more significant policies.
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of Southern National include the
accounts of the Parent Company and its subsidiaries, 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. (See Note B.) Results of operations of
companies acquired in transactions accounted for as purchases are included
from the dates of acquisition.
Certain amounts for prior years have been reclassified to conform with
statement presentations for 1994. The reclassifications have no effect on
either 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 one of three categories: held to maturity, available for
sale and trading. At January 1, 1994, $3.0 billion of securities, with a
market value of $3.1 billion, were classified as available for sale, and,
accordingly, $22.3 million, net of tax, was recorded as an adjustment to
shareholders' equity.
Debt securities acquired with both the intent and ability to hold to
maturity are classified as held to maturity and reported at amortized cost.
Gains or losses realized from the sale of securities held to maturity are
determined by specific identification and are included in noninterest income.
Securities which may be used to meet liquidity needs arising from
unanticipated deposit and loan fluctuations, changes in regulatory capital and
investment requirements, or unforeseen changes in market conditions, including
interest rates, market values or inflation rates, are classified as available
for sale. Securities available for sale are reported at estimated fair value,
with unrealized gains and losses reported as a separate component of
shareholders' equity, net of tax. Gains or losses realized from the sale of
securities available for sale are determined by specific identification and
are included in noninterest income.
Trading account securities, of which none were held on December 31, 1994 or
1993, 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
28
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
or losses and income earned on trading account securities are included in
noninterest income. Gains or losses realized from the sale of trading
securities are determined by specific identification and are included in
noninterest income.
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, with adjustments for prepayments as they
occur. 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. While
management uses the best information available in establishing the allowance
for losses, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
valuations or if required by regulators based upon information at the time of
their examinations. Such adjustments to original estimates, as necessary, are
made in the period in which these factors and other relevant considerations
indicate that loss levels may vary from previous estimates.
Nonperforming Assets
Nonperforming assets include loans and leases on which interest is not being
accrued and foreclosed property. Foreclosed property consists of real estate
and other assets acquired through customers' loan defaults.
Loans and leases are generally placed on nonaccrual status when concern
exists that principal or interest is not fully collectible, or when any
portion of principal or interest becomes 90 days past due, whichever occurs
first. Loans past due 90 days or more may remain on accrual status if
management determines that concern over the collectibility of principal and
interest is not significant. When loans are placed on nonaccrual status,
interest receivable is reversed against interest income in the current period.
Interest payments received thereafter are applied as a reduction to the
remaining principal balance when concern exists as to the ultimate collection
of the principal. Loans and leases are removed from nonaccrual status when
they become current as to both principal and interest and when concern no
longer exists as to the collectibility of principal or interest.
29
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Assets acquired as a result of foreclosure are valued at the lower of cost
or fair value, and carried thereafter at the lower of cost or fair value less
estimated costs to sell the asset. Cost is the sum of unpaid principal,
accrued but unpaid interest and acquisition costs associated with the loan.
Any excess of unpaid principal over fair value at the time of foreclosure is
charged to the allowance for losses. Generally, such properties are appraised
annually and the carrying value, if greater than the fair value, less costs to
sell, is adjusted with a charge to income. Routine maintenance costs, declines
in market value and net losses on disposal are included in other noninterest
expense.
Premises and Equipment
Premises, equipment, capital leases and leasehold improvements are stated at
cost less accumulated depreciation or amortization. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the related assets. Leasehold improvements are amortized on a straight-line
basis over the lesser of the lease terms or the estimated useful lives of the
improvements. Capitalized leases are amortized by the same methods as premises
and equipment over the estimated useful lives or the lease term, whichever is
lesser. Obligations under capital leases are amortized using the interest
method to allocate payments between principal reduction and interest expense.
Income Taxes
The operating results of Southern National and its subsidiaries are included
in a consolidated federal income tax return. Each subsidiary pays its
calculated portion of federal income taxes to Southern National, or receives
payment from Southern National to the extent that tax benefits are realized.
Deferred income taxes have been provided where different accounting methods
have been used for reporting for income tax purposes and for financial
reporting purposes. As of January 1, 1993, Southern National adopted SFAS No.
109, "Accounting for Income Taxes," which changed the method of accounting for
income taxes. As a result of adopting SFAS No. 109, Southern National
recognized a cumulative benefit of the change in accounting principle of
$6,368,000. The benefit is included under the caption "Cumulative effect of
changes in accounting principles, net of income taxes" in the Consolidated
Statements of 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.
30
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Per Share Data
Primary net income per common share has been computed by dividing income
applicable to common shares by the weighted average number of shares of common
stock and common stock equivalents of dilutive stock options outstanding
during the years.
Fully diluted net income per common share has been computed by dividing net
income, as adjusted for the interest expense related to convertible debt, by
the weighted average number of shares of common stock, common stock
equivalents and other potentially dilutive securities outstanding during the
years. Other potentially dilutive securities include the number of shares
issuable upon conversion of the preferred stock. Restricted stock grants are
considered as issued for purposes of calculating net income per share.
Weighted average numbers of shares were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Primary................................ 102,348,773 99,179,656 92,765,901
Fully diluted.......................... 107,399,466 105,064,145 100,433,295
</TABLE>
Intangible Assets
The cost in excess of the fair value of net assets acquired in transactions
accounted for as purchases (goodwill), premiums paid on acquisitions of
deposits and other identifiable intangible assets are included in other assets
in the "Consolidated Balance Sheets." Such assets are being amortized on
straight-line or accelerated bases over periods ranging from 5 to 15 years. At
December 31, 1994, Southern National had $46.1 million recorded as goodwill
and $17.7 million as other intangibles, net of amortization. Negative goodwill
is created when the fair value of the net assets purchased exceed the purchase
price. Such balances are included in other liabilities in the "Consolidated
Balance Sheets" and are being amortized over periods ranging from 10 to 15
years. At December 31, 1994, Southern National had negative goodwill totaling
$51.7 million, net of amortization.
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.
Changes in Accounting Principles
Effective January 1, 1993, The First Savings Bank, FSB ("The First") adopted
SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions." As a result of adopting SFAS No. 72, a cumulative charge
totaling $28,019,000 was recognized in 1993. The charge is included under the
caption "Cumulative effect of changes in accounting principles, net of income
taxes" in the "Consolidated Statements of Income."
SFAS No. 112, "Employers Accounting for Postemployment Benefits," which was
adopted by Southern National as of January 1, 1994, establishes accounting
standards for employers who provide benefits to former or inactive employees
after employment but before retirement. The statement requires employers to
recognize the obligation to provide benefits if the obligation is attributable
to employees' services already rendered, employees' rights to those benefits
accumulate or vest, payment of the benefits is probable and the amount can be
reasonably estimated. The implementation did not have a material impact on the
consolidated financial position or consolidated results of operations.
Effective January 1, 1995, Southern National adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which was amended by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosures." SFAS No. 114 requires that impaired loans be measured based
on
31
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. The implementation did not have a material impact on Southern
National's consolidated financial position or consolidated results of
operations.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from depository institutions,
interest-bearing bank balances, federal funds sold and securities purchased
under resale agreements or similar arrangements. Generally, both cash and cash
equivalents are considered to have maturities of three months or less.
Supplemental Disclosures of Cash Flow Information
As referenced in the "Consolidated Statements of Cash Flows," Southern
National acquired assets and assumed liabilities in transactions accounted for
under the purchase method of accounting. The fair values of these assets
acquired and liabilities assumed, at acquisition, were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Fair value of net assets acquired...................... $ 6,203 60,099 35,161
Total purchase price................................... 15,016 43,359 37,915
------- ------ ------
Excess of net assets acquired over purchase price
(purchase price over net assets acquired)............. $(8,813) 16,740 (2,754)
======= ====== ======
</TABLE>
Income and Expense Recognition
Items of income and expense are recognized using the accrual basis of
accounting, except for some immaterial amounts.
NOTE B. ACQUISITIONS AND MERGERS
Completed 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.
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.
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
32
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
On June 30, 1994, Southern National completed its acquisition of L.S.B.
Bancshares, Inc., ("L.S.B. Bancshares") of Lexington, South Carolina by the
issuance of 5,707,694 shares of Southern National common stock in exchange for
L.S.B. Bancshares' common stock outstanding.
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 acquired
institutions.
During 1994, Southern National acquired an insurance agency by issuing
49,812 shares of common stock in a transaction also accounted for under the
pooling-of-interests method of accounting. However, this transaction was not
material, and, accordingly, prior period financial statements have not been
restated.
On June 1, 1994, Southern National completed its acquisition of McLean,
Brady & McLean Agency, Inc. ("McLean") by the issuance of 38,823 shares of
Southern National common stock. In conjunction with the acquisition of McLean,
Southern National recorded $1.1 million of expiration rights which are being
amortized over 10 years.
On June 6, 1994, Southern National completed its acquisition of Leasing
Associates, Inc. ("Leasing") by the issuance of 97,876 shares of Southern
National common stock.
On November 1, 1994, Southern National completed its acquisition of Prime
Rate Premium Finance Corporation, Inc. and related interests, Agency
Technologies, Inc. and IFCO, Inc. ("Prime Rate") by the issuance of 590,406
shares of Southern National common stock. In conjunction with the acquisition
of Prime Rate, Southern National recorded $8.8 million of goodwill which is
being amortized over 15 years.
These acquisitions were accounted for under the purchase method of
accounting, and, therefore, the financial information contained herein
includes data relevant to the acquirees since the date of acquisition.
Mergers
On August 1, 1994, Southern National and BB&T Financial Corporation ("BB&T")
jointly announced the signing of a definitive agreement to merge. The
transaction was accounted for as a pooling-of-interests in which BB&T
shareholders received 1.45 shares of the common stock of the resulting company
for each share of BB&T stock held. The merger of the bank holding companies
was completed on February 28, 1995. On January 10, 1995, BB&T acquired
Commerce through the issuance of 5,210,476 shares of Southern National common
stock for all of the outstanding stock of Commerce.
Several adjustments were required to restate Southern National and BB&T.
Among these were adjustments necessary to implement SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions." SFAS No. 106
allowed employers to recognize the transition obligation associated with
implementation immediately, subject to certain limitations, or on a delayed
basis over the plan participants' future service periods. Southern National
and BB&T elected to treat the transition obligation differently, and these
adjustments conform BB&T's transition methodology to that elected by Southern
National, the cumulative charge resulting from a change in accounting
principle recorded for 1993 was increased by $7.0 million, net of related
income taxes, while noninterest expenses were reduced by $559,000 for both
1994 and 1993.
33
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In conjunction with the merger, certain material, nonrecurring adjustments
of approximately $88 million were recorded in February 1995. These adjustments
included approximately $50 million for settlement of obligations under
existing employment contracts, severance pay, early retirement and related
employee benefits, approximately $12 million associated with branch closings
and divestitures, approximately $6 million associated with consolidation of
bank operations and systems and approximately $13 million of expenses related
to effecting the merger.
The following presentation reflects key line items on an historical basis
for Southern National, BB&T and Commerce and on a pro forma combined basis
assuming the mergers with BB&T and Commerce were 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 19,855,063
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
Net (loss) earnings per
share
Primary............... (0.57) 2.95 2.38 0.81
Fully diluted......... NM 2.91 2.28 0.81
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
34
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE C. SECURITIES
The amortized costs and approximate fair values of securities were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
-------------------------------------- --------------------------------------
GROSS UNREALIZED ESTIMATED GROSS UNREALIZED ESTIMATED
AMORTIZED ----------------- FAIR AMORTIZED ----------------- FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---------- ------- --------- --------- ---------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to
maturity:
U.S. Treasury,
government and agency
obligations........... $1,190,558 386 44,434 1,146,510 $2,433,380 28,280 3,564 2,458,096
States and political
subdivisions.......... 165,520 2,591 2,156 165,955 203,422 10,968 619 213,771
Mortgage-backed
securities............ 608,676 102 31,977 576,801 567,520 9,631 782 576,369
Equity and other
securities............ 665 5 25 645 100,272 6,986 243 107,015
---------- ------- --------- --------- ---------- -------- ------- ---------
Total securities held
to maturity........... 1,965,419 3,084 78,592 1,889,911 3,304,594 55,865 5,208 3,355,251
---------- ------- --------- --------- ---------- -------- ------- ---------
Securities available for
sale:
U.S. Treasury,
government and agency
obligations........... 3,128,154 788 104,150 3,024,792 1,384,017 16,739 2,742 1,398,014
States and political
subdivisions.......... 18,501 9 1,592 16,918 -- -- -- --
Mortgage-backed
securities............ 324,007 617 14,310 310,314 535,299 14,324 603 549,020
Equity and other
securities............ 108,799 -- 1,125 107,674 1,572 -- -- 1,572
---------- ------- --------- --------- ---------- -------- ------- ---------
Total securities
available for sale.... 3,579,461 1,414 121,177 3,459,698 1,920,888 31,063 3,345 1,948,606
---------- ------- --------- --------- ---------- -------- ------- ---------
Total securities....... $5,544,880 4,498 199,769 5,349,609 $5,225,482 86,928 8,553 5,303,857
========== ======= ========= ========= ========== ======== ======= =========
</TABLE>
Securities with a book value of approximately $2,720,893,000 and
$2,040,413,000 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 securities during 1994, 1993 and 1992 were
$772,597,000, $533,944,000 and $886,884,000, respectively. Gross gains of
$3,601,000, $17,974,000 and $12,013,000 and gross losses of $527,000,
$1,133,000 and $2,675,000 were realized on those sales in 1994, 1993 and 1992,
respectively.
The amortized cost and estimated fair value of the securities portfolio at
December 31, 1994, 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
----------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
-------------------- -------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
TOTAL DEBT SECURITIES COST VALUE COST VALUE
--------------------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less............ $ 198,944 197,547 1,027,459 1,014,764
Due after one year through five
years............................. 1,081,513 1,039,705 1,980,442 1,900,476
Due after five years through ten
years............................. 75,793 75,343 133,880 121,936
Due after ten years................ 493 515 4,874 4,534
---------- --------- --------- ---------
1,356,743 1,313,110 3,146,655 3,041,710
Mortgage-backed securities......... 608,676 576,801 324,007 310,314
---------- --------- --------- ---------
Total debt securities............ $1,965,419 1,889,911 3,470,662 3,352,024
========== ========= ========= =========
</TABLE>
35
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.............. $ 2,679,046 2,031,561
Real estate--construction and land development...... 701,181 702,108
Real estate--mortgage............................... 7,787,792 7,114,136
Consumer............................................ 1,553,906 1,523,281
----------- ----------
Loans held for investment......................... 12,721,925 11,371,086
Loans held for sale............................... 136,855 682,097
----------- ----------
Total loans..................................... 12,858,780 12,053,183
Leases................................................ 304,544 225,312
----------- ----------
Total loans and leases.............................. 13,163,324 12,278,495
Less: unearned income............................. 55,222 44,656
----------- ----------
Loans and leases, net of unearned income............ $13,108,102 12,233,839
=========== ==========
</TABLE>
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 $8.5 billion. However, this
amount was not concentrated in any specific market or geographic area other
than the Bank's primary market.
The following table provides an analysis of loans made to directors,
executive officers and their interests, which in the aggregate exceeded
$60,000 at any time during 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............................ $130,685
Additions............................................. 119,657
Repayments............................................ 132,015
--------
BALANCE, DECEMBER 31, 1994............................ $118,327
========
</TABLE>
36
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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............................... $169,345 137,400 116,221
Provision for losses charged to expense.......... 17,846 53,311 62,871
Allowances of purchased companies................ 1,119 13,310 3,675
-------- ------- -------
Total.......................................... 188,310 204,021 182,767
Deduct:
Loans charged-off.............................. (30,070) (45,618) (57,484)
Less recoveries................................ 13,494 10,942 10,301
-------- ------- -------
Balance, December 31............................. $171,734 169,345 135,584
======== ======= =======
</TABLE>
At December 31, 1994, 1993 and 1992, the amount of loans not currently
accruing interest was $47.0 million, $61.7 million and $90.7 million,
respectively and loans 90 days or more past due and still accruing interest of
$24.2 million, $21.7 million and $18.9 million, 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 $3.3 million. Interest earned
and included in interest income during 1994 on such loans and leases amounted
to approximately $1.6 million. Transfer of loans to other real estate owned, a
noncash transaction, amounted to $20.4 million, $32.1 million and $65.2
million in 1994, 1993 and 1992, respectively. Foreclosed property was $12.2
million, $23.5 million and $65.4 million at December 31, 1994, 1993 and 1992,
respectively.
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............................ $ 55,368 49,897
Buildings and building improvements................... 230,464 212,009
Furniture and equipment............................... 252,998 230,585
Capitalized leases on premises and equipment.......... 6,385 6,509
----------- ----------
545,215 499,000
Less--accumulated depreciation and amortization....... 212,146 196,722
----------- ----------
Net premises and equipment.......................... $ 333,069 302,278
=========== ==========
</TABLE>
Depreciation expense, which is included in occupancy and equipment expense,
was $35.5 million, $41.0 million and $26.1 million in 1994, 1993 and 1992,
respectively.
37
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Southern National has noncancellable leases covering certain premises and
equipment. Total rent expense applicable to operating leases was $21.9
million, $23.8 million and $20.9 million 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............................................. $ 20,612 1,139
1996............................................. 20,452 611
1997............................................. 17,939 611
1998............................................. 12,340 610
1999............................................. 11,309 610
2000 and later years............................. 87,293 12,391
----------- ----------
Total minimum lease payments....................... $ 169,945 15,972
===========
Less--amount representing interest................. 9,820
----------
Present value of net minimum payments on
capitalized leases (Note H)....................... 6,152
==========
</TABLE>
NOTE G. SHORT-TERM BORROWED FUNDS
The composition of short-term borrowed funds at December 31 is presented in
the following table:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Federal funds purchased............................... $ 1,381,610 879,859
Securities sold under agreements to repurchase........ 1,239,492 655,896
Master notes.......................................... 254,269 158,654
Federal Reserve discount window borrowings............ -- 65,000
U.S. Treasury tax and loan deposit notes payable...... 22,713 41,623
Other short-term borrowings........................... 4,444 3,500
----------- ----------
Total short-term borrowings........................... $ 2,902,528 1,804,532
=========== ==========
</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).
38
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE H. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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
10%, convertible subordinated capital notes, dated 1990,
due in 2002. The notes are convertible into Southern
National's common stock on or before August 31, 2002,
unless previously redeemed............................. 4,995 4,995
$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
Floating rate subordinated notes, dated 1985, redeemed
in May of 1994. The interest rate was adjusted
quarterly to 25 basis points above the London interbank
offered quotations, or 5.25% at December 31, 1993...... -- 50,000
Unsecured subordinated capital notes, weighted average
rate of 11.13% which were paid in full in 1994......... -- 8,156
Capitalized leases, varying maturities to 2028 with
rates from 7.75% to 15.42%. This represents the
unamortized balances due on leases of various
facilities............................................. 6,152 6,406
Medium-term bank notes, varying maturities to 1996 with
rates from 4.73% to 5.78%.............................. 336,923 231,868
Advances from Federal Home Loan Bank, varying maturities
to 2014 with rates from 1.00% to 8.95%................. 553,796 520,887
Other mortgage indebtedness............................. 306 3,013
----------- ----------
$ 910,755 837,241
=========== ==========
</TABLE>
The 10% convertible subordinated capital notes are redeemable in whole or in
part, at Southern National's option subject to regulatory approval. Beginning
September 1, 1995, Southern National can redeem the subordinated capital notes
at 105% of the principal amount plus accrued and unpaid interest, and at
reducing premiums thereafter.
Excluding the capitalized leases set forth in Note F, future debt maturities
total $904,603,000 and are $273,654,000, $499,145,000, $35,688,000,
$37,519,000 and $15,469,000 for the next five years. The maturities for 2000
and later years are $43,128,000.
NOTE I. 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, 102,215,032 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 and pays
dividends at a rate of 6.75%. 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.
39
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $18.375. The incentive stock options vest over
four years and the non-qualified stock options vest over three years. Both
types of options have a ten year term.
The terms of these option plans provided for the immediate vesting of all
outstanding shares upon a change of control, as defined. The merger with BB&T
qualified as a change in control; accordingly, at February 28, 1995, options
outstanding at December 31, 1994, of 511,157 became exercisable. The shares
relating to the Omnibus Plan issued in 1994 did not vest in conjunction with
the merger.
BB&T had an incentive stock option plan and a special purpose option and
restricted stock plan. Under these plans, the option price is the fair market
value of the stock at the date of grant. At merger date, each BB&T option was
converted into an option to purchase 1.45 shares of Southern National common
stock. The terms of these option plans provided for the immediate vesting of
all outstanding shares upon a change of control, as defined. The merger with
Southern National qualified as a change in control; accordingly, all
outstanding options granted prior to August 1, 1994, totaling 1,331,505,
became exercisable.
40
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents historical share information for Southern
National, BB&T and Commerce on a combined basis:
<TABLE>
<CAPTION>
SHARE ACTIVITY
-----------------------------
1994 1993 1992
OPTION ACTIVITY --------- --------- ---------
<S> <C> <C> <C>
Outstanding January 1.......................... 4,532,967 4,522,122 3,837,553
Granted ($.01 to $23.88)....................... 1,109,234 1,061,106 971,817
Options of acquired companies.................. -- 76,776 --
Exercised ($.01 to $18.54)..................... 598,777 1,105,517 297,484
Expired or forfeited ($2.67 to $23.37)......... 53,845 21,521 155,516
--------- --------- ---------
Outstanding December 31 ($2.67 to $23.88)...... 4,989,579 4,532,966 4,356,370
========= ========= =========
Options exercisable at December 31, 1994
($2.67 to $23.88 per share)................... 2,477,674
=========
</TABLE>
NOTE J. 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.............................. $124,759 77,188 84,322
Cumulative effect of changes in accounting
principles......................................... -- (2,897) --
-------- ------ ------
Total provision for income taxes.................. $124,759 74,291 84,322
======== ====== ======
</TABLE>
The reasons for the difference between the provision for income taxes
attributable to operations and the amount computed by applying the statutory
federal income tax rate to income before income taxes were as follows:
The provision for income taxes attributable to operations was composed of the
following:
<TABLE>
<CAPTION>
1994 1993 1992
-------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal........................................ $133,522 88,449 77,978
State.......................................... 9,581 6,970 5,613
-------- ------- ------
143,103 95,419 83,591
Deferred (benefit) expense....................... (18,344) (18,231) 731
-------- ------- ------
Provision for income taxes....................... $124,759 77,188 84,322
======== ======= ======
<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.............. $126,571 69,048 78,556
Tax-exempt income from securities, loans and
leases less related non-deductible interest
expense......................................... (6,597) (7,050) (7,726)
State income taxes, net of federal tax benefit... 3,539 2,584 2,549
Changes in tax accounting method for bad debts of
savings institutions converting to a commercial
bank............................................ -- 9,389 5,190
Other, net....................................... 1,246 3,217 5,753
-------- ------- ------
Provision for income taxes....................... $124,759 77,188 84,322
======== ======= ======
Effective income tax rate........................ 34.5% 39.1 36.5
======== ======= ======
</TABLE>
41
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that gave rise to significant
portions of the net deferred tax assets (liabilities) in the "Consolidated
Balance Sheets" at December 31, 1994, as adjusted for the adoption of SFAS No.
109 were:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1993
-------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for losses................................... $ 66,103 47,212
Postretirement benefits other than pensions............ 15,441 14,074
Unrealized losses on securities available for sale..... 47,180 --
Tax deferred loss on sale of loans..................... 8,552 506
Difference in basis of assets (other than
depreciation)......................................... 6,366 11,621
Other.................................................. 21,017 17,371
-------- -------
Total tax deferred assets................................ 164,659 90,784
-------- -------
Deferred tax liabilities:
Tax accounting method changes.......................... (8,113) (10,811)
Depreciation........................................... (12,002) (3,727)
Lease financing........................................ (12,270) (9,833)
Dividends on FHLB stock................................ (4,681) (4,574)
Prepaid pension plan contribution...................... (3,885) (3,128)
Other.................................................. (6,302) (7,189)
-------- -------
Total tax deferred liabilities........................... (47,253) (39,262)
-------- -------
Net deferred tax asset................................... $117,406 51,522
======== =======
</TABLE>
The deferred tax assets have been determined to be realizable, and,
accordingly, a valuation allowance was not required. At December 31, 1994,
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 SNB
Savings Bank, Inc., SSB ("SSB") for which no provision for income taxes had
been made. 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 K. BENEFIT PLANS
The combination of actuarial information for the benefit plans of Southern
National and 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 on-going
Southern National plans and the assumptions used in the Southern National
calculations. Accordingly, the actuarial information presented below includes
separate disclosures for Southern National and BB&T prior to merger. The
following table discloses expenses relating to employee benefit plans on a
restated basis.
<TABLE>
<CAPTION>
1994* 1993* 1992*
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Defined benefit plans.............................. $ 10,705 8,379 6,623
Employee stock ownership plans (ESOP).............. 5,178 3,843 3,133
Defined contribution plans......................... 4,246 3,350 2,779
-------- ------- -------
Total expense related to benefit plans........... $ 20,129 15,572 12,535
======== ======= =======
</TABLE>
- --------
* Amounts restated for acquisitions accounted for as poolings-of-interests.
42
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
BB&T sponsors a noncontributory defined benefit pension plan covering
substantially all employees. The benefits are based on years of service, age
at retirement and the employee's compensation during the last five years of
employment. Contributions to the plan are based upon the Frozen Initial
Liability actuarial funding method and comply with the funding requirements of
the Employee Retirement Income Security Act.
Net periodic pension cost, which is included in personnel expense, consisted
of the following components in 1994, 1993 and 1992.
<TABLE>
<CAPTION>
SOUTHERN NATIONAL
---------------------------------------
BASIC PLAN SERP BB&T
----------------------- -------------- -----------------------
1994 1993 1992 1994 1993 1992 1994 1993 1992
------- ------ ------ ---- ---- ---- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost............ $ 3,872 2,708 2,183 $248 275 112 $ 5,311 3,749 3,471
Interest cost........... 4,539 3,577 3,173 178 129 64 4,787 4,282 3,789
Actual return on assets. (968) (3,512) (2,634) -- -- -- 1,679 (4,435) (4,219)
Net amortization and
deferral............... (4,573) (525) (895) 78 62 27 (6,204) (587) (347)
Early retirement........ -- -- 557 -- -- -- -- -- --
------- ------ ------ ---- --- --- ------- ------ ------
Net periodic pension
cost................. $ 2,870 2,248 2,384 $504 466 203 $ 5,573 3,009 2,694
======= ====== ====== ==== === === ======= ====== ======
</TABLE>
43
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the plans' funded status at December 31, 1994
and 1993.
<TABLE>
<CAPTION>
SOUTHERN NATIONAL
----------------------------------
BASIC PLAN SERP BB&T
----------------- --------------- ------------------
1994 1993 1994 1993 1994 1993
-------- ------- ------- ------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Accumulated benefit
obligation
Vested benefits........ $(48,599) (37,119) $ -- -- $(39,776) (39,320)
Nonvested benefits..... (1,000) (719) -- -- (2,097) (2,128)
-------- ------- ------- ------ -------- --------
$(49,599) (37,838) -- -- $(41,873) (41,448)
======== ======= ======= ====== ======== ========
Projected benefit
obligation at December
31..................... $(57,916) (49,472) $(2,721) (2,009) $(70,938) (69,141)
Plan assets at fair
value.................. 59,186 50,438 -- -- 56,643 55,499
-------- ------- ------- ------ -------- --------
Plan assets in excess of
(less than) projected
benefit obligation..... 1,270 966 (2,721) (2,009) (14,295) (13,642)
Unrecognized transition
amount................. (666) (154) 245 271 (6,151) (6,869)
Unrecognized prior
service cost........... (1,637) 1,217 -- -- 3,458 3,727
Unrecognized net loss... 10,096 2,866 933 691 12,781 13,098
-------- ------- ------- ------ -------- --------
Prepaid (accrued)
pension cost included
in
other assets (other
liabilities)........... $ 9,063 4,895 $(1,543) (1,047) $(4,207) (3,686)
======== ======= ======= ====== ======== ========
</TABLE>
Actuarial assumptions used in calculating these amounts were:
<TABLE>
<CAPTION>
SNC BB&T
--------------- ---------------
1994 1993 1992 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Rate of increase in future compensation.......... 4.8% 6.0 6.0 6.0% 5.5 6.0
Weighted average discount rate................... 7.8 8.0 8.0 7.8 7.0 8.0
Weighted average expected long-term rate of
return on assets................................ 9.0 9.0 9.0 8.0 9.0 9.0
</TABLE>
Plan assets consist primarily of obligations of the U.S. Treasury and
Federal agencies and corporations for SNC and listed stocks and U.S.
government securities for BB&T. Plan assets of BB&T included 135,271 and
131,411 shares of BB&T's common stock at December 31, 1994, and 1993,
respectively (196,143 and 190,546 of Southern National stock based on the
exchange ratio of 1.45 for the merger with Southern National).
Postretirement Benefits
Effective December 31, 1992, Southern National adopted a revised retiree
medical program ("Plan") in preparation for the implementation of SFAS No.
106, "Accounting for Postretirement Benefits Other Than Pensions." The Plan
covers employees retiring after January 1, 1993 who are eligible for
participation in the 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.
44
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to 1993, BB&T provided health care benefits to retirees and expensed
those costs as incurred. Retiree health care costs totaling approximately
$430,000 were paid and expensed during 1992. Effective January 1, 1993, BB&T
revised the retiree health care plan to provide a flexible benefit amount
which retirees can use to purchase health care and life insurance benefits.
Southern National adopted SFAS No. 106 as of January 1, 1993. As a result of
adopting SFAS No. 106, Southern National recognized a cumulative charge for
this change in accounting principle of $12,612,000 (net of $7,595,000 of
deferred income tax benefits). The charge is included under the caption
"Cumulative effect of changes in accounting principles, net of income taxes"
in the "Consolidated Statements of Income." The effect of this change, net of
income taxes and excluding the cumulative charge, for the year ended December
31, 1993 was to decrease net income by $1,304,000.
The following table sets forth the components of the retiree benefit plan
and the amount recognized in the consolidated financial statements at December
31, 1994 and 1993.
<TABLE>
<CAPTION>
SNC BB&T
---------------- -----------------
1994 1993 1994 1993
--------- ------ -------- -------
<S> <C> <C> <C> <C>
Net periodic postretirement benefit cost
Service cost.............................. $ 501 300 $ 489 191
Interest cost............................. 731 539 1,110 915
Amortization of net loss.................. -- -- 104 --
--------- ------ -------- -------
Total expense........................... $ 1,232 839 $ 1,703 1,106
========= ====== ======== =======
Reconciliation of funded status
Accumulated postretirement benefit
obligation............................. $(11,727) (7,469) $(15,863) (16,213)
Unrecognized net (gain) loss............ (904) -- 2,260 3,797
--------- ------ -------- -------
Accrued post retirement benefit costs
included in other liabilities.......... $(12,631) (7,469) $(13,603) (12,416)
========= ====== ======== =======
</TABLE>
Actuarial assumptions used in calculating these amounts were:
<TABLE>
<CAPTION>
SNC BB&T
---------- ----------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Annual rate of increase in the per capita cost of health
care claims
Current year.......................................... 10.0% 15.7 12.0% 13.0
Final constant amount................................. 5.0 6.5 5.0 5.0
Annual decrease....................................... 1.0 2.3 1.0 1.0
General inflation rate.................................. 4.0 5.5 4.0 4.0
Weighted average discount rate.......................... 7.8 8.5 7.8 7.0
Impact of 1% increase in assumed health care cost on:
Net periodic benefit cost.............................. 1.0 N/A 0.0 N/A
Expected postretirement benefit obligation............. 1.1 N/A 3.0 N/A
</TABLE>
Employee Stock Ownership Plan
Southern National's Employee Stock Ownership Plan allows all employees to
acquire common stock in Southern National by contributing up to 15% of their
salaries to the plan. Southern National matches 100% of each employee's
contributions, up to a maximum of 6% of the employee's salary.
45
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Savings and Thrift Plan
BB&T's Savings and Thrift Plan permits eligible employees to make
contributions up to 16% of base compensation, with the Bank's matching
contributions up to four percent of the employee's base compensation.
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.
Other
There are various other employment contracts, deferred compensation
arrangements and covenants not to compete with selected members of management
and certain retirees.
NOTE L. COMMITMENTS AND CONTINGENCIES
Southern National is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, options written,
standby letters of credit and financial guarantees, interest rate caps and
floors written, interest rate swaps and forward and futures contracts.
Southern National's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit and standby letters of credit and financial guarantees written is
represented by the contractual notional amount of those instruments. Southern
National uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
<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. $3,733,152 2,818,456
Standby letters of credit and financial guarantees
written............................................ 143,660 292,833
Commercial and similar letters of credit............ 17,089 10,891
Securities lent..................................... 51,137 8,335
Financial instruments whose notional or contract
amounts exceed the amount of credit risk:
Commitments to sell mortgage loans and mortgage-
backed securities.................................. 40,392 552,381
</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
46
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. Southern National
evaluates each customer's creditworthiness on a case-by-case basis. The amount
and type of collateral obtained if deemed necessary by Southern National upon
extension of credit is based on management's evaluation of the
creditworthiness of the counterparty.
Standby letters of credit and financial guarantees written are conditional
commitments issued by Southern National to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing and similar transactions. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers, and letters of credit are collateralized when
necessary.
Forward commitments to sell mortgage loans and mortgage-backed securities
are contracts for delayed delivery of securities in which Southern National
agrees to make delivery at a specified future date of a specified instrument,
at a specified price or yield. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
securities' values and interest rates.
NOTE M. REGULATORY REQUIREMENTS AND OTHER RESTRICTIONS
The Banks are required by the Board of Governors of the Federal Reserve
System to maintain reserve balances based on certain percentages of deposit
types. At December 31, 1994, these reserves amounted to $231 million.
Subject to restrictions imposed by state laws and federal regulations, the
Boards of Directors of the subsidiary banks could have declared dividends from
their retained earnings up to $542 million at December 31, 1994. The
subsidiary banks are prohibited from paying dividends from their capital stock
and paid-in capital accounts and are required by regulatory authorities to
maintain minimum capital levels.
The terms of the capital note agreement (Note H) 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 earnings.
47
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE N. PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993
---------- ---------
<S> <C> <C>
ASSETS
Cash...................................................... $ 164,013 137,916
Investment securities..................................... 78,010 108,041
Receivables from subsidiaries............................. 62,146 38,232
Investment in bank subsidiaries, at underlying book value. 1,450,626 1,315,965
Investment in other subsidiaries, at underlying book
value.................................................... 4,373 65,906
Premises.................................................. 6,158 6,330
Other assets.............................................. 8,025 9,466
---------- ---------
Total assets.......................................... $1,773,351 1,681,856
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings..................................... $ 254,269 158,655
Advance from bank subsidiary.............................. -- 58,250
Dividends payable......................................... 10,201 --
Accounts payable and accrued liabilities.................. 3,821 4,309
Capital notes and mortgages............................... 8,583 61,916
---------- ---------
Total liabilities..................................... 276,874 283,130
---------- ---------
Total shareholders' equity............................ 1,496,477 1,398,726
---------- ---------
Total liabilities and shareholders' equity............ $1,773,351 1,681,856
========== =========
</TABLE>
48
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
-------- ------- -------
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries...................... $138,201 101,216 44,487
Interest and other income from subsidiaries...... 13,291 10,864 18,620
Interest on investment securities................ 1,560 2,295 1,123
Rental income.................................... 1,292 1,292 1,292
Other income..................................... 2,303 938 (313)
-------- ------- -------
Total income................................... 156,647 116,605 65,209
-------- ------- -------
EXPENSES
Interest expense................................. 12,393 9,315 12,577
Occupancy expense................................ 172 450 182
Other expenses................................... 6,927 6,078 4,584
-------- ------- -------
Total expenses................................. 19,492 15,843 17,343
-------- ------- -------
Income before income tax provision (credit) and
equity in undistributed earnings of subsidiaries.. 137,155 100,762 47,866
Income tax provision............................... (433) (22) 826
-------- ------- -------
Income before equity in undistributed earnings of
subsidiaries...................................... 137,588 100,784 47,040
Equity in undistributed earnings (losses) of
subsidiaries...................................... 99,284 (14,956) 99,686
-------- ------- -------
NET INCOME......................................... $236,872 85,828 146,726
======== ======= =======
</TABLE>
49
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED 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...................................... $236,872 85,828 146,726
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed (earnings) losses of
subsidiaries................................. (99,284) 14,956 (99,686)
Depreciation of premises and equipment........ 172 1,041 361
Amortization of unearned compensation......... 1,711 730 --
Reconciliation of fiscal year of merged
companies to calendar year................... -- (51) 2,257
(Increase) decrease in receivables from
subsidiaries................................. (23,914) (7,384) 2,225
Decrease (increase) in other assets........... 1,446 (62,423) (199)
(Decrease) increase in accounts payable and
accrued liabilities.......................... (872) (581) 1,130
-------- -------- -------
Net cash provided by operating activities... 116,131 32,116 52,814
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available for sale
securities..................................... 10,128 -- --
Maturities of available for sale securities..... 65,002 180 --
Purchases of available for sale securities...... (63,177) -- --
Proceeds from maturities of held to maturity
securities..................................... -- 5,000 35,223
Purchases of held to maturity securities........ -- (66,915) (78,539)
Repayment of note from bank subsidiary.......... 30,000 -- --
Sale of savings bank subsidiary to bank
subsidiary..................................... 58,883 -- --
Investment in subsidiaries...................... (67,492) (116) (32,500)
Cash payment for stock acquired through purchase
conversions.................................... -- (28,818) (9,690)
Cash payment for purchased companies............ -- (58,250) --
Other........................................... (32,328) (3,379) (13,671)
-------- -------- -------
Net cash provided by (used in) investing
activities................................. 1,016 (152,298) (99,177)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in long-term debt...................... (53,333) (3,334) (2,333)
Repayment of advance from bank subsidiary....... (58,250) -- --
Net proceeds from common stock issued........... 23,630 113,160 40,008
Common stock acquired and retired............... (23,562) (30,275) (8,612)
Advances from bank subsidiary................... -- 58,250 --
Net proceeds from preferred stock issued........ -- -- 74,142
Net increase in short-term borrowings........... 95,614 48,050 (18,962)
Cash dividends paid on common and preferred
stock.......................................... (76,805) (61,056) (45,679)
Other........................................... 1,656 1,551 1,441
-------- -------- -------
Net cash (used in) provided by financing
activities................................. (91,050) 126,346 40,005
-------- -------- -------
Net Increase (Decrease) in Cash................... 26,097 6,164 (6,358)
Cash at Beginning of Year......................... 137,916 131,752 138,110
-------- -------- -------
CASH AT END OF YEAR............................... $164,013 137,916 131,752
======== ======== =======
</TABLE>
50
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE O. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires Southern National to disclose the estimated fair value of its on- and
off-balance sheet financial instruments. A financial instrument is defined by
SFAS No. 107 as cash, evidence of an ownership interest in an entity or a
contract that creates a contractual obligation or right to deliver to or
receive cash or another financial instrument from a second entity on
potentially favorable or unfavorable terms.
Fair value estimates are made at a point in time, based on relevant market
data and information about the financial instrument. SFAS No. 107 specifies
that fair values should be calculated based on the value of one trading unit
without regard to any premium or discount that may result from concentrations
of ownership of a 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 borrowed funds: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, master notes and other short-term
borrowings approximate their fair values.
Long-term debt: The fair values of long-term debt are estimated based on
quoted market prices for similar instruments or by using discounted cash flow
analyses, based on Southern National's current incremental borrowing rates for
similar types of instruments.
Interest rate swap agreements: The fair values of interest rate swaps (used
for hedging purposes) are the estimated amounts that the Corporation would
receive or pay to terminate the swap agreements at the reporting date, taking
into account current interest rates and the current creditworthiness of the
swap counterparties.
51
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.. $ 671,777 671,777 $ 859,632 859,632
Securities available for
sale...................... 3,459,698 3,459,698 1,920,888 1,948,606
Securities held to
maturity.................. 1,965,419 1,889,911 3,304,594 3,355,251
Loans and leases
Loans.................... 12,850,548 12,589,297 12,041,397 12,116,440
Leases................... 257,554 N/A 192,442 N/A
Allowance for losses..... (171,734) N/A (169,345) N/A
----------- ---------- ----------- ----------
Net loans and leases..... $12,936,368 $12,064,494
=========== ========== =========== ==========
Financial liabilities:
Deposits................... $14,314,154 14,320,080 $14,594,952 14,653,847
Short-term borrowed funds.. 2,902,528 2,902,528 1,804,532 1,804,532
Long-term debt............. 904,603 904,780 830,835 847,564
Capitalized leases......... 6,152 N/A 6,406 N/A
<CAPTION>
NOTIONAL/ NOTIONAL/
CONTRACT FAIR CONTRACT FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Unrecognized financial
instruments:
Interest rate swaps, caps
and floors................ $ 2,411,325 (70,698) $ 2,373,094 15,463
Commitments to extend,
originate or purchase
credit.................... 3,733,152 65,016 2,818,456 59,593
Standby and commercial
letters of credit and
financial guarantees
written................... 160,749 6,357 303,724 6,487
Commitments to sell loans
and securities............ 40,392 29 552,381 (287)
</TABLE>
- --------
N/ANot applicable.
52
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE P. 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, derivatives with a total notional
value of $2.4 billion, with terms ranging up to seven years, were outstanding.
The following tables set forth certain information concerning Southern
National's interest rate swaps at December 31, 1994:
INTEREST RATE SWAPS, CAPS AND FLOORS
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTIONAL RECEIVE PAY FAIR
TYPE AMOUNT RATE RATE VALUE
- ---- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Receive fixed swaps........... $1,200,000 5.52% 6.55% $ (50,087)
Pay fixed swaps............... 111,325 7.25 5.72 1,529
Caps and Floors............... 1,100,000 -- -- (22,140)
---------- --------- --------- ---------
Total......................... $2,411,325 5.67% 6.48% $ (70,698)
========== ========= ========= =========
<CAPTION>
RECEIVE PAY FIXED CAPS
YEAR-TO-DATE ACTIVITY FIXED SWAPS SWAPS AND FLOORS TOTAL
- --------------------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1993.... $1,010,000 113,094 1,250,000 2,373,094
Additions..................... 650,000 9,000 250,000 909,000
Maturities/amortizations...... (360,000) (10,769) (100,000) (470,769)
Terminations.................. (100,000) -- (300,000) (400,000)
---------- --------- --------- ---------
Balance, December 31, 1994.... $1,200,000 111,325 1,100,000 2,411,325
========== ========= ========= =========
<CAPTION>
ONE YEAR ONE TO FIVE FIVE TO 10
MATURITY SCHEDULE OR LESS YEARS YEARS TOTAL
- ----------------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Receive fixed swaps........... $ 100,000 1,100,000 -- 1,200,000
Pay fixed swaps............... 2,263 86,772 22,290 111,325
Caps and Floors............... -- 1,050,000 50,000 1,100,000
---------- --------- --------- ---------
Total......................... $ 102,263 2,236,772 72,290 2,411,325
========== ========= ========= =========
</TABLE>
As of December 31, 1994, unearned income from new swap transactions and
unamortized expenses from terminated swap transactions were $1.6 million and
$676,000, 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 $872,000.
53
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 over-the-counter put and call options in its
mortgage banking activities to hedge the mortgage pipeline. During 1994,
options on $157 million of securities were purchased and $27 million remained
outstanding at December 31, 1994.
The $2.4 billion of derivatives includes $650 million of indexed amortizing
swaps which are primarily used to hedge variable rate commercial loans and
$1.8 billion of other derivatives products which are used to hedge fixed-rate
commercial loans and leases, investments and liabilities.
Although off-balance sheet derivative financial instruments do not expose
Southern National to credit risk equal to the notional amount, such agreements
generate credit risk to the extent of the fair value gain in an off-balance
sheet derivative financial instrument if the counterparty fails to perform.
Such risk is minimized based on the quality of the counterparties and the
consistent monitoring of these agreements. The counterparties to these
transactions were large commercial banks and investment banks. Annually, the
counterparties are reviewed for creditworthiness by Southern National's credit
policy group. Where appropriate, master netting agreements are arranged or
collateral is obtained in the form of rights to securities.
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.
54
<PAGE>
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
TABLE S-1
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...... $ 2,679,046 2,031,561 1,868,658 1,783,219 1,779,824
Real estate--
construction and land
development........... 701,181 702,108 592,267 643,890 746,525
Real estate--mortgage.. 7,787,792 7,114,136 5,947,434 5,403,192 4,595,385
Consumer............... 1,553,906 1,523,281 1,473,526 1,477,479 1,430,250
----------- ---------- ---------- --------- ---------
Loans held for
investment.......... 12,721,925 11,371,086 9,881,885 9,307,780 8,551,984
Loans held for sale.. 136,855 682,097 426,281 262,842 98,857
----------- ---------- ---------- --------- ---------
Total loans........ 12,858,780 12,053,183 10,308,166 9,570,622 8,650,841
Leases................... 304,544 225,312 170,358 122,394 115,473
----------- ---------- ---------- --------- ---------
Total loans and
leases............ $13,163,324 12,278,495 10,478,524 9,693,016 8,766,314
=========== ========== ========== ========= =========
</TABLE>
- --------
* Balances include unearned income.
55
<PAGE>
TABLE S-2
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)....................... $ 299,161 24,839 324,000
1-5 years................................ 405,555 45,931 451,486
After 5 years............................ 174,001 17,399 191,400
---------- ------- ---------
Total.................................. 878,717 88,169 966,886
---------- ------- ---------
Variable rate:
1 year or less (2)....................... 1,215,274 558,747 1,774,021
1-5 years................................ 504,343 46,728 551,071
After 5 years............................ 80,712 7,537 88,249
---------- ------- ---------
Total.................................. 1,800,329 613,012 2,413,341
---------- ------- ---------
Total loans and leases (1)........... $2,679,046 701,181 3,380,227
========== ======= =========
</TABLE>
- --------
* Balances include unearned income.
(1) The table excludes:
<TABLE>
<S> <C>
(i) consumer loans to individuals for household, family and
other personal expenditures............................... $1,553,906
(ii)real estate mortgage loans................................ 7,787,792
(iii)loans held for sale...................................... 136,855
(iv)leases.................................................... 304,544
----------
$9,783,097
==========
</TABLE>
(2) Includes loans due on demand.
Scheduled repayments are reported in the maturity category in which the
payment is due. Determinations of maturities are based upon contract terms.
Southern National's credit policy does not permit automatic renewals of loans.
At the scheduled maturity date (including balloon payment date), the customer
must request a new loan to replace the matured loan and execute a new note
with rate, terms and conditions renegotiated at that time.
56
<PAGE>
TABLE S-3
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
-------- -------- ------- -------- ------- -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Commercial, financial
and agricultural...... $ 35,869 20% 44,018 17 31,036 18 26,049 18 20,633 20
Real estate:
Construction and land
development........... 10,874 5 12,311 6 10,260 5 10,352 7 5,888 9
Mortgage............... 63,186 61 63,996 63 50,444 61 37,168 59 27,532 54
-------- --- ------- --- ------- --- ------- --- ------ ---
Real estate--total..... 74,060 66 76,307 69 60,704 66 47,520 66 33,420 63
-------- --- ------- --- ------- --- ------- --- ------ ---
Consumer................ 23,444 12 23,138 12 20,621 14 25,279 15 22,992 16
Leases.................. 906 2 1,218 2 1,313 2 1,610 1 1,021 1
Unallocated............. 37,455 24,664 21,910 15,511 9,391
-------- --- ------- --- ------- --- ------- --- ------ ---
Total.................. $171,734 100% 169,345 100 135,584 100 115,969 100 87,457 100
======== === ======= === ======= === ======= === ====== ===
</TABLE>
57
<PAGE>
TABLE S-4
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................. $ 169,345 137,400 116,221 87,457 72,511
Charge-offs:
Commercial,
financial and
agricultural....... (10,759) (23,912) (27,131) (29,575) (19,533)
Real estate......... (6,694) (7,502) (10,796) (9,726) (8,248)
Consumer............ (11,971) (13,433) (18,129) (19,519) (15,878)
Lease receivables... (646) (771) (1,428) (1,308) (419)
----------- ---------- ---------- --------- ---------
Total charge-offs. (30,070) (45,618) (57,484) (60,128) (44,078)
----------- ---------- ---------- --------- ---------
Recoveries:
Commercial,
financial and
agricultural....... 6,770 5,892 3,872 2,347 2,286
Real estate......... 2,308 1,261 3,340 789 271
Consumer............ 4,122 3,640 2,901 2,381 2,235
Lease receivables... 294 149 188 116 126
----------- ---------- ---------- --------- ---------
Total recoveries.. 13,494 10,942 10,301 5,633 4,918
----------- ---------- ---------- --------- ---------
Net charge-offs......... (16,576) (34,676) (47,183) (54,495) (39,160)
----------- ---------- ---------- --------- ---------
Provision charged to
expense.............. 17,846 53,311 62,871 75,844 54,106
----------- ---------- ---------- --------- ---------
Allowance of loans
acquired in purchase
transactions......... 1,119 13,310 3,675 7,163 --
----------- ---------- ---------- --------- ---------
Balance, end of period.. $ 171,734 169,345 135,584 115,969 87,457
=========== ========== ========== ========= =========
Average loans and
leases*................ $12,360,633 11,177,299 10,149,563 9,187,287 8,732,105
Net charge-offs as a
percentage of average
loans and leases....... 0.13% 0.31 0.46 0.59 0.45
=========== ========== ========== ========= =========
</TABLE>
- --------
* Loans and leases are net of unearned income and include loans held for sale.
58
<PAGE>
TABLE S-5
COMPOSITION OF SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1993 1992
---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Securities held to maturity (at amortized
cost):
U.S. Treasury, government agencies and
corporations............................. $1,190,558 2,433,380 2,455,692
States and political subdivisions......... 165,520 203,422 225,685
Mortgage-backed securities................ 608,676 567,520 682,745
Other securities.......................... 665 100,272 110,070
---------- --------- ---------
Total held to maturity securities....... 1,965,419 3,304,594 3,474,192
---------- --------- ---------
Securities available for sale (1994 at
market, 1993 and 1992 at amortized cost):
U.S. Treasury, government agencies and
corporations............................. 3,024,792 1,384,017 464,366
States and political subdivisions......... 16,918 -- --
Mortgage-backed securities................ 310,314 535,299 269,874
Other securities.......................... 107,674 1,572 --
---------- --------- ---------
Total available for sale securities..... 3,459,698 1,920,888 734,240
---------- --------- ---------
Total securities............................ $5,425,117 5,225,482 4,208,432
========== ========= =========
</TABLE>
TABLE S-6
TIME DEPOSITS $100,000 AND OVER
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Maturity
Less than three months.............................. $ 935,954
Four through six months............................. 336,550
Seven through twelve months......................... 254,295
Over twelve months.................................. 268,240
----------
Balance at December 31, 1994.......................... $1,795,039
==========
</TABLE>
TABLE S-7
SHORT-TERM BORROWED FUNDS
(DOLLARS IN THOUSANDS)
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
---------- --------- ---------
<S> <C> <C> <C>
Maximum outstanding at any month-end during
the year.................................. $2,975,957 1,998,481 1,324,276
Average outstanding during the year........ 2,321,379 1,349,156 935,642
Average interest rate during the year...... 4.24% 3.23 3.42
Average interest rate at end of year....... 5.49 2.94 3.21
</TABLE>
59
<PAGE>
TABLE S-8
CAPITAL ADEQUACY
<TABLE>
<CAPTION>
REGULATORY SOUTHERN
MINIMUMS NATIONAL
---------- --------
<S> <C> <C>
Risk-based capital ratios:
Tier 1 capital (1)..................................... 4.0% 12.3
Total risk-based capital (2)........................... 8.0 13.6
Tier 1 leverage ratio (3)................................ 3.0 7.8
</TABLE>
- --------
(1) Shareholders' equity less non-qualifying intangible assets; computed as a
ratio of risk-weighted assets, as defined in the risk-based capital
guidelines.
(2) Tier 1 capital plus qualifying loan loss allowance and subordinated debt;
computed as a ratio of risk-weighted assets as defined in the risk-based
capital guidelines.
(3) Tier 1 capital computed as a ratio of fourth quarter average assets less
goodwill.
60
<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> 637,794
<INT-BEARING-DEPOSITS> 20,962
<FED-FUNDS-SOLD> 13,021
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,459,698
<INVESTMENTS-CARRYING> 1,965,419
<INVESTMENTS-MARKET> 1,889,911
<LOANS> 13,108,102
<ALLOWANCE> 171,734
<TOTAL-ASSETS> 19,855,063
<DEPOSITS> 14,314,154
<SHORT-TERM> 2,902,528
<LIABILITIES-OTHER> 231,149
<LONG-TERM> 910,755
<COMMON> 511,075
0
3,850
<OTHER-SE> 981,552
<TOTAL-LIABILITIES-AND-EQUITY> 19,855,063
<INTEREST-LOAN> 1,021,056
<INTEREST-INVEST> 291,805
<INTEREST-OTHER> 5,184
<INTEREST-TOTAL> 1,318,045
<INTEREST-DEPOSIT> 441,876
<INTEREST-EXPENSE> 581,279
<INTEREST-INCOME-NET> 736,766
<LOAN-LOSSES> 17,846
<SECURITIES-GAINS> 3,074
<EXPENSE-OTHER> 583,336
<INCOME-PRETAX> 361,631
<INCOME-PRE-EXTRAORDINARY> 236,872
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 236,872
<EPS-PRIMARY> 2.26
<EPS-DILUTED> 2.21
<YIELD-ACTUAL> 4.29
<LOANS-NON> 47,039
<LOANS-PAST> 24,224
<LOANS-TROUBLED> 402
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 169,345
<CHARGE-OFFS> 30,070
<RECOVERIES> 13,494
<ALLOWANCE-CLOSE> 171,734
<ALLOWANCE-DOMESTIC> 171,734
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 37,455
</TABLE>
