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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED:
DECEMBER 31, 1995
COMMISSION FILE NUMBER: 1-10853
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SOUTHERN NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NORTH CAROLINA 56-0939887
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
200 WEST SECOND STREET 27101
WINSTON-SALEM, NORTH CAROLINA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
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(910) 733-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B)
OF THE SECURITIES EXCHANGE ACT OF 1934:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
------------------------------------ ----------------------------------
COMMON STOCK, $5 PAR VALUE NEW YORK STOCK EXCHANGE
DEPOSITARY SHARES, STATED VALUE $25 NEW YORK STOCK EXCHANGE
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 31, 1996 was approximately $2.9 billion. The number of
shares of the Registrant's Common Stock outstanding on January 31, 1996 was
100,997,127.
Portions of the Proxy Statement of Registrant for the Annual Meeting of
Shareholders to be held on April 23, 1996, are incorporated in Part III of
this Report.
This Form 10-K has 75 pages excluding exhibits.
The Exhibit Index begins following page II-75.
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II-1
CROSS REFERENCE INDEX
PAGE
--------------------
PART I Item 1 Business.............................. II-4
Item 2 Properties............................ II-19, II-57
Item 3 Legal Proceedings..................... II-66
Item 4 Submission of Matters to a Vote of
Shareholders......................... II-2
There has been no submission of
matters to a vote of shareholders
during the quarter ended December 31,
1995.
PART II Item 5 Market for the Registrant's Common
Stock and Related Shareholder
Matters.............................. II-13, II-14, II-36,
II-38, II-46
Item 6 Selected Financial Data............... II-41
Item 7 Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... II-20
Item 8 Financial Statements and Supplementary
Data................................. II-40
Consolidated Balance Sheets at
December 31, 1995 and 1994........... II-44
Consolidated Statements of Income for
each of the years in the three-year
period ended December 31, 1995....... II-45
Consolidated Statements of Changes in
Shareholders' Equity for each of the
years in the three-year period ended
December 31, 1995.................... II-46
Consolidated Statements of Cash Flows
for each of the years in the three-
year period ended December 31, 1995.. II-47
Notes to Consolidated Financial
Statements........................... II-48
Report of Independent Public
Accountants.......................... II-43
Quarterly Financial Summary of 1995
and 1994............................. II-40
Item 9 There have been no disagreements with
accountants on accounting and
financial disclosures.
PART III Item 10 Directors and Executive Officers of
the Registrant....................... *
Item 11 Executive Compensation................ *
Item 12 Security Ownership of Certain
Beneficial Owners and Management..... *
Item 13 Certain Relationships and Related
Transactions......................... *
II-2
PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a)(1) Financial Statements (See Item 8 for reference).
(2) Financial Statement Schedules normally required on Form 10-K
are omitted since they are not applicable.
(3) Exhibits have been filed separately with the Commission and
are available upon written request.
(b) Southern National Corporation ("Southern National") filed a
Form 8-K under Item 5 on February 24, 1995, which included
consolidated financial statements for BB&T Financial
Corporation ("BB&T") as of December 31, 1993, and pro forma
condensed financial information relating to Southern
National's merger with BB&T. Southern National filed a Form
8-K under Item 5 on February 24, 1995, which included the
consolidated financial statements of Commerce Bank
("Commerce") as of September 30, 1994. Southern National
filed a Form 8-K under Item 2 on March 14, 1995, to report
the completion of the merger of the bank holding companies of
BB&T and Southern National, effective February 28, 1995. A
Form 8-K/A was subsequently filed on May 15, 1995, to amend
this Form 8-K in order to file BB&T's 1994 audited financial
statements, as well as related pro forma statements including
Southern National and Commerce. A second amendment on Form 8-
K/A dated May 22, 1995 was filed to update the information
filed on May 15, 1995. A third amendment on Form 8-K/A was
filed on August 4, 1995 to further update the pro forma
financial information included in the previous filings. A
Form 8-K was filed under Item 5 on May 24, 1995, to place the
1994 Summary Annual Report on file with the Securities and
Exchange Commission. On June 30, 1995, Southern National
filed a Current Report on Form 8-K under Item 5 to restate
the December 31, 1994 Form 10-K for the mergers with Commerce
and BB&T. On August 3, 1995, Southern National filed a Form
8-K under Item 5 to report the results of operations and
financial condition as of June 30, 1995. On October 19, 1995,
Southern National filed a Form 8-K under Item 5 to report the
results of operations and financial condition as of September
30, 1995. On January 22, 1996, Southern National filed a Form
8-K under Item 5 to report the results of operations and
financial condition as of December 31, 1995.
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* Information is incorporated by reference to Registrant's Proxy Statement
for the 1996 Annual Meeting of Shareholders filed as an exhibit to this
Form 10-K.
II-3
BUSINESS
GENERAL
Southern National Corporation ("Southern National" or the "Corporation" or
the "Company") is a multi-bank holding company headquartered in Winston-Salem,
North Carolina. Southern National conducts its operations in North Carolina,
South Carolina and Virginia primarily through its commercial banking
subsidiaries and, to a lesser extent, through its other subsidiaries.
Substantially all of Southern National's loans are to businesses and
individuals in the Carolinas. Southern National has no material amount of
foreign loans and no loans that can be defined as highly-leveraged
transactions. The principal assets of Southern National are all of the
outstanding shares of common stock of Branch Banking and Trust Company,
Winston-Salem, North Carolina; BB&T Financial Corporation of South Carolina,
Greenville, South Carolina, which in turn owns all the outstanding shares of
Branch Banking and Trust Company of South Carolina, Greenville, South
Carolina; BB&T Financial Corporation of Virginia, which in turn owns all the
outstanding shares of Commerce Bank; and Unified Investors Life Insurance
Company.
Subsidiaries
Branch Banking and Trust Company ("BB&T-NC"), Southern National's largest
subsidiary, is the oldest bank in North Carolina and currently operates
through 317 banking offices throughout North Carolina. BB&T-NC focuses on
providing a wide range of banking services in its local market for retail and
commercial customers, including small and mid-size businesses, public agencies
and local governments, trust customers and individuals. BB&T Leasing Corp., a
wholly-owned subsidiary of BB&T-NC, located in Charlotte, North Carolina,
offers lease financing to commercial businesses and municipal governments.
BB&T Investment Services, Inc., also a wholly-owned subsidiary of BB&T-NC
located in Wilson, North Carolina, offers customers investment alternatives,
including discount brokerage services, fixed-rate and variable-rate annuities,
mutual funds and government and municipal bonds. BB&T-NC has numerous
additional subsidiaries, including BB&T Insurance Services, Inc., located in
Raleigh, North Carolina, which offers life and property and casualty insurance
on an agency basis, Goddard Technology Corporation, which engages in the
design and production of imaging and security devices and programs, and Prime
Rate Premium Finance Corporation, Inc., which provides insurance premium
financing and services to customers in Virginia and the Carolinas.
BB&T of South Carolina ("BB&T-SC") serves South Carolina through 103 banking
offices. BB&T-SC focuses on providing a wide range of banking services in its
local market for retail and commercial customers, including small and mid-size
businesses, public agencies, local governments, trust customers and
individuals. BB&T-SC's subsidiaries include BB&T Investment Services of South
Carolina, Inc., which is licensed as a general broker/dealer of securities and
is currently engaged in retailing of mutual funds, U.S. Government securities,
municipal securities, fixed and variable insurance annuity products and unit
investment trusts.
Commerce Bank of Virginia Beach, Virginia ("Commerce"), acquired on January
10, 1995 by BB&T prior to merger with Southern National, operates 21 banking
offices in the Hampton Roads Region of Virginia. Commerce offers a full range
of commercial and retail banking services and provides Southern National with
a strong initial presence in Virginia.
Southern National's other significant active subsidiary, Unified Investors
Life Insurance Company ("Unified"), is a reinsurer and underwriter of certain
credit life and credit accident and health insurance policies written by a
non-affiliated insurance company in connection with loans made by the bank
subsidiaries.
II-4
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TABLE 1
SELECTED FINANCIAL DATA OF SUBSIDIARIES
AS OF/FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
BB&T-NC BB&T-SC COMMERCE
----------------------------------- -------------------------------- --------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
----------- ----------- ----------- ---------- ---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Total assets........... $15,991,534 $15,245,447 $13,302,191 $3,818,547 $4,084,659 $3,904,893 $737,462 $700,343 $689,630
Securities............. 4,236,682 4,088,564 3,713,066 942,193 1,064,061 994,397 154,358 187,461 247,175
Loans and leases, net
of unearned income*... 10,599,611 9,922,471 8,551,758 2,703,600 2,725,868 2,611,304 505,767 450,798 378,258
Deposits............... 11,544,525 10,925,196 10,189,091 2,923,981 2,956,733 3,097,767 669,000 628,750 634,141
Shareholder's equity... 1,111,680 1,104,458 1,056,798 360,262 303,058 193,742 60,734 47,865 43,589
Net interest income.... 555,765 549,231 499,179 153,669 157,550 152,030 31,231 28,863 26,264
Provision for loan and
lease losses.......... 24,772 8,004 24,603 4,718 7,241 25,173 1,910 2,600 2,825
Noninterest income..... 198,122 183,862 172,929 55,094 44,432 39,967 4,650 8,793 10,655
Noninterest expense.... 528,477 446,902 425,056 114,915 120,929 211,706 25,965 24,832 23,706
Net income (loss)...... 136,016 183,240 142,277 58,566 47,109 (61,464) 4,853 7,011 6,551
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* Includes loans held for sale.
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Acquisitions
Profitability and market share have been enhanced through both internal
growth and acquisitions during recent years. Specifically, expansion has been
enhanced both by the acquisition of financial institutions (including thrift
institutions) and the purchase of deposits and assets from the Resolution
Trust Corporation in federally-assisted transactions.
During the three years ended December 31, 1995, Southern National completed
several mergers and acquisitions of thrift institutions and financial services
companies. On February 28, 1995, Southern National merged with BB&T Financial
Corporation ("BB&T"), a multi-bank holding company with $11.0 billion in total
assets. Each BB&T shareholder received 1.45 shares of Southern National common
stock for each share of BB&T common stock held. A total of 57.9 million shares
of Southern National common stock was issued in conjunction with the merger.
Competition
The banking industry is highly competitive and dramatic change continues to
occur. The banking subsidiaries of Southern National compete actively with
national and state banks, savings and loan associations, securities dealers,
mortgage bankers, finance companies and insurance companies. Competition for
deposits continues to grow as depositors move their funds to nontraditional
financial institutions.
MARKET AREA
Southern National's primary market area consists of North Carolina, South
Carolina and Virginia. These states continue to support one of the most
dynamic and fastest growing economies in the nation. The area's employment
base is diverse, consisting of manufacturing industries, service,
wholesale/retail, strong financial centers and agricultural enterprises. Among
the primary area industries in which Southern National has significant
commercial lending relationships are textiles, furniture and health care. With
modern infrastructures and extensive educational systems, Southern National's
current market area is adequate to support consistent growth in assets and
deposits in the future. Even so, management expects to continue to employ
aggressive growth strategies, including possible expansion into neighboring
states. The current market area includes numerous small communities that
Southern National seeks to serve. Management believes that maintaining a
community bank approach as asset size and available services grow will
strengthen the Corporation's ability to successfully move into new states and
communities and successfully be the bank of choice for small to mid-sized
commercial customers in these areas.
II-5
LENDING ACTIVITIES
The primary goal of the Southern National lending function is to help
customers achieve their financial goals and secure their financial futures.
This purpose can best be accomplished by building strong, profitable customer
relationships over time, with the Southern National becoming an important
contributor to the prosperity and well-being of our customers. Southern
National's philosophy of lending is to attempt to meet all legitimate business
and consumer credit needs within defined market segments where standards of
safety, profitability and liquidity can be met.
Southern National focuses lending efforts on small to intermediate
commercial and industrial loans, one-to-four family residential mortgage loans
and other consumer loans. Typically, fixed-rate mortgage loans are sold in the
secondary mortgage market and adjustable-rate mortgages are retained for the
portfolio. Loan growth typically follows economic cycles and has been strong
during 1995, primarily in the mortgage category. Management's lending strategy
is to establish market share in strategic cities and develop customer
relationships by providing quality products and services to the customer base.
Once the relationship is established, management focuses on small business
lending and retail banking through the branches to generate additional growth.
During 1995, management's lending focus changed from an emphasis on
competitive pricing of loans to an emphasis on marketing loan products from a
quality perspective. During the merger of Southern National and BB&T, pricing
strategies surrounding loans and deposits were very competitive in order to
protect current market positions and retain customer relationships. However,
market research performed during and after the merger identified quality
service as the primary concern of borrowers.
It is Southern National's intention to conduct lending activities in the
context of the Corporation's community bank focus, with decentralized lending
decisions made as close to the customer as practicable.
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TABLE 2
COMPOSITION OF LOAN AND LEASE PORTFOLIO*
DECEMBER 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
Loans--
Commercial, financial
and agricultural...... $ 2,098,306 $ 2,679,046 $ 2,031,561 $ 1,868,658 $1,783,219
Real estate--construc-
tion and land develop-
ment.................. 949,513 701,181 702,108 592,267 643,890
Real estate--mortgage.. 8,671,941 7,787,792 7,114,136 5,947,434 5,403,192
Consumer............... 1,540,251 1,553,906 1,523,281 1,473,526 1,477,479
----------- ----------- ----------- ----------- ----------
Loans held for invest-
ment................. 13,260,011 12,721,925 11,371,086 9,881,885 9,307,780
Loans held for sale... 245,280 136,855 682,097 426,281 262,842
----------- ----------- ----------- ----------- ----------
Total loans.......... 13,505,291 12,858,780 12,053,183 10,308,166 9,570,622
Leases.................. 376,152 304,544 225,312 170,358 122,394
----------- ----------- ----------- ----------- ----------
Total loans and
leases............... $13,881,443 $13,163,324 $12,278,495 $10,478,524 $9,693,016
=========== =========== =========== =========== ==========
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* Balances are gross of unearned income.
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One-to-Four Family Residential Mortgage Lending
Southern National engages in mortgage loan originations by offering fixed-
and adjustable-rate government and conventional loans for the purpose of
constructing, purchasing or refinancing owner-occupied properties. As
mentioned above, the Corporation usually retains adjustable-rate loans for the
portfolio and sells fixed-rate loans and government loans within the secondary
mortgage market. Servicing rights on loans sold are typically retained by
Southern National. Loans are generally offered in amounts up to 95% of the
appraised value of the collateral
II-6
for terms up to 30 years based on the qualifications of the borrower. Except
in the "Community Reinvestment Act" program discussed below, private mortgage
insurance is required in an amount sufficient to reduce Southern National's
exposure to less than 80% of the loan-to-value ratio. Pricing for mortgage
loans is established to be highly-competitive with area lenders. Southern
National does not originate loans with negative amortization. Risks associated
with the residential lending function include interest rate risk, which is
mitigated through the sale of substantially all fixed-rate loans, and default
risk by the borrower, which is lessened through underwriting procedures and
private mortgage insurance. Southern National also purchases mortgage loans
through various correspondents and subjects them to the same underwriting and
investment strategies as loans originated through the branch delivery system.
The Corporation also offers, as part of its Community Reinvestment Act
("CRA") program, more flexible underwriting criteria to broaden the
availability of mortgage loans in the communities Southern National serves.
CRA loans are available at loan-to-value ratios up to 97% for households with
incomes up to a specified percentage of county median incomes. Such loans do
not require private mortgage insurance. These loans are retained in the
portfolio since they do not meet the necessary requirements to be sold in the
secondary mortgage market at the time of origination.
Commercial Lending
Southern National's commercial lending program is generally targeted to
serve small to middle-market businesses with sales of $250 million or less,
although in-house limits do allow lending to larger customers, including
national customers who have some reasonable business connections with the
banks' geographically-served markets. Commercial lending includes commercial,
financial, agricultural, industrial and real estate loans. Pricing on
commercial loans, driven largely by competition, is usually tied to the prime
rate.
Construction Lending
Real estate construction loans include 12 month contract housing loans which
are intended to convert to permanent one-to-four family residential mortgage
loans upon completion of the construction. These loans have terms and options
similar to residential mortgage loans and allow a rate to be "locked in" by
the borrower during the 12 month construction period. The loans also allow a
"float down" option once during the term of the construction loan. Such loans
are priced higher than other residential mortgage loans because of the added
"float down" risk and the shorter term of the loan.
Southern National also originates commercial construction loans. These loans
are usually to in-market developers, businesses, individuals or real estate
investors for the construction of commercial structures in the Corporation's
market area, including, but not limited to, industrial facilities, apartments,
shopping centers, office buildings, hotels and warehouses. The properties may
be for sale, lease or owner-occupancy. The Corporation generally requires the
borrower to make a commitment to "take-out" the construction loan and
typically requires significant levels of pre-sales, preleasing or, in the case
of owner-occupied properties, that the owner has adequate resources to repay
the debt. Generally, these loans carry floating interest rates tied to the
Corporation's prime interest rate or some other similar index, and range in
term from six to eighteen months.
Consumer Lending
Southern National offers various consumer loan products. Both secured and
unsecured loans are marketed to existing clients and to any other creditworthy
candidates. Standard Home Equity Loans and Lines are underwritten with note
amounts and credit limits that ensure consistency with the banks' loan-to-
value policy (80% for consumer loans secured by real estate). Numerous forms
of unsecured loans, including revolving credits (bankcards, DDA overdraft
protection and personal lines of credit) are provided and various installment
loan products, including vehicle loans, are offered. Pricing of such loans is
based, to a great degree, on in-market competition. Closed-end installment
loans are usually priced as fixed-rate simple interest loans, while most
revolving products are priced with variable rates.
II-7
Leasing
Southern National provides leasing products and services in North and South
Carolina through Southern National Leasing Corp. ("Leasing"). Since Leasing is
a separate subsidiary, it is not restricted to North and South Carolina to
obtain business. Leasing provides three primary products: finance or capital
leases, true leases (as defined under the Internal Revenue Code) and other
operating leases. Leasing is primarily involved in commercial leasing. Leasing
provides products and services for small to medium-sized commercial customers
primarily in Southern National's market area. Such products include vehicles,
rolling stock and tangible personal property. Leasing also solicits business
from municipal customers and is seeking to augment the existing customer base
with larger commercial customers. For the twenty year history with Southern
National, the sales effort of Leasing has been directed at fleet leasing. The
mix of vehicle and equipment leases has remained approximately 75% vehicle to
25% equipment.
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TABLE 3
SELECTED LOAN MATURITIES AND INTEREST SENSITIVITY*
DECEMBER 31, 1995
------------------------------------
COMMERCIAL,
FINANCIAL
AND REAL ESTATE:
AGRICULTURAL CONSTRUCTION TOTAL
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
Fixed rate:
1 year or less (2)...................... $ 164,088 $144,136 $ 308,224
1-5 years............................... 265,436 74,252 339,688
After 5 years........................... 53,087 -- 53,087
---------- -------- ----------
Total................................. 482,611 218,388 700,999
---------- -------- ----------
Variable rate:
1 year or less (2)...................... 759,377 482,543 1,241,920
1-5 years............................... 775,534 248,582 1,024,116
After 5 years........................... 80,784 -- 80,784
---------- -------- ----------
Total................................. 1,615,695 731,125 2,346,820
---------- -------- ----------
Total loans and leases (1).......... $2,098,306 $949,513 $3,047,819
========== ======== ==========
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* Balances are gross of unearned income.
(1) The table excludes:
(i) consumer loans to individuals for household, family
and other personal expenditures...................... $ 1,540,251
(ii) real estate mortgage loans............................ 8,671,941
(iii) loans held for sale................................... 245,280
(iv) leases................................................ 376,152
-----------
$10,833,624
===========
(2) Includes loans due on demand.
Scheduled repayments are reported in the maturity category in which the
payment is due. Determinations of maturities are based upon contract terms.
Southern National's credit policy does not permit automatic renewals of loans.
At the scheduled maturity date (including balloon payment date), the customer
must request a new loan to replace the matured loan and execute a new note
with rate, terms and conditions renegotiated at that time.
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II-8
NONACCRUAL LOANS AND LEASES
It is Southern National's policy to place commercial loans and leases on
nonaccrual status when full collection of principal and interest becomes
doubtful, or when any portion of principal or interest becomes 90 days past
due, whichever occurs first. When loans are placed on nonaccrual status,
interest receivable is reversed against interest income in the current period.
Interest payments received thereafter are applied as a reduction to the
remaining principal balance so long as concern exists as to the ultimate
collection of the principal. Loans and leases are removed from nonaccrual
status when they become current as to both principal and interest and when the
collectibility of principal or interest is no longer doubtful.
Mortgage loans and other consumer loans are also placed on nonaccrual status
when full collection of principal and interest becomes doubtful, but they are
subject to longer periods of time before they are automatically placed on
nonaccrual. This period of time varies for different types of consumer loans.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is established through a provision
for loan and lease losses based on management's evaluation of the risk
inherent in the loan portfolio and changes in the nature and volume of loan
activity. This evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers the loans' risk
grades, the estimated fair value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
consideration in providing for an adequate reserve. Southern National utilizes
ten "risk grades" to determine the repayment capacity of borrowers. Southern
National's objective is to maintain a loan portfolio that is diverse in terms
of loan type, industry concentration, geographic distribution and borrower
concentration in order to reduce overall credit risk by minimizing the adverse
impact of any single event or combination of related events. Although
management believes that the best information available is used to determine
the adequacy of the allowance, the nature of the process by which management
determines the appropriate allowance for credit losses requires the exercise
of considerable judgment. Unforeseen market conditions could result in
adjustments in the allowance which would affect earnings. Future additions to
Southern National's allowance will be the result of periodic loan, property
and collateral reviews as well as projected changes in overall economic and
real estate markets.
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TABLE 4
ALLOCATION OF RESERVE BY CATEGORY
DECEMBER 31,
-----------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------- ----------------- ----------------- ----------------- -----------------
% LOANS % LOANS % LOANS % LOANS % LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at end of period
applicable to:
Commercial, financial
and agricultural...... $ 27,824 15% $ 35,869 20% $ 44,018 17% $ 31,036 18% $ 26,049 18%
Real estate:
Construction and land
development........... 13,443 7 10,874 5 12,311 6 10,260 5 10,352 7
Mortgage............... 76,079 64 63,186 61 63,996 63 50,444 61 37,168 59
-------- --- -------- --- -------- --- -------- --- -------- ---
Real estate--total..... 89,522 71 74,060 66 76,307 69 60,704 66 47,520 66
-------- --- -------- --- -------- --- -------- --- -------- ---
Consumer................ 23,824 11 23,444 12 23,138 12 20,621 14 25,279 15
Leases.................. 3,443 3 906 2 1,218 2 1,313 2 1,610 1
Unallocated............. 27,545 37,455 24,664 21,910 15,511
-------- --- -------- --- -------- --- -------- --- -------- ---
Total.................. $172,158 100% $171,734 100% $169,345 100% $135,584 100% $115,969 100%
======== === ======== === ======== === ======== === ======== ===
- -------------------------------------------------------------------------------
II-9
The following table sets forth information with respect to Southern
National's allowance for loan and lease losses for the most recent five years.
- -------------------------------------------------------------------------------
TABLE 5
COMPOSITION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
Balance, beginning of
period................. $ 171,734 $ 169,345 $ 137,400 $ 116,221 $ 87,457
----------- ----------- ----------- ----------- ----------
Charge-offs:
Commercial, financial
and agricultural..... (10,151) (10,759) (23,912) (27,131) (29,575)
Real estate........... (9,993) (6,694) (7,502) (10,796) (9,726)
Consumer.............. (21,717) (11,971) (13,433) (18,129) (19,519)
Lease receivables..... (614) (646) (771) (1,428) (1,308)
----------- ----------- ----------- ----------- ----------
Total charge-offs.... (42,475) (30,070) (45,618) (57,484) (60,128)
----------- ----------- ----------- ----------- ----------
Recoveries:
Commercial, financial
and agricultural..... 4,177 6,770 5,892 3,872 2,347
Real estate........... 2,567 2,308 1,261 3,340 789
Consumer.............. 4,360 4,122 3,640 2,901 2,381
Lease receivables..... 395 294 149 188 116
----------- ----------- ----------- ----------- ----------
Total recoveries..... 11,499 13,494 10,942 10,301 5,633
----------- ----------- ----------- ----------- ----------
Net charge-offs......... (30,976) (16,576) (34,676) (47,183) (54,495)
----------- ----------- ----------- ----------- ----------
Provision charged to
expense............... 31,400 17,846 53,311 62,871 75,844
----------- ----------- ----------- ----------- ----------
Allowance of loans
acquired in purchase
transactions.......... -- 1,119 13,310 3,675 7,163
----------- ----------- ----------- ----------- ----------
Balance, end of period.. $ 172,158 $ 171,734 $ 169,345 $ 135,584 $ 115,969
=========== =========== =========== =========== ==========
Average loans and
leases*................ $13,640,565 $12,360,633 $11,177,299 $10,149,563 $9,187,287
Net charge-offs as a
percentage of average
loans and leases....... 0.23% 0.13% 0.31% 0.46% 0.59%
=========== =========== =========== =========== ==========
- --------
* Loans and leases are net of unearned income and include loans held for sale.
- -------------------------------------------------------------------------------
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual loans and leases and foreclosed
property. Southern National directs significant energy to maintaining low
levels of nonperforming assets and works quickly with delinquent borrowers to
resolve problems. Loans are considered delinquent in most cases the first day
after payment is due. After a loan has been delinquent for ten days, Southern
National mails a reminder notice to borrowers, and if the borrower does not
contact a collection officer, late charges are assessed on the sixteenth day
after the due date. Numerous attempts to work with the borrower to establish a
repayment plan are made throughout the delinquent period of the loan. When a
commercial loan becomes 90 days past due, the loan is placed on nonaccrual
status. For mortgage and most consumer loans, the period of time before a
delinquent loan is placed on nonaccrual status varies, as discussed above. In
some cases, loans may be placed on nonaccrual status earlier based on specific
circumstances surrounding the loan. If the collection of principal and/or
interest becomes doubtful at any time during the collection process, the loan
is placed on nonaccrual status. Every effort is made to reach an agreement on
payment with the borrower. If it becomes necessary to foreclose on loans,
acquired assets are quickly sold to minimize the cost of carrying such assets.
II-10
INVESTMENT ACTIVITIES
Southern National maintains a portion of its assets as investment
securities. Banks are allowed to purchase, sell, deal in and hold certain
investment securities as prescribed by regulations. These investments include
all obligations of the U.S. Treasury, agencies of the Federal government,
obligations of any state or political subdivision, various types of corporate
debt, mutual funds, limited equity securities and certain derivative
securities.
Investment portfolio activities are governed internally by a written, board-
approved investment policy. Investment policy is carried out by the
Corporation's Asset and Liability Committee ("ALCO") which meets regularly to
review the economic environment, assess current activities for appropriateness
and establish investment strategies. The ALCO also has much broader
responsibilities which are discussed in the section "Asset/Liability
Management" of "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Corporation maintains its investment portfolio in accordance with the
Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." This statement established accounting procedures
consistent with the intent to hold securities until maturity, to hold
securities in an available-for-sale capacity or to trade securities.
Investment strategies are established by the ALCO in consideration of the
interest rate cycle, mix of the balance sheet, actual and anticipated loan
demand, funding opportunities and the overall interest rate sensitivity of the
Corporation. In general, the investment portfolio is managed in a manner
appropriate to the attainment of the following goals: (i) to provide a
sufficient margin of liquid assets and liabilities to cover unanticipated
deposit and loan fluctuations, seasonal funds flow variations and overall
funds management objectives; (ii) to provide eligible securities to secure
public funds and trust deposits as prescribed by law; and (iii) to earn the
maximum return on funds invested that is commensurate with meeting the
requirements of (i) and (ii).
Within the overall context of the primary purposes of portfolio management
as just described, investment strategy during 1995 was established and
continually adjusted within an environment of stable short-term interest rates
since the second quarter.
At December 31, 1995, the investment portfolio represented 26% of the total
assets of the Corporation. That percentage is somewhat higher than historical
norms for the Corporation. During the past four years, investment securities
have increased as a percentage of total assets. Management has judged overall
liquidity and interest rate sensitivity to be adequate to allow the growth of
both the investment and loan portfolios during that time. It is anticipated
that the opportunities that permitted the growth of both portfolios will not
be present in the immediate future, and, as a result, management has begun to
allow the investment portfolio to decline as a percentage of total assets
toward more historical norms.
As has been the case for the past several years, investment activity during
1995 was centered on obligations of the U.S. Treasury and Federal agencies.
U.S. Treasury and Federal agencies comprised 94% of the total book value of
the portfolio at year end. The value of these securities from return and
quality perspectives made them relatively more attractive than other types of
investments. Emphasis continued to be placed on short and intermediate-term
maturities, balancing reasonable stability between liquidity and yield. The
average maturity of the entire portfolio at December 31, 1995 was 3 years
compared to 4 years at December 31, 1994. Table 11--"Securities" shows the
maturity distribution by category of Southern National's investment portfolio
at December 31, 1995.
During the fourth quarter of 1995, Southern National transferred $1.5
billion of securities classified as held to maturity into the securities
available-for-sale category. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for additional discussion of
this transaction.
II-11
The following table provides information regarding the composition of
Southern National's securities portfolio.
- -------------------------------------------------------------------------------
TABLE 6
COMPOSITION OF SECURITIES PORTFOLIO
DECEMBER 31,
--------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Securities held to maturity (at amortized
cost):
U.S. Treasury, government and agency
obligations............................... $ 9,461 $1,190,558 $2,433,380
States and political subdivisions.......... 144,508 165,520 203,422
Mortgage-backed securities................. -- 608,676 567,520
Other securities........................... -- 665 100,272
---------- ---------- ----------
Total securities held to maturity........ 153,969 1,965,419 3,304,594
---------- ---------- ----------
Securities available for sale (1995 and 1994
at market,
1993 at amortized cost):
U.S. Treasury, government and agency
obligations............................... 4,060,423 3,024,792 1,384,017
States and political subdivisions.......... 20,773 16,918 --
Mortgage-backed securities................. 977,727 310,314 535,299
Other securities........................... 142,421 107,674 1,572
---------- ---------- ----------
Total securities available for sale...... 5,201,344 3,459,698 1,920,888
---------- ---------- ----------
Total securities............................. $5,355,313 $5,425,117 $5,225,482
========== ========== ==========
- -------------------------------------------------------------------------------
SOURCES OF FUNDS
Deposits are the primary source of funds for lending and investing
activities. The amortization and scheduled payment of loans and maturities of
investment securities provide a stable source of funds, while deposit
fluctuations and loan prepayments are significantly influenced by the overall
interest rate environment and other market conditions. Federal Home Loan Bank
("FHLB") advances, Federal funds purchased and short-term borrowed funds all
provide supplemental liquidity sources based on specific needs, or if
management determines that these are the best sources of funds to meet current
requirements.
Deposits
Customer deposits are attracted principally from within Southern National's
market area through the offering of a broad selection of deposit instruments
including demand deposits, negotiable order of withdrawal accounts, passbook
and statement savings accounts, money market deposits, certificates of deposit
and individual retirement accounts. Deposit account terms vary with respect to
the minimum balance required, the time period the funds must remain on deposit
and the interest rate. Interest rates paid on specific deposits are set by the
ALCO and are determined based on (i) the interest rates offered by
competitors, (ii) anticipated needs for cash and the timing of the cash flow
needs offset by the availability of more cost-effective funding sources and
(iii) anticipated future economic conditions and interest rates. Customer
deposits are attractive sources of liquidity because of stability, pricing
control and the ability to generate fee income through the cross-sale of
deposit-related services.
II-12
- -------------------------------------------------------------------------------
TABLE 7
TIME DEPOSITS $100,000 AND OVER
(DOLLARS IN THOUSANDS)
Maturity
Less than three months................................. $ 864,652
Four through six months................................ 368,789
Seven through twelve months............................ 243,542
Over twelve months..................................... 315,147
----------
BALANCE AT DECEMBER 31, 1995............................. $1,792,130
==========
- -------------------------------------------------------------------------------
Short-Term Borrowed Funds
Southern National's ability to borrow significant funds through non-deposit
sources generates additional flexibility to meet the needs of customers by
offsetting liquidity risk and to reach the goals set by the ALCO. Southern
National has done this in the past primarily through securities sold under
repurchase agreements. Other components of short-term borrowed funds at year
end were master notes, Federal funds purchased and U.S. Treasury tax and loan
deposit notes payable.
- -------------------------------------------------------------------------------
TABLE 8
SHORT-TERM BORROWED FUNDS
The following information summarizes certain pertinent information for the
past three years on securities sold under agreement to repurchase, Federal
funds purchased, master notes, Federal Reserve discount window borrowings,
U.S. Treasury tax and loan deposit notes payable and other short-term borrowed
funds.
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Maximum outstanding at any month-end
during the year.......................... $3,724,127 $2,975,957 $1,998,481
Average outstanding during the year....... 3,055,180 2,321,379 1,349,156
Average interest rate during the year..... 5.85% 4.24% 3.23%
Average interest rate at end of year...... 5.28 5.49 2.94
- -------------------------------------------------------------------------------
CAPITAL ADEQUACY AND RESOURCES
Overall capital adequacy is monitored on an ongoing basis by management and
reviewed regularly by the Board of Directors. Southern National's principal
capital planning goals are to provide an adequate return to shareholders while
retaining a sufficient base from which to provide future growth and compliance
with all regulatory standards. Close attention is given to regulatory levels
of capital as percentages of assets and risk-weighted assets. The accompanying
table outlines the regulatory minimums for Tier 1 capital, total risk-based
capital and the leverage ratio, as well as such amounts for Southern National
as of December 31, 1995.
- -------------------------------------------------------------------------------
TABLE 9
CAPITAL ADEQUACY
REGULATORY SOUTHERN BB&T- BB&T-
MINIMUMS NATIONAL NC SC COMMERCE
---------- -------- ----- ----- --------
Risk-based capital ratios:
Tier 1 capital (1)................... 4.0% 13.0% 10.4% 14.1% 11.2%
Total risk-based capital (2)......... 8.0 14.3 11.6 15.3 12.5
Tier 1 leverage ratio (3).............. 3.0 7.8 6.4 9.0 8.2
- --------
(1) Shareholders' equity less non-qualifying intangible assets; computed as a
ratio of risk-weighted assets, as defined in the risk-based capital
guidelines.
(2) Tier 1 capital plus qualifying loan loss allowance and subordinated debt;
computed as a ratio of risk-weighted assets, as defined in the risk-based
capital guidelines.
(3) Tier 1 capital computed as a ratio of fourth quarter average assets less
goodwill.
II-13
CERTAIN REGULATORY CONSIDERATIONS
GENERAL
As a bank holding company, the Company is subject to regulation under the
Bank Holding Company Act of 1956 (as amended, the "BHCA") and its examination
and reporting requirements. Under the BHCA, bank holding companies may not
directly or indirectly acquire the ownership or control of more than five
percent of the voting shares or substantially all of the assets of any
company, including a bank, without the prior approval of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). In
addition, bank holding companies are generally prohibited under the BHCA from
engaging in nonbanking activities, subject to certain exceptions.
In addition, BB&T-NC, BB&T-SC and Commerce (collectively, the "Banks") are
extensively regulated under state and federal law. As state-chartered
commercial banks, the Banks are subject to regulation, supervision and
examination by state banking authorities in their respective home states,
including the North Carolina Commissioner, in the case of BB&T-NC, the South
Carolina Commissioner, in the case of BB&T-SC, and the Virginia State
Corporation Commission, Bureau of Financial Institutions, in the case of
Commerce. As federally-insured, nonmember banks, each of the Banks is also
subject to regulation, supervision and examination by the Federal Deposit
Insurance Corporation (the "FDIC").
The earnings of the Company's subsidiaries, and therefore the earnings of
the Company, are affected by general economic conditions, management policies
and the legislative and governmental actions of various regulatory
authorities, including those referred to above. In addition, there are
numerous governmental requirements and regulations which affect the activities
of the Company and its subsidiaries.
The following description summarizes some of the state and federal laws to
which the Company and the Banks are subject. To the extent statutory or
regulatory provisions or proposals are described, the description is qualified
in its entirety by reference to the particular statutory or regulatory
provisions or proposals.
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from its banking and
other subsidiaries. A major portion of the revenues of the Company result from
amounts paid as dividends to the Company by its banking subsidiaries. The
Company's banking subsidiaries are subject to state laws and regulations that
limit the amount of dividends they can pay. The Company does not expect that
these laws and regulations will materially impact the ability of its banking
subsidiaries to pay dividends. During the year ended December 31, 1995, the
Banks paid $91.5 million in cash dividends to the Company.
In addition, both the Company and the Banks are subject to various general
regulatory policies and requirements relating to the payment of dividends,
including requirements to maintain adequate capital above regulatory minimums.
The appropriate federal or state regulatory authority is authorized to
determine under certain circumstances relating to the financial condition of a
bank or bank holding company that the payment of dividends would be an unsafe
or unsound practice and to prohibit payment thereof. The Federal Reserve Board
has indicated that banking organizations should generally pay dividends only
out of current operating earnings.
CAPITAL
The Company. The minimum requirement for a bank holding company's ratio of
capital to risk-weighted assets (including certain off-balance-sheet
activities, such as standby letters of credit) is 8 percent. At least half of
the total capital is to be composed of common equity, retained earnings and
qualifying perpetual preferred stock, less certain intangibles ("Tier 1
capital"). The remainder may consist of subordinated debt, qualifying
preferred stock and a limited amount of the loan loss allowance ("Tier 2
capital" and, together with Tier 1 capital, "total capital"). At December 31,
1995, the Company's Tier 1 and total capital ratios were 13.0% and 14.3%,
respectively.
II-14
In addition, the Federal Reserve Board has established minimum leverage
ratio requirements for bank holding companies. These requirements provide for
a minimum leverage ratio of Tier 1 capital to adjusted average quarterly
assets ("leverage ratio") equal to 3 percent for bank holding companies that
meet certain specified criteria, including that they have the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a leverage ratio of from at least 4 to 5 percent. The Company's
leverage ratio at December 31, 1995, was 7.8%. The requirements also provide
that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant
reliance on intangible assets. Furthermore, the requirements indicate that the
Federal Reserve Board will continue to consider a "tangible Tier 1 leverage
ratio" (deducting all intangibles) in evaluating proposals for expansion or
new activity.
The Banks. The FDIC has adopted minimum risk-based and leverage ratio
guidelines to which the Banks are subject. Under the risk-based capital
requirements of the FDIC, each of the Banks is required to maintain a minimum
ratio of total capital (Tier 1 plus Tier 2 capital) to total risk-adjusted
assets (which include the credit risk equivalents of certain off-balance sheet
items) of 8 percent, of which half (4 percent) must be Tier 1 capital. In
addition, the FDIC requires a minimum leverage ratio (Tier 1 capital to
average total consolidated assets) of 3 percent. These risk-based capital and
leverage ratios are minimum supervisory ratios generally applicable to banks
that meet certain specified criteria, including that they have one of the two
highest regulatory ratings. Banking institutions not meeting these criteria
are expected to operate with capital positions well above the minimum ratios.
In addition, the FDIC may set capital requirements for a particular bank that
are higher than the minimum ratios when circumstances warrant.
The FDIC's risk-based capital standards explicitly identify concentrations
of credit risk and the risk arising from non-traditional activities, as well
as an institution's ability to manage these risks, as important factors to be
taken into account by the agency in assessing an institution's overall capital
adequacy. The capital regulations also provide that an institution's exposure
to a decline in the economic value of its capital due to changes in interest
rates be considered by the agency as a factor in evaluating a bank's capital
adequacy. The banking agencies issued for comment a proposed joint policy
statement that describes the process the banking agencies will use to measure
and assess the exposure of a bank's net economic value to changes in interest
rates. The agencies may, ultimately, establish an explicit capital charge for
interest rate risk.
Under federal banking laws, failure to meet the minimum regulatory capital
requirements could subject a banking institution to a variety of enforcement
remedies available to federal regulatory authorities, including, in the most
severe cases, the termination of deposit insurance by the FDIC and placing the
institution into conservatorship or receivership.
The capital ratios of each of the Banks exceeded all minimum regulatory
capital requirements as of December 31, 1995. As of December 31, 1995, the
ratio of total capital to total risk-adjusted assets for BB&T-NC, BB&T-SC and
Commerce were 11.6%, 15.3% and 12.5%, respectively, and the Banks' leverage
ratios (Tier 1 capital to average total consolidated assets) were 6.4%, 9.0%
and 8.2%, respectively.
FIRREA
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), among other things, imposes liability on an institution the
deposits of which are insured by the FDIC, such as the Banks, for certain
potential obligations to the FDIC incurred in connection with other FDIC-
insured institutions under common control with such institution.
Under Federal Reserve Board policy, the Company is expected to act as a
source of financial strength to each of the Banks and to commit resources to
support each of such subsidiaries. This support may be required at times when,
absent such Federal Reserve Board policy, the Company may not find itself able
to provide it.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary banks. In the event of a bank holding
II-15
company's bankruptcy, any commitment by the bank holding company to a federal
bank regulatory agency to maintain the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
PROMPT CORRECTIVE ACTION UNDER FDICIA
The prompt corrective action provisions of the Federal Deposit Insurance
Company Improvement Act of 1991 ("FDICIA") significantly expanded the
regulatory and enforcement powers of federal banking regulators, including the
FDIC. Among other things, FDICIA establishes additional capital standards for
insured depository institutions and requires specific enforcement actions by
the appropriate federal regulatory agencies against institutions that fail to
meet these standards. The extent of these powers depends upon whether the
institutions in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized."
The FDIC's regulations establish specific actions that are permitted or, in
certain cases, required to be taken by regulators with respect to institutions
falling within one of the three undercapitalized categories. Depending on the
level of an institution's capital, the agency's corrective powers can include:
requiring a capital restoration plan; placing limits on asset growth and
restrictions on activities; requiring the institution to issue additional
stock (including voting stock) or to be acquired; placing restrictions on
transactions with affiliates; restricting the interest rate the institution
may pay on deposits; ordering a new election for the institution's board of
directors; requiring that certain senior executive officers or directors be
dismissed; prohibiting the institution from accepting deposits from
correspondent banks; requiring the institution to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated debt;
prohibiting the holding company from making capital distributions without
prior regulatory approval; and, in the most severe cases, appointing a
receiver for the institution. A bank that is undercapitalized is required to
submit a capital restoration plan, and such a plan will not be accepted
unless, among other things, the bank holding company guarantees the capital
plan, up to a certain specified amount. Under certain circumstances, a "well
capitalized," "adequately capitalized" or "undercapitalized" institution may
be required to comply with restrictions applicable to the next lowest capital
category.
As of December 31, 1995, the Company and each of the Banks were classified
as "well capitalized."
CONSERVATORSHIP AND RECEIVERSHIP POWERS OF THE FEDERAL AND STATE BANKING
AGENCIES
The federal banking agencies have broad enforcement powers over depository
institutions, including the power to terminate deposit insurance, impose
substantial fines and other civil penalties and to appoint a conservator or
receiver. The federal statutes to which the Company and its subsidiaries are
subject also contain criminal penalties. In addition to the grounds discussed
under "Prompt Corrective Action Under FDICIA," the FDIC may appoint itself as
conservator or receiver for each of the Banks if any one or more of a number
of circumstances exist, including, without limitation, the fact that the bank
is undercapitalized and has no reasonable prospect of becoming adequately
capitalized; fails to become adequately capitalized when required to do so;
fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan.
State regulatory authorities have broad enforcement powers over state
banking institutions chartered in each of their states including powers to
impose fines and other civil penalties and to appoint a conservator (with the
approval of the Governor in the case of North Carolina) in order to conserve
the assets of any such institution for the benefit of depositors and other
creditors thereof. The state statutes to which the Company and its
subsidiaries are subject also contain criminal penalties. In addition, the
North Carolina Commissioner has the authority to take possession of a state
bank in certain circumstances, including, among other things, when it appears
that such bank has violated its charter or any applicable laws or is
conducting its business in an unauthorized or unsafe manner, or is in an
unsafe or unsound condition to transact its business or has an impairment of
its capital stock. A conservator has the authority, under the direction of the
applicable state
II-16
authority, to take possession of the books, records and assets of a bank and
to exercise all powers of such state authority in order to preserve the assets
of such bank.
The FDIC may provide federal assistance to a "troubled institution" without
placing the institution into conservatorship or receivership. In such a case,
preexisting debtholders and shareholders may be required to make substantial
concessions and, insofar as practical, the FDIC will succeed to their
interests in proportion to the amount of federal assistance provided.
INSOLVENCY, LIQUIDATION, OR OTHER DEFAULT BY THE BANKS
In the event of the liquidation or other resolution of any federally-insured
depository institution, such as each of the Banks, the claims of depositors of
such an institution (including claims by the FDIC as subrogee of insured
depositors) and administrative expenses of the receiver are entitled to
priority in payment over the claims of any other senior or general creditors
of the institution, other than secured creditors. A substantial majority of
the liabilities of each of the Banks are deposits or secured liabilities.
A depository institution insured by the FDIC can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (i) the default of a commonly-controlled depository institution or (ii)
any assistance provided by the FDIC to a commonly-controlled depository
institution in danger of default. However, such liability to the FDIC would be
subordinated in right of payment to deposit liabilities and to most secured,
senior, general or subordinated obligations, other than obligations owed to
any affiliate of the depository institution (with certain exceptions) and any
obligations to shareholders of such depository institution in their capacity
as such.
As conservator or receiver for an insured depository institution, and in
order to promote the orderly administration of the institution's affairs, the
FDIC may disaffirm or repudiate any contract or lease to which such
institution is a party. The FDIC as conservator or receiver is also permitted
to enforce most types of contracts pursuant to their terms notwithstanding any
acceleration provisions therein, and may transfer to a new obligor any of the
institution's assets and liabilities, without approval or consent of the
institution's creditors. Pursuant to FDICIA, the FDIC is also authorized to
settle all uninsured and unsecured claims in the insolvency of an insured bank
by making a final settlement payment at a percentage rate reflecting an
average of the FDIC's receivership recovery experience and constituting full
payment and disposition of the FDIC's obligations to such uninsured and
unsecured claimants.
Should a state regulatory authority elect to take possession of any bank for
the purpose of liquidation, administrative claims and claims of depositors are
entitled to priority in payment over the claims of creditors. Each of the
state authorities may appoint the FDIC as its agent for the purpose of
liquidation of a bank, provided that the liabilities of such bank to its
depositors are insured by the FDIC.
If the FDIC or state regulatory agency were appointed receiver of a bank,
the amount paid on claims in respect of the bank's obligations to its
creditors would depend upon, among other factors, the amount of assets in the
receivership and the relative priority of the claim.
DEPOSIT INSURANCE ASSESSMENTS
The deposits of each of the Banks are insured by the FDIC, up to applicable
limits. Most of the deposits of the Banks are subject to deposit premium
assessments of the Bank Insurance Fund ("BIF") of the FDIC. In addition,
approximately 40 percent of the Banks' deposits (which are related to each
Bank's acquisition of thrift deposits) is subject to assessments by the
Savings Association Insurance Fund ("SAIF") of the FDIC. Under the FDIC's
risk-based insurance system, BIF-assessed deposits are currently subject to
premiums of between $.00 and $.27 per $100 of deposits, depending upon the
institution's capital position and other supervisory factors. The current
premiums reflect a reduction, effective January 1, 1996, from a range of $.04
to $.31 per $100 of deposits. The rate applicable to the BIF-assessed deposits
of each of the Banks is currently $.00 per
II-17
$100 of eligible deposits, with a minimum semiannual assessment of $1,000. The
range of premiums applicable to SAIF-assessed deposits is between $.23 and
$.31 per $100 of deposits, and the assessment rate for each of the Banks'
SAIF-assessed deposits is $.23 per $100 of eligible deposits.
Proposed budget reconciliation legislation that contains provisions to
recapitalize the SAIF was passed by both houses of Congress and reconciled in
conference committee. However, the President vetoed the proposed budget
reconciliation legislation on December 6, 1995, for reasons unrelated to the
SAIF recapitalization issue. Draft conference report language released by the
House Committee on Banking and Financial Services includes provisions for a
one-time special assessment, as determined by the FDIC, on SAIF-assessable
deposits of insured depository institutions in an amount adequate to cause the
SAIF to achieve its specific designated reserve ratio of 1.25 percent. The
proposed legislation called for a special assessment in the range of $.80 per
$100 of insured deposits for SAIF institutions.
The draft conference report language provides that the assessment would be
applied to the amount of SAIF-assessable deposits held as of March 31, 1995.
However, more recent negotiations have resulted in a proposal that the cut-off
date for SAIF-assessable deposits be December 31, 1995. The SAIF-assessable
deposits of BB&T-NC and BB&T-SC as of March 31, 1995 totaled approximately
$4.3 billion and $1.5 billion, respectively. Under the proposed legislation,
BB&T-NC would receive a 20 percent discount on the assessment, because the
bank's SAIF-assessable deposits were less than 50 percent of its total
assessable deposits as of June 30, 1995. The pretax impact on the Company of
this one-time assessment is not expected to exceed $41.0 million. The Company
expects to record this expense following the enactment of the legislation. In
the event that the SAIF is recapitalized pursuant to this legislation, it is
expected that the assessment rates applicable to SAIF-assessable deposits
would be reduced.
The proposed legislation contains additional provisions that, among other
things, would require BIF-member institutions to share pro rata in the
obligations of SAIF members for certain government bonds.
The final form of the proposed legislation, including whether the
legislation will contain some or all of the provisions discussed above, cannot
be determined with certainty at this time. Similarly, the date of passage of
the final form of the legislation, or whether this or any similar legislation
will be passed during this session of Congress, cannot be determined with
certainty at this time.
Under the federal banking laws, a federally-insured institution is
prohibited from paying interest on its capital notes or debentures (if such
interest is required to be paid only out of net profits) or distributing any
of its capital assets while it remains in default in the payment of any
assessment due to the FDIC.
SAFETY AND SOUNDNESS STANDARDS
Effective August 9, 1995, the federal banking agencies published final
agency guidelines that establish safety and soundness standards addressing
operational and managerial, as well as compensation matters for insured
financial institutions like the Banks, as required by FDICIA. Banks failing to
meet these standards are required to submit compliance plans to their
appropriate federal regulators. On this same date, the agencies issued for
comment proposed guidelines regarding asset quality and earnings standards for
insured institutions.
INTERSTATE BANKING AND BRANCHING LEGISLATION
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("IBBEA"), authorizes interstate acquisitions of banks and bank holding
companies without geographic limitation. In addition, beginning June 1, 1997,
IBBEA authorizes a bank to merge with a bank in another state as long as
neither of the states has opted out of interstate branching between the date
of enactment of IBBEA and May 31, 1997. IBBEA further provides that states may
enact laws permitting interstate bank merger transactions prior to June 1,
1997. A bank may establish and operate a de novo branch in a state in which
the bank does not maintain a branch if that state expressly permits de novo
branching. Once a bank has established branches in a state through an
interstate
II-18
merger transaction, the bank may establish and acquire additional branches at
any location in the state where any bank involved in the interstate merger
transaction could have established or acquired branches under applicable
federal or state law. A bank that has established a branch in a state through
de novo branching may establish and acquire additional branches in such state
in the same manner and to the same extent as a bank having a branch in such
state as a result of an interstate merger. If a state opts out of interstate
branching within the specified time period, no bank in any other state may
establish a branch in the opting out state, whether through an acquisition or
de novo.
North Carolina has enacted an early opt-in law permitting interstate bank
merger transactions effective June 22, 1995. The North Carolina law permits de
novo branching on a reciprocal basis until June 1, 1997, and unrestricted de
novo branching thereafter. Virginia has enacted an early opt-in law permitting
interstate bank merger transactions effective July 1, 1995. The Virginia law
permits de novo branching on a reciprocal basis. At this time, South Carolina
has not enacted an early opt-in law.
EMPLOYEES
At December 31, 1995, Southern National had approximately 7,700 full-time-
equivalent employees.
PROPERTIES
Southern National and its significant subsidiaries occupy headquarters
offices that are either owned or operated under long-term leases and also own
free-standing operations centers in Wilson, Charlotte and Lumberton. Branch
office locations are variously owned or leased. The premises occupied by
Southern National and its subsidiaries are considered to be well-located and
suitably equipped to serve as financial service facilities.
II-19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of the financial condition and results
of operations of Southern National Corporation ("Southern National" or the
"Corporation") for each of the three years in the period ended December 31,
1995, and related financial information are presented in conjunction with the
consolidated financial statements and related notes to assist in the
evaluation of Southern National's 1995 performance.
On February 28, 1995, Southern National and BB&T Financial Corporation
("BB&T") merged in a transaction accounted for under the pooling-of-interests
method of accounting. The merger created the sixth largest bank holding
company in the Southeast and the 36th largest in the U.S. BB&T's acquisition
of Commerce Bank of Virginia Beach, Virginia ("Commerce") on January 10, 1995,
was also accounted for as a pooling-of-interests. Accordingly, all discussion
contained herein of prior results and future prospects is presented as if
Southern National, BB&T and Commerce were combined at the beginning of each
period presented. The results might have been different had the companies
actually been combined throughout the periods presented, and the financial
results presented are not necessarily indicative of future performance.
Certain adjustments have been made to conform accounting methodology, and
certain amounts for prior years have been reclassified to conform the
statement presentations. The primary adjustment required was to conform BB&T's
accounting for the adoption of a new accounting policy for postretirement
benefits other than pensions to that of Southern National. In adopting the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 106,
"Accounting for Postretirement Benefits Other Than Pensions," in 1993, BB&T
elected to amortize the accumulated postretirement obligation related to the
adoption over a period of 21 years, while Southern National elected to reflect
the adoption through the recording of a cumulative charge for this change in
accounting principle. In conforming BB&T's transition methodology to that
elected by Southern National, the cumulative charge resulting from a change in
accounting principle recorded in 1993 was increased by $7.0 million, net of
related income taxes, while noninterest expenses were reduced by $559,000 for
both 1994 and 1993.
Southern National incurred significant nonrecurring expenses during 1995
resulting from the merger with BB&T. These charges totaled $76.3 million,
after tax, and were comprised primarily of severance and other personnel
costs, branch closings and divestitures, merger and conversion costs and
consolidations of bank operations. See "Analysis of Results of Operations" for
additional discussion concerning the impact of these charges.
ANALYSIS OF FINANCIAL CONDITION
The economy's slower growth during 1995 was reflected in the banking
industry by moderate loan growth, tighter liquidity and declining interest-
rate spreads, while capitalization remained strong. Continued growth in loan
portfolios throughout the industry tightened liquidity at many institutions.
Liquidity for funding loan portfolio activities is typically derived from
deposits, borrowings or sales of assets such as securities. These trends have
created higher loan to deposit ratios throughout the industry. As market
interest rates decreased in 1995, the importance of deposits as a funding
source (and the value of related customer relationships as openings to offer
other products) kept many institutions from lowering deposit rates to the same
degree as decreases in market interest rates. This contributed to narrower
interest rate margins during the year.
For Southern National, average assets totaled $20.3 billion in 1995, an
increase of approximately 6.8% over the average of $19.0 billion in 1994.
Average assets grew 11.2% in 1994 compared to 1993. At the end of 1995, assets
totaled $20.5 billion.
The five-year compound rate of growth in average assets was 9.7%. Over the
same five-year period, the compound annual growth rates based on average
balances have been 9.0% for loans, 13.9% for securities and 6.6% for deposits.
All growth rates have been enhanced by the effects of acquisitions accounted
for as purchases.
II-20
- -------------------------------------------------------------------------------
TABLE 10
COMPOSITION OF AVERAGE TOTAL ASSETS
% CHANGE
---------------
1995 V. 1994 V.
1995 1994 1993 1994 1993
----------- ----------- ----------- ------- -------
(DOLLARS IN THOUSANDS)
Securities *............ $ 5,405,773 $ 5,350,982 $ 4,670,213 1 % 15 %
Federal funds sold and
other earning assets... 44,384 130,670 152,370 (66) (14)
Loans and leases, net of
unearned income **..... 13,640,565 12,360,633 11,177,299 10 11
----------- ----------- -----------
Average earning assets.. 19,090,722 17,842,285 15,999,882 7 12
Non-earning assets...... 1,182,306 1,133,525 1,067,159 4 6
----------- ----------- -----------
Average total assets.... $20,273,028 $18,975,810 $17,067,041 7 % 11 %
=========== =========== ===========
Average earning assets
as a percentage of
average total assets... 94.2% 94.0% 93.7%
=========== =========== ===========
- --------
* Based on amortized cost.
** Includes loans held for sale based on lower of amortized cost or market.
Amounts are gross of the allowance for loan and lease losses.
- -------------------------------------------------------------------------------
SECURITIES
The securities portfolios provide earnings and liquidity, as well as
providing an effective tool in managing interest rate risk. Management has
continued to emphasize investments with a maturity of five years or less
because of the changing interest rate environment and the strong economy of
the last two years. U.S. Treasury securities, which continue to comprise the
majority of the portfolio, provide adequate current yields with minimal risk
and maturities structured to address liquidity concerns.
During 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement, which was adopted
by Southern National as of January 1, 1994, addresses the accounting and
reporting of investments in equity securities that have readily determinable
fair values and all investments in debt securities. These investments are
classified in one of three categories: held to maturity, trading and available
for sale. Securities classified as available for sale are carried at estimated
fair value with unrealized depreciation or appreciation, net of tax, reported
as a separate component of shareholders' equity. Securities classified as held
to maturity are carried in the financial statements at amortized cost.
Securities classified as trading are carried at estimated fair value with
market adjustments, fees, gains or losses and interest income earned on the
securities recognized in current period earnings. Southern National engages in
securities trading transactions as a normal course of business, but had no
securities classified as trading at year end.
Securities decreased 1.3% in 1995 to a total of $5.4 billion at the end of
the year. This followed an increase of 3.8% in 1994.
Southern National historically has maintained a securities portfolio of 21-
25% of total assets. However, securities have been 25-28% of assets in recent
years because of reduced demand for loans. At the end of 1995, securities
represented 26% of assets. This percentage is lower than the prior year
balance of 27% because lower-yielding U.S. Treasuries have been allowed to
mature during the fourth quarter without reinvestment of the proceeds as
discussed below. Over the long term, Southern National expects the securities
portfolio to return to historic levels of 21-25% of total assets.
II-21
The market value of the available-for-sale portfolio was $51.2 million
greater than the amortized cost of these securities. At December 31, 1995,
Southern National's available-for-sale portfolio had net unrealized
appreciation, net of tax, of $31.2 million, which is reported as a separate
component of equity. Equity adjustments resulting from market valuation gains
and losses do not represent permanent increases or reductions in equity and
are not considered for purposes of calculating actual levels of risk-based
capital. If securities so designated are sold, then the actual gains or losses
realized are reported in current period earnings.
Market valuation gains or losses in the Corporation's held-to-maturity
category affect neither earnings nor capital since these securities are
carried at amortized cost. The Corporation's held-to-maturity securities
totaled $154.0 million at December 31, 1995, with net unrealized gains totaled
$5.9 million.
The fully taxable equivalent ("FTE") yield on the total securities portfolio
was 6.22% for the year ended December 31, 1995, compared to 5.85% for the year
ended December 31, 1994 and 6.43% for 1993.
During the first quarter of 1995, securities declined $196.6 million because
of a restructuring of the securities portfolio. This restructuring was
undertaken to conform the investment policies and portfolios of the combined
companies after merger. Mortgage-backed securities with average projected
maturities of approximately five years accounted for the majority of
securities sold. The balance was comprised of older, lower-yielding U.S.
Treasury and Federal agency securities with average maturities of three to
five years. The average combined yield at cost for securities sold was
approximately 6.00%. The total loss recognized on the sales was $19.8 million.
Reinvestment of the proceeds from the restructuring was accomplished during
the first and second quarters. U.S. Treasury and Federal agency securities
with average maturities of three years and average yields at cost of
approximately 7.00% were purchased.
The restructuring of the securities portfolio resulted in a shift in
portfolio holdings. The combined balance sheets of BB&T and SNB contained a
high concentration of mortgage-related assets, comprised of fixed-rate loans
and securities acquired as a result of acquisitions of thrift institutions
during the last few years. This concentration of mortgage-related assets had
become a significant factor on the balance sheets of both organizations. The
sale of mortgage-backed securities was, in part, carried out to reduce the
concentration of this type of asset on the balance sheet of the combined
organization. Mortgage-related assets typically have longer durations than
other bank assets and are generally more sensitive to changes in interest
rates. The replacement of these securities with U.S. Treasury and Federal
agency securities improved the mix of assets from both credit and interest
sensitivity measurements.
At December 31, 1995, the balance in the Corporation's available-for-sale
category was $5.2 billion, which represents approximately 97% of the entire
investment portfolio. This balance represents a 50% increase over the December
31, 1994 balance. This significant increase resulted from a fourth quarter
transfer of the bulk of Southern National's securities which were previously
classified as held to maturity into the available-for-sale category. The
Financial Accounting Standards Board ("FASB") provided enterprises with the
opportunity to make a one-time reassessment of the classification of all
investment securities held at that time, such that the reclassification of any
security from the held-to-maturity category would not call into question the
enterprise's intent to hold other debt securities to maturity in the future.
Management anticipates that this classification will allow more flexibility in
the day-to-day management of the overall portfolio than the prior
classifications.
During the fourth quarter of 1995, Southern National began to reshape the
balance sheet by changing the mix of investments held. The change in mix has
been undertaken to improve the overall interest yield of the securities
portfolio. This effort will continue into the first two quarters of 1996.
Lower-yielding U.S. Treasuries which matured during the quarter were not
reinvested in similar securities because many such securities have yields
below the current Federal funds rate and the advantages these investments
provided in prior years through reduced state taxes are currently less
beneficial for Southern National. This effort resulted in the runoff of
approximately $400 million in U.S. Treasuries during the quarter. The proceeds
from these maturities were used primarily to pay down overnight funds. These
securities were replaced in the portfolio by $301 million of longer-term
higher-yielding mortgage-backed securities which were obtained through the
securitization of a portion of Southern National's mortgage loan portfolio as
discussed in the "Loans and Leases" section.
II-22
Management expects interest rates to decrease somewhat, but remain mostly
stable throughout 1996. A major investment strategy for the first half of 1996
will be to continue to allow lower-yielding U.S. Treasuries to mature without
reinvestment in similar securities. Anticipated investment strategies include
continued emphasis on securitization of mortgage loans and retaining these
securities in the available for sale portfolio for the foreseeable future,
high quality U.S. Treasury and Federal agency securities, investment in short
and intermediate maturities, and a slight decline in the portion of securities
categorized as held to maturity. The Corporation's ALCO will continually
evaluate such strategies in consideration of actual economic and balance sheet
developments.
- -------------------------------------------------------------------------------
TABLE 11
SECURITIES
DECEMBER 31, 1995
--------------------------------
CARRYING VALUE AVERAGE YIELD (3)
-------------- -----------------
(DOLLARS IN THOUSANDS)
U.S. Treasury, government and agency
obligations (1)
Within one year............................ $2,028,045 5.93%
One to five years.......................... 2,238,489 6.55
Five to ten years.......................... 476,974 6.45
After ten years............................ 304,103 6.90
---------- ----
Total.................................... 5,047,611 6.31
---------- ----
States and political subdivisions
Within one year............................ 23,038 9.61
One to five years.......................... 91,633 8.89
Five to ten years.......................... 49,378 8.76
After ten years............................ 1,232 7.98
---------- ----
Total.................................... 165,281 8.94
---------- ----
Other securities
Within one year............................ 200 7.29
One to five years.......................... 3,238 9.15
Five to ten years.......................... 667 7.84
After ten years............................ -- --
---------- ----
Total.................................... 4,105 8.85
---------- ----
Securities with no stated maturity........... 138,316 9.15
---------- ----
Total securities (2)..................... $5,355,313 6.47%
========== ====
- --------
(1) Included in U.S. Treasury, government and agency obligations are mortgage-
backed securities totaling $977.7 million classified as available for sale
and disclosed at estimated fair value. These securities are included in
each of the categories based upon final stated maturity dates. The
original contractual lives of these securities range from five to 30
years; however, a more realistic average maturity would be substantially
shorter because of the monthly return of principal on certain securities.
(2) Includes securities held to maturity of $154.0 million disclosed at
amortized cost and securities available for sale of $5.2 billion disclosed
at estimated fair value.
(3) Taxable equivalent basis as applied to amortized cost.
- -------------------------------------------------------------------------------
LOANS AND LEASES
Net loans and leases totaled approximately $13.6 billion at the end of 1995.
This represented an increase of $704.0 million in 1995, following an increase
of $874.3 million in 1994. While the economy has expanded at a moderate rate
over the past two years, loan demand has not been as strong as might
historically be expected in a
II-23
growing economy. The long-range objective of Southern National is to maintain
a rate of internal growth which approximates that of its markets in the
Carolinas and Virginia. Southern National believes that this will result in a
rate of increase which will be sustainable and profitable.
During 1995, interest rates decreased slightly which led to an increase in
mortgage originations. The overall economic environment remained stable, with
mixed results from leading economic indicators. Consumer spending and
borrowing remained strong, while automobile sales, real income levels and new
job rates fell. 1995 was similarly a year of mixed results for Southern
National's market area. In addition to growth in mortgage loans, Southern
National has seen significant growth in more-profitable retail lending during
1995. Management anticipates continued growth in overall loan demand.
Southern National concentrated efforts on expanding the leasing function
throughout 1995. Municipal leasing, primarily tax-exempt leases with counties
and municipalities, was stronger than in the prior year. The leasing function
has developed numerous lease-based products and services that have been
effectively marketed to current Southern National customers and noncustomers.
The leasing subsidiary provides a quality stream of earnings. Lease
receivables, gross of unearned income, grew $71.6 million or 23.5% during
1995.
The acquisitions of thrift institutions completed in recent years have
created a concentration of mortgage loans in the portfolio higher than many of
Southern National's peers. As discussed in the "Securities" section, Southern
National securitized $301 million of fixed-rate mortgage loans during the
fourth quarter in an attempt to lower this concentration. Management plans to
securitize an additional $800 million during the first two quarters of 1996 to
continue this process.
ASSET QUALITY
The credit quality of the loan and lease portfolio remained relatively
constant during the first and second quarters of 1995, continuing favorable
trends in asset quality ratios since 1991. As reflected in Table 12--"Asset
Quality," nonperforming assets ("NPA's") were $68.4 million at year end, up
$9.2 million or 15.5% for the year. As a percentage of total assets, NPA's
increased from .30% at December 31, 1994 to .33% at current year end. As a
percentage of loans plus foreclosed properties, NPA's increased from .45% to
.49%. The allowance for losses as a percentage of loans and leases was 1.25%
at December 31, 1995, compared to 1.31% at December 31, 1994. Certain asset
quality measures deteriorated somewhat during the third and fourth quarters of
1995. The increases in nonperforming assets and the corresponding increases in
net charge-offs during the quarters reflect a reorganization of the
collections function which resulted from the merger of Southern National and
BB&T. Also, Southern National's asset quality ratios have been unusually
strong compared to historic norms. Increases in net charge-offs to a more
normalized level were expected by management as segments of the overall
economy softened during the second half of 1995. Loans 90 days or more past
due and still accruing interest increased slightly during 1995 to a balance of
$29.1 million compared to a December 31, 1994 balance of $24.2 million.
Southern National assigns risk grades to all commercial loans in the
portfolio. This assignment of loans to one of ten categories is based upon the
relative strength of the repayment source. All significant loans in the four
highest risk grades are reviewed monthly for appropriateness of risk grade,
accrual status and loss reserves.
II-24
The following table reflects relevant asset quality information for Southern
National for the most recent three years.
- -------------------------------------------------------------------------------
TABLE 12
ASSET QUALITY
DECEMBER 31,
-------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
Nonaccrual loans and leases......................... $61,489 $47,039 $61,737
Foreclosed property................................. 6,868 12,153 23,510
------- ------- -------
Nonperforming assets................................ $68,357 $59,192 $85,247
======= ======= =======
Loans 90 days or more past due and still accruing... $29,094 $24,224 $21,741
======= ======= =======
ASSET QUALITY RATIOS
Nonaccrual loans and leases as a percentage of
loans and leases................................. 0.45% 0.36% 0.50%
Nonperforming assets as a percentage of:
Total assets.................................... 0.33 0.30 0.45
Loans and leases plus foreclosed property....... 0.49 0.45 0.70
Net charge-offs as a percentage of average loans
and leases....................................... 0.23 0.13 0.31
Allowance for losses as a percentage of loans and
leases........................................... 1.25 1.31 1.38
Ratio of allowance for losses to:
Net charge-offs................................. 5.56X 10.36x 4.88x
Nonaccrual loans and leases..................... 2.80 3.65 2.74
- --------
NOTE: Items referring to loans and leases are net of unearned income, gross of
the allowance and include loans held for sale.
- -------------------------------------------------------------------------------
DEPOSITS AND OTHER BORROWINGS
Average deposits remained fairly stable at $14.3 billion, following an
increase of approximately 5.6% in 1994. End of period interest-bearing
deposits increased approximately $327.2 million in 1995 to a balance of $12.8
billion while non-interest bearing demand deposits increased $42.7 million to
$1.9 billion.
Core deposits compose Southern National's primary funding source, but
management also uses short-term borrowed funds, primarily Federal funds
purchased and repurchase agreements, to meet funding needs. Management also
employs long-term debt for additional funding. Southern National's average
short-term borrowed funds increased $733.8 million during 1995, while average
long-term debt increased $450.3 million. These increases were necessary
because of strong loan demand and a lack of growth in average deposits. The
rates on short-term borrowed funds are primarily floating and typically
indexed to various money market rates compared to loans which are largely
based on the prime rate. Remaining borrowings and sales of available-for-sale
securities were used to increase holdings of investment securities.
During the quarters immediately following the merger of Southern National
and BB&T, management adopted aggressive pricing strategies for loans and
deposits in an effort to protect the customer base of the new bank. While
these tactics proved successful in maintaining valuable customer
relationships, they also contributed to the compression in net interest margin
from 4.29% during 1994 to 4.05% during 1995. Also, the use of funding sources
other than deposits placed additional pressure on the net interest margin. In
an effort to control the cost of funds during 1996, management has developed a
$2 billion bank note program to ease the reliance on shorter-term funding.
Management has also emphasized the use of brokered deposits, Federal Home Loan
Bank ("FHLB") advances and foreign deposits instead of short-term borrowed
funds. FHLB advances are among the most cost-effective and most convenient
alternative funding sources because such funds are fully securitized by
II-25
mortgage loans. While brokered deposits and foreign deposits still compose a
small portion of total deposits, these sources of funds are also more cost-
effective than other nondeposit sources.
Southern National faces an ongoing challenge in attracting new deposits and
other core funds as competition from both financial and non-financial
institutions continues to increase. Trends during 1995 have been encouraging
as Southern National maintained and increased the number of customer accounts
during the conversion process.
Southern National continually considers liquidity needs in evaluating
funding sources. The ultimate goal is to maintain funding flexibility, which
will allow Southern National to react rapidly to opportunities brought about
by growth and market volatility.
- -------------------------------------------------------------------------------
TABLE 13
COMPOSITION OF AVERAGE DEPOSITS AND OTHER BORROWINGS
% CHANGE
-----------
1995 1994
V. V.
1995 1994 1993 1994 1993
--------------- --------------- --------------- ---- ----
(DOLLARS IN THOUSANDS)
Savings deposits........ $ 2,854,827 15% $ 3,433,750 20% $ 2,908,944 19% (17)% 18%
Money market deposits... 1,935,157 11 1,971,263 11 2,039,937 13 (2) (3)
Time deposits........... 7,715,365 42 7,155,207 42 7,040,758 45 8 2
----------- --- ----------- --- ----------- ---
Total interest-bearing
deposits............... 12,505,349 68 12,560,220 73 11,989,639 77 -- 5
Demand deposits......... 1,745,827 9 1,738,508 10 1,556,411 10 -- 12
----------- --- ----------- --- ----------- ---
Total deposits.......... 14,251,176 77 14,298,728 83 13,546,050 87 -- 6
Short-term borrowed
funds.................. 3,055,180 17 2,321,379 13 1,349,156 9 32 72
Long-term debt.......... 1,127,575 6 677,227 4 597,519 4 66 13
----------- --- ----------- --- ----------- ---
Total deposits and other
borrowings............. $18,433,931 100% $17,297,334 100% $15,492,725 100% 7% 12%
=========== === =========== === =========== === === ===
- -------------------------------------------------------------------------------
ANALYSIS OF RESULTS OF OPERATIONS
Consolidated net income for 1995 totaled $178.1 million, which produced
primary earnings per share of $1.66 and fully diluted earnings per share of
$1.64. Net income was $236.9 million in 1994 and $85.8 million in 1993. In
1993, income before the cumulative effect of changes in accounting principles,
net of income taxes, totaled $120.1 million. Primary earnings per share were
$2.26 in 1994 and $.81 in 1993, while fully diluted per share earnings were
$2.21 and $.81, respectively. Before the cumulative effect of changes in
accounting principles in 1993, both primary and fully diluted per share
earnings were $1.16.
The cumulative effect of changes in accounting principles, net of related
income taxes, recorded in 1993 included $12.6 million to record the
accumulated postretirement obligation related to the adoption of SFAS No. 106,
and $28.0 million as a result of the adoption of SFAS No. 72, "Accounting For
Certain Acquisitions of Banking and Thrift Institutions," by a merged company,
less a $6.4 million benefit resulting from the adoption of SFAS No. 109,
"Accounting for Income Taxes," implemented as of January 1, 1994.
The returns on average assets were .88% for 1995, 1.25% for 1994 and .50%
for 1993. For the same years, the returns on average common equity were
11.56%, 16.88% and 6.19%, respectively.
The decrease in earnings during 1995 was caused by $108.0 million in pretax
nonrecurring charges related to the merger between Southern National and BB&T
and $19.8 million in securities losses resulting from the restructuring of the
securities portfolio discussed in the "Analysis of Financial Condition"
section, which was offset by a $12.3 million gain on the sale of divested
deposits made necessary by the merger. The net after-tax
II-26
impact of these nonrecurring items and securities losses was to reduce net
income by $76.3 million. A brief description of the nature of the nonrecurring
items is presented below:
(INCREASE)
DECREASE IN
INCOME
YEAR-TO-DATE
----------------------
(DOLLARS IN THOUSANDS)
Other service charges, commissions and fees...... $ 470
Other noninterest income (premium on divested
deposits)....................................... (12,294)
Securities losses................................ 19,787
Personnel expense................................ 59,771
Occupancy expense................................ 3,690
Furniture and equipment expense.................. 6,668
Other noninterest expense........................ 37,358
Income taxes (pre-tax equivalent)*............... 4,566
--------
Total.......................................... $120,016
========
Total--net of tax.............................. $ 76,331
========
- --------
* Recapture of tax bad debt reserve.
Excluding nonrecurring items and securities losses, Southern National would
have had net income of $254.5 million, or $2.34 per fully diluted share. This
represents a $17.6 million or 7.4% increase over earnings from the prior year.
Recurring earnings for 1995 provided returns of 1.26% on average assets and
16.65% on average common shareholders' equity.
At December 31, 1995, approximately $37.9 million of the total pretax amount
of nonrecurring items had not yet been incurred and are reflected on the
Consolidated Balance Sheets as accrued liabilities of $28.8 million relating
to termination of employee contracts and severance and $9.1 million of other
accrued liabilities.
NET INTEREST INCOME
Net interest income is Southern National's primary source of revenue. The
amount of net interest income is determined based on a number of factors,
including the volume of interest-earning assets and interest-bearing
liabilities and the interest rates earned and paid to obtain the asset-
generating funds. The difference between rates earned on interest-earning
assets (with an adjustment made to tax-exempt income to provide comparability
with taxable income) and the cost of supporting funds is measured by the net
yield on earning assets. The accompanying table presents the dollar amount of
changes in interest income and interest expense and distinguishes between the
changes related to average outstanding balances of interest-earning assets and
interest-bearing liabilities (volume) and the changes related to average
interest rates on such assets and liabilities (rate). Changes attributable to
both volume and rate have been allocated proportionately.
II-27
TABLE 14
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE
----------------------------------- ---------------- -------------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------
FULLY TAXABLE EQUIVALENT--(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury, government and other (5)...... $ 5,235,169 $ 5,171,260 $ 4,469,880 6.13% 5.74% 6.28% $ 320,950 $ 296,933 $ 280,541
States and political subdivisions............ 170,604 179,722 200,333 8.94 9.08 9.97 15,255 16,323 19,978
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------
Total securities (5)....................... 5,405,773 5,350,982 4,670,213 6.22 5.85 6.43 336,205 313,256 300,519
Other earning assets (2)..................... 44,384 130,670 152,370 5.75 3.97 2.89 2,552 5,184 4,410
Loans and leases, net of unearned
income (1)(3)(4)(5)......................... 13,640,565 12,360,633 11,177,299 9.10 8.31 8.24 1,241,954 1,027,693 921,235
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------
Total earning assets....................... 19,090,722 17,842,285 15,999,882 8.28 7.54 7.66 1,580,711 1,346,133 1,226,164
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------
Non-earning assets......................... 1,182,306 1,133,525 1,067,159
----------- ----------- -----------
Total assets.............................. $20,273,028 $18,975,810 $17,067,041
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings deposits............................ $ 2,854,827 $ 3,433,750 $ 2,908,944 2.28 2.19 2.42 65,202 75,125 70,507
Money market deposits....................... 1,935,157 1,971,263 2,039,937 3.29 2.73 2.65 63,665 53,874 54,028
Time deposits............................... 7,715,365 7,155,207 7,040,758 5.55 4.37 4.31 428,282 312,877 303,659
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------
Total interest-bearing deposits............ 12,505,349 12,560,220 11,989,639 4.46 3.52 3.57 557,149 441,876 428,194
Short-term borrowed funds.................... 3,055,180 2,321,379 1,349,156 5.85 4.24 3.23 178,879 98,476 43,608
Long-term debt............................... 1,127,575 677,227 597,519 6.26 6.04 5.76 70,599 40,927 34,390
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------
Total interest-bearing liabilities......... 16,688,104 15,558,826 13,936,314 4.83 3.74 3.63 806,627 581,279 506,192
----------- ----------- ----------- ---- ---- ---- ---------- ---------- ---------
Demand deposits............................ 1,745,827 1,738,508 1,556,411
Other liabilities.......................... 269,128 231,864 197,370
Shareholders' equity....................... 1,569,969 1,446,612 1,376,946
----------- ----------- -----------
Total liabilities and shareholders'
equity................................... $20,273,028 $18,975,810 $17,067,041
=========== =========== ===========
Average interest rate spread................. 3.45 3.80 4.03
Net yield on earning assets.................. 4.05% 4.29% 4.50% $ 774,084 $ 764,854 $ 719,972