Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED:
DECEMBER 31, 1996
COMMISSION FILE NUMBER: 1-10853
----------------
SOUTHERN NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NORTH CAROLINA 56-0939887
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
200 WEST SECOND STREET 27101
WINSTON-SALEM, NORTH CAROLINA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
----------------
(910) 733-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE SECURITIES EXCHANGE ACT
OF 1934:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
----------------------- ---------------------
COMMON STOCK, $5 PAR VALUE NEW YORK STOCK EXCHANGE
SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 31, 1997 was approximately $4.2 billion. The number of
shares of the Registrant's Common Stock outstanding on January 31, 1997 was
109,466,577.
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on April 22, 1997, are incorporated by reference in
Part III of this Report.
The Exhibit Index begins on page 81.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1
CROSS REFERENCE INDEX
PAGE
------
PART I Item 1 Business............................................. 4
Item 2 Properties........................................... 18, 59
Item 3 Legal Proceedings.................................... 70
Item 4 Submission of Matters to a Vote of Shareholders...... 2
None.
PART II Item 5 Market for the Registrant's Common Stock and Related 38-39
Shareholder Matters.................................
On November 7, 1996, the Registrant issued 70,207
shares of common stock to the three shareholders of
an insurance agency based in Greenville, South
Carolina in exchange for the transfer of
substantially all of the net assets of such agency
to Branch Banking and Trust Company ("BB&T-NC"). On
November 13, 1996, the Registrant issued 48,120
shares of common stock to the two shareholders of a
second insurance agency based in Greenville, South
Carolina in exchange for the transfer of
substantially all of the net assets of such agency
to BB&T-NC. On November 22, 1996, the Registrant
issued 492,063 shares of common stock to the five
shareholders of an insurance agency based in
Columbia, South Carolina in exchange for the
transfer of substantially all of the net assets of
such agency to BB&T-NC. The Registrant made each of
the foregoing issuances in reliance on the exemption
from registration provided under Section 4(2) of the
Securities Act and based on the number of purchasers
(as to each transaction and in the aggregate), their
ability to evaluate the merits and risks of the
investment and the absence of public solicitation of
investors.
Item 6 Selected Financial Data.............................. 42
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 19
Item 8 Financial Statements and Supplementary Data.......... 41
Consolidated Balance Sheets at December 31, 1996 and
1995................................................ 45
Consolidated Statements of Income for each of the
years in the three-year period ended December 31,
1996................................................ 46
Consolidated Statements of Changes in Shareholders'
Equity for each of the years in the three-year
period ended December 31, 1996...................... 47
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended December 31,
1996................................................ 48
Notes to Consolidated Financial Statements........... 49
Report of Independent Public Accountants............. 44
Quarterly Financial Summary for 1996 and 1995........ 41
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.
None.
PART III Item 10 Directors and Executive Officers of the Registrant... *, 15
Item 11 Executive Compensation............................... *
Item 12 Security Ownership of Certain Beneficial Owners and
Management.......................................... *
Item 13 Certain Relationships and Related Transactions....... *
2
PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-
K
(a)(1) Financial Statements (See Item 8 for reference).
(2) Financial Statement Schedules normally required on Form 10-K
are omitted since they are not applicable.
(3) Exhibits have been filed separately with the Commission and
are available upon written request.
(b) Southern National Corporation ("Southern National") filed a
Form 8-K on January 22, 1996, under Item 5 to report the
results of operations and financial condition as of December
31, 1995. Southern National filed a Form 8-K under Item 5 on
April 15, 1996 to report the results of operations and
financial condition as of March 31, 1996. Southern National
filed a Form 8-K under Item 5 on May 3, 1996 to report plans
to acquire Regional Acceptance Corporation of Greenville,
North Carolina. Southern National filed a Form 8-K under Item
5 on July 12, 1996 to report the results of operations and
financial condition as of June 30, 1996. Southern National
filed a Form 8-K under Item 5 on August 27, 1996 to report
plans to acquire Fidelity Financial Bankshares Corporation of
Richmond, Virginia. Southern National filed a Form 8-K under
Item 5 on September 3, 1996 to report that the acquisition of
Regional Acceptance Corporation had been completed through
the issuance of 5.85 million shares of common stock. Southern
National filed a Form 8-K under Item 5 on October 11, 1996 to
report the results of operations and financial condition as
of September 30, 1996. Southern National filed a Form 8-K
under Item 5 on October 11, 1996 to report plans to purchase
a number of common shares equal to the amount issued in the
Fidelity Financial Bankshares Corporation transaction.
Southern National also reported that the transaction would be
accounted for as a purchase, instead of a pooling of
interests, which was originally planned. Southern National
filed a Form 8-K under Item 5 on November 4, 1996 to report
plans to acquire United Carolina Bancshares Corporation of
Whiteville, North Carolina. Southern National filed a Form 8-
K under Item 5 on December 19, 1996 to announce the adoption
of a shareholder rights plan. Southern National filed a Form
8-K under Item 5 on January 14, 1997 to report the results of
operations and financial condition as of December 31, 1996.
- --------
* The information called for by Item 10 is incorporated herein by reference to
the information that appears under the headings "Additional Matters Relating
to the SNC Meeting--Election of Directors" and "--Section 16(a) Beneficial
Ownership Reporting Compliance" in the Registrant's Proxy Statement for the
1997 Annual Meeting of Shareholders.
The information called for by Item 11 is incorporated herein by reference to
the information that appears under the headings "Additional Matters Relating
to the SNC Meeting--Compensation of Executive Officers", "Retirement Plans"
and "SNC Compensation Committee Report on Executive Compensation" in the
Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders.
The information called for by Item 12 is incorporated herein by reference to
the information that appears under the headings "Additional Matters Relating
to the SNC Meeting--Security Ownership" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Registrant's Proxy Statement for the
1997 Annual Meeting of Shareholders.
The information called for by Item 13 is incorporated herein by reference to
the information that appears under the headings "Additional Matters Relating
to the SNC Meeting--Compensation Committee Interlocks and Insider
Participation" and "Transactions with Officers and Directors" in the
Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders.
3
BUSINESS
GENERAL
Southern National Corporation ("Southern National" or the "Corporation") is
a multi-bank holding company headquartered in Winston-Salem, North Carolina.
Southern National conducts its operations in North Carolina, South Carolina
and Virginia primarily through its commercial banking subsidiaries and, to a
lesser extent, through its other subsidiaries. Substantially all of Southern
National's loans are to businesses and individuals in the Carolinas and
Virginia. The principal assets of Southern National are all of the outstanding
shares of common stock of Branch Banking and Trust Company, of Winston-Salem,
North Carolina; BB&T Financial Corporation of South Carolina, located in
Greenville, South Carolina, which in turn owns all the outstanding shares of
Branch Banking and Trust Company of South Carolina; BB&T Financial Corporation
of Virginia, which in turn owns all the outstanding shares of Branch Banking
and Trust Company of Virginia; and Regional Acceptance Corporation of
Greenville, North Carolina.
Subsidiaries
Branch Banking and Trust Company ("BB&T-NC"), Southern National's largest
subsidiary, is the oldest bank in North Carolina and currently operates
through 299 banking offices throughout North Carolina. BB&T-NC focuses on
providing a wide range of banking services in its local market for retail and
commercial customers, including small and mid-sized businesses, public
agencies and local governments, trust customers and individuals. BB&T-NC's
subsidiaries include BB&T Leasing Corp., in Charlotte, North Carolina, which
offers lease financing to commercial businesses. BB&T Investment Services,
Inc., also a wholly-owned subsidiary of BB&T-NC located in Wilson, North
Carolina, offers customers investment alternatives, including discount
brokerage services, fixed-rate and variable-rate annuities, mutual funds and
government and municipal bonds. BB&T Insurance Services, Inc., located in
Raleigh, North Carolina, offers life and property and casualty insurance on an
agency basis. Southern National currently has the largest independent
insurance agency network in North and South Carolina. BB&T-NC has numerous
additional subsidiaries, including Goddard Technology Corporation, which
engages in the design and production of imaging and security devices and
programs, and Prime Rate Premium Finance Corporation, Inc., which provides
insurance premium financing and services to customers in Virginia and the
Carolinas. BB&T-NC also owns 51% of AutoBase Information Systems, Inc.
("AutoBase"), a Charlotte, North Carolina-based company that uses advanced
technologies to simplify the car-buying process for consumers and automotive
dealers.
Branch Banking & Trust Company of South Carolina ("BB&T-SC") serves South
Carolina through 95 banking offices. BB&T-SC focuses on providing a wide range
of banking services in its local market for retail and commercial customers,
including small and mid-sized businesses, public agencies, local governments,
trust customers and individuals. BB&T-SC's subsidiaries include BB&T
Investment Services of South Carolina, Inc., which is licensed as a general
broker/dealer of securities and is currently engaged in the retailing of
mutual funds, U.S. Government securities, municipal securities, fixed and
variable rate insurance annuity products and unit investment trusts.
Branch Banking & Trust Company of Virginia ("BB&T-VA"), operates 21 banking
offices in the Hampton Roads Region of Virginia. BB&T-VA offers a full range
of commercial and retail banking services and provides Southern National with
a strong initial presence in Virginia.
Regional Acceptance Corporation ("Regional Acceptance"), a subsidiary of
Southern National, was acquired effective September 1, 1996. Regional
Acceptance, which operates 28 branch offices in the Carolinas, Tennessee and
Virginia, specializes in indirect financing for consumer purchases of mid-
model and late-model used automobiles.
Unified Investors Life Insurance Company ("Unified") is a reinsurer and
underwriter of certain credit life and credit accident and health insurance
policies written by a non-affiliated insurance company in connection with
loans made by the bank subsidiaries.
4
The following table discloses selected information related to Southern
National's banking subsidiaries:
- -------------------------------------------------------------------------------
TABLE 1
SELECTED FINANCIAL DATA OF BANKING SUBSIDIARIES
AS OF / FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
BB&T-NC BB&T-SC BB&T-VA
----------------------------------- -------------------------------- --------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
----------- ----------- ----------- ---------- ---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Total assets........... $16,595,684 $15,991,534 $15,245,447 $3,826,477 $3,818,547 $4,084,659 $790,955 $737,462 $700,343
Securities............. 4,164,538 4,236,682 4,088,564 929,753 942,193 1,064,061 147,019 154,358 187,461
Loans and leases, net
of unearned income*... 11,253,963 10,599,611 9,922,471 2,635,833 2,703,600 2,725,868 550,218 505,767 450,798
Deposits............... 11,975,969 11,544,525 10,925,196 2,987,021 2,923,981 2,956,733 690,318 669,000 628,750
Shareholder's equity... 1,307,223 1,111,680 1,104,458 373,622 360,262 303,058 67,039 60,734 47,865
Net interest income.... 609,150 555,765 549,231 159,000 153,669 157,550 35,144 31,231 28,863
Provision for loan and
lease losses.......... 36,875 24,772 8,004 7,355 4,718 7,241 2,550 1,910 2,600
Noninterest income..... 277,775 198,122 183,862 54,459 55,094 44,432 10,296 4,650 8,793
Noninterest expense.... 543,788 528,477 446,902 128,315 114,915 120,929 24,839 25,965 24,832
Net income............. 208,406 136,016 183,240 52,785 58,566 47,109 11,791 4,853 7,011
- --------
* Includes loans held for sale.
- -------------------------------------------------------------------------------
Acquisitions and Pending Mergers
Profitability and market share have been enhanced through both internal
growth and acquisitions in recent years. The acquisition strategy of Southern
National is focused on three primary objectives: (1) to pursue in-market
acquisitions of high-quality banks and thrifts in the $250 million to $5
billion range, (2) to acquire companies in niche markets that provide products
or services that can be offered to Southern National's current customer base,
and (3) to build a portfolio of "venture capital" investments by taking an
equity interest in first and second stage companies that have a product with
potential application for the financial services industry.
On September 1, 1996, Southern National acquired Regional Acceptance in a
stock transaction valued at $167 million. Regional Acceptance's shareholders
received .3861 shares of Southern National's common stock for each share of
common stock held.
On August 22, 1996, Southern National announced plans to acquire Fidelity
Financial Bankshares Corporation of Richmond, Virginia, ("Fidelity") in a
stock transaction valued at $59.4 million. Fidelity, with $321 million in
assets, operates seven branches in the Richmond metropolitan area through its
subsidiary, Fidelity Federal Savings Bank. The savings bank will merge into
BB&T-VA. The merger of Fidelity will be accounted for as a purchase.
On August 29, 1996, Southern National announced that it had become a
majority shareholder of AutoBase, by purchasing 51% of the Charlotte, North
Carolina-based company's outstanding common stock. AutoBase will continue to
operate under its name as a subsidiary of BB&T-NC.
Southern National also purchased certain assets and liabilities of four
insurance agencies during 1996 with combined premiums of $65 million. These
agencies were Boyle-Vaughan Associates, Inc., of Columbia, South Carolina, the
William Goldsmith Agency Inc. and the C. Dan Joyner Insurance Agency, both of
Greenville, South Carolina and the James R. Lingle Agency, Inc. of Florence,
South Carolina. These acquisitions solidify Southern National's position as
the Carolinas' largest network of independent insurance agencies.
5
On November 4, 1996, Southern National and United Carolina Bancshares
Corporation ("UCB") jointly announced the signing of a merger agreement. The
merger will be accounted for as a pooling of interests in which UCB
shareholders will receive 1.135 shares of Southern National common stock for
each share of UCB common stock held. The transaction is valued at $985
million.
On January 23, 1997, Southern National announced plans to acquire Refloat,
Inc. of Mount Airy, North Carolina, and its principal subsidiary, Sheffield
Financial Corp., a finance company in Clemmons, North Carolina that
specializes in loans to small commercial lawn care businesses across the
country.
On February 4, 1997, Southern National announced plans to acquire Phillips
Factors Corporation and its subsidiaries, Phillips Financial Corporation and
Phillips Acceptance Corporation, all of High Point, North Carolina. Phillips
Financial Corporation, which will operate as a subsidiary of Southern
National, purchases and manages receivables in the temporary staffing industry
nationwide. It also provides payroll processing services to that industry.
Phillips Factors Corporation buys and manages account receivables primarily in
the furniture, textiles and home furnishings-related industries.
Competition
The banking industry is highly competitive and dramatic change continues to
occur. The banking subsidiaries of Southern National compete actively with
national and state banks, savings and loan associations, securities dealers,
mortgage bankers, finance companies and insurance companies. Competition for
financial products continues to grow as customers move to nontraditional
financial institutions. For additional information on markets, Southern
National's competitive position and strategies, see "Market Area" and "Lending
Activities" below.
MARKET AREA
Southern National's primary market area consists of North Carolina, South
Carolina and Virginia. The area's employment base consists of manufacturing
industries, service, wholesale/retail, financial centers and agricultural
enterprises. Among the primary area industries in which Southern National has
significant commercial lending relationships are textiles, furniture and
health care. Southern National believes its current market area is adequate to
support consistent growth in assets and deposits in the future. Even so,
management expects to continue to employ aggressive growth strategies,
including possible expansion into neighboring states. The current market area
includes numerous small communities that Southern National seeks to serve.
Management believes that maintaining a community bank approach as asset size
and available services grow will strengthen the Corporation's ability to move
into new states and communities and to target small to mid-sized commercial
customers in these areas.
LENDING ACTIVITIES
The primary goal of the Southern National lending function is to help
customers achieve their financial goals and secure their financial futures.
This purpose can best be accomplished by building strong, profitable customer
relationships over time, with Southern National becoming an important
contributor to the prosperity and well-being of its customers. Southern
National's philosophy of lending is to attempt to meet all legitimate business
and consumer credit needs within defined market segments where standards of
safety, profitability and liquidity can be met.
Southern National focuses lending efforts on small to intermediate
commercial and industrial loans, one-to-four family residential mortgage loans
and other consumer loans. Typically, fixed-rate mortgage loans are sold in the
secondary mortgage market and adjustable-rate mortgages are retained for the
portfolio. Loan growth typically follows economic cycles and has been steady,
with increasing momentum, during 1996. Management's lending strategy is to
establish market share in strategic cities and develop customer relationships
by providing quality products and services to the customer base. Once the
relationship is established, management focuses on
6
small business lending and retail banking through the branches to generate
additional growth. During 1996, management's lending focus emphasized
marketing loan products from a quality, service-driven perspective. After the
merger of Southern National and BB&T Financial Corporation in early 1995,
pricing strategies surrounding loans and deposits were very competitive in
order to protect current market positions and retain customer relationships.
However, market research performed during and after the merger identified
quality service as the primary concern of borrowers.
It is Southern National's intention to conduct lending activities in the
context of the Corporation's community bank focus, with decentralized lending
decisions made as close to the customer as practicable.
- -------------------------------------------------------------------------------
TABLE 2
COMPOSITION OF LOAN AND LEASE PORTFOLIO*
DECEMBER 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Loans--
Commercial, financial
and agricultural...... $ 2,375,121 $ 2,098,306 $ 2,679,046 $ 2,031,561 $ 1,868,658
Real estate--
construction and land
development........... 1,228,043 949,513 701,181 702,108 592,267
Real estate--mortgage.. 8,513,945 8,671,941 7,787,792 7,114,136 5,947,434
Consumer............... 1,830,519 1,716,399 1,702,058 1,608,443 1,532,536
----------- ----------- ----------- ----------- -----------
Loans held for invest-
ment................. 13,947,628 13,436,159 12,870,077 11,456,248 9,940,895
Loans held for sale... 219,469 245,280 136,855 682,097 426,281
----------- ----------- ----------- ----------- -----------
Total loans.......... 14,167,097 13,681,439 13,006,932 12,138,345 10,367,176
Leases.................. 576,991 376,152 304,544 225,312 170,358
----------- ----------- ----------- ----------- -----------
Total loans and
leases............... $14,744,088 $14,057,591 $13,311,476 $12,363,657 $10,537,534
=========== =========== =========== =========== ===========
- --------
* Balances are gross of unearned income.
- -------------------------------------------------------------------------------
One-to-Four Family Residential Mortgage Lending
Southern National engages in mortgage loan originations by offering fixed-
and adjustable-rate government and conventional loans for the purpose of
constructing, purchasing or refinancing owner-occupied properties. As
mentioned above, the Corporation usually retains adjustable-rate loans for the
portfolio and sells fixed-rate loans and government loans within the secondary
mortgage market. Servicing rights on loans sold are typically retained by
Southern National. Loans are generally offered in amounts up to 95% of the
appraised value of the collateral for terms up to 30 years based on the
qualifications of the borrower. Except in the Community Reinvestment Act
("CRA") program discussed below, private mortgage insurance is required in an
amount sufficient to reduce Southern National's exposure to less than 80% of
the loan-to-value ratio. Pricing for mortgage loans is established to be
highly-competitive with area lenders. Southern National does not originate
loans with negative amortization. Risks associated with the residential
lending function include interest rate risk, which is mitigated through the
sale of substantially all fixed-rate loans, and default risk by the borrower,
which is lessened through underwriting procedures and private mortgage
insurance. Southern National also purchases mortgage loans through various
correspondents and subjects them to the same underwriting and investment
strategies as loans originated through the branch delivery system.
The Corporation also offers, as part of its CRA program, more flexible
underwriting criteria to broaden the availability of mortgage loans in the
communities Southern National serves. CRA loans are available at loan-to-
7
value ratios up to 97% for households with incomes up to a specified
percentage of county median incomes. Such loans do not require private
mortgage insurance. These loans are currently retained in the portfolio since
they do not meet the necessary requirements to be sold in the secondary
mortgage market at the time of origination.
Commercial Lending
Southern National's commercial lending program is generally targeted to
serve small to middle-market businesses with sales of $250 million or less,
although in-house limits do allow lending to larger customers, including
national customers who have some reasonable business connections with the
Corporation's geographically-served markets. Commercial lending includes
commercial, financial, agricultural, industrial and real estate loans. Pricing
on commercial loans, driven largely by competition, is usually tied to the
prime rate.
Construction Lending
Real estate construction loans include 12 month contract housing loans which
are intended to convert to permanent one-to-four family residential mortgage
loans upon completion of the construction. These loans have terms and options
similar to residential mortgage loans and allow a rate to be "locked in" by
the borrower during the 12 month construction period. The loans also allow a
"float down" option once during the term of the construction loan. Southern
National also originates commercial construction loans. These loans are
usually to in-market developers, businesses, individuals or real estate
investors for the construction of commercial structures in the Corporation's
market area, including, but not limited to, industrial facilities, apartments,
shopping centers, office buildings, hotels and warehouses. The properties may
be for sale, lease or owner-occupancy. The Corporation generally requires the
borrower to make a commitment to "take-out" the construction loan and
typically requires significant levels of pre-sales, pre-leasing or, in the
case of owner-occupied properties, that the owner has adequate resources to
repay the debt. Generally, these loans carry floating interest rates tied to
the Corporation's prime interest rate or some other similar index, and range
in term from six to eighteen months.
Consumer Lending
Southern National offers various consumer loan products. Both secured and
unsecured loans are marketed to existing clients and to any other creditworthy
candidates. Standard Home Equity Loans and Lines are underwritten with note
amounts and credit limits that ensure consistency with the Corporation's loan-
to-value policy (80% for consumer loans secured by real estate). Numerous
forms of unsecured loans, including revolving credits (bankcards, DDA
overdraft protection and personal lines of credit) are provided and various
installment loan products, including vehicle loans, are offered. Pricing of
such loans is based, to a great degree, on in-market competition. Closed-end
installment loans are usually priced as fixed-rate simple interest loans,
while most revolving products are priced with variable rates.
Through the acquisition of Regional Acceptance, Southern National is
expanding the sales finance function by accepting riskier loans on customer
purchases of mid-model to late-model used automobiles. Such loans are priced
higher than Southern National's normal grade consumer loans based on the
higher level of risk associated with these types of loans.
Leasing
Southern National provides commercial leasing products and services in North
Carolina, South Carolina and Virginia primarily through BB&T Leasing Corp.
("Leasing"). Since Leasing is a separate subsidiary, it is not restricted to
North and South Carolina to obtain business. Leasing provides three primary
products: finance or capital leases, true leases (as defined under the
Internal Revenue Code) and other operating leases. Leasing provides products
and services for small to medium-sized commercial customers primarily in
Southern National's market area. Such products include vehicles, rolling stock
and tangible personal property. Leasing is
8
seeking to augment the existing customer base with larger commercial
customers. For the twenty-two year history with Southern National, the sales
effort of Leasing has been directed at fleet leasing. The mix of vehicle and
equipment leases has remained approximately 75% vehicle to 25% equipment.
Southern National also solicits leasing business from municipalities in
North and South Carolina through its subsidiary banks.
- -------------------------------------------------------------------------------
TABLE 3
SELECTED LOAN MATURITIES AND INTEREST SENSITIVITY*
DECEMBER 31, 1996
------------------------------------
COMMERCIAL,
FINANCIAL
AND REAL ESTATE:
AGRICULTURAL CONSTRUCTION TOTAL
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
Fixed rate:
1 year or less (2)...................... $ 185,734 $ 189,241 $ 374,975
1-5 years............................... 294,990 93,208 388,198
After 5 years........................... 65,553 -- 65,553
---------- ---------- ----------
Total................................. 546,277 282,449 828,726
---------- ---------- ----------
Variable rate:
1 year or less (2)...................... 859,556 633,547 1,493,103
1-5 years............................... 877,845 312,047 1,189,892
After 5 years........................... 91,443 -- 91,443
---------- ---------- ----------
Total................................. 1,828,844 945,594 2,774,438
---------- ---------- ----------
Total loans and leases (1).......... $2,375,121 $1,228,043 $3,603,164
========== ========== ==========
- --------
* Balances are gross of unearned income.
(1) The table excludes:
(i) consumer loans to individuals for household, family and
other personal expenditures............................ $ 1,830,519
(ii) real estate mortgage loans.............................. 8,513,945
(iii) loans held for sale.................................... 219,469
(iv) leases.................................................. 576,991
------------
$ 11,140,924
============
(2) Includes loans due on demand.
Scheduled repayments are reported in the maturity category in which the
payment is due. Determinations of maturities are based upon contract terms.
Southern National's credit policy does not permit automatic renewals of loans.
At the scheduled maturity date (including balloon payment date), the customer
must request a new loan to replace the matured loan and execute a new note
with rate, terms and conditions renegotiated at that time.
- -------------------------------------------------------------------------------
NONACCRUAL LOANS AND LEASES
It is Southern National's policy to place commercial loans and leases on
nonaccrual status when full collection of principal and interest becomes
doubtful, or when any portion of principal or interest becomes 90 days past
due, whichever occurs first. When loans are placed on nonaccrual status,
interest receivable is reversed
9
against interest income in the current period and any prior year interest is
charged off. Interest payments received thereafter are applied as a reduction
to the remaining principal balance so long as concern exists as to the
ultimate collection of the principal. Loans and leases are removed from
nonaccrual status when they become current as to both principal and interest
and when the collectability of principal or interest is no longer doubtful.
Mortgage loans and other consumer loans are also placed on nonaccrual status
when full collection of principal and interest becomes doubtful, but they are
subject to longer periods of time before they are automatically placed on
nonaccrual. This period of time varies for different types of consumer loans.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is established through a provision
for loan and lease losses based on management's evaluation of the risk
inherent in the loan portfolio and changes in the nature and volume of loan
activity. This evaluation, which includes a review of loans for which full
collectability may not be reasonably assured, considers the loans' risk
grades, the estimated fair value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
consideration in providing for an adequate reserve. Southern National utilizes
ten "risk grades" to determine the repayment capacity of borrowers. Southern
National's objective is to maintain a loan portfolio that is diverse in terms
of loan type, industry concentration, geographic distribution and borrower
concentration in order to reduce overall credit risk by minimizing the adverse
impact of any single event or combination of related events. Although
management believes that the best information available is used to determine
the adequacy of the allowance, the nature of the process by which management
determines the appropriate allowance for credit losses requires the exercise
of considerable judgment. Unforeseen market conditions could result in
adjustments in the allowance which would affect earnings. Future additions to
Southern National's allowance will be the result of periodic loan, property
and collateral reviews as well as projected changes in overall economic and
real estate markets.
- -------------------------------------------------------------------------------
TABLE 4
ALLOCATION OF RESERVE BY CATEGORY
DECEMBER 31,
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ----------------- -----------------
% LOANS % LOANS % LOANS % LOANS % LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at end of period
applicable to:
Commercial, financial
and agricultural...... $ 25,750 16% $ 27,824 15% $ 35,869 20% $ 44,018 17% $ 31,036 18%
Real estate:
Construction and land
development........... 11,036 8 13,443 7 10,874 5 12,311 6 10,260 5
Mortgage............... 77,251 60 76,079 63 63,186 60 63,996 62 50,444 60
-------- --- -------- --- -------- --- -------- --- -------- ---
Real estate--total..... 88,287 68 89,522 70 74,060 65 76,307 68 60,704 65
-------- --- -------- --- -------- --- -------- --- -------- ---
Consumer................ 38,626 12 27,254 13 25,812 13 24,581 14 21,677 15
Leases.................. 3,679 4 3,443 2 906 2 1,218 1 1,313 2
Unallocated............. 27,590 -- 27,545 -- 37,455 -- 24,664 -- 21,910 --
-------- --- -------- --- -------- --- -------- --- -------- ---
Total.................. $183,932 100% $175,588 100% $174,102 100% $170,788 100% $136,640 100%
======== === ======== === ======== === ======== === ======== ===
- -------------------------------------------------------------------------------
10
The following table sets forth information with respect to Southern
National's allowance for loan and lease losses for the most recent five years.
- -------------------------------------------------------------------------------
TABLE 5
COMPOSITION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Balance, beginning of
period................. $ 175,588 $ 174,102 $ 170,788 $ 138,456 $ 117,113
----------- ----------- ----------- ----------- -----------
Charge-offs:
Commercial, financial
and agricultural..... (8,966) (10,151) (10,759) (23,912) (27,131)
Real estate........... (10,555) (9,993) (6,694) (7,502) (10,796)
Consumer.............. (39,195) (23,969) (13,467) (14,369) (18,873)
Lease receivables..... (768) (614) (647) (771) (1,428)
----------- ----------- ----------- ----------- -----------
Total charge-offs.... (59,484) (44,727) (31,567) (46,554) (58,228)
----------- ----------- ----------- ----------- -----------
Recoveries:
Commercial, financial
and agricultural..... 4,632 4,177 6,770 5,892 3,872
Real estate........... 4,501 2,567 2,308 1,261 3,340
Consumer.............. 4,898 4,442 4,208 3,716 3,096
Lease receivables..... 136 395 295 149 188
----------- ----------- ----------- ----------- -----------
Total recoveries..... 14,167 11,581 13,581 11,018 10,496
----------- ----------- ----------- ----------- -----------
Net charge-offs......... (45,317) (33,146) (17,986) (35,536) (47,732)
----------- ----------- ----------- ----------- -----------
Provision charged to
expense............... 53,661 34,632 20,181 54,558 63,584
----------- ----------- ----------- ----------- -----------
Allowance of loans
acquired in purchase
transactions.......... -- -- 1,119 13,310 3,675
----------- ----------- ----------- ----------- -----------
Balance, end of period.. $ 183,932 $ 175,588 $ 174,102 $ 170,788 $ 136,640
=========== =========== =========== =========== ===========
Average loans and
leases*................ $14,190,985 $13,768,629 $12,456,509 $11,235,092 $10,194,358
Net charge-offs as a
percentage of average
loans and leases....... 0.32% 0.24% 0.14% 0.32% 0.47%
=========== =========== =========== =========== ===========
- --------
* Loans and leases are net of unearned income and include loans held for sale.
- -------------------------------------------------------------------------------
NONPERFORMING ASSETS AND CLASSIFIED ASSETS
Nonperforming assets include nonaccrual loans and leases, foreclosed real
estate and other repossessions. Loans are considered delinquent in most cases
the first day after payment is due. After a loan has been delinquent for ten
days, Southern National mails a reminder notice to borrowers, and if the
borrower does not contact a collection officer, late charges are assessed on
the sixteenth day after the due date. Numerous attempts to work with the
borrower to establish a repayment plan are made throughout the delinquent
period of the loan. When a commercial loan or unsecured consumer loan becomes
90 days past due, the loan is placed on nonaccrual status. For mortgage and
most other consumer loans, the period of time before a delinquent loan is
placed on nonaccrual status varies, as discussed above. In some cases, loans
may be placed on nonaccrual status earlier based on specific circumstances
surrounding the loan. If the collection of principal and/or interest becomes
doubtful at any time during the collection process, the loan is placed on
nonaccrual status. Every effort is made to reach an
11
agreement on payment with the borrower. If it becomes necessary to foreclose
on loans, acquired assets are aggressively marketed to minimize the cost of
carrying such assets.
INVESTMENT ACTIVITIES
Southern National maintains a portion of its assets as investment
securities. Banks are allowed to purchase, sell, deal in and hold certain
investment securities as prescribed by bank regulations. These investments
include all obligations of the U.S. Treasury, agencies of the Federal
government, obligations of any state or political subdivision, various types
of corporate debt, mutual funds, limited equity securities and certain
derivative securities.
Investment portfolio activities are governed internally by a written, board-
approved investment policy. Investment policy is carried out by the
Corporation's Asset and Liability Committee ("ALCO") which meets regularly to
review the economic environment, assess current activities for appropriateness
and establish investment strategies. The ALCO also has much broader
responsibilities which are discussed in the section, Market Risk Management,
of "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Investment strategies are established by the ALCO in consideration of the
interest rate cycle, balance sheet mix, actual and anticipated loan demand,
funding opportunities and the overall interest rate sensitivity of the
Corporation. In general, the investment portfolio is managed in a manner
appropriate to the attainment of the following goals: (i) to provide a
sufficient margin of liquid assets and liabilities to cover unanticipated
deposit and loan fluctuations, seasonal funds flow variations and overall
funds management objectives; (ii) to provide eligible securities to secure
public funds and trust deposits as prescribed by law; and (iii) to earn the
maximum return on funds invested that is commensurate with meeting the
requirements of (i) and (ii).
Within the overall context of the primary purposes of portfolio management
as just described, investment strategy during 1996 was established and
continually adjusted within an environment of stable short-term interest rates
since the second quarter, as set by the Federal Reserve's Open Market
Committee.
At December 31, 1996, the investment portfolio represented approximately 25%
of the total assets of the Corporation. Management has judged overall
liquidity and interest rate sensitivity to be adequate to allow the continued
growth of both the investment and loan portfolios. As described below, during
1996 and 1995 whole mortgage loans were securitized and placed in the
investment portfolio, increasing investment yields, improving the liquidity of
those assets, and reducing required loan reserves. A similar amount of lower-
yielding investments was allowed to mature; thus, the total amount of
securities holdings was only slightly reduced as a percentage of total assets.
Overall liquidity was maintained at acceptable levels and balance sheet
profitability was increased.
As has been the case for the past several years, investment activity during
1996 was centered on obligations of the U.S. Treasury and Federal agencies.
Including mortgage-backed securities, U.S. Treasuries and Federal agencies
comprised 92% of the total book value of the portfolio at year end. The value
of these securities from return and quality perspectives made them relatively
more attractive than other types of investments. Emphasis continued to be
placed on short and intermediate-term maturities, balancing reasonable
stability between liquidity and yield. The average contractual maturity of the
entire portfolio at December 31, 1996 was 7 years and 4 months compared to 3
years at December 31, 1995. This increase in maturity reflects rapid growth in
Southern National's holdings of mortgage-backed securities resulting from the
securitization of $1.2 billion of mortgage loans during 1995 and 1996. These
mortgage-backed securities have replaced U.S. Treasuries in the portfolio
which have significantly shorter contractual maturities than mortgage-backed
securities. However, the actual cash flows relating to the investment
portfolio, particularly for mortgage-backed securities, are expected to be
significantly shorter than contractual maturity because the actual payments of
the securities and the resultant opportunity to reinvest those cash flows are
subject to prepayments. At December 31, 1996, the approximate
12
expected maturity of Southern National's investment portfolio was 3 years.
Table 11--"Securities" shows the maturity distribution by category of Southern
National's investment portfolio at December 31, 1996.
The following table provides information regarding the composition of
Southern National's securities portfolio.
- -------------------------------------------------------------------------------
TABLE 6
COMPOSITION OF SECURITIES PORTFOLIO
DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Securities held to maturity (at amortized
cost):
U.S. Treasury, government and agency obli-
gations................................... $ 6,283 $ 9,461 $1,190,558
States and political subdivisions.......... 118,435 144,508 165,520
Mortgage-backed securities................. -- -- 608,676
Other securities........................... -- -- 665
---------- ---------- ----------
Total securities held to maturity........ 124,718 153,969 1,965,419
---------- ---------- ----------
Securities available for sale (at estimated
fair value):
U.S. Treasury, government and agency
obligations............................... 3,115,625 4,060,423 3,024,792
States and political subdivisions.......... 22,875 20,773 16,918
Mortgage-backed securities................. 1,725,715 977,727 310,314
Other securities........................... 272,574 142,421 107,674
---------- ---------- ----------
Total securities available for sale...... 5,136,789 5,201,344 3,459,698
---------- ---------- ----------
Total securities............................. $5,261,507 $5,355,313 $5,425,117
========== ========== ==========
- -------------------------------------------------------------------------------
SOURCES OF FUNDS
Deposits are the primary source of funds for lending and investing
activities. The amortization and scheduled payment of loans and maturities of
investment securities provide a stable source of funds, while deposit
fluctuations and loan prepayments are significantly influenced by the overall
interest rate environment and other market conditions. Federal Home Loan Bank
("FHLB") advances, Federal funds purchased and other short-term borrowed funds
all provide supplemental liquidity sources based on specific needs, or if
management determines that these are the best sources of funds to meet current
requirements.
Deposits
Customer deposits are attracted principally from within Southern National's
market area through the offering of a broad selection of deposit instruments
including demand deposits, negotiable order of withdrawal accounts, passbook
and statement savings accounts, money rate savings, certificates of deposit
and individual retirement accounts. Deposit account terms vary with respect to
the minimum balance required, the time period the funds must remain on deposit
and the interest rate. Interest rates paid on specific deposits are set by the
ALCO and are determined based on (i) the interest rates offered by
competitors, (ii) anticipated needs for cash and the timing of the cash flow
needs offset by the availability of more cost-effective funding sources and
(iii) anticipated future economic conditions and interest rates. Customer
deposits are attractive sources of liquidity because of stability, pricing
control and the ability to generate fee income through the cross-sale of
deposit-related services.
13
- -------------------------------------------------------------------------------
TABLE 7
TIME DEPOSITS $100,000 AND OVER
(DOLLARS IN THOUSANDS)
Maturity
Less than three months................................. $ 881,276
Four through six months................................ 451,835
Seven through twelve months............................ 352,348
Over twelve months..................................... 318,921
----------
BALANCE AT DECEMBER 31, 1996............................. $2,004,380
==========
At December 31, 1996, the scheduled maturities of time deposits are $5.7
billion, $2.1 billion, $214.2 million, $151.7 million and $57.9 million for
each of the next five years. The maturities for 2002 and later years total
$22.7 million.
- -------------------------------------------------------------------------------
Short-Term Borrowed Funds
Southern National's ability to borrow significant funds through non-deposit
sources generates additional flexibility to meet the needs of customers by
offsetting liquidity risk and to reach the goals set by the ALCO. Components
of short-term borrowed funds at year end were master notes, securities sold
under repurchase agreements, FHLB advances, Federal funds purchased and U.S.
Treasury tax and loan deposit notes payable.
- -------------------------------------------------------------------------------
TABLE 8
SHORT-TERM BORROWED FUNDS
The following information summarizes certain pertinent information for the
past three years on short-term borrowed funds:
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Maximum outstanding at any month-end
during the year.......................... $2,326,704 $3,828,258 $3,060,225
Average outstanding during the year....... 2,011,565 3,148,179 2,389,428
Average interest rate during the year..... 5.27% 5.91% 4.33%
Average interest rate at end of year...... 4.79 5.36 5.48
- -------------------------------------------------------------------------------
CAPITAL ADEQUACY AND RESOURCES
Overall capital adequacy is monitored on an ongoing basis by management and
reviewed regularly by the Board of Directors. Southern National's principal
capital planning goals are to provide an adequate return to shareholders while
retaining a sufficient base from which to provide future growth and compliance
with all regulatory standards. Close attention is given to regulatory levels
of capital as percentages of assets and risk-weighted assets. The accompanying
table outlines the regulatory minimums for Tier 1 capital, total risk-based
capital and the leverage ratio, as well as such amounts for Southern National
as of December 31, 1996.
14
- -------------------------------------------------------------------------------
TABLE 9
CAPITAL ADEQUACY
REGULATORY SOUTHERN BB&T- BB&T- BB&T-
MINIMUMS NATIONAL NC SC VA
---------- -------- ----- ----- -----
Risk-based capital ratios:
Tier 1 capital (1)................... 4.0% 11.7% 11.0% 14.4% 11.7%
Total risk-based capital (2)......... 8.0 14.7 12.3 15.7 12.9
Tier 1 leverage ratio (3).............. 3.0 8.0 7.5 9.7 8.6
- --------
(1) Shareholders' equity less non-qualifying intangible assets; computed as a
ratio of risk-weighted assets, as defined in the risk-based capital
guidelines.
(2) Tier 1 capital plus qualifying loan loss allowance and subordinated debt;
computed as a ratio of risk-weighted assets as defined in the risk-based
capital guidelines.
(3) Tier 1 capital computed as a ratio of fourth quarter average assets less
goodwill.
- -------------------------------------------------------------------------------
EXECUTIVE OFFICERS OF SOUTHERN NATIONAL
Southern National's Chairman and Chief Executive Officer is John A. Allison,
IV. Mr. Allison is 48 and has 26 years of service with the Corporation. (For
purposes of this paragraph, the term "Corporation" refers to both Southern
National Corporation and the former BB&T Financial Corporation.) W. Kendall
Chalk is the Senior Executive Vice President for the Lending Group. Mr. Chalk
is 51 and has served for 22 years. Robert E. Greene is the President of Branch
Banking and Trust Company and is the Senior Executive Vice President for
Administrative Services for the Corporation. Mr. Greene is 47 and has served
the Corporation for 24 years. Kelly S. King is the President of Southern
National Corporation and is the Senior Executive Vice President for the
Branching Network. Mr. King is 48 and has 25 years of service with the
Corporation. Morris D. Marley is the Senior Executive Vice President for Funds
Management. Mr. Marley is 46 and has served the Corporation for 12 years.
Scott E. Reed is the Senior Executive Vice President and Chief Financial
Officer. Mr. Reed is 48 and has 25 years of service with the Corporation.
Michael W. Sperry is the Senior Executive Vice President for Corporate
Banking. Mr. Sperry is 52 and has 7 years of service with the Corporation.
Henry G. Williamson, Jr. is the Chief Operating Officer for the Corporate
Group. Mr. Williamson is 49 and has 25 years of service with the Corporation.
Prior to the merger of BB&T Financial Corporation with Southern National
Corporation in 1995, Messrs. Allison, Chalk, King, Reed and Williamson served
in substantially the same positions with BB&T Financial Corporation.
15
CERTAIN REGULATORY CONSIDERATIONS
GENERAL
As a bank holding company, Southern National is subject to regulation under
the Bank Holding Company Act of 1956 (as amended, the "BHCA") and the
examination and reporting requirements of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). Under the BHCA, a bank
holding company may not directly or indirectly acquire ownership or control of
more than 5% of the voting shares or substantially all of the assets of any
additional bank or merge or consolidate with another bank holding company
without the prior approval of the Federal Reserve Board. The BHCA also
generally limits the activities of a bank holding company to that of banking,
managing or controlling banks, or any other activity which is determined to be
so closely related to banking or to managing or controlling banks that an
exception is allowed for those activities.
As state-chartered commercial banks, BB&T-NC, BB&T-SC and BB&T-VA
(collectively, the "Banks") are subject to regulation, supervision and
examination by state bank authorities in their respective home states. These
authorities include the North Carolina Commissioner, in the case of BB&T-NC,
the South Carolina Commissioner, in the case of BB&T-SC, and the Virginia
State Corporation Commission's Bureau of Financial Institutions, in the case
of BB&T-VA. Each of the Banks is also subject to regulation, supervision and
examination by the Federal Deposit Insurance Corporation (the "FDIC"). State
and federal law also govern the activities in which the Banks engage, the
investments they make and the aggregate amount of loans that may be granted to
one borrower. Various consumer and compliance laws and regulations also affect
the Banks' operations.
The earnings of Southern National's subsidiaries, and therefore the earnings
of Southern National, are affected by general economic conditions, management
policies and the legislative and governmental actions of various regulatory
authorities, including those referred to above. The following description
summarizes some of the state and federal laws to which Southern National and
the Banks are subject. To the extent statutory or regulatory provisions or
proposals are described, the description is qualified in its entirety by
reference to the particular statutory or regulatory provisions or proposals.
PAYMENT OF DIVIDENDS
Southern National is a legal entity separate and distinct from its banking
and other subsidiaries. A major portion of the revenues of Southern National
result from amounts paid as dividends to Southern National by its bank
subsidiaries. Southern National's banking subsidiaries are subject to state
laws and regulations that limit the amount of dividends they can pay. In
addition, both Southern National and the Banks are subject to various general
regulatory policies relating to the payment of dividends, including
requirements to maintain adequate capital above regulatory minimums. The
Federal Reserve Board has indicated that banking organizations should
generally pay dividends only if (1) the organization's net income available to
common shareholders over the past year has been sufficient to fund fully the
dividends and (2) the prospective rate of earnings retention appears
consistent with the organization's capital needs, asset quality and overall
financial condition. Southern National does not expect that any of these laws,
regulations or policies will materially impact the ability of its Banks to pay
dividends. During the year ended December 31, 1996, the Banks recorded $125.7
million in cash dividends to Southern National.
CAPITAL
The Federal Reserve Board and the FDIC have issued substantially similar
risk-based and leverage capital guidelines applicable to banking organizations
they supervise. Under the risk-based capital requirements, Southern National
and the Banks are each generally required to maintain a minimum ratio of total
capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit), of 8%. At least half of the
total capital is to be composed of common equity, retained earnings and
qualifying perpetual preferred stock, less certain intangibles ("Tier 1
capital"). The remainder may consist of certain subordinated
16
debt, certain hybrid capital instruments and other qualifying preferred stock
and a limited amount of the loan loss allowance ("Tier 2 capital" and,
together with Tier 1 capital, "total capital"). At December 31, 1996, Southern
National's Tier 1 capital and total capital ratios were 11.7% and 14.7%,
respectively, and the ratio of total capital to total risk-adjusted assets for
BB&T-NC, BB&T-SC, and BB&T-VA were 12.3%, 15.7% and 12.9%, respectively.
In addition, each of the Federal bank regulatory agencies has established
minimum leverage capital ratio requirements for banking organizations. These
requirements provide for a minimum leverage ratio of Tier 1 capital to
adjusted average quarterly assets equal to 3% for banks and bank holding
companies that meet certain specified criteria. All other banks and bank
holding companies will generally be required to maintain a leverage ratio of
at least 100 to 200 basis points above the stated minimum. Southern National's
leverage ratio at December 31, 1996 was 8.0%, and the Banks' leverage ratios
were 7.5%, 9.7% and 8.6%, respectively.
The risk-based capital standards of both the Federal Reserve Board and the
FDIC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agency in
assessing an institution's overall capital adequacy. The capital guidelines
also provide that an institution's exposure to a decline in the economic value
of its capital due to changes in interest rates be considered by the agency as
a factor in evaluating a bank's capital adequacy. The Federal Reserve Board
also has recently issued additional capital guidelines for bank holding
companies that engage in certain trading activities.
DEPOSIT INSURANCE ASSESSMENTS
The deposits of each Bank are insured by the FDIC up to the limits set forth
under applicable law. A majority of the deposits of the Banks are subject to
the deposit insurance assessments of the Bank Insurance Fund ("BIF") of the
FDIC. However, approximately 40% of the deposits of BB&T-NC and BB&T-SC
(relating to the Banks' acquisitions of various savings associations) are
subject to assessments imposed by the Savings Association Insurance Fund
("SAIF") of the FDIC.
Pursuant to budget reconciliation legislation enacted in 1996, the FDIC
imposed a special assessment on SAIF-assessable deposits of $.657 per $100 of
SAIF-assessable deposits in order to increase the SAIF's net worth to 1.25% of
SAIF-insured deposits as of October 1, 1996. Certain institutions that engaged
in thrift acquisitions, including BB&T-NC and BB&T-VA, received a 20% discount
on the assessment. As a result, the pre-tax impact of the special assessment
on Southern National was approximately $33 million and was recorded as an
expense as of September 30, 1996.
The FDIC thereafter equalized the assessment rates for BIF-insured and SAIF-
insured deposits effective January 1, 1997. Thus, for the semi-annual period
beginning January 1, 1997, the assessments imposed on all FDIC deposits for
deposit insurance have an effective rate ranging from 0 to 27 basis points per
$100 of insured deposits, depending on the institution's capital position and
other supervisory factors. However, because the legislation enacted in 1996
requires that both SAIF-insured and BIF-insured deposits pay a pro rata
portion of the interest due on the obligations issued by the Financing
Corporation ("FICO"), the FDIC is assessing BIF-insured deposits an additional
1.30 basis points per $100 of deposits, and SAIF-insured deposits an
additional 6.48 basis points per $100 of deposits, to cover those obligations.
OTHER SAFETY AND SOUNDNESS REGULATIONS
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution becomes in danger of default or is in
default. For example, under a policy of the Federal Reserve Board with respect
to bank holding company operations, a bank holding company is required to
serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions
17
in circumstances where it might not do so otherwise. In addition, the "cross-
guarantee" provisions of Federal law require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the SAIF or the BIF as a result of the default of a
commonly controlled insured depository institution or for any assistance
provided by the FDIC to a commonly controlled insured depository institution
in danger of default. The FDIC may decline to enforce the cross-guarantee
provision if it determines that a waiver is in the best interests of the SAIF
or the BIF or both. The FDIC's claim for reimbursement is superior to claims
of shareholders of the insured depository institution or its holding company
but is subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institution.
The Federal banking agencies also have broad powers under current Federal
law to take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institution
in question is well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized or critically undercapitalized, as defined by
the law. As of December 31, 1996, Southern National and each of the Banks were
classified as well-capitalized.
State regulatory authorities also have broad enforcement powers over the
Banks, including the power to impose fines and other civil and criminal
penalties, and to appoint a conservator (with the approval of the Governor in
the case of North Carolina) in order to conserve the assets of any such
institution for the benefit of depositors and other creditors. The North
Carolina Commissioner also has the authority to take possession of a state
bank in certain circumstances, including, among other things, when it appears
that such bank has violated its charter or any applicable laws, is conducting
its business in an unauthorized or unsafe manner, is in an unsafe or unsound
condition to transact its business or has an impairment of its capital stock.
INTERSTATE BANKING AND BRANCHING
Current Federal law authorizes interstate acquisitions of banks and bank
holding companies without geographic limitation. Effective June 1, 1997, a
bank headquartered in one state will be authorized to merge with a bank
headquartered in another state, as long as neither of the states has opted out
of such interstate merger authority prior to such date. States are authorized
to enact laws permitting such interstate bank merger transactions prior to
June 1, 1997, as well as authorizing a bank to establish "de novo" interstate
branches. North Carolina, South Carolina and Virginia have enacted early "opt
in" laws, permitting interstate bank merger transactions. Once a bank has
established branches in a state through an interstate merger transaction, the
bank may establish and acquire additional branches at any location in the
state where a bank headquartered in that state could have established or
acquired branches under applicable Federal or state law.
EMPLOYEES
At December 31, 1996, Southern National had approximately 7,800 full-time-
equivalent employees.
PROPERTIES
Southern National and its significant subsidiaries occupy headquarters
offices that are either owned or operated under long-term leases and also own
free-standing operations centers in Wilson, Charlotte and Lumberton, North
Carolina. Branch office locations are variously owned or leased. The premises
occupied by Southern National and its subsidiaries are considered to be well-
located and suitably equipped to serve as financial service facilities. See
Note F. "Premises and Equipment" of Notes to Consolidated Financial Statements
in this report.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of the financial condition and results
of operations of Southern National Corporation ("Southern National" or the
"Corporation") for each of the three years in the period ended December 31,
1996, and related financial information are presented in conjunction with the
consolidated financial statements and related notes to assist in the
evaluation of Southern National's 1996 performance.
This report contains certain forward-looking statements with respect to the
financial condition, results of operations and business of Southern National.
These forward-looking statements involve certain risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) competitive pressure in the banking industry
increases significantly; (2) changes in the interest rate environment reduce
margins; (3) general economic conditions, either nationally or regionally, are
less favorable than expected, resulting in, among other things, a
deterioration in credit quality; (4) changes occur in the regulatory
environment; (5) changes occur in business conditions and inflation; (6)
expected cost savings associated with pending mergers cannot be fully
realized; (7) deposit attrition, customer loss or revenue loss following
pending mergers is greater than expected; (8) required operational
divestitures associated with pending mergers are greater than expected; and
(9) changes occur in the securities markets.
Economic indicators during 1996 revealed steady, modest growth in the
economy and relatively low pressure on inflation. Job growth, retail sales,
auto sales and home sales were moderate, with growth rates easing by the end
of the year. Consumer confidence remained high throughout 1996, despite low
levels of growth in the gross domestic product. The Federal Reserve's Open
Market Committee, which determines pricing on key central funding sources,
voted to cut the Federal funds rate 25 basis points to 5.25% in January, 1996.
This was the central bank's only action on interest rates during the year. The
commercial banking industry experienced slower growth in loans, with overall
loan growth falling into the single digits. 1996 continued to be a year of
industry consolidation, with several large bank mergers. Credit quality also
began to modestly erode during the year, particularly in revolving credit
portfolios, creating concern for institutions with large credit card
portfolios.
ANALYSIS OF FINANCIAL CONDITION
Average assets totaled $20.6 billion in 1996, an increase of approximately
.8% over the average of $20.4 billion in 1995. Average assets increased 7.0%
in 1995 compared to 1994. At the end of 1996, assets totaled $21.2 billion.
The modest growth during 1996 reflects a restructuring of the balance sheet
undertaken by management during 1995. As further discussed below, Southern
National has changed the composition of assets by securitizing mortgage loans
and replacing U.S. Treasuries in the securities portfolio with the resulting
mortgage-backed securities. These efforts have improved net interest margin by
improving the yields of both the loans and securities portfolios while
enabling management to pay down more volatile short-term borrowed funds. These
actions have served to improve earnings while maintaining a steady level of
total and average assets.
Southern National's other assets increased $120.9 million in 1996 as a
result of increases in cash surrender value of life insurance, up $58.9
million, mortgage servicing rights, which increased $18.8 million, and
intangible assets, up $13.9 million.
The five-year compound rate of growth in average assets was 8.5%. Over the
same five-year period, the compound annual growth rates based on average
balances have been 9.0% for loans, 9.2% for securities and 5.3% for deposits.
All growth rates have been enhanced by the effects of acquisitions accounted
for as purchases.
19
- -------------------------------------------------------------------------------
TABLE 10
COMPOSITION OF AVERAGE TOTAL ASSETS
% CHANGE
----------------
1996 V. 1995 V.
1996 1995 1994 1995 1994
----------- ----------- ----------- ------- -------
(DOLLARS IN THOUSANDS)
Securities*............. $ 5,175,119 $ 5,405,773 $ 5,350,982 (4.3)% 1.0 %
Federal funds sold and
other earning assets... 13,631 44,384 130,670 (69.3) (66.0)
Loans and leases, net of
unearned income**...... 14,190,985 13,768,629 12,456,509 3.1 10.5
----------- ----------- -----------
Average earning assets.. 19,379,735 19,218,786 17,938,161 .8 7.1
Non-earning assets...... 1,194,335 1,185,084 1,134,455 .8 4.5
----------- ----------- -----------
Average total assets.... $20,574,070 $20,403,870 $19,072,616 .8 % 7.0 %
=========== =========== ===========
Average earning assets
as percent of average
total assets........... 94.2% 94.2% 94.1%
=========== =========== ===========
- --------
* Based on amortized cost.
** Includes loans held for sale based on lower of amortized cost or market.
Amounts are gross of the allowance for loan and lease losses.
- -------------------------------------------------------------------------------
SECURITIES
The securities portfolios provide earnings and liquidity, as well as
providing an effective tool in managing interest rate risk. Management has
historically emphasized investments with a maturity of five years or less
because of the changing interest rate environment and to provide greater
flexibility in balance sheet management. As a result of the acquisition of
longer-term mortgage-backed securities, and the runoff of lower-yielding,
shorter maturity U.S. Treasuries, the maturity of the total portfolio now
exceeds seven years. However, the actual expected maturity of the investment
portfolio is approximately three years because of the faster prepayment
streams associated with mortgage-backed securities. U.S. Treasury securities,
which continue to comprise the majority of the portfolio, provide adequate
current yields with minimal risk and maturities structured to address
liquidity concerns.
During the fourth quarter of 1995 and throughout 1996, Southern National
securitized mortgages held in the loan portfolio and transferred them to the
investment portfolio. Management determined that this strategy would increase
yields in the investment portfolio by allowing lower-yielding securities to
run off and replacing them with higher-yielding mortgage-backed securities.
Total outstanding securities decreased 1.8% in 1996 to a total of $5.3
billion at the end of the year. Securities held to maturity only make up 2.4%
of the total portfolio and are primarily composed of investments in states and
municipalities. Such securities are carried at amortized cost and totaled
$124.7 million at year end, compared to $154.0 million outstanding at the end
of 1995. Market valuation gains in the Corporation's held-to-maturity category
affect neither earnings nor capital. The held-to-maturity portfolio had a net
unrealized gain of $3.7 million at December 31, 1996.
Securities available for sale totaled $5.1 billion at year end and are
carried at estimated fair value in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115. The available-for-sale portfolio is
primarily composed of investments in U.S. Treasuries, government and agency
obligations, which, excluding mortgage-backed securities, composed 60.7% of
the outstanding balance at year end. This percentage has decreased from the
1995 percentage of 78.1%, which reflects management's efforts to invest in
higher yielding mortgage-backed securities obtained through the securitization
of a portion of Southern National's mortgage loan portfolio. At December 31,
1996, mortgage-backed securities comprised 33.6% of the available-
20
for-sale portfolio, compared to 18.8% at the end of 1995. The available-for-
sale portfolio also contains investments in states and municipalities, which
composed less than 1% of the portfolio, and equity and other securities, which
composed the remaining 5.3% of the portfolio. The percentage of holdings in
states and municipalities did not significantly change from the prior year.
The available-for-sale portfolio composed 97.6% of total securities. During
the fourth quarter of 1995, Southern National transferred $1.6 billion of
securities which were previously classified as held to maturity to the
available-for-sale category. The Financial Accounting Standards Board ("FASB")
provided enterprises the opportunity to make a one-time reassessment of the
classification of all investment securities held at that time, such that the
reclassification of any security from the held-to-maturity category would not
call into question the enterprise's intent to hold other debt securities to
maturity in the future. Management believes that this classification allows
more flexibility in the day-to-day management of the overall portfolio than
the held-to-maturity classifications. Southern National held no securities
classified as trading at December 31, 1996 or 1995.
The market value of the available-for-sale portfolio was $20.1 million
greater than the amortized cost of these securities. At December 31, 1996,
Southern National's available-for-sale portfolio had net unrealized
appreciation, net of tax, of $11.8 million, which is reported as a separate
component of equity. This compares to net unrealized appreciation of $31.2
million at December 31, 1995. Equity adjustments resulting from market
valuation gains and losses do not represent permanent increases or reductions
in equity. If securities that are categorized as available for sale are held
until they mature for strategic reasons, or if market values improve during
the period of time held, any fluctuations in estimated fair value will be
reflected as a separate component of equity, net of tax. If securities so
designated are sold, then the actual gains or losses realized are reported in
current period earnings.
The fully taxable equivalent ("FTE") yield on the total securities portfolio
was 6.69% for the year ended December 31, 1996, compared to 6.22% for the
prior year. The improvement in FTE yield resulted from higher yields for each
category of investments. U.S. Treasuries improved from 6.05% to 6.50%,
mortgage-backed securities increased from 6.60% to 6.94% and state and
municipal securities grew from 8.94% to 8.99%.
Management expects interest rates to remain relatively stable throughout
1997. A major investment strategy for the first half of 1997 will be to
selectively replace lower-yielding securities with other high-quality U.S.
Treasury and Federal agency obligations, with short and intermediate
maturities. The Corporation's Asset/Liability Management Committee ("ALCO")
will continually evaluate such strategies in consideration of actual economic
and balance sheet developments.
21
- -------------------------------------------------------------------------------
TABLE 11
SECURITIES
DECEMBER 31, 1996
--------------------------------
CARRYING VALUE AVERAGE YIELD (3)
-------------- -----------------
(DOLLARS IN THOUSANDS)
U.S. Treasury, government and agency obliga-
tions (1)
Within one year............................ $ 568,228 6.31%
One to five years.......................... 2,837,819 6.56
Five to ten years.......................... 152,960 6.55
After ten years............................ 1,288,616 7.21
---------- ----
Total.................................... 4,847,623 6.70
---------- ----
States and political subdivisions
Within one year............................ 18,944 8.46
One to five years.......................... 90,759 8.81
Five to ten years.......................... 31,262 8.80
After ten years............................ 345 7.83
---------- ----
Total.................................... 141,310 8.76
---------- ----
Other securities
Within one year............................ 100 6.24
One to five years.......................... 2,968 8.22
Five to ten years.......................... 185,556 6.68
---------- ----
Total.................................... 188,624 6.70
---------- ----
Securities with no stated maturity........... 83,950 8.22
---------- ----
Total securities (2)..................... $5,261,507 6.78%
========== ====
- --------
(1) Included in U.S. Treasury, government and agency obligations are mortgage-
backed securities totaling $1.7 billion classified as available for sale
and disclosed at estimated fair value. These securities are included in
each of the categories based upon final stated maturity dates. The
original contractual lives of these securities range from five to 30
years; however, a more realistic average maturity would be substantially
shorter because of the monthly return of principal on certain securities.
(2) Includes securities held to maturity of $124.7 million disclosed at
amortized cost and securities available for sale of $5.1 billion disclosed
at estimated fair value.
(3) Taxable equivalent basis as applied to amortized cost.
- -------------------------------------------------------------------------------
LOANS AND LEASES
Net loans and leases, including loans held for sale, totaled approximately
$14.4 billion at the end of 1996. This represented an increase of $623.7
million in 1996 or 4.5%. This rate of growth includes the impact of $1.2
billion in mortgage loans securitizations. Excluding the impact of the
mortgage loan securitizations, loans and leases, including loans held for
sale, grew at a rate of 10.1% from December 31, 1995 to December 31, 1996.
Average loans for the twelve months increased 3.1% over the prior year.
Excluding the impact of the securitizations, average loans increased 7.9%
compared with year-end 1995.
The objective of these loan securitizations has been to maintain adequate
regulatory liquidity requirements while using proceeds from maturities of
lower-yielding U.S. Treasuries to fund higher-yielding consumer and commercial
loans and to reduce short-term borrowed funds.
22
The net yield on loans has decreased from 9.23% for the twelve months ended
December 1995 to 9.12% for the current year, attributable to overall market
rates. A better indicator of the success of the balance sheet management
strategies is the improvement in overall net interest margin (FTE) from 4.14%
in 1995 to 4.45% for the current year.
Southern National's long range lending strategy is to maintain a rate of
internal growth which approximates that of its markets in the Carolinas and
Virginia. Management believes that this will result in a rate of increase
which will be sustainable and profitable. Average commercial loans increased
at a rate of 7.4% during 1996 and yielded 9.0%. Average consumer loans grew
7.2% over the course of the year and yielded 10.5%. Average mortgage loans,
including the impact of securitizations, decreased 6.9% during 1996, while
yielding 7.9%. Excluding the impact of the securitizations, average mortgage
loans increased 9.3%.
The acquisition of Regional Acceptance Corporation ("Regional Acceptance")
in the third quarter of 1996 is expected to increase consumer loan growth and
change the composition of the loan portfolio to include a greater percentage
of higher-yielding consumer loans. Regional Acceptance specializes in indirect
financing for consumer purchases of mid-model and late-model used automobiles.
Southern National concentrated efforts on expanding the leasing function
throughout 1996. Municipal leasing, primarily tax-exempt leases with counties
and municipalities, was stronger than in the prior year. The leasing function,
which provides a quality stream of earnings, has developed numerous lease-
based products and services that have been effectively marketed to current
Southern National customers and noncustomers. End of period lease receivables,
gross of unearned income, grew $200.8 million or 53.3%, during 1996.
Management will seek to continue the current balance sheet strategies
entering 1997. The trends in loan growth show increasing momentum in demand
during the third and fourth quarters of 1996. Excluding the impact of the
mortgage loan securitizations, end of period loans grew at an annualized rate
of 12.3% during the fourth quarter of 1996 compared to the third quarter.
Growth in average loans improved to 10.0% for the fourth quarter compared to
the third quarter, with particular strength in commercial loans, which
increased 14.3% over the same time frame.
ASSET QUALITY
The credit quality of the loan and lease portfolio remained relatively
constant during 1996 compared to 1995. As reflected in Table 12--"Asset
Quality," nonperforming assets ("NPAs") were $80.2 million at year end, up
$4.3 million or 5.6% for the year. However, as a percentage of total assets,
NPAs were .38% at December 31, 1996 compared to .37% at the end of the prior
year. As a percentage of loans plus foreclosed properties, NPAs were .55% at
December 31, 1996 compared to .54% at the end of 1995. The allowance for loan
and lease losses as a percentage of loans and leases was 1.26% at December 31,
1996, compared to 1.26% at December 31, 1995. Loans 90 days or more past due
and still accruing interest increased slightly during 1996 to a balance of
$32.1 million compared to a December 31, 1995 balance of $29.1 million. These
ratios reflect very consistent levels of asset quality during the year. Net
charge-offs as a percentage of average loans and leases increased from .24% in
1995 to .32% in 1996, primarily as a result of higher charge-offs in consumer
lending. Management considers a charge-off level of .32% to be within
reasonable norms from an historical perspective.
Regional Acceptance also experienced higher-than-expected net charge-offs in
the last two quarters of 1996. These higher net charge-offs are indicative of
the current nature of the used automobile financing industry. This level of
net charge-offs is not expected to have a material impact on Southern
National's consolidated financial condition or consolidated results of
operations.
Southern National assigns risk grades to all commercial loans in the
portfolio. This assignment of loans to one of ten categories is based upon the
relative strength of the repayment source. All significant loans in the four
highest risk grades are reviewed monthly for appropriateness of risk grade,
accrual status and loss reserves. Management does not anticipate any
significant deterioration in asset quality levels during 1997.
23
The following table reflects relevant asset quality information for Southern
National for the most recent three years.
- -------------------------------------------------------------------------------
TABLE 12
ASSET QUALITY
DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
Nonaccrual loans and leases*........................ $59,717 $62,231 $48,545
Foreclosed property................................. 20,452 13,652 13,521
------- ------- -------
Nonperforming assets................................ $80,169 $75,883 $62,066
======= ======= =======
Loans 90 days or more past due and still accruing... $32,052 $29,094 $24,224
======= ======= =======
ASSET QUALITY RATIOS
Nonaccrual loans and leases as a percentage of
loans and leases................................. .41% .45% .36%
Nonperforming assets as a percentage of:
Total assets.................................... .38 .37 .31
Loans and leases plus foreclosed property....... .55 .54 .47
Net charge-offs as a percentage of average loans
and leases....................................... .32 .24 .14
Allowance for losses as a percentage of loans and
leases........................................... 1.26 1.26 1.32
Ratio of allowance for losses to:
Net charge-offs................................. 4.06X 5.30x 9.68x
Nonaccrual loans and leases..................... 3.08 2.82 3.59
- --------
NOTE: Items referring to loans and leases are net of unearned income, gross
of the allowance and include loans held for sale.
* Includes $16.0 million of impaired loans at December 31, 1996. See Note
A in the "Notes to Consolidated Financial Statements."
- -------------------------------------------------------------------------------
DEPOSITS AND OTHER BORROWINGS
Management's primary objectives for funding balance sheet activity are to
provide adequate, stable, cost-effective sources of funds. Core deposits
compose Southern National's primary funding source, despite trends away from
traditional transaction and savings accounts by depositors. As depositors have
sought greater returns in recent years, growth rates for deposits have
typically not kept pace with asset growth. Southern National's total deposits
at December 31, 1996, compared to year-end 1995, increased 1.8% to $15.0
billion. This modest increase was led by a 5.6% increase in noninterest-
bearing demand deposits and a 10.6% increase in money rate savings accounts.
These increases were offset somewhat by a 13.5% decrease in deposits in
savings and interest checking accounts. Other time deposits, including
individual retirement accounts and certificates of deposit, increased less
than 1% and remain Southern National's largest component of total deposits at
54.9%. Average deposits increased 3.7% in 1996 to a balance of $14.8 billion.
Management also used various other short-term borrowed funds to meet funding
needs. Among these are Federal funds purchased, which composed 35.0% of total
short-term borrowed funds and securities sold under repurchase agreements,
which composed 29.4% of short-term borrowed funds at year end. Management also
utilized master notes, U.S. Treasury tax and loan deposit notes and short-term
Federal Home Loan Bank ("FHLB") advances to supplement short-term funding
needs. In certain circumstances, management also used foreign deposits and, to
a lesser degree, brokered certificates of deposit. Although average short-term
borrowed funds decreased $1.1 billion or 36.1%, this was offset by a $538.0
million increase in average foreign deposits, which are classified as other
time deposits. Management has diversified both short-term and long-term
funding
24
sources and the shift to foreign deposits represents an effort to establish
available credit lines with nonbank providers of such funds. Total short-term
borrowed funds at year-end 1996 decreased $332.1 million or 12.8% compared to
year-end 1995.
The rates paid on average short-term borrowed funds decreased from 5.91% in
1995 to 5.27% during 1996. This decrease resulted from a decline in short-term
money market rates as well as the increased availability of short-term funding
sources providing management the ability to execute on a more cost-effective
strategy.
Management also employs long-term debt for additional funding, and
management significantly increased reliance on longer-term funding sources
during 1996. Southern National's total end of period outstanding long-term
debt increased 48.3% to $2.1 billion. On average, long-term debt increased
$731.0 million. Southern National's long-term debt consists primarily of FHLB
advances, which composed 67.0% of total outstanding long-term debt at December
31, 1996. FHLB advances are the most cost-effective long-term funding source
and the FHLB provides Southern National the flexibility to structure the debt
to manage interest rate risk and liquidity as needed. In an effort to
diversify long-term funding sources, management developed various debt
programs, including a $2 billion senior and subordinated banknote program. The
initial debt issuance was $225 million for five years at a fixed coupon rate
of 5.70%. The remainder of the $424.8 million outstanding at year end was
shorter-term floating rate banknotes. In addition to the $2 billion banknote
program, Southern National also registered $1 billion in debt for future
funding needs. On May 21, 1996, Southern National issued $250 million of 7.05%
subordinated long-term notes which mature in 2003. The average rate paid on
long-term debt during 1996 decreased from 6.26% for 1995 to 5.78% for 1996.
Southern National continually considers liquidity needs in evaluating
funding sources. The ultimate goal is to maintain funding flexibility, which
will allow Southern National to react rapidly to opportunities brought about
by growth and market volatility. Management will continue to focus on
traditional core funding strategies during 1997, including targeting growth in
noninterest-bearing deposits.
- -------------------------------------------------------------------------------
TABLE 13
COMPOSITION OF AVERAGE DEPOSITS AND OTHER BORROWINGS
% CHANGE
----------------
1996 V. 1995 V.
1996 1995 1994 1995 1994
--------------- --------------- --------------- ------- -------
(DOLLARS IN THOUSANDS)
Savings, interest
checking and MRS
sweeps................. $ 3,156,994 17% $ 3,237,553 18% $ 3,433,750 20% (2.5)% (5.7)%
Money rate savings...... 1,416,791 8 1,552,431 8 1,971,263 11 (8.7) (21.2)
Other time deposits..... 8,346,545 44 7,715,365 42 7,155,207 41 8.2 7.8
----------- --- ----------- --- ----------- ---
Total interest-bearing
deposits............... 12,920,330 69 12,505,349 68 12,560,220 72 3.3 (.4)
Noninterest-bearing
demand deposits........ 1,857,207 10 1,745,827 9 1,738,508 10 6.4 .4
----------- --- ----------- --- ----------- ---
Total deposits.......... 14,777,537 79 14,251,176 77 14,298,728 82 3.7 (.3)
Short-term borrowed
funds.................. 2,011,565 11 3,148,179 17 2,389,428 14 (36.1) 31.8
Long-term debt.......... 1,858,569 10 1,127,575 6 677,227 4 64.8 66.5
----------- --- ----------- --- ----------- ---
Total deposits and other
borrowings............. $18,647,671 100% $18,526,930 100% $17,365,383 100% .6% 6.7 %
=========== === =========== === =========== === ===== =====
- -------------------------------------------------------------------------------
ANALYSIS OF RESULTS OF OPERATIONS
Consolidated net income for 1996 totaled $283.7 million, which generated
primary earnings per share of $2.56 and fully diluted earnings per share of
$2.54. Net income for the prior year was $186.3 million and net earnings for
1994 were $243.8 million. Primary earnings per share were $1.65 in 1995 and
$2.21 in 1994, while fully diluted per share earnings were $1.62 and $2.16,
respectively.
25
Management utilizes the return on average assets ratio to measure the
profitability of each dollar of assets and to compare Southern National's
performance to peers. The returns on average assets produced by the earnings
discussed above were 1.38% for 1996, .91% for 1995 and 1.28% for 1994.
Management's target return on average assets is 1.25%, which places Southern
National among industry leaders. A similar measure of profitability is return
on average common equity. Southern National's returns on average common equity
were 17.21%, 11.84% and 17.07%, for the years ended December 31, 1996, 1995
and 1994, respectively.
Southern National incurred significant nonrecurring expenses during both
1996 and 1995 which are reflected in the earnings and profitability ratios
above. During the third quarter of 1996, Southern National recorded a one-time
assessment by the Federal Deposit Insurance Corporation ("FDIC") which was
charged to all financial institutions with deposits insured by the Savings
Association Insurance Fund ("SAIF"). The impact of Southern National's
assessment was approximately $33 million on a pre-tax basis. On an after-tax
basis, the assessment totaled $21.3 million or $.19 per fully diluted share.
Excluding the impact of the assessment, Southern National's net income for
1996 would have been $304.9 million or $2.73 per fully diluted share.
Recurring earnings for 1996 provided returns of 1.48% on average assets and
18.51% on average common shareholders' equity.
During 1995, Southern National incurred $108.0 million in pre-tax
nonrecurring expenses relating to the merger between Southern National and
BB&T Financial Corporation ("BB&T") and $19.8 million in securities losses
resulting from a restructuring of the securities portfolio. These costs were
offset somewhat by a $12.3 million gain on the sale of divested deposits made
necessary by the merger. The net after-tax impact of these nonrecurring items
and securities losses was to reduce net income by $76.3 million. Excluding the
impact of these nonrecurring items, Southern National's net income for 1995
would have been $262.7 million, or $2.29 per fully diluted share. Recurring
earnings for 1995 produced returns of 1.29% on average assets and 16.83% on
average common shareholders' equity.
On a recurring basis, Southern National's net income grew $42.3 million or
16.1% during 1996. Fully diluted earnings per share increased $.44 or 19.2%.
Southern National accomplished many objectives which were established in
conjunction with the merger of Southern National and BB&T. The success in
achieving goals set by management led to the growth in recurring earnings.
NET INTEREST INCOME
Net interest income is Southern National's primary source of revenue. The
amount of net interest income is influenced by a number of factors, including
the volume of interest-earning assets and interest-bearing liabilities and the
interest rates earned and paid to obtain the asset-generating funds. The
difference between rates earned on interest-earning assets (with an adjustment
made to tax-exempt income to provide comparability with taxable income) and
the cost of supporting funds is measured by the net yield. The accompanying
table presents the dollar amount of changes in interest income and interest
expense and distinguishes between the changes related to average outstanding
balances of interest-earning assets and interest-bearing liabilities (volume)
and the changes related to average interest rates on such assets and
liabilities (rate). Changes attributable to both volume and rate have been
allocated proportionately.
26
TABLE 14
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AVERAGE BALANCES YIELD/RATE
------------------------------------- ------------------
1996 1995 1994 1996 1995 1994
----------- ----------- ----------- ---- ---- ----
(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury, government and other (5)........... $ 5,024,926 $ 5,235,169 $ 5,171,260 6.62% 6.13% 5.74%
States and political subdivisions................. 150,193 170,604 179,722 8.99 8.94 9.08
----------- ----------- ----------- ---- ---- ----
Total securities (5).......................... 5,175,119 5,405,773 5,350,982 6.69 6.22 5.85
Other earning assets (2)............................. 13,631 44,384 130,670 5.65 5.75 3.97
Loans and leases, net of unearned income (1)(3)(4)(5) 14,190,985 13,768,629 12,456,509 9.12 9.23 8.42
----------- ----------- ----------- ---- ---- ----
Total earning assets.......................... 19,379,735 19,218,786 17,938,161 8.47 8.37 7.62
----------- ----------- ----------- ---- ---- ----
Non-earning assets............................ 1,194,335 1,185,084 1,134,455
----------- ----------- -----------
Total assets............................. $20,574,070 $20,403,870 $19,072,616
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings, interest-checking and MRS sweeps......... $ 3,156,994 $ 3,237,553 $ 3,433,750 1.70 2.26 2.19
Money rate savings................................ 1,416,791 1,552,431 1,971,263 3.62 3.59 2.73
Other time deposits............................... 8,346,545 7,715,365 7,155,207 5.51 5.55 4.37
----------- ----------- ----------- ---- ---- ----
Total interest-bearing deposits............... 12,920,330 12,505,349 12,560,220 4.37 4.46 3.52
Short-term borrowed funds............................ 2,011,565 3,148,179 2,389,428 5.27 5.91 4.33
Long-term debt....................................... 1,858,569 1,127,575 677,227 5.78 6.26 6.04
----------- ----------- ----------- ---- ---- ----
Total interest-bearing liabilities............ 16,790,464 16,781,103 15,626,875 4.63 4.85 3.75
----------- ----------- ----------- ---- ---- ----
Noninterest-bearing demand deposits........... 1,857,207 1,745,827 1,738,508
Other liabilities............................. 266,864 273,911 235,183
Shareholders' equity.......................... 1,659,535 1,603,029 1,472,050
----------- ----------- -----------
Total liabilities and shareholders' equity. $20,574,070 $20,403,870 $19,072,616
=========== =========== ===========
Average interest rate spread......................... 3.84 3.52 3.87
Net yield on earning assets.......................... 4.45% 4.14% 4.36%
==== ==== ====
Taxable equivalent adjustment........................
1996 V. 1995
---------------------------------
INCOME/EXPENSE CHANGE DUE TO
--------------------------------- INCREASE ---------------------
1996 1995 1994 (DECREASE) RATE VOLUME
--------- --------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury, government and other (5)........... $ 332,725 $ 320,950 $ 296,933 $ 11,775 $ 25,009 $ (13,234)
States and political subdivisions................. 13,503 15,255 16,323 (1,752) 83 (1,835)
--------- --------- --------- ---------- --------- ----------
Total securities (5).......................... 346,228 336,205 313,256 10,023 25,092 (15,069)
Other earning assets (2)............................. 771 2,552 5,184 (1,781) (41) (1,740)
Loans and leases, net of unearned income (1)(3)(4)(5) 1,293,802 1,270,390 1,049,190 23,412 (15,224) 38,636
--------- --------- --------- ---------- --------- ----------
Total earning assets.......................... 1,640,801 1,609,147 1,367,630 31,654 9,827 21,827
Non-earning assets............................
Total assets.............................
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Savings, interest-checking and MRS sweeps......... 53,531 73,203 75,125 (19,672) (17,892) (1,780)
Money rate savings................................ 51,226 55,664 53,874 (4,438) 463 (4,901)
Other time deposits............................... 459,990 428,282 312,877 31,708 (3,098) 34,806
--------- --------- --------- ---------- --------- ----------
Total interest-bearing deposits............... 564,747 557,149 441,876 7,598 (20,527) 28,125
Short-term borrowed funds............................ 105,936 186,194 103,493 (80,258) (18,685) (61,573)
Long-term debt....................................... 107,437 70,599 40,927 36,838 (5,790) 42,628
--------- --------- --------- ---------- --------- ----------
Total interest-bearing liabilities............ 778,120 813,942 586,296 (35,822) (45,002) 9,180
--------- --------- --------- ---------- --------- ----------
Noninterest-bearing demand deposits...........
Other liabilities.............................
Shareholders' equity..........................
Total liabilities and shareholders' equity.
Average interest rate spread.........................
Net yield on earning assets.......................... $ 862,681 795,205 $ 781,334 $ 67,476 $ 54,829 $ 12,647
========= ========= ========= ========== ========= ==========
Taxable equivalent adjustment........................ $ 34,188 $ 32,535 $ 28,088
========= ========= =========
1995 v. 1994
---------------------------------------
Change due to
INCREASE --------------------------
DECREASE) Rate Volume
---------- ----------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury, government and other (5)........... $ 24,017 $ 20,309 $ 3,708
States and political subdivisions................. (1,068) (250) (818)
---------- ----------- ------------
Total securities (5).......................... 22,949 20,059 2,890
Other earning assets (2)............................. (2,632) 1,706 (4,338)
Loans and leases, net of