EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF SOUTHERN NATIONAL CORPORATION:
We have audited the accompanying consolidated statements of condition of
Southern National Corporation (a North Carolina corporation) and subsidiaries as
of December 31, 1993 and 1992, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
financial statements have been restated to give retroactive effect to the
mergers which have been accounted for as pooling-of-interests as described in
Note B to the consolidated financial statements. We did not audit the financial
statements of The First Savings Bank, FSB, for the years ended June 30, 1992 and
1991, which statements reflect total assets of 28% as of December 31, 1992, and
net interest income of 22% and 25% for the years ended December 31, 1992 and
1991, respectively, of the related consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to the amounts included for The First Savings Bank, FSB,
is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Southern National
Corporation and subsidiaries as of December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles.
As explained in Notes A, L and M to the consolidated financial statements,
effective January 1, 1993, the Company changed its method of accounting for
acquisitions of thrift institutions, income taxes and postretirement benefits
other than pensions.
ARTHUR ANDERSEN LLP
Charlotte, North Carolina,
February 28, 1994 (except with respect to the matter discussed in Note B, which
is as of August 1, 1994).
1
CONSOLIDATED STATEMENTS OF CONDITION
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
December 31, 1993 and 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1993 1992
ASSETS
Cash and due from depository institutions.......................................................... $ 283,909 $ 259,895
Interest-bearing bank balances..................................................................... 64,954 80,722
Federal funds sold and securities purchased under resale agreements or similar arrangements........ 13,438 32,203
Securities held for sale (market value: $1,210,995 in 1993 and $291,358 in 1992)................... 1,194,230 278,127
Loans held for sale................................................................................ 316,544 174,321
Investment securities (market value: $1,381,371 in 1993 and $1,729,323 in 1992).................... 1,356,102 1,678,258
Loans and leases, net of unearned income of $36,945 in 1993 and $29,779 in 1992.................... 4,838,274 4,597,451
Less -- allowance for losses..................................................................... (69,503) (52,024)
Net loans and leases........................................................................... 4,768,771 4,545,427
Premises and equipment, net........................................................................ 136,228 125,884
Other assets....................................................................................... 140,294 205,151
Total assets................................................................................... $8,274,470 $7,379,988
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing.............................................................................. $ 820,177 $ 629,666
Interest-bearing................................................................................. 5,574,694 5,411,262
Total deposits................................................................................. 6,394,871 6,040,928
Short-term borrowings.............................................................................. 756,343 405,522
Accounts payable and other liabilities............................................................. 78,715 67,940
Long-term debt..................................................................................... 479,677 290,143
Total liabilities.............................................................................. 7,709,606 6,804,533
Shareholders' equity:
Preferred stock, $5 par, 5,000,000 shares authorized, 770,000 issued and outstanding in
1993 and 1992.................................................................................. 3,850 3,850
Common stock, $5 par, 120,000,000 shares authorized, 42,961,214 issued and outstanding in
1993 and 38,090,409 in 1992.................................................................... 214,806 190,452
Paid-in capital.................................................................................. 151,186 143,167
Retained earnings................................................................................ 195,022 237,986
Total shareholders' equity..................................................................... 564,864 575,455
Total liabilities and shareholders' equity..................................................... $8,274,470 $7,379,988
See notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF OPERATIONS
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
For the Years Ended December 31, 1993, 1992 and 1991
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1993 1992 1991
INTEREST INCOME
Interest and fees on loans and leases............................................ $405,121 $428,923 $456,154
Interest and dividends on securities............................................. 139,768 137,025 124,221
Interest on temporary investments................................................ 2,421 5,486 10,569
Total interest income........................................................ 547,310 571,434 590,944
INTEREST EXPENSE
Interest on deposits............................................................. 195,204 251,172 315,460
Interest on short-term borrowings................................................ 18,525 14,964 20,078
Interest on long-term debt....................................................... 23,118 25,652 33,060
Total interest expense....................................................... 236,847 291,788 368,598
NET INTEREST INCOME................................................................ 310,463 279,646 222,346
Provision for loan and lease losses.............................................. 31,438 25,671 30,602
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES...................... 279,025 253,975 191,744
NONINTEREST INCOME
Service charges on deposit accounts.............................................. 36,838 36,455 34,387
Nondeposit fees and commissions.................................................. 24,507 20,454 19,023
Securities gains, net............................................................ 13,714 1,972 10,845
Other income..................................................................... 12,613 19,871 17,113
Total noninterest income..................................................... 87,672 78,752 81,368
NONINTEREST EXPENSE
Personnel expense................................................................ 131,681 114,258 99,163
Occupancy and equipment expense.................................................. 38,153 33,184 30,783
Federal deposit insurance expense................................................ 14,074 12,826 10,869
Foreclosed property expense...................................................... 22,601 11,355 8,631
Loss on bulk sale of assets...................................................... 49,147 -- --
Other expense.................................................................... 80,403 61,949 55,155
Total noninterest expense.................................................... 336,059 233,572 204,601
EARNINGS
Income before income taxes....................................................... 30,638 99,155 68,511
Provision for income taxes....................................................... 22,445 39,992 23,902
Income before cumulative effect of changes in accounting principles.............. 8,193 59,163 44,609
Less: cumulative effect of changes in accounting principles, net of
income taxes................................................................. 27,217 -- --
NET (LOSS) INCOME................................................................ (19,024) 59,163 44,609
Preferred dividend requirements.................................................. 5,196 4,605 --
Net (loss) income applicable to common shares.................................... $(24,220) $ 54,558 $ 44,609
PER COMMON SHARE
Net (loss) income:
Primary
Income before cumulative effect.............................................. $ .07 $ 1.34 $ 1.17
Less: cumulative effect...................................................... .64 -- --
Net (loss) income......................................................... $ (.57) $ 1.34 $ 1.17
Fully diluted
Income before cumulative effect.............................................. $ NM $ 1.31 $ 1.17
Less: cumulative effect...................................................... NM -- --
Net income................................................................ $ NM $ 1.31 $ 1.17
Cash dividends paid per common share............................................. $ .64 $ .50 $ .46
NM -- not meaningful
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
For the Years Ended December 31, 1993, 1992 and 1991
(DOLLARS IN THOUSANDS)
Shares of Retained
Common Preferred Common Paid-In Earnings
Stock Stock Stock Capital and Other* Total
BALANCE, DECEMBER 31, 1990, AS PREVIOUSLY REPORTED...... 27,819,507 $ -- $139,097 $ 29,003 $ 83,900 $252,000
Merger with The First Savings Bank, FSB accounted for
under the pooling-of-interests method............... 4,006,583 -- 20,033 20,569 54,785 95,387
Merger with Regency Bancshares Inc. accounted for
under the pooling-of-interests method............... 1,125,142 -- 5,626 -- 11,219 16,845
Merger with Home Federal Savings Bank accounted for
under the pooling-of-interests method............... 824,601 -- 4,123 -- 1,918 6,041
BALANCE, DECEMBER 31, 1990, AS RESTATED................. 33,775,833 -- 168,879 49,572 151,822 370,273
ADD (DEDUCT)
Net income............................................ -- -- -- -- 44,609 44,609
Common stock issued................................... 723,894 -- 3,619 (12) (699) 2,908
Common stock dividend by merged companies............. 493,140 -- 2,466 48 (2,514) --
Change in valuation allowance for net unrealized loss
on equity securities................................ -- -- -- -- 189 189
Stock conversion of merged company.................... -- -- -- -- 20,695 20,695
Unamortized ESOP compensation and unearned
compensation........................................ -- -- -- -- (2,533) (2,533)
Cash dividends declared by merged companies........... -- -- -- -- (400) (400)
Cash dividends declared by Southern National.......... -- -- -- -- (10,427) (10,427)
BALANCE, DECEMBER 31, 1991.............................. 34,992,867 -- 174,964 49,608 200,742 425,314
ADD (DEDUCT)
Net income............................................ -- -- -- -- 59,163 59,163
Common stock dividend by merged companies............. 919,519 -- 4,598 1,439 (6,037) --
Common stock issued................................... 182,430 -- 911 312 (12) 1,211
Preferred stock issued................................ -- 3,850 -- 70,292 -- 74,142
Common stock acquired and retired..................... (213,332) -- (1,067) -- (778) (1,845)
Change in valuation allowance for net unrealized loss
on equity securities................................ -- -- -- -- 114 114
Acquistion of Workmen's Bancorp, Inc. accounted for
under the purchase method........................... 2,466,798 -- 12,335 21,516 -- 33,851
Amortization of ESOP compensation and unearned
compensation........................................ -- -- -- -- 1,000 1,000
Reconciliation of fiscal year of merged company to
calendar year....................................... (257,873) -- (1,289) -- 1,370 81
Tax benefit from vesting of certain benefit plans
accelerated as a result of the change in control of
merged company...................................... -- -- -- -- 905 905
Cash dividends declared by merged companies........... -- -- -- -- (1,570) (1,570)
Cash dividends declared/accrued by Southern National:
Common stock........................................ -- -- -- -- (12,306) (12,306)
Preferred stock..................................... -- -- -- -- (4,605) (4,605)
BALANCE, DECEMBER 31, 1992.............................. 38,090,409 3,850 190,452 143,167 237,986 575,455
ADD (DEDUCT)
Net loss.............................................. -- -- -- -- (19,024) (19,024)
Three-for-two stock split by merged company........... 2,528,560 -- 12,643 (9,685) (2,958) --
Common stock issued................................... 1,106,131 -- 5,530 2,773 (5,140) 3,163
Common stock acquired and retired..................... (288) -- (1) -- (4) (5)
Change in valuation allowance for net unrealized loss
on equity securities................................ -- -- -- -- 17 17
Acquisition of East Coast Savings Bank, SSB accounted
for under the purchase method....................... 1,172,475 -- 5,862 13,970 -- 19,832
Amortization of unearned compensation................. -- -- -- -- 2,050 2,050
Reconciliation of fiscal year of merged companies to
calender year....................................... 63,927 -- 320 191 6,749 7,260
Tax benefit for non-incentive options exercised....... -- -- -- 770 -- 770
Cash dividends declared by merged companies........... -- -- -- -- (535) (535)
Cash dividends declared/accrued by Southern National:
Common stock........................................ -- -- -- -- (18,923) (18,923)
Preferred stock..................................... -- -- -- -- (5,196) (5,196)
BALANCE, DECEMBER 31, 1993.............................. 42,961,214 $ 3,850 $214,806 $151,186 $195,022 $564,864
* Other includes unrealized losses on equity securities, unamortized ESOP
compensation and unearned compensation.
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
For the Years Ended December 31, 1993, 1992 and 1991
(DOLLARS IN THOUSANDS)
1993 1992 1991
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................................................... $ (19,024) $ 59,163 $ 44,609
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Cumulative effect of changes in accounting principles, net of taxes................... 27,217 -- --
Provision for loan and lease losses................................................... 31,438 25,671 30,602
Depreciation of premises and equipment................................................ 22,929 12,448 11,433
Amortization of intangibles........................................................... 9,527 5,411 3,604
Amortization of unearned stock compensation........................................... 730 -- --
Discount accretion and premium amortization on securities, net........................ 4,376 1,389 747
Gain on sales of securities, net...................................................... (15,155) (340) (4,571)
Gain on sales of loans, net........................................................... (5,849) (11,672) (13,513)
Net loss (gain) on disposals of premises and equipment................................ 1,120 (551) 69
Loss on bulk sale of assets........................................................... 49,147 -- --
Net loss on foreclosed property and other real estate owned........................... 4,743 8,054 5,848
Net proceeds from sales of trading account securities................................. 1,441 2,312 15,416
Proceeds from sales of loans held for sale............................................ 986,343 652,943 472,283
Purchases of loans held for sale...................................................... (97,619) (75,900) (169,697)
Origination of loans held for sale, net of principal collected........................ (751,936) (652,806) (427,329)
Reconciliation of fiscal year of merged companies to calendar year.................... 5,267 (18,997) 17,118
Decrease (increase) in:
Accrued interest receivable......................................................... (1,707) 1,141 5,682
Other assets........................................................................ (20,772) 8,574 (11,603)
Increase (decrease) in:
Accrued interest payable............................................................ 27 (4,635) (6,869)
Accounts payable and other liabilities.............................................. 23,343 (4,370) 14,075
Net cash provided by (used in) operating activities............................... 255,586 7,835 (12,096)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of held for sale securities....................................... 280,460 99,581 625,112
Proceeds from sales of held to maturity securities.................................... 26,695 84,281 192,134
Maturities of held to maturity securities............................................. 622,700 521,559 217,621
Purchases of held to maturity securities.............................................. (1,451,759) (910,414) (912,906)
Leases made to customers.............................................................. (43,034) (41,589) (28,089)
Principal collected on leases......................................................... 34,750 33,849 28,614
Loan originations, net of principal collected......................................... (369,131) (228,610) (130,879)
Purchases of loans.................................................................... (3,907) (6,685) (55,003)
Net cash acquired in transactions accounted for under the purchase method of
accounting........................................................................... 32,221 56,796 220,464
Proceeds from disposals of premises and equipment..................................... 1,367 3,713 973
Investment in real estate acquired for development and resale......................... (4,139) (3,230) (1,619)
Purchases of premises and equipment................................................... (36,054) (20,109) (13,178)
Proceeds from sales of foreclosed property............................................ 43,896 33,420 36,351
Net cash (used in) provided by investing activities............................... (865,935) (377,438) 179,595
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.............................................................. 136,998 183,469 125,591
Net increase (decrease) in short-term borrowings...................................... 350,821 149,875 (80,167)
Proceeds from long-term debt.......................................................... 364,148 149,945 281,316
Repayment of long-term debt........................................................... (230,641) (129,460) (458,520)
Net proceeds from preferred stock issued.............................................. -- 74,142 --
Common stock acquired and retired..................................................... (5) (1,845) --
Net proceeds from common stock issued................................................. 3,163 1,211 23,465
Cash dividends paid on common and preferred stock..................................... (24,654) (18,481) (10,827)
Net cash provided by (used in) financing activities............................... 599,830 408,856 (119,142)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...................................... (10,519) 39,253 48,357
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................................ 372,820 333,567 285,210
CASH AND CASH EQUIVALENTS AT END OF YEAR.................................................. $ 362,301 $ 372,820 $ 333,567
See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES
For the Years Ended December 31, 1993, 1992 and 1991
Southern National Corporation ("Parent Company") is a multi-bank holding
company organized under the laws of North Carolina and registered with the
Federal Reserve Board under the Bank Holding Company Act of 1956, as amended.
Southern National Bank of North Carolina ("SNBNC"), Southern National Bank of
South Carolina ("SNBSC") (the "Banks") and SNB Savings Bank, Inc., SSB ("SSB")
comprise the Parent Company's principal subsidiaries.
The accounting and reporting policies of Southern National Corporation and
Subsidiaries ("Southern National" or "SNC") are in accordance with generally
accepted accounting principles and conform to general practices within the
banking industry. The following is a summary of the more significant policies.
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Southern National include the
accounts of the Parent Company and its subsidiaries, all of which are
wholly-owned. In consolidation, all significant intercompany accounts and
transactions have been eliminated. Prior period financial statements have been
restated to include the accounts of companies acquired in transactions accounted
for as poolings-of-interests. Results of operations of companies acquired in
transactions accounted for as purchases are included from the dates of
acquisition.
Certain amounts for prior years have been reclassified to conform with
statement presentations for 1993. The reclassifications have no effect on
shareholders' equity or net income as previously reported.
SECURITIES
Securities classified as held for investment are those securities that
management intends to hold to maturity, subject to continued creditworthiness of
the issuer, and that Southern National has the ability to hold on a long-term
basis. Accordingly, these securities are stated at cost, adjusted for
amortization of premium and accretion of discount, computed using the
level-yield method.
Securities classified as held for sale are intended to be held for indefinite
periods of time and include those securities that management may employ as part
of its asset/liability strategy or that may be sold in response to changes in
interest rates, prepayments, regulatory capital requirements or similar factors.
These securities are carried at the lower of amortized cost or market value.
Trading account securities, of which none were held on December 31, 1993 and
1992, are selected according to fundamental and technical analyses that identify
potential market movements. Trading account securities are positioned to take
advantage of such movements and are carried at market value. Market adjustments,
fees, gains or losses and income earned on trading account securities are
included in noninterest income.
Gains or losses from the sale of securities are determined from specific
cost-basis identification and are included in noninterest income.
On January 1, 1994 Southern National adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". SFAS No. 115 addresses the accounting and reporting
for investments in equity securities that have readily determinable fair values
and for all investments in debt securities. These investments are to be
classified in three categories: held to maturity, trading and available for
sale. At January 1, 1994, $1.19 billion of securities, with a market value of
approximately $1.21 billion, were classified as available for sale. Accordingly,
shareholders' equity increased approximately $11 million after tax. In
preparation for the adoption of SFAS No. 115, these same securities were
classified as held for sale at December 31, 1993. This classification at
year-end had no effect on income or shareholders' equity.
LOANS AND LEASE RECEIVABLES
Commercial loans and substantially all installment loans accrue interest on
the unpaid balance of the loans. The net amount of nonrefundable loan
origination fees and costs associated with the lending process, including
commitment fees, are deferred and amortized to interest income over the
contractual lives of the loans using the level-yield method. If the commitment
expires unexercised, the income is recognized upon expiration of the commitment.
Lease receivables consist primarily of direct financing leases on rolling
stock and equipment. Lease receivables are stated as the total amount of lease
payments receivable plus guaranteed residual values, less unearned income.
Recognition of income over the lives of the lease contracts approximates the
level-yield method.
LOANS HELD FOR SALE
Gains or losses on sale of loans are recognized at the time of sale and are
determined by the difference between the net sales proceeds and the carrying
value of the loans sold, adjusted for any yield differential, servicing fees and
servicing costs applicable to future years. Any resulting deferred premium or
discount is amortized, as an adjustment of yield, over the remaining life of the
loans using the level-yield method. Loans held for sale are reported at the
lower of cost or market value on an aggregate loan basis.
6
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOSSES
The provision for loan and lease losses charged to noninterest expense is the
estimated amount required to maintain the allowance for loan and lease losses at
a level adequate to cover estimated losses related to loans and leases currently
outstanding. The primary factors considered in determining the allowance are the
distribution of loans by risk class, the amount of the allowance specifically
allocated to nonperforming loans and other problem loans, prior years' loan loss
experience, economic conditions in Southern National's market areas and the
growth of the credit portfolio. Ultimate losses may vary from original estimates
and adjustments, as necessary, are made in the period in which these factors and
other relevant considerations indicate that loss levels may vary from those
previously estimated.
NONPERFORMING ASSETS
Nonperforming assets include loans and leases accounted for on a nonaccrual
basis and other real estate acquired through foreclosure.
Loans and leases are placed on nonaccrual status when concern exists that
principal or interest is not fully collectible, or when any portion of principal
or interest becomes 90 days past due, whichever occurs first. When loans are
placed on nonaccrual status, interest receivable is reversed against interest
income in the current period. Interest payments received thereafter are applied
as a reduction to the remaining principal balance when concern exists as to the
ultimate collection of the principal; otherwise such payments are recognized as
interest income. Loans and leases are removed from nonaccrual status when they
become current as to both principal and interest and when concern no longer
exists as to the collectibility of principal or interest.
Assets acquired as a result of foreclosure are valued at the lower of cost or
fair value, and carried thereafter at the lower of cost or fair value less
estimated selling costs. Cost is the sum of unpaid principal accrued but unpaid
interest and acquisition costs associated with the loan. Any excess of cost over
fair value at time of foreclosure is charged to the allowance for losses.
Foreclosed property was $6,356,000 and $36,778,000 at December 31, 1993 and
1992, and is included in other assets in the "CONSOLIDATED STATEMENTS OF
CONDITION".
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using principally the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements are
amortized on a straight-line basis over the lease terms. Capitalized leases are
amortized by the same methods as premises and equipment over the estimated
useful lives or the lease term, whichever is shorter. The related obligations
under capital leases are amortized using the interest method to allocate
payments between principal reduction and interest expense. Amortization of
capital lease assets and rent expense of operating leases are included in
occupancy and equipment expense, depending on the nature of the asset.
Additions, major replacements or improvements are added to premises and
equipment accounts at cost. Expenditures for maintenance, repairs and minor
replacements are charged to expense as incurred. Gains or losses on the disposal
of premises and equipment are included in results of current operations.
PURCHASED MORTGAGE SERVICING RIGHTS
Amounts paid to acquire the right to service certain mortgage loans are
capitalized. These rights are then amortized over the estimated servicing lives
of the loans to which they relate. The carrying amount, if greater than fair
value (as measured by expected net cash flows on a discounted, disaggregated
method) is adjusted by a charge to income. The 1993 results of operations
reflect an increase in the amortization of $3.9 million to conform the
accounting policies of the acquired entities to those of Southern National.
INCOME TAXES
The operating results of the Parent Company and its eligible subsidiaries are
included in a consolidated federal income tax return. Each subsidiary pays its
calculated portion of federal income taxes to the Parent Company, or receives
payment from the Parent Company to the extent that tax benefits are realized.
Deferred income taxes have been provided where different accounting methods have
been used for reporting for income tax purposes and for financial reporting
purposes. As explained in Note L, Southern National changed its method of
accounting for income taxes as of January 1, 1993. The operating results of
acquired institutions were included in their respective income tax returns for
the periods prior to consummation of the acquisition.
OFF-BALANCE SHEET INSTRUMENTS
Southern National utilizes financial forward and futures contracts, options
written, interest rate caps and floors written and interest rate swaps to hedge
interest rate risk associated with the asset/liability management, investment
and trading account functions. These represent future commitments to purchase or
sell financial instruments and, accordingly, the related notional values are not
reflected in the "CONSOLIDATED STATEMENTS OF CONDITION".
Income or expense on swaps and caps and floors qualifying as hedge
instruments is recognized over the lives of the agreements as an adjustment to
the yield of the particular underlying asset being hedged.
PER SHARE DATA
Primary net (loss) income per common share has been computed by dividing net
(loss) income applicable to common shares by the weighted average number of
shares of common stock and common stock equivalents outstanding during the
years, adjusted for the transactions accounted for as poolings-of-interests.
Common stock equivalents include the number of shares issuable on exercise of
outstanding options less the number of shares that could be purchased with the
proceeds from the exercise of the options based on the
7
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
average price of common stock during the years. Restricted stock grants are
considered as issued for purposes of calculating net income per share.
Fully diluted net income per common share has been computed by dividing net
income by the weighted average number of shares of common stock, common stock
equivalents and other potentially dilutive securities outstanding during the
years. Other potentially dilutive securities include the number of shares
issuable upon conversion of the preferred stock. The number of shares issuable
on exercise of options was calculated in the same manner as for primary net
income per common share, except that purchases of common stock with the proceeds
from the exercise of options have been assumed to have been made at the greater
of the average price for the year or year-end price.
Weighted average number of shares were as follows:
1993 1992
Primary..................................................................................... 42,331,126 40,777,780
Fully diluted............................................................................... 46,889,289 44,993,809
1991
Primary..................................................................................... 38,079,355
Fully diluted............................................................................... 38,111,574
Cash dividends per share relate to Southern National only and do not include
cash dividends paid by merged companies.
PURCHASE ACCOUNTING
The cost in excess of the fair value of net assets acquired in transactions
accounted as purchases, premiums paid on acquisitions of deposits and other
identifiable intangible assets are included in other assets in the "CONSOLIDATED
STATEMENTS OF CONDITION". These assets, which totaled $10.4 million and $41.9
million at December 31, 1993 and 1992, are being amortized on straight-line or
accelerated bases over periods ranging from 5 to 15 years. The excess of the
fair value of the net assets related to the East Coast Savings Bank, SSB ("East
Coast") transaction, reflected as negative goodwill in other liabilities in the
"CONSOLIDATED STATEMENTS OF CONDITION", amounted to approximately $16.5 million
at December 31, 1993 and is being amortized over 15 years. The 1993 results of
operations reflect an increase in the amortization of premiums paid on
acquisitions of deposits of $5.3 million to conform the accounting policies of
the acquired institutions to those of Southern National.
CHANGE IN ACCOUNTING PRINCIPLE
In 1982, The First acquired several troubled thrift institutions prior to the
effective date of SFAS No. 72, "Accounting for Certain Acquisitions of Banking
and Thrift Institutions". Effective as of January 1, 1993, The First adopted
SFAS No. 72 as of the date of the acquisition of these institutions. SFAS No. 72
sets forth a preferred method of allocating and amortizing to future periods the
excess of cost over net assets of certain acquired financial institutions.
Pursuant to this requirement, the intangible assets are being amortized using a
level-yield method over the actual lives of the long-term interest-bearing
assets of the acquired thrift institutions. The effect of the adoption of SFAS
No. 72 was to significantly accelerate the amortization of goodwill and the
accretion of the discounts on loans purchased resulting from the acquisition. As
a result of adopting SFAS No. 72, The First recognized a cumulative charge for
this change in accounting principle of $28,019,000, or $.60 per fully diluted
share. This charge is included under the caption "Cumulative effect of changes
in accounting principles, net of income taxes" in the "CONSOLIDATED STATEMENTS
OF OPERATIONS".
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
As referenced in the "CONSOLIDATED STATEMENTS OF CASH FLOWS", Southern
National acquired assets and assumed liabilities in transactions accounted for
under the purchase method of accounting. The fair value of the assets acquired
and liabilities assumed, at acquisition, are as follows:
1993 1992 1991
(DOLLARS IN THOUSANDS)
FAIR VALUE OF NET ASSETS ACQUIRED:
Fair value of assets acquired............................................................... $282,076 $314,531 $232,624
Fair value of liabilities assumed........................................................... 244,277 279,370 230,506
Fair value of net assets acquired......................................................... 37,799 35,161 2,118
PURCHASE PRICE:
Fair value of common shares and options issued.............................................. 20,839 33,947 --
Cash premium paid........................................................................... -- 3,751 1,784
Capitalized acquisition costs............................................................... 220 217 334
Total purchase price...................................................................... 21,059 37,915 2,118
Excess of net assets acquired over purchase price (purchase price over net assets acquired)... $ 16,740 $ (2,754) $ --
CASH PAID DURING THE YEAR FOR:
Interest.................................................................................... $233,175 $302,064 $379,708
Income taxes................................................................................ 57,031 35,907 20,319
TRANSFER OF LOANS TO OTHER REAL ESTATE ACQUIRED IN FORECLOSURE................................ 17,333 37,690 53,257
8
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from depository institutions,
interest-bearing bank balances, federal funds sold and securities purchased
under resale agreements or similar arrangements. Generally, both cash and cash
equivalents are considered to have maturities of three months or less.
INCOME AND EXPENSE RECOGNITION
Items of income and expense are recognized using the accrual basis of
accounting, except for some immaterial amounts.
TRUST ASSETS AND FEES
Assets held in fiduciary or agency capacities are not included in the
"CONSOLIDATED STATEMENTS OF CONDITION" since such items are not assets of
Southern National. Income from trust activities is reported on an accrual basis
or, in certain immaterial instances, a modified cash basis.
FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires Southern National to disclose the estimated fair value of its on-and
off-balance sheet financial instruments. A financial instrument is defined by
SFAS No. 107 as cash, evidence of an ownership interest in an entity or a
contract that creates a contractual obligation or right to deliver to or receive
cash or another financial instrument from a second entity on potentially
favorable or unfavorable terms.
Fair value estimates are made at a point in time, based on relevant market
data and information about the financial instrument. SFAS 107 specifies that
fair values should be calculated based on the value of one trading unit without
regard to any premium or discount that may result from concentrations of
ownership of a financial instrument, possible tax ramifications, estimated
transaction costs that may result from bulk sales or the relationship between
various financial instruments. Because no readily available market exists for a
significant portion of Southern National's financial instruments, fair value
estimates for these instruments are based on judgments regarding current
economic conditions, currency and interest rate risk characteristics, loss
experience and other factors. Many of these estimates involve uncertainties and
matters of significant judgment and cannot be determined with precision.
Therefore, the calculated fair value estimates cannot always be substantiated by
comparison to independent markets and, in many cases, may not be realizable in a
current sale of the instrument. Changes in assumptions could significantly
affect the estimates.
The following methods and assumptions were used by Southern National in
estimating the fair value of its financial instruments at December 31, 1993 and
1992.
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the "CONSOLIDATED
STATEMENTS OF CONDITION" approximate the fair value of those assets.
SECURITIES: Fair values for securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
LOANS RECEIVABLE: The fair values for certain mortgage loans and credit card
loans are based on quoted prices of similar loans, adjusted for differences in
loan characteristics. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms and credit quality. The carrying amount of accrued
interest approximates its fair values.
OFF-BALANCE SHEET INSTRUMENTS: The fair values for off-balance sheet
instruments (futures, swaps, forwards, options, guarantees and lending
commitments) are based on quoted prices, current settlement values or pricing
models or other formulas.
DEPOSIT LIABILITIES: The fair values disclosed for demand deposits,
interest-checking accounts, savings accounts and certain money market accounts
are, by definition, equal to the amount payable on demand at the reporting date,
i.e., their carrying amounts. Fair values for certificates of deposit are
estimated using a discounted cash flow calculation that applies current interest
rates to aggregate expected maturities.
SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, master notes and other short-term
borrowings approximate their fair values.
LONG-TERM DEBT: The fair values of long-term debt are based on quoted market
prices for similar instruments or are estimated using discounted cash flow
analyses, based on Southern National's current incremental borrowing rates for
similar types of instruments.
ACCOUNTING PRONOUNCEMENTS
In June 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". SFAS No. 114 requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, or as a practical
expedient, at the loan's observable market price or the fair value of the
collateral, less selling costs, if the loan is collateral dependent. Southern
National has not yet adopted SFAS No. 114; however, the implementation of SFAS
No. 114 is not expected to have a material impact on Southern National's
financial position. SFAS No. 114 is effective for fiscal years beginning after
December 15, 1994.
9
NOTE B. ACQUISITIONS AND PENDING MERGER
COMPLETED ACQUISITIONS
On January 28, 1994, Southern National completed its acquisition of The
First Savings Bank, FSB ("The First") by the issuance of 8,052,860 shares
of Southern National common stock, or 0.854815 share of Southern National
common stock in exchange for each share of The First's common stock
outstanding. Options to purchase shares of The First's common stock were
converted into options to purchase Southern National common stock at the
agreed-upon exchange rate of .855. The First, headquartered in
Greenville, South Carolina, operated 57 offices throughout South Carolina and
five out-of-state mortgage loan production offices in Georgia, North Carolina
and Virginia. The First was merged into SNBSC.
On January 31, 1994, Southern National completed its acquisition of Regency
Bancshares Inc. ("Regency") by the issuance of 2,437,498 shares of
Southern National common stock, or 1.8117 shares of Southern National
common stock in exchange for each share of Regency's common stock
outstanding. Options to purchase shares of Regency's common stock
were converted into options to purchase Southern National common stock at the
agreed-upon exchange rate of 1.81197. Regency was a multi-thrift holding company
operating First Savings Bank, Inc., SSB in Hickory, North Carolina, and Davidson
Savings Bank, Inc., SSB, in Lexington, North Carolina. Regency was merged into
Southern National Bank of North Carolina ("SNBNC").
On February 24, 1994, Southern National completed its acquisition of Home
Federal Savings Bank ("Home") by the issuance of 824,601 shares of
Southern National common stock, or 2.576878 shares of Southern National
common stock in exchange for each share of Home's common stock
outstanding. Options to purchase shares of Home's common stock were
converted into options to purchase Southern National common stock at the
agreed-upon exchange rate of 2.57717. Home, headquartered in Statesville, North
Carolina, operated three branches in North Carolina. Home was merged into SNBNC.
These acquisitions were accounted for under the pooling-of-interests method
of accounting. Accordingly, all financial information presented herein has been
restated to include the results of The First, Regency and Home. Shown in the
following table is a reconciliation of selected financial data on an historical
basis and as restated for 1993, 1992 and 1991.
Southern National Historical Basis
as orginally reported Regency Home The First
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1993
Net interest income........................................ $ 224,655 $ 9,525 $ 4,120 $ 72,163
Net income (loss).......................................... 71,993 (4,766) (1,262) (84,989)
Earnings (loss) per share
Primary.................................................. 2.16 (3.51) (3.94) (8.98)
Fully diluted............................................ 2.03 (3.51) (3.94) (8.98)
Assets..................................................... 5,898,394 262,910 98,098 2,015,068
Deposits................................................... 4,536,998 210,198 89,679 1,557,996
Shareholders' equity....................................... 503,149 19,014 6,813 35,888
1992
Net interest income........................................ 207,969 9,488 3,849 58,340
Net income................................................. 47,239 1,923 1,399 8,602
Earnings per share
Primary.................................................. 1.43 1.45 4.37 .96
Fully diluted............................................ 1.39 1.44 4.37 .96
Assets..................................................... 5,003,961 274,290 104,607 1,997,130
Deposits................................................... 4,132,125 221,522 95,855 1,591,426
Shareholders' equity....................................... 431,889 22,630 7,703 113,233
1991
Net interest income........................................ 157,883 7,842 3,107 53,514
Net income................................................. 33,819 1,571 775 8,444
Earnings per share
Primary.................................................. 1.21 1.23 2.42 .98
Fully diluted............................................ 1.21 1.22 2.42 .98
Assets..................................................... 4,120,994 263,492 106,435 2,076,388
Deposits................................................... 3,550,392 213,447 98,397 1,641,912
Shareholders' equity....................................... 293,722 20,898 6,560 104,134
Southern
National
as
restated
1993
Net interest income........................................ $ 310,463
Net income (loss).......................................... (19,024)
Earnings (loss) per share
Primary.................................................. (.57)
Fully diluted............................................ NM
Assets..................................................... 8,274,470
Deposits................................................... 6,394,871
Shareholders' equity....................................... 564,864
1992
Net interest income........................................ 279,646
Net income................................................. 59,163
Earnings per share
Primary.................................................. 1.34
Fully diluted............................................ 1.31
Assets..................................................... 7,379,988
Deposits................................................... 6,040,928
Shareholders' equity....................................... 575,455
1991
Net interest income........................................ 222,346
Net income................................................. 44,609
Earnings per share
Primary.................................................. 1.17
Fully diluted............................................ 1.17
Assets..................................................... 6,567,309
Deposits................................................... 5,504,148
Shareholders' equity....................................... 425,314
NM -- not meaningful
10
NOTE B. ACQUISITIONS AND PENDING MERGER (CONTINUED)
PENDING MERGER
On August 1, 1994, Southern National and BB&T Financial Corporation ("BB&T")
jointly announced the signing of a definitive agreement to merge. The
transaction will be accounted for as a pooling-of-interests in which BB&T
shareholders will receive 1.45 shares of the common stock of the resulting
company for each share of BB&T stock held. The market transaction has an
indicated total value of $2.2 billion based on July 29, 1994 closing prices of
the stock of both institutions. The merger, if approved, is expected to be
completed by the end of the second quarter of 1995.
NOTE C. SECURITIES
The amortized cost and approximate market value of securities were as
follows:
DECEMBER 31, 1993 December 31, 1992
GROSS ESTIMATED Gross
AMORTIZED UNREALIZED MARKET Amortized Unrealized
COST GAINS LOSSES VALUE Cost Gains Losses
(DOLLARS IN THOUSANDS)
U.S. Treasury, government and agency
obligations.................................... $ 780,646 $16,683 $1,024 $ 796,305 $ 993,507 $31,905 $1,187
States and political subdivisions............... 54,047 1,517 131 55,433 57,680 1,300 33
Mortgage-backed securities...................... 473,956 8,420 204 482,172 555,749 19,345 325
Other debt securities........................... 633 10 2 641 25,640 4 10
Total debt securities.......................... 1,309,282 26,630 1,361 1,334,551 1,632,576 52,554 1,555
Equity securities............................... 46,820 -- -- 46,820 45,682 66 --
Total investment securities.................... 1,356,102 26,630 1,361 1,381,371 1,678,258 52,620 1,555
Securities held for sale:
Mortgage-backed securities..................... 447,032 8,963 579 455,416 269,874 13,338 83
U.S. Treasury, government and agency
obligations................................... 747,198 10,902 2,521 755,579 8,253 47 71
Total securities held for sale................. 1,194,230 19,865 3,100 1,210,995 278,127 13,385 154
Total securities............................... $2,550,332 $46,495 $4,461 $2,592,366 $1,956,385 $66,005 $1,709
Estimated
Market
Value
<
U.S. Treasury, government and agency
obligations.................................... $1,024,225
States and political subdivisions............... 58,947
Mortgage-backed securities...................... 574,769
Other debt securities........................... 25,634
Total debt securities.......................... 1,683,575
Equity securities............................... 45,748
Total investment securities.................... 1,729,323
Securities held for sale:
Mortgage-backed securities..................... 283,129
U.S. Treasury, government and agency
obligations................................... 8,229
Total securities held for sale................. 291,358
Total securities............................... $2,020,681
Securities with a book value of approximately $1,098,086,000 and
$968,854,000 at December 31, 1993 and 1992, respectively, were pledged to secure
municipal deposits, securities sold under agreements to repurchase, Federal
Reserve discount window borrowings and for other purposes as required by law.
At December 31, 1993 and 1992, there was no concentration of investments in
obligations of states and political subdivisions that were secured by or payable
from the same taxing authority or revenue source and that exceeded ten percent
of shareholders' equity.
Proceeds from sales of debt securities during 1993, 1992 and 1991 were
$307,155,000, $183,862,000 and $817,246,000, respectively. Gross gains of
$14,794,000, $2,239,000 and $11,514,000 and gross losses of $1,080,000, $267,000
and $669,000 were realized on those sales in 1993, 1992 and 1991, respectively.
11
NOTE C. SECURITIES (CONTINUED)
The amortized cost and estimated market value of debt securities at December
31, 1993 and 1992, by contractual maturity, are shown in the accompanying table.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
December 31,
1993 1992
ESTIMATED Estimated
AMORTIZED MARKET Amortized Market
COST VALUE Cost Value
(DOLLARS IN THOUSANDS)
DEBT SECURITIES
Due in one year or less.................................................... $ 309,855 $ 315,735 $ 245,097 $ 251,802
Due after one year through five years...................................... 511,804 522,717 800,354 824,991
Due after five years through ten years..................................... 13,667 13,927 13,086 13,490
Due after ten years........................................................ -- -- 18,290 18,523
835,326 852,379 1,076,827 1,108,806
Mortgage-backed securities................................................. 473,956 482,172 555,749 574,769
Total investment debt securities........................................... 1,309,282 1,334,551 1,632,576 1,683,575
Securities held for sale................................................... 1,194,230 1,210,995 278,127 291,358
Total debt securities..................................................... $2,503,512 $2,545,546 $1,910,703 $1,974,933
NOTE D. LOANS AND LEASES
Loans and leases at December 31 were composed of the following:
1993 1992
(DOLLARS IN THOUSANDS)
Loans --
Commercial, financial and agricultural............................................................ $ 804,281 $ 765,475
Real estate -- construction and land development.................................................. 248,253 198,075
Real estate -- mortgage........................................................................... 2,904,525 2,667,561
Consumer.......................................................................................... 692,848 825,761
Loans held for investment....................................................................... 4,649,907 4,456,872
Loans held for sale............................................................................. 316,544 174,321
Total loans................................................................................... 4,966,451 4,631,193
Leases.............................................................................................. 225,312 170,358
Total loans and leases........................................................................ $5,191,763 $4,801,551
The net investment in direct financing leases was $192,442,000 and
$148,051,000 at December 31, 1993 and 1992, respectively. Loans held for sale
include loans in the bulk sale of assets which are carried at fair market value.
The difference between the carrying value of these loans and the fair market
value has been reflected in the loss on bulk sale of assets in the "CONSOLIDATED
STATEMENTS OF OPERATIONS".
Southern National's only significant concentration of credit at December 31,
1993 occurred in real estate loans, which totaled $3.5 billion. However, this
amount was not concentrated in any specific market or geographic area within
Southern National's market area. The distribution of real estate loans in North
and South Carolina is comparable to the distribution of total loans in the
two-state area. While real estate loans accounted for 67% of loans and leases at
December 31, 1993, only 5% of loans and leases were for construction, land
acquisition and development. Another $1.9 billion consisted of mortgage loans
for 1-4 family dwellings, including $382.7 million in home equity loans.
The fair value of the loan portfolio, excluding leases, at December 31, 1993
and 1992 was estimated to be $4,958,948,000 and $4,633,009,000, respectively.
12
NOTE E. ALLOWANCE FOR LOSSES
An analysis of the allowance for losses is presented in the following table:
Year Ended December 31,
1993 1992 1991
(DOLLARS IN THOUSANDS)
Balance, January 1............................................................................ $ 53,840 $ 44,918 $ 36,347
Provision for losses charged to expense....................................................... 31,438 25,671 30,602
Charge-offs................................................................................... (23,122) (27,147) (26,082)
Recoveries.................................................................................... 4,597 5,732 2,949
Allowance of loans acquired in purchase transactions.......................................... 2,750 2,850 850
Balance, December 31.......................................................................... $ 69,503 $ 52,024 $ 44,666
At December 31, 1993, 1992 and 1991, the amount of loans not currently
accruing interest based on the accrual policies of the individual institutions
prior to consummation of the acquisitions by Southern National was $28,372,000,
$60,430,000 and $61,232,000, respectively.The gross interest income that would
have been earned during 1993 if the outstanding nonaccrual loans and leases had
been current in accordance with the original terms and had been outstanding
throughout the period (or since origination, if held for part of the period) was
approximately $1.8 million. Interest earned and included in interest income
during 1993 on such loans and leases amounted to approximately $300,000. These
amounts are as originally reported by Southern National as such amounts for the
acquired institutions are not available.
NOTE F. PREMISES AND EQUIPMENT
Following is a summary of premises and equipment:
December 31,
1993 1992
(DOLLARS IN THOUSANDS)
Land and land improvements............................................................................ $ 25,596 $ 18,613
Buildings and building improvements................................................................... 93,207 84,074
Furniture and equipment............................................................................... 98,933 108,793
Capitalized leases on premises and equipment.......................................................... 5,054 4,963
222,790 216,443
Less -- accumulated depreciation and amortization..................................................... 86,562 90,559
Net premises and equipment.......................................................................... $136,228 $125,884
Depreciation expense, which is included in occupancy and equipment expense,
was $22,929,000, $12,448,000 and $11,433,000 in 1993, 1992 and 1991,
respectively.
Southern National has noncancellable leases covering certain premises and
equipment. Total rent expense applicable to operating leases was $8,502,000,
$7,299,000 and $6,943,000 for 1993, 1992 and 1991, respectively. Future minimum
lease payments for operating and capitalized leases for years subsequent to 1993
are as follows:
Leases
Operating Capitalized
(DOLLARS IN THOUSANDS)
Year ended December 31:
1994................................................................................................. $ 7,378 $ 492
1995................................................................................................. 7,172 487
1996................................................................................................. 5,314 487
1997................................................................................................. 4,659 487
1998................................................................................................. 4,309 487
1999 and later years................................................................................. 50,458 11,293
Total minimum lease payments........................................................................... $79,290 13,733
Less -- amount representing interest................................................................... 9,160
Present value of net minimum payments on capitalized leases (Note I)................................... $ 4,573
13
NOTE G. DEPOSITS
The composition of deposits at December 31 is presented in the following
table:
1993 1992
ESTIMATED Estimated
CARRYING FAIR Carrying Fair
VALUE VALUE Value Value
(DOLLARS IN THOUSANDS)
Demand deposits............................................................. $ 820,177 $ 820,177 $ 629,666 $ 629,666
Savings deposits............................................................ 1,380,241 1,380,241 1,129,312 1,129,312
Money market deposits....................................................... 1,005,356 1,005,356 958,017 958,017
Certificates of deposit $100,000 and over................................... 843,848 849,568 702,124 704,303
Other certificates of deposit............................................... 2,345,249 2,368,465 2,621,809 2,642,149
Total deposits............................................................. $6,394,871 $6,423,807 $6,040,928 $6,063,447
NOTE H. SHORT-TERM BORROWINGS
The composition of short-term borrowings at December 31 is presented in the
following table:
1993 1992
(DOLLARS IN THOUSANDS)
Securities sold under agreements to repurchase........................................................ $565,291 $394,087
Master notes.......................................................................................... 25,539 --
Federal Reserve discount window borrowings............................................................ 65,000 --
Federal funds purchased............................................................................... 58,890 8,810
U.S. Treasury tax and loan deposit notes payable...................................................... 41,623 755
Other short-term borrowings........................................................................... -- 1,870
Total short-term borrowings........................................................................... $756,343 $405,522
Federal funds purchased represent unsecured borrowings from other banks and
generally mature daily. Securities sold under agreements to repurchase are
borrowings collateralized by securities of the U.S. Government or its agencies
and have maturities ranging from one to ninety days. U.S. Treasury tax and loan
deposit notes payable are payable upon demand to the U.S. Treasury. Master notes
are unsecured, non-negotiable obligations of Southern National (variable rate
commercial paper).
NOTE I. LONG-TERM DEBT
Long-term debt at December 31, 1993 and 1992 consisted of the following:
1993 1992
(DOLLARS IN THOUSANDS)
PARENT COMPANY:
9.28%, $20 million senior capital notes, dated 1986, due in annual installments of amounts ranging
from $3,000,000 to $4,000,000 through 1996........................................................ $ 10,000 $ 13,000
$5 million Industrial Revenue Bond, dated 1984, secured by premises with a net book value of
$6,330,000 at December 31, 1993, due in quarterly installments of $83,340 through second quarter,
1999, and one final installment of $82,940 in 1999. Interest rate is variable -- 4.619% at
December 31, 1993................................................................................. 1,916 2,250
SNBNC:
Capitalized leases, varying maturities to 2028 with rates from 8.11% to 15.42%. This represents the
unamortized balances due on leases of various facilities.......................................... 4,573 4,615
Advances from Federal Home Loan Bank, varying maturities to 1997 with rates from 4.41% to 6.30%..... 103,800 38,800
Obligations of ESOP................................................................................. -- 1,320
Other mortgage indebtedness......................................................................... 312 14
SNBSC:
Advances from Federal Home Loan Bank, varying maturities to 2006 with rates from 3.73% to 8.52%..... 350,920 221,525
Unsecured subordinated capital notes, weighted average rate of 11.13% which mature in 1997.......... 8,156 7,903
Other mortgage indebtedness......................................................................... -- 716
$479,677 $290,143
14
NOTE I. LONG-TERM DEBT (CONTINUED)
Excluding the capitalized leases set forth in Note F, future debt maturities
total $475,104,000 and are $269,194,000, $37,738,000, $79,638,000, $23,604,000
and $28,938,000 for the next five years. The maturities for 1999 and later years
are $35,992,000. The estimated fair value of long-term debt, excluding
capitalized leases, at December 31, 1993 was $486,415,000.
NOTE J. SHAREHOLDERS' EQUITY
The authorized capital stock of Southern National consists of 120,000,000
shares of common stock, $5 par value, and 5,000,000 shares of preferred stock,
$5 par value. At December 31, 1993, 42,961,214 shares of common stock and
770,000 shares of preferred were issued and outstanding. The preferred stock is
convertible at any time into 5.9068 shares of common stock. Although not subject
to any mandatory redemption or sinking fund requirement, the preferred stock is
redeemable at the option of Southern National after March 1, 1996.
STOCK OPTION PLANS
The Non-Employee Directors' Stock Option Plan ("Directors' Plan") is intended
to provide incentives to non-employee directors to remain on the Board of
Directors and share in the profitability of Southern National and creates a
deferred compensation system for participating non-employee directors. Each
non-employee director may elect to defer 0%, 50% or 100% of the annual retainer
fee and meeting fees for each calendar year and apply that percentage toward the
grant of options to purchase Southern National common stock. Such elections are
required to be in writing and are irrevocable for each calendar year. The
exercise price at which shares of Southern National common stock may be
purchased shall be equal to 75% of the market value of the common stock as of
the date of grant. Options are vested in six months and may be exercised anytime
thereafter until the expiration date, which is 10 years from the date of grant.
The Directors' Plan provides for the reservation of up to 400,000 shares of
Southern National common stock. At December 31, 1993, options to purchase
101,427 shares of common stock at prices ranging from $12.7155 to $15.528 were
outstanding pursuant to the Directors' Plan.
The incentive stock option plan ("ISOP") and the non-qualified stock option
plan ("NQSOP ") were established to retain key officers and key management
employees and to offer them the incentive to use their best efforts on behalf of
Southern National. The plans, which expire on December 19, 2000, further provide
for 1,101,000 shares of common stock to be reserved over a five year period for
the granting of options, which have a four year vesting schedule and must be
exercised within ten years from the date granted. Incentive stock options
granted must have an exercise price equal to at least 100% of the fair market
value of common stock on the date granted, and the non-qualified stock options
must have an exercise price equal to at least 85% of the fair market value on
the date granted. At December 31, 1993, options to purchase 527,789 shares of
common stock at prices ranging from $9.50 to $16.75 were outstanding pursuant to
the NQSOP. At December 31, 1993, options to purchase 256,570 shares of common
stock at $19.77 were outstanding pursuant to the ISOP.
In connection with the acquisition of East Coast, the directors of East Coast
entered into consulting agreements with SNBNC and certain East Coast executive
officers entered into employment agreements with SNBNC. As part of these
agreements, options to purchase 157,382 shares of Southern National common
stock, with an exercise price of $21.06 per share, were granted to these
individuals.
At the time of acquisition by Southern National, The First had two incentive
stock option plans which provided for the granting of options to purchase shares
of The First's common stock to directors, officers and other key employees. At
merger date, each option was converted into an option to purchase .855 share of
Southern National common stock.
Regency had an incentive stock option plan for the granting of options to
purchase shares of Regency common stock to certain full-time officers and
employees. On the date of grant, the option exercise period was limited to ten
years. Regency also had a non-qualified directors' stock option plan. At merger
date, each Regency option was converted into an option to purchase 1.81197
shares of Southern National common stock.
Home also has an incentive stock option plan which provided for the granting
of options to key employees to purchase shares of Home common stock. Under the
terms of the plan, the options were exercisable over a ten year period. Each
option to purchase Home's common stock was converted into an option to purchase
2.57717 shares of Southern National common stock.
1993 1992 1991
AGGREGATE Aggregate Aggregate
OPTION ACTIVITY SHARES PRICE Shares Price Shares Price
(DOLLARS IN THOUSANDS)
Outstanding, January 1............................... 2,162,221 $15,793 1,703,729 $ 9,316 1,008,780 $ 5,313
Granted ($2.67 to $21.06)............................ 464,073 9,152 450,301 5,697 968,364 5,094
Exercised ($2.67 to $13.02).......................... 904,358 3,975 150,352 821 7,031 28
Expired or forfeited................................. -- -- 7,208 26 266,384 1,063
Outstanding December 31 ($2.67 to $21.06)............ 1,721,936 $20,970 1,996,470 $14,166 1,703,729 $ 9,316
Options exercisable at December 31, 1993
($2.67 to $21.06 per share)........................ 995,225 $ 7,931
15
NOTE K. SUPPLEMENTAL INCOME STATEMENT INFORMATION
Year Ended December 31,
1993 1992 1991
(DOLLARS IN THOUSANDS)
INTEREST ON DEPOSITS
Savings deposits.......................................................................... $ 30,924 $ 26,877 $ 29,307
Money market deposits..................................................................... 25,677 37,978 50,891
Certificates of deposit $100,000 and over................................................. 16,498 22,474 32,689
Other certificates of deposit............................................................. 122,105 163,843 202,573
$195,204 $251,172 $315,460
NONINTEREST INCOME
Nondeposit fees and commissions:
Insurance fees and commissions.......................................................... $ 6,569 $ 3,447 $ 3,073
Trust fees.............................................................................. 3,000 2,688 2,542
Bankcard related fees................................................................... 7,567 5,526 5,228
Other fees and commissions.............................................................. 7,371 8,793 8,180
$ 24,507 $ 20,454 $ 19,023
Other income
Gain on sales of loans, net............................................................. $ 5,849 $ 11,672 $ 13,513
Other................................................................................... 6,764 8,199 3,600
$ 12,613 $ 19,871 $ 17,113
NONINTEREST EXPENSE
Personnel expense:
Salaries................................................................................ $107,052 $ 92,907 $ 82,124
Employee benefits....................................................................... 24,629 21,351 17,039
$131,681 $114,258 $ 99,163
Other expense:
Data Processing......................................................................... $ 7,374 $ 4,279 $ 4,099
Advertising............................................................................. 7,000 6,439 5,744
Amortization of intangibles............................................................. 9,527 5,411 3,604
Other................................................................................... 56,502 45,820 41,708
$ 80,403 $ 61,949 $ 55,155
NOTE L. INCOME TAXES
The total provision for income taxes was allocated as follows:
1993 1992 1991
(DOLLARS IN THOUSANDS)
Income from operations.......................................................................... $22,445 $39,992 $23,902
Cumulative effect of changes in accounting principles........................................... (2,897) -- --
Total provision for income taxes................................................................ $19,548 $39,992 $23,902
The provision for income taxes attributable to operations was composed of
the following:
1993 1992 1991
(DOLLARS IN THOUSANDS)
Currently payable:
Federal...................................................................................... $ 31,965 $34,824 $24,898
State........................................................................................ 1,732 1,590 624
33,697 36,414 25,522
Deferred (benefit) expense..................................................................... (11,252) 3,578 (1,620)
Provision for income taxes..................................................................... $ 22,445 $39,992 $23,902
16
NOTE L. INCOME TAXES (CONTINUED)
Deferred (benefit) expense results from timing differences in the accounting
for certain income and expense items for financial reporting purposes and for
income tax purposes. The book and tax accounting difference related to changes
in the tax accounting method for bad debts of savings institutions converting to
a commercial bank resulted in a deferred tax expense of $3,823,000 for 1992.
There were no other significant book and tax accounting differences in 1992 or
1991.
The reasons for the difference between the provision for income taxes
attributable to operations and the amount computed by applying the statutory
federal income tax rate to the income before income taxes were as follows:
1993 1992 1991
(DOLLARS IN THOUSANDS)
Federal income taxes at statutory rates of 35% for 1993 and 34% for 1992 and 1991............... $10,723 $33,713 $23,294
Tax-exempt income from securities, loans and leases less related non-deductible interest
expense....................................................................................... (2,399) (1,963) (1,843)
Changes in tax accounting method for bad debts of savings institutions converting to a
commercial bank............................................................................... 9,389 5,190 --
Other, net...................................................................................... 4,732 3,052 2,451
Provision for income taxes...................................................................... $22,445 $39,992 $23,902
Effective income tax rate....................................................................... 73.3% 40.3% 34.9%
Income taxes (benefits) related to securities gains (losses) for 1993, 1992
and 1991 were $5,219,000, $(30,000) and $1,465,000, respectively.
As of January 1, 1993, Southern National adopted SFAS No. 109, "Accounting
for Income Taxes", which changes the method of accounting for income taxes under
generally accepted accounting principles. As a result of adopting SFAS 109,
Southern National recognized a cumulative benefit of the change in accounting
principle of $6,368,000, or $.14 per fully diluted share. The benefit is
included under the caption "Cumulative effect of changes in accounting
principles, net of income taxes" in the "CONSOLIDATED STATEMENTS OF OPERATIONS".
The effect of this change, excluding the cumulative benefit, for the year ended
December 31, 1993 had no material effect on net income or fully diluted earnings
per share.
The tax effects of temporary differences that gave rise to significant
portions of the net deferred tax assets (liabilities) in the "CONSOLIDATED
STATEMENTS OF CONDITION" at December 31, 1993, as adjusted for the adoption of
SFAS 109 were:
DECEMBER 31,
1993
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Allowance for losses.................................................................................. $ 25,498
Postretirement benefits other than pensions........................................................... 4,017
Other................................................................................................. 11,223
Total tax deferred assets............................................................................... 40,738
Deferred tax liabilities:
Tax accounting method changes......................................................................... (10,811)
Lease financing....................................................................................... (9,833)
Dividends on FHLB stock............................................................................... (4,574)
Other................................................................................................. (7,454)
Total tax deferred liabilities.......................................................................... (32,672)
Net deferred tax asset.................................................................................. $ 8,066
The deferred tax assets have been determined to be realizable and,
accordingly, a valuation allowance was not required. At December 31, 1993,
Southern National did not have any operating losses, income tax credits or
alternative minimum tax credit carryforwards.
Retained earnings at December 31, 1993 included the effect of $7,411,000 of
tax bad debt reserves accumulated prior to October 1, 1988 which were applicable
to SSB for which no provision for income taxes has been made. If in the future
this portion of retained earnings is used for any purpose other than to absorb
tax bad debt losses of SSB, income taxes will be imposed at the then applicable
rates. Since SSB does not intend to use the reserves for purposes other than to
absorb its tax bad debt losses, deferred income taxes have not been provided on
such reserves. Deferred income taxes have been provided on the tax bad debt
reserves of the acquired entities and SSB's tax bad debt reserves accumulated
after September 30, 1988.
17
NOTE M. BENEFIT PLANS
Southern National has various employee benefit plans and arrangements.
Employees of the acquired entities participate in existing Southern National
plans upon consummation of the acquisitions. Credit is given to these employees
for years of service at the acquired institution.
The combination of actuarial information for the benefit plans of the
acquired entities is not meaningful because the benefits offered in those plans
and assumptions used in the calculations related to those plans will be
superceded by the benefits offered in the Southern National plans and the
assumptions used in the Southern National calculations. Accordingly, the
actuarial information presented for retirement plans and postretirement benefits
is that of Southern National as originally presented.
The following amounts are included in the "CONSOLIDATED STATEMENTS OF
OPERATIONS", as restated for the acquisitions, related to employee benefit plans
of Southern National and the acquired institutions:
1993 1992 1991
(DOLLARS IN THOUSANDS)
Defined benefit plans.............................................................................. $3,705 $3,499 $2,876
Employee stock ownership plans (ESOP).............................................................. 3,010 2,567 2,083
Defined contribution plans......................................................................... 255 259 105
Total expense related to benefit plans........................................................... $6,970 $6,325 $5,064
RETIREMENT PLANS
Southern National has a non-contributory defined benefit pension plan ("Basic
Plan") covering substantially all employees. The benefits are based on years of
service and the employee's compensation during the five consecutive years of
employment that will produce the highest average pay. Southern National's
contributions to the plan are in amounts between the minimum required for
funding standard account purposes and the maximum deductible for Internal
Revenue Service purposes. Contributions to the plan of $3,089,000 and $4,299,000
were made in 1993 and 1992, respectively.
Supplemental retirement benefits are provided to certain key officers under
Southern National's Supplemental Executive Retirement Plan ("SERP"), effective
January 1, 1989. This plan is not qualified under the Internal Revenue Code.
Although technically an unfunded plan, insurance policies on the lives of the
covered employees are intended to be adequate to fund future benefits.
Net periodic pension cost, which is included in personnel expense, consisted
of the following components in 1993, 1992 and 1991.
Basic Plan SERP
1993 1992 1991 1993 1992 1991
(DOLLARS IN THOUSANDS)
Service cost.............................................................. $ 2,708 $ 2,183 $ 2,042 $275 $112 $ 69
Interest cost............................................................. 3,577 3,173 2,797 129 64 49
Actual return on assets................................................... (3,512) (2,634) (4,584) -- -- --
Net amortization and deferral............................................. (525) (895) 1,653 62 27 27
Early retirement.......................................................... -- 557 -- -- -- --
Net periodic pension cost............................................... $ 2,248 $ 2,384 $ 1,908 $466 $203 $145
The following table sets forth the plans' funded status and amounts
recognized in Southern National's "CONSOLIDATED STATEMENTS OF CONDITION" at
December 31, 1993 and 1992.
Basic Plan SERP
1993 1992 1993 1992
(DOLLARS IN THOUSANDS)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $37,119 in 1993 and
$34,030 in 1992................................................................... $(37,838) $(34,694) $ -- $ --
Projected benefit obligation at
December 31....................................................................... $(49,472) $(45,127) $(2,009) $ (981)
Plan assets at fair value, primarily obligations of the U.S. Treasury and Federal
agencies and corporations........................................................... 50,438 46,582 -- --
Plan assets in excess of (less than) projected benefit obligation..................... 966 1,455 (2,009) (981)
Unrecognized transition amount........................................................ (154) (307) 271 299
Unrecognized prior service cost....................................................... 1,217 1,537 -- --
Unrecognized net loss................................................................. 2,866 1,399 691 94
Prepaid (accrued) pension cost........................................................ $ 4,895 $ 4,084 $(1,047) $ (588)
18
NOTE M. BENEFIT PLANS (CONTINUED)
The rate of increase in future compensation used in determining the actuarial
present value of the projected benefit obligation was 6.0% for 1993 and 1992.
The weighted average assumed discount rate was 8.0% in 1993 and 1992. The
weighted average expected long-term rate of return on assets used was 9.0% in
1993 and 1992.
POSTRETIREMENT BENEFITS
Effective December 31, 1992, Southern National adopted a revised retiree
medical program ("Plan") in preparation for implementation of SFAS No. 106,
"Accounting for Postretirement Benefits Other Than Pensions". The Plan covers
employees retiring after January 1, 1993 who are eligible for participation in
the Southern National Retirement Plan and have at least ten years of service.
The Plan requires retiree contributions, with a subsidy by Southern National
based upon years of service of the employee at the time of retirement. The
subsidy is adjusted each year for movement of the Consumer Price Index. There is
no employer subsidy for dependent benefits. Employees who retired prior to
January 1, 1993 are grandfathered and may choose from three comprehensive
medical options with varying deductibles.
Southern National adopted SFAS No. 106 as of January 1, 1993. As a result of
adopting SFAS No. 106, Southern National recognized a cumulative charge for this
change in accounting principle of $5,566,000 (net of $2,897,000 of deferred
income tax benefits), or $.15 per fully diluted share. The charge is included
under the caption "Cumulative effect of changes in accounting principles, net of
income taxes" in the "CONSOLIDATED STATEMENTS OF OPERATIONS". The effect of this
change, net of income taxes and excluding the cumulative charge, for the year
ended December 31, 1993 was to decrease net income by $628,000 or approximately
$.01 per fully diluted share.
The accumulated postretirement benefit obligation was $7,469,000 at December
31, 1993. Net postretirement health care cost for 1993 includes the following
components:
1993
(DOLLARS IN THOUSANDS)
Service cost -- benefits attributed to service during the period......................................... $300
Interest cost on accumulated postretirement benefit obligation........................................... 539
Net periodic postretirement benefit costs.............................................................. $839
For measurement purposes, a 15.7% annual rate of increase in the per capita
cost of covered health care claims was assumed for 1993; the rate was assumed to
remain stable for four years, then decrease to 6.5% for 1997 and years
thereafter. Medical costs are assumed to increase from 13% of the gross national
product in 1991 to 17.5% in 1997 and remain constant thereafter. A 1% increase
in the assumed long-term health care trend rate would increase the net periodic
benefit cost by 4.6% and the expected postretirement benefit obligation by 4.2%.
Other actuarial assumptions are an 8.5% discount rate and a 5.5% assumed annual
increase in all other items. Although technically an unfunded plan,
corporate-owned life insurance policies are intended to partially fund future
benefits.
EMPLOYEE STOCK OWNERSHIP PLAN
Southern National's Employee Stock Ownership Plan allows all employees to
acquire common stock in SNC by contributing up to 15% of their salaries to the
plan. Southern National matches 100% of each employee's contributions, up to a
maximum of 6% of the employee's salary.
OTHER
There are various deferred compensation arrangements, employment contracts
and covenants not to compete with selected members of management and certain
retirees.
NOTE N. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS
Southern National is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, options written,
standby letters of credit and financial guarantees, interest rate caps and
floors written, interest rate swaps and forward and futures contracts. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. The contract, or
notional amounts, of those instruments reflect the extent of involvement
Southern National has in particular classes of financial instruments.
Southern National's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual notional amount of those instruments. Southern National uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. For interest rate caps, floors, swap
transactions, forward and futures contracts and options written, the contract or
notional amounts do not represent exposure to credit loss. Southern National
controls the credit risk of its interest rate swap agreements and forward and
futures contracts through credit approvals, limits and monitoring procedures.
19
NOTE N. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Unless noted otherwise, Southern National does not require collateral or
other security to support financial instruments with credit risk.
Estimated
Fair Value at
Contract or December 31,
Notional Amount at Unrealized
December 31, (gain) loss
1993 1992 1993 1992
(Dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend, originate or purchase credit............................. $874,064 $ 902,745 $(2,051) $(2,893)
Standby letters of credit and financial guarantees written...................... 167,933 25,626 (655) (123)
Financial instruments whose notional or contract amounts exceed the amount of
credit risk:
Commitments to sell mortgage loans and mortgage-backed securities............... 367,381 133,453 (287) (2,065)
Interest rate swap agreements................................................... 213,094 13,917 (1,010) 239
Interest rate caps and floors................................................... 400,000 1,050,000 90 2,250
Commitments to extend credit are arrangements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Southern National evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by Southern National upon extension of credit is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by Southern National to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing and similar transactions. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities
to customers. Southern National holds first deeds of trust, certificates of
deposit and/or marketable securities as collateral supporting those commitments
for which collateral is deemed necessary. The extent of collateral held for
those commitments at December 31, 1993 was approximately $11.5 million.
Forward commitments to sell mortgage loans and mortgage-backed securities are
contracts for delayed delivery of securities in which Southern National agrees
to make delivery at a specified future date of a specified instrument, at a
specified price or yield. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
securities' values and interest rates.
Southern National enters into a variety of interest rate
contracts -- including interest rate caps and floors written, options written
and interest rate swap agreements -- in its trading activities and in managing
its interest rate exposure. Interest rate caps and floors written by Southern
National enable customers to transfer, modify or reduce their interest rate
risk. Options are contracts that allow the holder of the option to purchase or
sell a financial instrument at a specified price and within a specified period
of time from the seller or "writer" of the option. As a writer of options,
Southern National receives a premium at the outset and then bears the risk of an
unfavorable change in the price of the financial instrument underlying the
option.
Interest rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amounts. These transactions are used as part of the
asset/liability management function. Southern National minimizes its exposure to
the interest rate risk inherent in swaps by entering into offsetting swap
positions that essentially counterbalance each other. Entering into interest
rate swap agreements involves not only the risk of dealing with counterparties
and their ability to meet the terms of the contracts but also the interest rate
risk associated with unmatched positions. Notional principal amounts often are
used to express the volume of these transactions, but the amounts potentially
subject to credit risk are much smaller.
LITIGATION
In June 1991, the trustee in bankruptcy for Kenyon Home Furnishings
("Kenyon") filed an adversary proceeding against SNBNC in the United States
Bankruptcy Court for the Middle District of North Carolina. The trustee alleges
that American Bank and Trust Company ("American"), which was acquired by SNBNC
in October 1989, aided and abetted Kenyon's officers in defrauding Kenyon's
creditors and others. The trustee seeks to recover more than $40 million in
damages. The trustee also filed separate proceedings against a number of other
persons, corporations and financial institutions seeking identical damages. In
these actions, the trustee is seeking to recover attorney's fees and treble
damages. The claim addresses events and circumstances occurring on or before
October 31, 1989, the date SNBNC acquired American. The case is in the discovery
stage and SNBNC is vigorously defending this action. Based on information
presently available to Southern National, management believes that the ultimate
outcome of this matter will not have a material impact on the consolidated
financial condition or consolidated results of operations of Southern National.
20
NOTE N. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In July 1993, the trustee in bankruptcy for Florida Hotel Properties Limited
Partnership ("Florida ") filed an adversary proceeding against SNBNC in the
United States Bankruptcy Court for the Western District of North Carolina. The
trustee alleges that SNBNC aided and abetted Florida's officers in defrauding
Florida through SNBNC's handling of deposit accounts from which Florida
allegedly made fraudulent transfers to third parties by check and/or wire
transfer. The trustee seeks to recover compensatory damages in excess of
$10,000, equitable subordination of any claim filed by SNBNC in the Florida
bankruptcy, treble damages plus interest and attorney's fees. The trustee also
filed separate proceedings against a number of other persons, corporations and
financial institutions seeking damages. The case is in an early procedural
stage, and SNBNC is vigorously defending this action. Based on information
presently available to Southern National, management believes that the ultimate
outcome of this matter will not have a material impact on the consolidated
financial condition or consolidated results of operations of Southern National.
In August 1993, the trustee for Southeast Hotel Properties Limited
Partnership Claims Liquidating Trust ("Southeast ") filed an action against
SNBNC in the United States District Court for the Western District of North
Carolina. The trustee alleges that SNBNC aided and abetted Southeast's officers
in defrauding Southeast through SNBNC's handling of deposit accounts from which
Southeast allegedly made fraudulent transfers to third parties by check and/or
wire transfer. The trustee seeks to recover compensatory damages as established
at trial, punitive damages, exemplary damages, treble damages and attorney's
fees. The total amount of damages sought by the trustee from SNBNC, including
amounts sought by the trustee from immediate transferees of Southeast, exceeds
$7,501,000. The damages stated by the trustee do not reflect any offsets which
appear available or amounts which should be recovered by the trustee from third
parties. The trustee also filed separate proceedings against a number of other
persons, corporations and financial institutions seeking damages. The case is in
an early procedural stage, and SNBNC is vigorously defending this action. The
case will likely be consolidated with the Florida adversary proceeding for trial
as the allegations refer to related entities. Based on information presently
available to Southern National, management believes that the ultimate outcome of
this matter will not have a material impact on the consolidated financial
condition or consolidated results of operations of Southern National.
SNBSC as successor in interest by merger to The First is a defendant in a
lawsuit filed in 1991 in the Court of Common Pleas, Thirteenth Judicial Circuit,
State of South Carolina against The First Savings Bank. On May 21, 1993, a jury
awarded the plaintiffs a $4.1 million judgment against The First consisting of
$500,000 in actual damages and $3.6 million in punitive damages for allegedly
acting as a control person and aiding and abetting a state securities law
violation. The plaintiffs, limited partners in a failed venture to construct and
operate a residential health care facility for senior citizens, alleged that The
First, as an escrow agent and lender for the project, knew or should have known
that its loan commitment was insufficient and that The First was therefore
responsible for the losses suffered by the limited partners resulting from the
actions of the general partners.
Prior to this case going to jury, The First made a motion for a directed
verdict which was not granted. Rule 50(b) of the South Carolina Rules of Civil
Procedure states that when a motion for directed verdict is not granted, the
Court is deemed to have submitted the action to the jury subject to a later
determination of the legal question raised in the motion. After the jury
verdict, The First renewed that motion in the form of a motion for judgment
notwithstanding the verdict, as well as an alternative motion for a new trial.
This motion and the plaintiff's petition for legal fees, costs and interest were
argued before the Circuit Judge on June 22, 1993. The First's motion was granted
as to the plaintiff's "control person" theory of liability, but denied as to the
plaintiff's aiding and abetting violations of securities laws theory of
liability. The request for a new trial was also denied. As a result, the
judgment remains in effect, but has been appealed. It is the opinion of Southern
National's legal counsel that it is not probable that a loss in the amount of
the present jury verdict will be incurred by SNBSC. Furthermore, if a loss
ultimately is incurred following appeals, it is not probable that the loss would
exceed $750,000 which amount has been accrued as of December 31, 1993.
Therefore, it is management's opinion, based upon counsel's analysis of the
outcome of the suit, that any future liability arising from this suit will not
have a material adverse effect on the consolidated financial position or
consolidated results of operations of Southern National.
The nature of the business of Southern National's banking subsidiaries
ordinarily results in a certain amount of litigation. The subsidiaries of
Southern National are involved in various other claims and lawsuits, all of
which are considered incidental to the conduct of its business.
NOTE O. REGULATORY REQUIREMENTS AND OTHER RESTRICTIONS
Southern National, the Banks and SSB are required by various regulatory
agencies to maintain certain capital-to-assets ratios. At December 31, 1993,
these ratios were above the minimums prescribed for bank holding companies,
national banks and state savings banks.
The Banks and SSB are required by the Board of Governors of the Federal
Reserve System ("Board"), to maintain reserve balances based on certain
percentages of deposit types. At December 31, 1993, these reserves amounted to
$101,835,000 and were satisfied by vault cash and noninterest-bearing deposits
with the Federal Reserve Bank.
Under the regulations of the Office of the Comptroller of the Currency
("OCC"), at December 31, 1993, SNBNC and SNBSC could have paid additional
dividends to Southern National of $43.3 million and $12.9 million, respectively,
without obtaining prior approval of the OCC. SSB, in accordance with Title IV of
North Carolina general statutes, Chapter 16A.0105, can make capital
distributions, including cash dividends, to Southern National with prior
approval of the Administrator, in an amount less than the greater of one-half of
net income for the most recent fiscal year or the average of net income for the
most recent three years.
21
NOTE O. REGULATORY REQUIREMENTS AND OTHER RESTRICTIONS (CONTINUED)
At the time a mutual thrift is converted to a capital stock form of
organization, a liquidation account is established to be maintained for the
benefit of eligible deposit account holders who continue to maintain their
deposit accounts with the institution, or a successor institution, after
conversion. Except for payment of dividends to Parent Company, the existence of
these liquidation accounts will not restrict the use or application of
shareholder's equity of SSB or SNBNC.
The terms of the capital note agreement (Note I) provide for various
restrictions on Southern National, including restrictions on the payment of
dividends and incurrence of additional debt. Under these covenants, as of
December 31, 1993, approximately $198.0 million was available for payment of
cash dividends by Southern National from its retained earnings.
The following table provides an analysis of loans made to directors,
executive officers and their interests, which in the aggregate exceeded $60,000
at any time during 1993. All amounts shown represent loans made by Southern
National's subsidiary banks in the ordinary course of business at the Banks'
normal credit terms, including interest rate and collateralization prevailing at
the time for comparable transactions with other persons:
(DOLLARS IN THOUSANDS)
Balance, December 31, 1992.............................................................................. $ 27,220
Additions............................................................................................... 33,634
Repayments.............................................................................................. 25,140
BALANCE, DECEMBER 31, 1993.............................................................................. $ 35,714
NOTE P. PARENT COMPANY FINANCIAL STATEMENTS
STATEMENTS OF CONDITION
December 31, 1993 and 1992
(DOLLARS IN THOUSANDS)
1993 1992
ASSETS
Cash.................................................................................................. $ 1,699 $ 3,001
Securities............................................................................................ 108,041 48,013
Receivables from subsidiaries......................................................................... 8,232 848
Investment in bank subsidiaries, at equity............................................................ 411,537 387,114
Investment in other subsidiaries, at equity........................................................... 65,906 146,405
Premises.............................................................................................. 6,330 6,501
Other assets.......................................................................................... 1,849 2,233
Total assets...................................................................................... $603,594 $594,115
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings................................................................................. $ 25,540 $ --
Accounts payable and accrued liabilities.............................................................. 1,274 3,410
Capital notes and mortgages........................................................................... 11,916 15,250
Total liabilities................................................................................. 38,730 18,660
Shareholders' equity:
Preferred stock..................................................................................... 3,850 3,850
Common stock........................................................................................ 214,806 190,452
Paid-in capital..................................................................................... 151,186 143,167
Retained earnings................................................................................... 195,022 237,986
Total shareholders' equity........................................................................ 564,864 575,455
Total liabilities and shareholders' equity........................................................ $603,594 $594,115
22
NOTE P. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1993, 1992 and 1991
(DOLLARS IN THOUSANDS)
1993 1992 1991
INCOME
Dividend income from subsidiaries............................................................ $ 66,449 $17,849 $13,004
Interest income from subsidiaries............................................................ 619 4,612 1,073
Interest on investment securities............................................................ 2,295 1,123 176
Rental income................................................................................ 1,292 1,292 1,294
Other income................................................................................. 897 102 66
Total income............................................................................... 71,552 24,978 15,613
EXPENSES
Interest expense............................................................................. 1,636 1,512 1,670
Occupancy expense............................................................................ 450 182 172
Other expenses............................................................................... 2,631 2,228 631
Total expenses............................................................................. 4,717 3,922 2,473
Income before income tax provision (credit) and equity in undistributed earnings of
subsidiaries................................................................................. 66,835 21,056 13,140
Income tax provision (credit).................................................................. 365 958 (201)
Income before equity in undistributed earnings of subsidiaries................................. 66,470 20,098 13,341
Equity in undistributed (losses) earnings of subsidiaries...................................... (85,494) 39,065 31,268
NET (LOSS) INCOME.............................................................................. $(19,024) $59,163 $44,609
23
NOTE P. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1993, 1992 and 1991
(DOLLARS IN THOUSANDS)
1993 1992 1991
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................................................... $(19,024) $ 59,163 $ 44,609
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Equity in undistributed (losses) earnings of subsidiaries................................. 85,494 (39,065) (31,268)
Depreciation of premises and equipment.................................................... 1,041 361 194
Discount accretion and premium amortization on securities................................. 126 -- --
Decrease (increase) in receivables from subsidiaries...................................... (6,654) 2,225 (300)
Reconciliation of fiscal year of merged companies to calendar year........................ (51) 2,257 --
Increase in other assets.................................................................. (2,117) (160) (2,585)
Increase (decrease) in accounts payable and accrued liabilities........................... (557) (203) 592
Net cash provided by operating activities............................................... 58,258 24,578 11,242
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in merger accounted for as purchase........................................... -- 311 --
Proceeds from maturities of investment securities........................................... 5,000 35,000 --
Proceeds from sales of investment securities................................................ -- -- 336
Purchase of investment securities........................................................... (65,154) (77,739) (9,641)
Additional investment in subsidiaries....................................................... (116) (32,500) (12,864)
Return of investment in subsidiaries........................................................ -- -- 229
Net cash used in investing activities..................................................... (60,270) (74,928) (21,940)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt................................................................. (3,334) (2,333) (1,334)
Common stock acquired and retired........................................................... (5) (1,845) --
Proceeds from common stock issued pursuant to stock options................................. 3,163 1,211 23,465
Net proceeds from sale of preferred stock................................................... -- 74,142 --
Net increase in short-term borrowings....................................................... 25,540 -- --
Cash dividends paid on common and preferred stock........................................... (24,654) (18,481) (10,827)
Net cash provided by financing activities................................................. 710 52,694 11,304
NET (DECREASE) INCREASE IN CASH............................................................... (1,302) 2,344 606
CASH AT BEGINNING OF YEAR..................................................................... 3,001 657 51
CASH AT END OF YEAR........................................................................... $ 1,699 $ 3,001 $ 657
During the years ended December 31, 1993, 1992 and 1991, Parent Company paid
$1,306,000, $1,512,000 and $1,670,000, respectively, for interest on long-term
debt.
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