WINSTON-SALEM, N.C. -- Southern National Corp. finished the 1980s as a sleepy alsoran confined mainly to the eastern part of North Carolina. Now, midway through the 1990s, it has become a highly profitable regional bank, with a strong franchise in both Carolinas.

L. Glenn Orr Jr., the man who engineered this transformation, believes that Southern National, with $8.1 billion of assets, can chart its own destiny by remaining independent or, if it chooses, selling on its own terms.

"We can go either way," says Mr. Orr, the company's chairman, president, and CEO.

The independence question takes on some urgency since North Carolina will be open to reciprocal national interstate banking by July 1, 1996, which would allow banks from outside the Southeast to buy into the state. Legislation making its way through Congress could make that happen even sooner.

Eye Toward Virginia

But Mr. Orr indicates he's likely to be more of an acquirer. And while he expects to remain focused on the two Carolinas "for the foreseeable future," he doesn't rule out venturing into a contiguous state, most likely Virginia.

"I just believe the opportunities for a bank our size would be better in Virginia," he says.

Mr. Orr exudes self confidence and with good reason. Southern National finished the first quarter with a return on assets of 1.30% and a return on equity of 19.61%. The company outstrips most of its peers in both efficiency (with a 60% expense-to-revenue ratio) and credit quality (0.86% nonperformers to total loans).

But there are some lingering questions. An expensive and dilutive thrift acquisition last year - five times larger than any previous deal in the company's history - could yet come back to haunt Mr. Orr. Southern National's paucity of fee income also makes it heavily dependent on its net interest margin, which could come under pressure later this year.

Greenville Deal

The acquisition of the First Savings Bank of Greenville, S.C., was clearly Southern National's major strategic move of the '90s. In one fell swoop, Mr. Orr added $2 billion of new assets and boosted Southern National's deposit market share in South Carolina from ninth place to third.

Trouble is, the deal didn't come cheap. Southern National agreed to pay $181 million in stock, or 1.74 times the First's tangible book value, for a mediocre performer.

Southern National avoided impairing its future earnings performance by taking all its lumps up front. A $74 million merger-related restructuring charge in last year's fourth quarter produced a downward restatement of Southern National's 1993 earnings from $2.03 a share to 57 cents, which ate into common equity and reduced yearend book value from $13.47 a share to $11.42.

Mr. Orr defends the price as necessary to clinch the deal. Other bidders were reported to be in the hunt, including Charlotte-based First Union Corp. and South Trust Corp., Birmingham, Ala. In addition, no other opportunities existed in South Carolina for Southern National to increase its presence in a meaningful way.

"When we finally came down to the yes or no trigger, I think the value that we saw in the South Carolina market and the value represented by the First overcame our reluctance to take dilution," says Morris D. Marley, Southern National's chief investment officer and treasurer.

Southern National's challenge now is to build the First's profitability up to its own standards, which mainly entails building a portfolio of commercial loans - no small task since the First was principally a residential mortgage lender with only an embryonic commercial lending arm.

The influx of the First's residential mortgages has already reduced Southern National's overall ratio of commercial loans to total loans from 53% to 48%.

"The burden of proof is on Southern National right now," says Guy W. Ford, an analyst with Scott & Stringfellow Inc. in Richmond.

Building Up Staff

To build up its commercial lending effort in South Carolina, Southern National has been aggressively hiring employees away from competitors. Its new city executive in Spartanburg, Mickey Pierce, comes from First Union. His counterpart in Orangeburg, Jim Ferguson, joined Southern National from NationsBank Corp.

Over time, Southern National hopes this team can duplicate the success of its commercial lenders in North Carolina, who have been able to hold their own against other mid tier-banks and the Big Three: First Union, NationsBank, and Wachovia Corp. Southern National showed good loan growth throughout the early '90s, when the recession was hindering other lenders.

Chief credit officer Michael W. Sperry says Southern National is able to win deals from the Big Three by providing customers with more flexibility in loan structuring. Southern National is also not shy about calling in the company's big guns, including himself or Mr. Orr, to persuade an undecided customer.

Explains Thinking

"When it gets to the $5 million to $10 million deal, more than likely, we're going to have better quality resources focused on that deal than the competition has, just because their better people are working on the $50 million deals," Mr. Sperry says.

Southern National's other major challenge is to build up its fee income, which is now a relatively low 23% of revenues. A high-level executive task force regularly analyzes possible fee income generators and Mr. Orr says he plans to hire someone whose sole responsibility will be to look for these opportunities.

Acquiring the First helped noninterest income, boosting Southern National's mortgage servicing portfolio by $2.4 billion in outstandings to $3.7 billion, making it the largest mortgage lender in South Carolina.

The bank is also selling mutual funds and annuities through its broker-dealer subsidiary and plans to market insurance products through a subsidiary thrift, which doesn't face bank-like restrictions on insurance powers.

Investment Products Profits

Last year, the broker-dealer subsidiary sold $75 million of investment products - three-fourths of which were third-party mutual funds, the rest annuities - generating $4 million in revenues.

Mr. Orr says he's currently weighing a decision about expanding the credit card operation, which has reached $51.4 million in outstandings, or getting out of that business. Until now, Southern National has marketed cards to only its own customers, a strategy Mr. Orr feels is no longer viable.

Mr. Orr, 54, is an avid golfer who relishes the outdoors and nearly any kind of sport. "If I had done what I wanted to in life, I'd be a football coach," he says.

Instead, the Spartanburg, S.C., native began a banking career 28 years ago as a manager trainee at Wachovia in Winston-Salem. After eight years spent absorbing Wachovia's conservative credit culture as a lending officer, Mr. Orr went on to run community banks in Greenville, S.C., and then Winston-Salem.

He joined Southern National in 1982 when that Lumberton-based company bought his bank, Forsyth Bank & Trust Co. He took command as chairman and CEO in 1990.

Southern National, which traces its roots to 1897, was profitable at that time, but inefficent. Some units, such as the trust department, were retained as a customer service but not required to show a profit.

The bank also spent the '80s building a lot of branches, which helped boost the expenses-to-revenue ratio to 68%. Return on assets limped along at 0.70% and return on equity languished at 10.87%.

Mr. Orr and his team decided early on to focus the company on several financial goals: get 12% earnings per-share growth, year after year; bump ROA up to at least the 1% level and ROE up to 15%. By closing underperforming branches and improving revenues, Mr. Orr and his managers achieved those goals by 1992.

"They've taken a company that was a good bank but a fairly mediocre-to-average performer and turned it into, by just about any fundamental measure, a high performing bank," says David C. Stumpf, an analyst with Wheat First Securities in Richmond.

Southern National employees credit Mr. Orr with the transformation. "It was like he lit a fire in everybody in the system," says Mr. Marley, the treasurer.

Moved to the City

Underlining Southern National's improved self-image was Mr. Orr's decision to move the headquarters of its North Carolina bank from Lumberton (pop. 18,601), in the rural southeast of the state, to Winston-Salem (pop. 143,485), a more bustling business center in the Piedmont.

Southern National's holding company remains officially based in Lumberton, but Mr. Orr spends three or four days a week in Winston-Salem, where the bank occupies a 20-story glass tower. Wachovia's new 28-story headquarters is being constructed right across the street.

Mr. Orr doesn't mind being in the shadow of Wachovia, whose $36 billion in assets make it four times as large as Southern National. In fact, he considers it a blessing. One of the reasons Southern National moved to Winston-Salem was to be more accessible to Wall Street analysts and money managers, thereby facilitating its capital-raising efforts.

"To get an analyst to come to a place like Lumberton, which is kind of out of the way, is very difficult," he says. "Now, when these analysts come to see Wachovia, they're going to go out the back door of Wachovia and come over to see us."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.