-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GWa9fJ9/7lAo+4W74xIR6ko7cBSZlLdNhRT1P6H1TNGukrfi6VQJxF/EbNVbryj3 W7jwfJ7ae/kkqdi21zbpcg== 0000928385-97-000444.txt : 19970318 0000928385-97-000444.hdr.sgml : 19970318 ACCESSION NUMBER: 0000928385-97-000444 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970317 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN NATIONAL CORP /NC/ CENTRAL INDEX KEY: 0000092230 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 560939887 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10853 FILM NUMBER: 97557808 BUSINESS ADDRESS: STREET 1: 200 WEST SECOND STREET CITY: WINSTON-SALEM STATE: NC ZIP: 27101 BUSINESS PHONE: 9107332180 MAIL ADDRESS: STREET 1: 200 WEST SECOND STREET CITY: WINSTON-SALEM STATE: NC ZIP: 27101 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996 COMMISSION FILE NUMBER: 1-10853 ---------------- SOUTHERN NATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NORTH CAROLINA 56-0939887 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 200 WEST SECOND STREET 27101 WINSTON-SALEM, NORTH CAROLINA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ---------------- (910) 733-2000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE SECURITIES EXCHANGE ACT OF 1934: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ----------------------- --------------------- COMMON STOCK, $5 PAR VALUE NEW YORK STOCK EXCHANGE SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The aggregate market value of the voting stock held by non-affiliates of the Registrant at January 31, 1997 was approximately $4.2 billion. The number of shares of the Registrant's Common Stock outstanding on January 31, 1997 was 109,466,577. Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on April 22, 1997, are incorporated by reference in Part III of this Report. The Exhibit Index begins on page 81. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1 CROSS REFERENCE INDEX
PAGE ------ PART I Item 1 Business............................................. 4 Item 2 Properties........................................... 18, 59 Item 3 Legal Proceedings.................................... 70 Item 4 Submission of Matters to a Vote of Shareholders...... 2 None. PART II Item 5 Market for the Registrant's Common Stock and Related 38-39 Shareholder Matters................................. On November 7, 1996, the Registrant issued 70,207 shares of common stock to the three shareholders of an insurance agency based in Greenville, South Carolina in exchange for the transfer of substantially all of the net assets of such agency to Branch Banking and Trust Company ("BB&T-NC"). On November 13, 1996, the Registrant issued 48,120 shares of common stock to the two shareholders of a second insurance agency based in Greenville, South Carolina in exchange for the transfer of substantially all of the net assets of such agency to BB&T-NC. On November 22, 1996, the Registrant issued 492,063 shares of common stock to the five shareholders of an insurance agency based in Columbia, South Carolina in exchange for the transfer of substantially all of the net assets of such agency to BB&T-NC. The Registrant made each of the foregoing issuances in reliance on the exemption from registration provided under Section 4(2) of the Securities Act and based on the number of purchasers (as to each transaction and in the aggregate), their ability to evaluate the merits and risks of the investment and the absence of public solicitation of investors. Item 6 Selected Financial Data.............................. 42 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................. 19 Item 8 Financial Statements and Supplementary Data.......... 41 Consolidated Balance Sheets at December 31, 1996 and 1995................................................ 45 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1996................................................ 46 Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended December 31, 1996...................... 47 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1996................................................ 48 Notes to Consolidated Financial Statements........... 49 Report of Independent Public Accountants............. 44 Quarterly Financial Summary for 1996 and 1995........ 41 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. None. PART III Item 10 Directors and Executive Officers of the Registrant... *, 15 Item 11 Executive Compensation............................... * Item 12 Security Ownership of Certain Beneficial Owners and Management.......................................... * Item 13 Certain Relationships and Related Transactions....... *
2 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8- K (a)(1) Financial Statements (See Item 8 for reference). (2) Financial Statement Schedules normally required on Form 10-K are omitted since they are not applicable. (3) Exhibits have been filed separately with the Commission and are available upon written request. (b) Southern National Corporation ("Southern National") filed a Form 8-K on January 22, 1996, under Item 5 to report the results of operations and financial condition as of December 31, 1995. Southern National filed a Form 8-K under Item 5 on April 15, 1996 to report the results of operations and financial condition as of March 31, 1996. Southern National filed a Form 8-K under Item 5 on May 3, 1996 to report plans to acquire Regional Acceptance Corporation of Greenville, North Carolina. Southern National filed a Form 8-K under Item 5 on July 12, 1996 to report the results of operations and financial condition as of June 30, 1996. Southern National filed a Form 8-K under Item 5 on August 27, 1996 to report plans to acquire Fidelity Financial Bankshares Corporation of Richmond, Virginia. Southern National filed a Form 8-K under Item 5 on September 3, 1996 to report that the acquisition of Regional Acceptance Corporation had been completed through the issuance of 5.85 million shares of common stock. Southern National filed a Form 8-K under Item 5 on October 11, 1996 to report the results of operations and financial condition as of September 30, 1996. Southern National filed a Form 8-K under Item 5 on October 11, 1996 to report plans to purchase a number of common shares equal to the amount issued in the Fidelity Financial Bankshares Corporation transaction. Southern National also reported that the transaction would be accounted for as a purchase, instead of a pooling of interests, which was originally planned. Southern National filed a Form 8-K under Item 5 on November 4, 1996 to report plans to acquire United Carolina Bancshares Corporation of Whiteville, North Carolina. Southern National filed a Form 8- K under Item 5 on December 19, 1996 to announce the adoption of a shareholder rights plan. Southern National filed a Form 8-K under Item 5 on January 14, 1997 to report the results of operations and financial condition as of December 31, 1996.
- -------- * The information called for by Item 10 is incorporated herein by reference to the information that appears under the headings "Additional Matters Relating to the SNC Meeting--Election of Directors" and "--Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders. The information called for by Item 11 is incorporated herein by reference to the information that appears under the headings "Additional Matters Relating to the SNC Meeting--Compensation of Executive Officers", "Retirement Plans" and "SNC Compensation Committee Report on Executive Compensation" in the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders. The information called for by Item 12 is incorporated herein by reference to the information that appears under the headings "Additional Matters Relating to the SNC Meeting--Security Ownership" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders. The information called for by Item 13 is incorporated herein by reference to the information that appears under the headings "Additional Matters Relating to the SNC Meeting--Compensation Committee Interlocks and Insider Participation" and "Transactions with Officers and Directors" in the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders. 3 BUSINESS GENERAL Southern National Corporation ("Southern National" or the "Corporation") is a multi-bank holding company headquartered in Winston-Salem, North Carolina. Southern National conducts its operations in North Carolina, South Carolina and Virginia primarily through its commercial banking subsidiaries and, to a lesser extent, through its other subsidiaries. Substantially all of Southern National's loans are to businesses and individuals in the Carolinas and Virginia. The principal assets of Southern National are all of the outstanding shares of common stock of Branch Banking and Trust Company, of Winston-Salem, North Carolina; BB&T Financial Corporation of South Carolina, located in Greenville, South Carolina, which in turn owns all the outstanding shares of Branch Banking and Trust Company of South Carolina; BB&T Financial Corporation of Virginia, which in turn owns all the outstanding shares of Branch Banking and Trust Company of Virginia; and Regional Acceptance Corporation of Greenville, North Carolina. Subsidiaries Branch Banking and Trust Company ("BB&T-NC"), Southern National's largest subsidiary, is the oldest bank in North Carolina and currently operates through 299 banking offices throughout North Carolina. BB&T-NC focuses on providing a wide range of banking services in its local market for retail and commercial customers, including small and mid-sized businesses, public agencies and local governments, trust customers and individuals. BB&T-NC's subsidiaries include BB&T Leasing Corp., in Charlotte, North Carolina, which offers lease financing to commercial businesses. BB&T Investment Services, Inc., also a wholly-owned subsidiary of BB&T-NC located in Wilson, North Carolina, offers customers investment alternatives, including discount brokerage services, fixed-rate and variable-rate annuities, mutual funds and government and municipal bonds. BB&T Insurance Services, Inc., located in Raleigh, North Carolina, offers life and property and casualty insurance on an agency basis. Southern National currently has the largest independent insurance agency network in North and South Carolina. BB&T-NC has numerous additional subsidiaries, including Goddard Technology Corporation, which engages in the design and production of imaging and security devices and programs, and Prime Rate Premium Finance Corporation, Inc., which provides insurance premium financing and services to customers in Virginia and the Carolinas. BB&T-NC also owns 51% of AutoBase Information Systems, Inc. ("AutoBase"), a Charlotte, North Carolina-based company that uses advanced technologies to simplify the car-buying process for consumers and automotive dealers. Branch Banking & Trust Company of South Carolina ("BB&T-SC") serves South Carolina through 95 banking offices. BB&T-SC focuses on providing a wide range of banking services in its local market for retail and commercial customers, including small and mid-sized businesses, public agencies, local governments, trust customers and individuals. BB&T-SC's subsidiaries include BB&T Investment Services of South Carolina, Inc., which is licensed as a general broker/dealer of securities and is currently engaged in the retailing of mutual funds, U.S. Government securities, municipal securities, fixed and variable rate insurance annuity products and unit investment trusts. Branch Banking & Trust Company of Virginia ("BB&T-VA"), operates 21 banking offices in the Hampton Roads Region of Virginia. BB&T-VA offers a full range of commercial and retail banking services and provides Southern National with a strong initial presence in Virginia. Regional Acceptance Corporation ("Regional Acceptance"), a subsidiary of Southern National, was acquired effective September 1, 1996. Regional Acceptance, which operates 28 branch offices in the Carolinas, Tennessee and Virginia, specializes in indirect financing for consumer purchases of mid- model and late-model used automobiles. Unified Investors Life Insurance Company ("Unified") is a reinsurer and underwriter of certain credit life and credit accident and health insurance policies written by a non-affiliated insurance company in connection with loans made by the bank subsidiaries. 4 The following table discloses selected information related to Southern National's banking subsidiaries: - ------------------------------------------------------------------------------- TABLE 1 SELECTED FINANCIAL DATA OF BANKING SUBSIDIARIES AS OF / FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
BB&T-NC BB&T-SC BB&T-VA ----------------------------------- -------------------------------- -------------------------- 1996 1995 1994 1996 1995 1994 1996 1995 1994 ----------- ----------- ----------- ---------- ---------- ---------- -------- -------- -------- (DOLLARS IN THOUSANDS) Total assets........... $16,595,684 $15,991,534 $15,245,447 $3,826,477 $3,818,547 $4,084,659 $790,955 $737,462 $700,343 Securities............. 4,164,538 4,236,682 4,088,564 929,753 942,193 1,064,061 147,019 154,358 187,461 Loans and leases, net of unearned income*... 11,253,963 10,599,611 9,922,471 2,635,833 2,703,600 2,725,868 550,218 505,767 450,798 Deposits............... 11,975,969 11,544,525 10,925,196 2,987,021 2,923,981 2,956,733 690,318 669,000 628,750 Shareholder's equity... 1,307,223 1,111,680 1,104,458 373,622 360,262 303,058 67,039 60,734 47,865 Net interest income.... 609,150 555,765 549,231 159,000 153,669 157,550 35,144 31,231 28,863 Provision for loan and lease losses.......... 36,875 24,772 8,004 7,355 4,718 7,241 2,550 1,910 2,600 Noninterest income..... 277,775 198,122 183,862 54,459 55,094 44,432 10,296 4,650 8,793 Noninterest expense.... 543,788 528,477 446,902 128,315 114,915 120,929 24,839 25,965 24,832 Net income............. 208,406 136,016 183,240 52,785 58,566 47,109 11,791 4,853 7,011
- -------- * Includes loans held for sale. - ------------------------------------------------------------------------------- Acquisitions and Pending Mergers Profitability and market share have been enhanced through both internal growth and acquisitions in recent years. The acquisition strategy of Southern National is focused on three primary objectives: (1) to pursue in-market acquisitions of high-quality banks and thrifts in the $250 million to $5 billion range, (2) to acquire companies in niche markets that provide products or services that can be offered to Southern National's current customer base, and (3) to build a portfolio of "venture capital" investments by taking an equity interest in first and second stage companies that have a product with potential application for the financial services industry. On September 1, 1996, Southern National acquired Regional Acceptance in a stock transaction valued at $167 million. Regional Acceptance's shareholders received .3861 shares of Southern National's common stock for each share of common stock held. On August 22, 1996, Southern National announced plans to acquire Fidelity Financial Bankshares Corporation of Richmond, Virginia, ("Fidelity") in a stock transaction valued at $59.4 million. Fidelity, with $321 million in assets, operates seven branches in the Richmond metropolitan area through its subsidiary, Fidelity Federal Savings Bank. The savings bank will merge into BB&T-VA. The merger of Fidelity will be accounted for as a purchase. On August 29, 1996, Southern National announced that it had become a majority shareholder of AutoBase, by purchasing 51% of the Charlotte, North Carolina-based company's outstanding common stock. AutoBase will continue to operate under its name as a subsidiary of BB&T-NC. Southern National also purchased certain assets and liabilities of four insurance agencies during 1996 with combined premiums of $65 million. These agencies were Boyle-Vaughan Associates, Inc., of Columbia, South Carolina, the William Goldsmith Agency Inc. and the C. Dan Joyner Insurance Agency, both of Greenville, South Carolina and the James R. Lingle Agency, Inc. of Florence, South Carolina. These acquisitions solidify Southern National's position as the Carolinas' largest network of independent insurance agencies. 5 On November 4, 1996, Southern National and United Carolina Bancshares Corporation ("UCB") jointly announced the signing of a merger agreement. The merger will be accounted for as a pooling of interests in which UCB shareholders will receive 1.135 shares of Southern National common stock for each share of UCB common stock held. The transaction is valued at $985 million. On January 23, 1997, Southern National announced plans to acquire Refloat, Inc. of Mount Airy, North Carolina, and its principal subsidiary, Sheffield Financial Corp., a finance company in Clemmons, North Carolina that specializes in loans to small commercial lawn care businesses across the country. On February 4, 1997, Southern National announced plans to acquire Phillips Factors Corporation and its subsidiaries, Phillips Financial Corporation and Phillips Acceptance Corporation, all of High Point, North Carolina. Phillips Financial Corporation, which will operate as a subsidiary of Southern National, purchases and manages receivables in the temporary staffing industry nationwide. It also provides payroll processing services to that industry. Phillips Factors Corporation buys and manages account receivables primarily in the furniture, textiles and home furnishings-related industries. Competition The banking industry is highly competitive and dramatic change continues to occur. The banking subsidiaries of Southern National compete actively with national and state banks, savings and loan associations, securities dealers, mortgage bankers, finance companies and insurance companies. Competition for financial products continues to grow as customers move to nontraditional financial institutions. For additional information on markets, Southern National's competitive position and strategies, see "Market Area" and "Lending Activities" below. MARKET AREA Southern National's primary market area consists of North Carolina, South Carolina and Virginia. The area's employment base consists of manufacturing industries, service, wholesale/retail, financial centers and agricultural enterprises. Among the primary area industries in which Southern National has significant commercial lending relationships are textiles, furniture and health care. Southern National believes its current market area is adequate to support consistent growth in assets and deposits in the future. Even so, management expects to continue to employ aggressive growth strategies, including possible expansion into neighboring states. The current market area includes numerous small communities that Southern National seeks to serve. Management believes that maintaining a community bank approach as asset size and available services grow will strengthen the Corporation's ability to move into new states and communities and to target small to mid-sized commercial customers in these areas. LENDING ACTIVITIES The primary goal of the Southern National lending function is to help customers achieve their financial goals and secure their financial futures. This purpose can best be accomplished by building strong, profitable customer relationships over time, with Southern National becoming an important contributor to the prosperity and well-being of its customers. Southern National's philosophy of lending is to attempt to meet all legitimate business and consumer credit needs within defined market segments where standards of safety, profitability and liquidity can be met. Southern National focuses lending efforts on small to intermediate commercial and industrial loans, one-to-four family residential mortgage loans and other consumer loans. Typically, fixed-rate mortgage loans are sold in the secondary mortgage market and adjustable-rate mortgages are retained for the portfolio. Loan growth typically follows economic cycles and has been steady, with increasing momentum, during 1996. Management's lending strategy is to establish market share in strategic cities and develop customer relationships by providing quality products and services to the customer base. Once the relationship is established, management focuses on 6 small business lending and retail banking through the branches to generate additional growth. During 1996, management's lending focus emphasized marketing loan products from a quality, service-driven perspective. After the merger of Southern National and BB&T Financial Corporation in early 1995, pricing strategies surrounding loans and deposits were very competitive in order to protect current market positions and retain customer relationships. However, market research performed during and after the merger identified quality service as the primary concern of borrowers. It is Southern National's intention to conduct lending activities in the context of the Corporation's community bank focus, with decentralized lending decisions made as close to the customer as practicable. - ------------------------------------------------------------------------------- TABLE 2 COMPOSITION OF LOAN AND LEASE PORTFOLIO*
DECEMBER 31, ----------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Loans-- Commercial, financial and agricultural...... $ 2,375,121 $ 2,098,306 $ 2,679,046 $ 2,031,561 $ 1,868,658 Real estate-- construction and land development........... 1,228,043 949,513 701,181 702,108 592,267 Real estate--mortgage.. 8,513,945 8,671,941 7,787,792 7,114,136 5,947,434 Consumer............... 1,830,519 1,716,399 1,702,058 1,608,443 1,532,536 ----------- ----------- ----------- ----------- ----------- Loans held for invest- ment................. 13,947,628 13,436,159 12,870,077 11,456,248 9,940,895 Loans held for sale... 219,469 245,280 136,855 682,097 426,281 ----------- ----------- ----------- ----------- ----------- Total loans.......... 14,167,097 13,681,439 13,006,932 12,138,345 10,367,176 Leases.................. 576,991 376,152 304,544 225,312 170,358 ----------- ----------- ----------- ----------- ----------- Total loans and leases............... $14,744,088 $14,057,591 $13,311,476 $12,363,657 $10,537,534 =========== =========== =========== =========== ===========
- -------- * Balances are gross of unearned income. - ------------------------------------------------------------------------------- One-to-Four Family Residential Mortgage Lending Southern National engages in mortgage loan originations by offering fixed- and adjustable-rate government and conventional loans for the purpose of constructing, purchasing or refinancing owner-occupied properties. As mentioned above, the Corporation usually retains adjustable-rate loans for the portfolio and sells fixed-rate loans and government loans within the secondary mortgage market. Servicing rights on loans sold are typically retained by Southern National. Loans are generally offered in amounts up to 95% of the appraised value of the collateral for terms up to 30 years based on the qualifications of the borrower. Except in the Community Reinvestment Act ("CRA") program discussed below, private mortgage insurance is required in an amount sufficient to reduce Southern National's exposure to less than 80% of the loan-to-value ratio. Pricing for mortgage loans is established to be highly-competitive with area lenders. Southern National does not originate loans with negative amortization. Risks associated with the residential lending function include interest rate risk, which is mitigated through the sale of substantially all fixed-rate loans, and default risk by the borrower, which is lessened through underwriting procedures and private mortgage insurance. Southern National also purchases mortgage loans through various correspondents and subjects them to the same underwriting and investment strategies as loans originated through the branch delivery system. The Corporation also offers, as part of its CRA program, more flexible underwriting criteria to broaden the availability of mortgage loans in the communities Southern National serves. CRA loans are available at loan-to- 7 value ratios up to 97% for households with incomes up to a specified percentage of county median incomes. Such loans do not require private mortgage insurance. These loans are currently retained in the portfolio since they do not meet the necessary requirements to be sold in the secondary mortgage market at the time of origination. Commercial Lending Southern National's commercial lending program is generally targeted to serve small to middle-market businesses with sales of $250 million or less, although in-house limits do allow lending to larger customers, including national customers who have some reasonable business connections with the Corporation's geographically-served markets. Commercial lending includes commercial, financial, agricultural, industrial and real estate loans. Pricing on commercial loans, driven largely by competition, is usually tied to the prime rate. Construction Lending Real estate construction loans include 12 month contract housing loans which are intended to convert to permanent one-to-four family residential mortgage loans upon completion of the construction. These loans have terms and options similar to residential mortgage loans and allow a rate to be "locked in" by the borrower during the 12 month construction period. The loans also allow a "float down" option once during the term of the construction loan. Southern National also originates commercial construction loans. These loans are usually to in-market developers, businesses, individuals or real estate investors for the construction of commercial structures in the Corporation's market area, including, but not limited to, industrial facilities, apartments, shopping centers, office buildings, hotels and warehouses. The properties may be for sale, lease or owner-occupancy. The Corporation generally requires the borrower to make a commitment to "take-out" the construction loan and typically requires significant levels of pre-sales, pre-leasing or, in the case of owner-occupied properties, that the owner has adequate resources to repay the debt. Generally, these loans carry floating interest rates tied to the Corporation's prime interest rate or some other similar index, and range in term from six to eighteen months. Consumer Lending Southern National offers various consumer loan products. Both secured and unsecured loans are marketed to existing clients and to any other creditworthy candidates. Standard Home Equity Loans and Lines are underwritten with note amounts and credit limits that ensure consistency with the Corporation's loan- to-value policy (80% for consumer loans secured by real estate). Numerous forms of unsecured loans, including revolving credits (bankcards, DDA overdraft protection and personal lines of credit) are provided and various installment loan products, including vehicle loans, are offered. Pricing of such loans is based, to a great degree, on in-market competition. Closed-end installment loans are usually priced as fixed-rate simple interest loans, while most revolving products are priced with variable rates. Through the acquisition of Regional Acceptance, Southern National is expanding the sales finance function by accepting riskier loans on customer purchases of mid-model to late-model used automobiles. Such loans are priced higher than Southern National's normal grade consumer loans based on the higher level of risk associated with these types of loans. Leasing Southern National provides commercial leasing products and services in North Carolina, South Carolina and Virginia primarily through BB&T Leasing Corp. ("Leasing"). Since Leasing is a separate subsidiary, it is not restricted to North and South Carolina to obtain business. Leasing provides three primary products: finance or capital leases, true leases (as defined under the Internal Revenue Code) and other operating leases. Leasing provides products and services for small to medium-sized commercial customers primarily in Southern National's market area. Such products include vehicles, rolling stock and tangible personal property. Leasing is 8 seeking to augment the existing customer base with larger commercial customers. For the twenty-two year history with Southern National, the sales effort of Leasing has been directed at fleet leasing. The mix of vehicle and equipment leases has remained approximately 75% vehicle to 25% equipment. Southern National also solicits leasing business from municipalities in North and South Carolina through its subsidiary banks. - ------------------------------------------------------------------------------- TABLE 3 SELECTED LOAN MATURITIES AND INTEREST SENSITIVITY*
DECEMBER 31, 1996 ------------------------------------ COMMERCIAL, FINANCIAL AND REAL ESTATE: AGRICULTURAL CONSTRUCTION TOTAL ------------ ------------ ---------- (DOLLARS IN THOUSANDS) Fixed rate: 1 year or less (2)...................... $ 185,734 $ 189,241 $ 374,975 1-5 years............................... 294,990 93,208 388,198 After 5 years........................... 65,553 -- 65,553 ---------- ---------- ---------- Total................................. 546,277 282,449 828,726 ---------- ---------- ---------- Variable rate: 1 year or less (2)...................... 859,556 633,547 1,493,103 1-5 years............................... 877,845 312,047 1,189,892 After 5 years........................... 91,443 -- 91,443 ---------- ---------- ---------- Total................................. 1,828,844 945,594 2,774,438 ---------- ---------- ---------- Total loans and leases (1).......... $2,375,121 $1,228,043 $3,603,164 ========== ========== ==========
- -------- * Balances are gross of unearned income. (1) The table excludes: (i) consumer loans to individuals for household, family and other personal expenditures............................ $ 1,830,519 (ii) real estate mortgage loans.............................. 8,513,945 (iii) loans held for sale.................................... 219,469 (iv) leases.................................................. 576,991 ------------ $ 11,140,924 ============
(2) Includes loans due on demand. Scheduled repayments are reported in the maturity category in which the payment is due. Determinations of maturities are based upon contract terms. Southern National's credit policy does not permit automatic renewals of loans. At the scheduled maturity date (including balloon payment date), the customer must request a new loan to replace the matured loan and execute a new note with rate, terms and conditions renegotiated at that time. - ------------------------------------------------------------------------------- NONACCRUAL LOANS AND LEASES It is Southern National's policy to place commercial loans and leases on nonaccrual status when full collection of principal and interest becomes doubtful, or when any portion of principal or interest becomes 90 days past due, whichever occurs first. When loans are placed on nonaccrual status, interest receivable is reversed 9 against interest income in the current period and any prior year interest is charged off. Interest payments received thereafter are applied as a reduction to the remaining principal balance so long as concern exists as to the ultimate collection of the principal. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and when the collectability of principal or interest is no longer doubtful. Mortgage loans and other consumer loans are also placed on nonaccrual status when full collection of principal and interest becomes doubtful, but they are subject to longer periods of time before they are automatically placed on nonaccrual. This period of time varies for different types of consumer loans. ALLOWANCE FOR LOAN AND LEASE LOSSES The allowance for loan and lease losses is established through a provision for loan and lease losses based on management's evaluation of the risk inherent in the loan portfolio and changes in the nature and volume of loan activity. This evaluation, which includes a review of loans for which full collectability may not be reasonably assured, considers the loans' risk grades, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant consideration in providing for an adequate reserve. Southern National utilizes ten "risk grades" to determine the repayment capacity of borrowers. Southern National's objective is to maintain a loan portfolio that is diverse in terms of loan type, industry concentration, geographic distribution and borrower concentration in order to reduce overall credit risk by minimizing the adverse impact of any single event or combination of related events. Although management believes that the best information available is used to determine the adequacy of the allowance, the nature of the process by which management determines the appropriate allowance for credit losses requires the exercise of considerable judgment. Unforeseen market conditions could result in adjustments in the allowance which would affect earnings. Future additions to Southern National's allowance will be the result of periodic loan, property and collateral reviews as well as projected changes in overall economic and real estate markets. - ------------------------------------------------------------------------------- TABLE 4 ALLOCATION OF RESERVE BY CATEGORY
DECEMBER 31, ----------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------------- ----------------- ----------------- ----------------- ----------------- % LOANS % LOANS % LOANS % LOANS % LOANS IN EACH IN EACH IN EACH IN EACH IN EACH AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Balance at end of period applicable to: Commercial, financial and agricultural...... $ 25,750 16% $ 27,824 15% $ 35,869 20% $ 44,018 17% $ 31,036 18% Real estate: Construction and land development........... 11,036 8 13,443 7 10,874 5 12,311 6 10,260 5 Mortgage............... 77,251 60 76,079 63 63,186 60 63,996 62 50,444 60 -------- --- -------- --- -------- --- -------- --- -------- --- Real estate--total..... 88,287 68 89,522 70 74,060 65 76,307 68 60,704 65 -------- --- -------- --- -------- --- -------- --- -------- --- Consumer................ 38,626 12 27,254 13 25,812 13 24,581 14 21,677 15 Leases.................. 3,679 4 3,443 2 906 2 1,218 1 1,313 2 Unallocated............. 27,590 -- 27,545 -- 37,455 -- 24,664 -- 21,910 -- -------- --- -------- --- -------- --- -------- --- -------- --- Total.................. $183,932 100% $175,588 100% $174,102 100% $170,788 100% $136,640 100% ======== === ======== === ======== === ======== === ======== ===
- ------------------------------------------------------------------------------- 10 The following table sets forth information with respect to Southern National's allowance for loan and lease losses for the most recent five years. - ------------------------------------------------------------------------------- TABLE 5 COMPOSITION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
DECEMBER 31, --------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Balance, beginning of period................. $ 175,588 $ 174,102 $ 170,788 $ 138,456 $ 117,113 ----------- ----------- ----------- ----------- ----------- Charge-offs: Commercial, financial and agricultural..... (8,966) (10,151) (10,759) (23,912) (27,131) Real estate........... (10,555) (9,993) (6,694) (7,502) (10,796) Consumer.............. (39,195) (23,969) (13,467) (14,369) (18,873) Lease receivables..... (768) (614) (647) (771) (1,428) ----------- ----------- ----------- ----------- ----------- Total charge-offs.... (59,484) (44,727) (31,567) (46,554) (58,228) ----------- ----------- ----------- ----------- ----------- Recoveries: Commercial, financial and agricultural..... 4,632 4,177 6,770 5,892 3,872 Real estate........... 4,501 2,567 2,308 1,261 3,340 Consumer.............. 4,898 4,442 4,208 3,716 3,096 Lease receivables..... 136 395 295 149 188 ----------- ----------- ----------- ----------- ----------- Total recoveries..... 14,167 11,581 13,581 11,018 10,496 ----------- ----------- ----------- ----------- ----------- Net charge-offs......... (45,317) (33,146) (17,986) (35,536) (47,732) ----------- ----------- ----------- ----------- ----------- Provision charged to expense............... 53,661 34,632 20,181 54,558 63,584 ----------- ----------- ----------- ----------- ----------- Allowance of loans acquired in purchase transactions.......... -- -- 1,119 13,310 3,675 ----------- ----------- ----------- ----------- ----------- Balance, end of period.. $ 183,932 $ 175,588 $ 174,102 $ 170,788 $ 136,640 =========== =========== =========== =========== =========== Average loans and leases*................ $14,190,985 $13,768,629 $12,456,509 $11,235,092 $10,194,358 Net charge-offs as a percentage of average loans and leases....... 0.32% 0.24% 0.14% 0.32% 0.47% =========== =========== =========== =========== ===========
- -------- * Loans and leases are net of unearned income and include loans held for sale. - ------------------------------------------------------------------------------- NONPERFORMING ASSETS AND CLASSIFIED ASSETS Nonperforming assets include nonaccrual loans and leases, foreclosed real estate and other repossessions. Loans are considered delinquent in most cases the first day after payment is due. After a loan has been delinquent for ten days, Southern National mails a reminder notice to borrowers, and if the borrower does not contact a collection officer, late charges are assessed on the sixteenth day after the due date. Numerous attempts to work with the borrower to establish a repayment plan are made throughout the delinquent period of the loan. When a commercial loan or unsecured consumer loan becomes 90 days past due, the loan is placed on nonaccrual status. For mortgage and most other consumer loans, the period of time before a delinquent loan is placed on nonaccrual status varies, as discussed above. In some cases, loans may be placed on nonaccrual status earlier based on specific circumstances surrounding the loan. If the collection of principal and/or interest becomes doubtful at any time during the collection process, the loan is placed on nonaccrual status. Every effort is made to reach an 11 agreement on payment with the borrower. If it becomes necessary to foreclose on loans, acquired assets are aggressively marketed to minimize the cost of carrying such assets. INVESTMENT ACTIVITIES Southern National maintains a portion of its assets as investment securities. Banks are allowed to purchase, sell, deal in and hold certain investment securities as prescribed by bank regulations. These investments include all obligations of the U.S. Treasury, agencies of the Federal government, obligations of any state or political subdivision, various types of corporate debt, mutual funds, limited equity securities and certain derivative securities. Investment portfolio activities are governed internally by a written, board- approved investment policy. Investment policy is carried out by the Corporation's Asset and Liability Committee ("ALCO") which meets regularly to review the economic environment, assess current activities for appropriateness and establish investment strategies. The ALCO also has much broader responsibilities which are discussed in the section, Market Risk Management, of "Management's Discussion and Analysis of Financial Condition and Results of Operations." Investment strategies are established by the ALCO in consideration of the interest rate cycle, balance sheet mix, actual and anticipated loan demand, funding opportunities and the overall interest rate sensitivity of the Corporation. In general, the investment portfolio is managed in a manner appropriate to the attainment of the following goals: (i) to provide a sufficient margin of liquid assets and liabilities to cover unanticipated deposit and loan fluctuations, seasonal funds flow variations and overall funds management objectives; (ii) to provide eligible securities to secure public funds and trust deposits as prescribed by law; and (iii) to earn the maximum return on funds invested that is commensurate with meeting the requirements of (i) and (ii). Within the overall context of the primary purposes of portfolio management as just described, investment strategy during 1996 was established and continually adjusted within an environment of stable short-term interest rates since the second quarter, as set by the Federal Reserve's Open Market Committee. At December 31, 1996, the investment portfolio represented approximately 25% of the total assets of the Corporation. Management has judged overall liquidity and interest rate sensitivity to be adequate to allow the continued growth of both the investment and loan portfolios. As described below, during 1996 and 1995 whole mortgage loans were securitized and placed in the investment portfolio, increasing investment yields, improving the liquidity of those assets, and reducing required loan reserves. A similar amount of lower- yielding investments was allowed to mature; thus, the total amount of securities holdings was only slightly reduced as a percentage of total assets. Overall liquidity was maintained at acceptable levels and balance sheet profitability was increased. As has been the case for the past several years, investment activity during 1996 was centered on obligations of the U.S. Treasury and Federal agencies. Including mortgage-backed securities, U.S. Treasuries and Federal agencies comprised 92% of the total book value of the portfolio at year end. The value of these securities from return and quality perspectives made them relatively more attractive than other types of investments. Emphasis continued to be placed on short and intermediate-term maturities, balancing reasonable stability between liquidity and yield. The average contractual maturity of the entire portfolio at December 31, 1996 was 7 years and 4 months compared to 3 years at December 31, 1995. This increase in maturity reflects rapid growth in Southern National's holdings of mortgage-backed securities resulting from the securitization of $1.2 billion of mortgage loans during 1995 and 1996. These mortgage-backed securities have replaced U.S. Treasuries in the portfolio which have significantly shorter contractual maturities than mortgage-backed securities. However, the actual cash flows relating to the investment portfolio, particularly for mortgage-backed securities, are expected to be significantly shorter than contractual maturity because the actual payments of the securities and the resultant opportunity to reinvest those cash flows are subject to prepayments. At December 31, 1996, the approximate 12 expected maturity of Southern National's investment portfolio was 3 years. Table 11--"Securities" shows the maturity distribution by category of Southern National's investment portfolio at December 31, 1996. The following table provides information regarding the composition of Southern National's securities portfolio. - ------------------------------------------------------------------------------- TABLE 6 COMPOSITION OF SECURITIES PORTFOLIO
DECEMBER 31, -------------------------------- 1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Securities held to maturity (at amortized cost): U.S. Treasury, government and agency obli- gations................................... $ 6,283 $ 9,461 $1,190,558 States and political subdivisions.......... 118,435 144,508 165,520 Mortgage-backed securities................. -- -- 608,676 Other securities........................... -- -- 665 ---------- ---------- ---------- Total securities held to maturity........ 124,718 153,969 1,965,419 ---------- ---------- ---------- Securities available for sale (at estimated fair value): U.S. Treasury, government and agency obligations............................... 3,115,625 4,060,423 3,024,792 States and political subdivisions.......... 22,875 20,773 16,918 Mortgage-backed securities................. 1,725,715 977,727 310,314 Other securities........................... 272,574 142,421 107,674 ---------- ---------- ---------- Total securities available for sale...... 5,136,789 5,201,344 3,459,698 ---------- ---------- ---------- Total securities............................. $5,261,507 $5,355,313 $5,425,117 ========== ========== ==========
- ------------------------------------------------------------------------------- SOURCES OF FUNDS Deposits are the primary source of funds for lending and investing activities. The amortization and scheduled payment of loans and maturities of investment securities provide a stable source of funds, while deposit fluctuations and loan prepayments are significantly influenced by the overall interest rate environment and other market conditions. Federal Home Loan Bank ("FHLB") advances, Federal funds purchased and other short-term borrowed funds all provide supplemental liquidity sources based on specific needs, or if management determines that these are the best sources of funds to meet current requirements. Deposits Customer deposits are attracted principally from within Southern National's market area through the offering of a broad selection of deposit instruments including demand deposits, negotiable order of withdrawal accounts, passbook and statement savings accounts, money rate savings, certificates of deposit and individual retirement accounts. Deposit account terms vary with respect to the minimum balance required, the time period the funds must remain on deposit and the interest rate. Interest rates paid on specific deposits are set by the ALCO and are determined based on (i) the interest rates offered by competitors, (ii) anticipated needs for cash and the timing of the cash flow needs offset by the availability of more cost-effective funding sources and (iii) anticipated future economic conditions and interest rates. Customer deposits are attractive sources of liquidity because of stability, pricing control and the ability to generate fee income through the cross-sale of deposit-related services. 13 - ------------------------------------------------------------------------------- TABLE 7 TIME DEPOSITS $100,000 AND OVER
(DOLLARS IN THOUSANDS) Maturity Less than three months................................. $ 881,276 Four through six months................................ 451,835 Seven through twelve months............................ 352,348 Over twelve months..................................... 318,921 ---------- BALANCE AT DECEMBER 31, 1996............................. $2,004,380 ==========
At December 31, 1996, the scheduled maturities of time deposits are $5.7 billion, $2.1 billion, $214.2 million, $151.7 million and $57.9 million for each of the next five years. The maturities for 2002 and later years total $22.7 million. - ------------------------------------------------------------------------------- Short-Term Borrowed Funds Southern National's ability to borrow significant funds through non-deposit sources generates additional flexibility to meet the needs of customers by offsetting liquidity risk and to reach the goals set by the ALCO. Components of short-term borrowed funds at year end were master notes, securities sold under repurchase agreements, FHLB advances, Federal funds purchased and U.S. Treasury tax and loan deposit notes payable. - ------------------------------------------------------------------------------- TABLE 8 SHORT-TERM BORROWED FUNDS The following information summarizes certain pertinent information for the past three years on short-term borrowed funds:
1996 1995 1994 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Maximum outstanding at any month-end during the year.......................... $2,326,704 $3,828,258 $3,060,225 Average outstanding during the year....... 2,011,565 3,148,179 2,389,428 Average interest rate during the year..... 5.27% 5.91% 4.33% Average interest rate at end of year...... 4.79 5.36 5.48
- ------------------------------------------------------------------------------- CAPITAL ADEQUACY AND RESOURCES Overall capital adequacy is monitored on an ongoing basis by management and reviewed regularly by the Board of Directors. Southern National's principal capital planning goals are to provide an adequate return to shareholders while retaining a sufficient base from which to provide future growth and compliance with all regulatory standards. Close attention is given to regulatory levels of capital as percentages of assets and risk-weighted assets. The accompanying table outlines the regulatory minimums for Tier 1 capital, total risk-based capital and the leverage ratio, as well as such amounts for Southern National as of December 31, 1996. 14 - ------------------------------------------------------------------------------- TABLE 9 CAPITAL ADEQUACY
REGULATORY SOUTHERN BB&T- BB&T- BB&T- MINIMUMS NATIONAL NC SC VA ---------- -------- ----- ----- ----- Risk-based capital ratios: Tier 1 capital (1)................... 4.0% 11.7% 11.0% 14.4% 11.7% Total risk-based capital (2)......... 8.0 14.7 12.3 15.7 12.9 Tier 1 leverage ratio (3).............. 3.0 8.0 7.5 9.7 8.6
- -------- (1) Shareholders' equity less non-qualifying intangible assets; computed as a ratio of risk-weighted assets, as defined in the risk-based capital guidelines. (2) Tier 1 capital plus qualifying loan loss allowance and subordinated debt; computed as a ratio of risk-weighted assets as defined in the risk-based capital guidelines. (3) Tier 1 capital computed as a ratio of fourth quarter average assets less goodwill. - ------------------------------------------------------------------------------- EXECUTIVE OFFICERS OF SOUTHERN NATIONAL Southern National's Chairman and Chief Executive Officer is John A. Allison, IV. Mr. Allison is 48 and has 26 years of service with the Corporation. (For purposes of this paragraph, the term "Corporation" refers to both Southern National Corporation and the former BB&T Financial Corporation.) W. Kendall Chalk is the Senior Executive Vice President for the Lending Group. Mr. Chalk is 51 and has served for 22 years. Robert E. Greene is the President of Branch Banking and Trust Company and is the Senior Executive Vice President for Administrative Services for the Corporation. Mr. Greene is 47 and has served the Corporation for 24 years. Kelly S. King is the President of Southern National Corporation and is the Senior Executive Vice President for the Branching Network. Mr. King is 48 and has 25 years of service with the Corporation. Morris D. Marley is the Senior Executive Vice President for Funds Management. Mr. Marley is 46 and has served the Corporation for 12 years. Scott E. Reed is the Senior Executive Vice President and Chief Financial Officer. Mr. Reed is 48 and has 25 years of service with the Corporation. Michael W. Sperry is the Senior Executive Vice President for Corporate Banking. Mr. Sperry is 52 and has 7 years of service with the Corporation. Henry G. Williamson, Jr. is the Chief Operating Officer for the Corporate Group. Mr. Williamson is 49 and has 25 years of service with the Corporation. Prior to the merger of BB&T Financial Corporation with Southern National Corporation in 1995, Messrs. Allison, Chalk, King, Reed and Williamson served in substantially the same positions with BB&T Financial Corporation. 15 CERTAIN REGULATORY CONSIDERATIONS GENERAL As a bank holding company, Southern National is subject to regulation under the Bank Holding Company Act of 1956 (as amended, the "BHCA") and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any additional bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve Board. The BHCA also generally limits the activities of a bank holding company to that of banking, managing or controlling banks, or any other activity which is determined to be so closely related to banking or to managing or controlling banks that an exception is allowed for those activities. As state-chartered commercial banks, BB&T-NC, BB&T-SC and BB&T-VA (collectively, the "Banks") are subject to regulation, supervision and examination by state bank authorities in their respective home states. These authorities include the North Carolina Commissioner, in the case of BB&T-NC, the South Carolina Commissioner, in the case of BB&T-SC, and the Virginia State Corporation Commission's Bureau of Financial Institutions, in the case of BB&T-VA. Each of the Banks is also subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation (the "FDIC"). State and federal law also govern the activities in which the Banks engage, the investments they make and the aggregate amount of loans that may be granted to one borrower. Various consumer and compliance laws and regulations also affect the Banks' operations. The earnings of Southern National's subsidiaries, and therefore the earnings of Southern National, are affected by general economic conditions, management policies and the legislative and governmental actions of various regulatory authorities, including those referred to above. The following description summarizes some of the state and federal laws to which Southern National and the Banks are subject. To the extent statutory or regulatory provisions or proposals are described, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals. PAYMENT OF DIVIDENDS Southern National is a legal entity separate and distinct from its banking and other subsidiaries. A major portion of the revenues of Southern National result from amounts paid as dividends to Southern National by its bank subsidiaries. Southern National's banking subsidiaries are subject to state laws and regulations that limit the amount of dividends they can pay. In addition, both Southern National and the Banks are subject to various general regulatory policies relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The Federal Reserve Board has indicated that banking organizations should generally pay dividends only if (1) the organization's net income available to common shareholders over the past year has been sufficient to fund fully the dividends and (2) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality and overall financial condition. Southern National does not expect that any of these laws, regulations or policies will materially impact the ability of its Banks to pay dividends. During the year ended December 31, 1996, the Banks recorded $125.7 million in cash dividends to Southern National. CAPITAL The Federal Reserve Board and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to banking organizations they supervise. Under the risk-based capital requirements, Southern National and the Banks are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit), of 8%. At least half of the total capital is to be composed of common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles ("Tier 1 capital"). The remainder may consist of certain subordinated 16 debt, certain hybrid capital instruments and other qualifying preferred stock and a limited amount of the loan loss allowance ("Tier 2 capital" and, together with Tier 1 capital, "total capital"). At December 31, 1996, Southern National's Tier 1 capital and total capital ratios were 11.7% and 14.7%, respectively, and the ratio of total capital to total risk-adjusted assets for BB&T-NC, BB&T-SC, and BB&T-VA were 12.3%, 15.7% and 12.9%, respectively. In addition, each of the Federal bank regulatory agencies has established minimum leverage capital ratio requirements for banking organizations. These requirements provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% for banks and bank holding companies that meet certain specified criteria. All other banks and bank holding companies will generally be required to maintain a leverage ratio of at least 100 to 200 basis points above the stated minimum. Southern National's leverage ratio at December 31, 1996 was 8.0%, and the Banks' leverage ratios were 7.5%, 9.7% and 8.6%, respectively. The risk-based capital standards of both the Federal Reserve Board and the FDIC explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution's ability to manage these risks, as important factors to be taken into account by the agency in assessing an institution's overall capital adequacy. The capital guidelines also provide that an institution's exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a bank's capital adequacy. The Federal Reserve Board also has recently issued additional capital guidelines for bank holding companies that engage in certain trading activities. DEPOSIT INSURANCE ASSESSMENTS The deposits of each Bank are insured by the FDIC up to the limits set forth under applicable law. A majority of the deposits of the Banks are subject to the deposit insurance assessments of the Bank Insurance Fund ("BIF") of the FDIC. However, approximately 40% of the deposits of BB&T-NC and BB&T-SC (relating to the Banks' acquisitions of various savings associations) are subject to assessments imposed by the Savings Association Insurance Fund ("SAIF") of the FDIC. Pursuant to budget reconciliation legislation enacted in 1996, the FDIC imposed a special assessment on SAIF-assessable deposits of $.657 per $100 of SAIF-assessable deposits in order to increase the SAIF's net worth to 1.25% of SAIF-insured deposits as of October 1, 1996. Certain institutions that engaged in thrift acquisitions, including BB&T-NC and BB&T-VA, received a 20% discount on the assessment. As a result, the pre-tax impact of the special assessment on Southern National was approximately $33 million and was recorded as an expense as of September 30, 1996. The FDIC thereafter equalized the assessment rates for BIF-insured and SAIF- insured deposits effective January 1, 1997. Thus, for the semi-annual period beginning January 1, 1997, the assessments imposed on all FDIC deposits for deposit insurance have an effective rate ranging from 0 to 27 basis points per $100 of insured deposits, depending on the institution's capital position and other supervisory factors. However, because the legislation enacted in 1996 requires that both SAIF-insured and BIF-insured deposits pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation ("FICO"), the FDIC is assessing BIF-insured deposits an additional 1.30 basis points per $100 of deposits, and SAIF-insured deposits an additional 6.48 basis points per $100 of deposits, to cover those obligations. OTHER SAFETY AND SOUNDNESS REGULATIONS There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by Federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution becomes in danger of default or is in default. For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions 17 in circumstances where it might not do so otherwise. In addition, the "cross- guarantee" provisions of Federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the SAIF or the BIF as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provision if it determines that a waiver is in the best interests of the SAIF or the BIF or both. The FDIC's claim for reimbursement is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution. The Federal banking agencies also have broad powers under current Federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution in question is well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized, as defined by the law. As of December 31, 1996, Southern National and each of the Banks were classified as well-capitalized. State regulatory authorities also have broad enforcement powers over the Banks, including the power to impose fines and other civil and criminal penalties, and to appoint a conservator (with the approval of the Governor in the case of North Carolina) in order to conserve the assets of any such institution for the benefit of depositors and other creditors. The North Carolina Commissioner also has the authority to take possession of a state bank in certain circumstances, including, among other things, when it appears that such bank has violated its charter or any applicable laws, is conducting its business in an unauthorized or unsafe manner, is in an unsafe or unsound condition to transact its business or has an impairment of its capital stock. INTERSTATE BANKING AND BRANCHING Current Federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Effective June 1, 1997, a bank headquartered in one state will be authorized to merge with a bank headquartered in another state, as long as neither of the states has opted out of such interstate merger authority prior to such date. States are authorized to enact laws permitting such interstate bank merger transactions prior to June 1, 1997, as well as authorizing a bank to establish "de novo" interstate branches. North Carolina, South Carolina and Virginia have enacted early "opt in" laws, permitting interstate bank merger transactions. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable Federal or state law. EMPLOYEES At December 31, 1996, Southern National had approximately 7,800 full-time- equivalent employees. PROPERTIES Southern National and its significant subsidiaries occupy headquarters offices that are either owned or operated under long-term leases and also own free-standing operations centers in Wilson, Charlotte and Lumberton, North Carolina. Branch office locations are variously owned or leased. The premises occupied by Southern National and its subsidiaries are considered to be well- located and suitably equipped to serve as financial service facilities. See Note F. "Premises and Equipment" of Notes to Consolidated Financial Statements in this report. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion and analysis of the financial condition and results of operations of Southern National Corporation ("Southern National" or the "Corporation") for each of the three years in the period ended December 31, 1996, and related financial information are presented in conjunction with the consolidated financial statements and related notes to assist in the evaluation of Southern National's 1996 performance. This report contains certain forward-looking statements with respect to the financial condition, results of operations and business of Southern National. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressure in the banking industry increases significantly; (2) changes in the interest rate environment reduce margins; (3) general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality; (4) changes occur in the regulatory environment; (5) changes occur in business conditions and inflation; (6) expected cost savings associated with pending mergers cannot be fully realized; (7) deposit attrition, customer loss or revenue loss following pending mergers is greater than expected; (8) required operational divestitures associated with pending mergers are greater than expected; and (9) changes occur in the securities markets. Economic indicators during 1996 revealed steady, modest growth in the economy and relatively low pressure on inflation. Job growth, retail sales, auto sales and home sales were moderate, with growth rates easing by the end of the year. Consumer confidence remained high throughout 1996, despite low levels of growth in the gross domestic product. The Federal Reserve's Open Market Committee, which determines pricing on key central funding sources, voted to cut the Federal funds rate 25 basis points to 5.25% in January, 1996. This was the central bank's only action on interest rates during the year. The commercial banking industry experienced slower growth in loans, with overall loan growth falling into the single digits. 1996 continued to be a year of industry consolidation, with several large bank mergers. Credit quality also began to modestly erode during the year, particularly in revolving credit portfolios, creating concern for institutions with large credit card portfolios. ANALYSIS OF FINANCIAL CONDITION Average assets totaled $20.6 billion in 1996, an increase of approximately .8% over the average of $20.4 billion in 1995. Average assets increased 7.0% in 1995 compared to 1994. At the end of 1996, assets totaled $21.2 billion. The modest growth during 1996 reflects a restructuring of the balance sheet undertaken by management during 1995. As further discussed below, Southern National has changed the composition of assets by securitizing mortgage loans and replacing U.S. Treasuries in the securities portfolio with the resulting mortgage-backed securities. These efforts have improved net interest margin by improving the yields of both the loans and securities portfolios while enabling management to pay down more volatile short-term borrowed funds. These actions have served to improve earnings while maintaining a steady level of total and average assets. Southern National's other assets increased $120.9 million in 1996 as a result of increases in cash surrender value of life insurance, up $58.9 million, mortgage servicing rights, which increased $18.8 million, and intangible assets, up $13.9 million. The five-year compound rate of growth in average assets was 8.5%. Over the same five-year period, the compound annual growth rates based on average balances have been 9.0% for loans, 9.2% for securities and 5.3% for deposits. All growth rates have been enhanced by the effects of acquisitions accounted for as purchases. 19 - ------------------------------------------------------------------------------- TABLE 10 COMPOSITION OF AVERAGE TOTAL ASSETS
% CHANGE ---------------- 1996 V. 1995 V. 1996 1995 1994 1995 1994 ----------- ----------- ----------- ------- ------- (DOLLARS IN THOUSANDS) Securities*............. $ 5,175,119 $ 5,405,773 $ 5,350,982 (4.3)% 1.0 % Federal funds sold and other earning assets... 13,631 44,384 130,670 (69.3) (66.0) Loans and leases, net of unearned income**...... 14,190,985 13,768,629 12,456,509 3.1 10.5 ----------- ----------- ----------- Average earning assets.. 19,379,735 19,218,786 17,938,161 .8 7.1 Non-earning assets...... 1,194,335 1,185,084 1,134,455 .8 4.5 ----------- ----------- ----------- Average total assets.... $20,574,070 $20,403,870 $19,072,616 .8 % 7.0 % =========== =========== =========== Average earning assets as percent of average total assets........... 94.2% 94.2% 94.1% =========== =========== ===========
- -------- * Based on amortized cost. ** Includes loans held for sale based on lower of amortized cost or market. Amounts are gross of the allowance for loan and lease losses. - ------------------------------------------------------------------------------- SECURITIES The securities portfolios provide earnings and liquidity, as well as providing an effective tool in managing interest rate risk. Management has historically emphasized investments with a maturity of five years or less because of the changing interest rate environment and to provide greater flexibility in balance sheet management. As a result of the acquisition of longer-term mortgage-backed securities, and the runoff of lower-yielding, shorter maturity U.S. Treasuries, the maturity of the total portfolio now exceeds seven years. However, the actual expected maturity of the investment portfolio is approximately three years because of the faster prepayment streams associated with mortgage-backed securities. U.S. Treasury securities, which continue to comprise the majority of the portfolio, provide adequate current yields with minimal risk and maturities structured to address liquidity concerns. During the fourth quarter of 1995 and throughout 1996, Southern National securitized mortgages held in the loan portfolio and transferred them to the investment portfolio. Management determined that this strategy would increase yields in the investment portfolio by allowing lower-yielding securities to run off and replacing them with higher-yielding mortgage-backed securities. Total outstanding securities decreased 1.8% in 1996 to a total of $5.3 billion at the end of the year. Securities held to maturity only make up 2.4% of the total portfolio and are primarily composed of investments in states and municipalities. Such securities are carried at amortized cost and totaled $124.7 million at year end, compared to $154.0 million outstanding at the end of 1995. Market valuation gains in the Corporation's held-to-maturity category affect neither earnings nor capital. The held-to-maturity portfolio had a net unrealized gain of $3.7 million at December 31, 1996. Securities available for sale totaled $5.1 billion at year end and are carried at estimated fair value in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115. The available-for-sale portfolio is primarily composed of investments in U.S. Treasuries, government and agency obligations, which, excluding mortgage-backed securities, composed 60.7% of the outstanding balance at year end. This percentage has decreased from the 1995 percentage of 78.1%, which reflects management's efforts to invest in higher yielding mortgage-backed securities obtained through the securitization of a portion of Southern National's mortgage loan portfolio. At December 31, 1996, mortgage-backed securities comprised 33.6% of the available- 20 for-sale portfolio, compared to 18.8% at the end of 1995. The available-for- sale portfolio also contains investments in states and municipalities, which composed less than 1% of the portfolio, and equity and other securities, which composed the remaining 5.3% of the portfolio. The percentage of holdings in states and municipalities did not significantly change from the prior year. The available-for-sale portfolio composed 97.6% of total securities. During the fourth quarter of 1995, Southern National transferred $1.6 billion of securities which were previously classified as held to maturity to the available-for-sale category. The Financial Accounting Standards Board ("FASB") provided enterprises the opportunity to make a one-time reassessment of the classification of all investment securities held at that time, such that the reclassification of any security from the held-to-maturity category would not call into question the enterprise's intent to hold other debt securities to maturity in the future. Management believes that this classification allows more flexibility in the day-to-day management of the overall portfolio than the held-to-maturity classifications. Southern National held no securities classified as trading at December 31, 1996 or 1995. The market value of the available-for-sale portfolio was $20.1 million greater than the amortized cost of these securities. At December 31, 1996, Southern National's available-for-sale portfolio had net unrealized appreciation, net of tax, of $11.8 million, which is reported as a separate component of equity. This compares to net unrealized appreciation of $31.2 million at December 31, 1995. Equity adjustments resulting from market valuation gains and losses do not represent permanent increases or reductions in equity. If securities that are categorized as available for sale are held until they mature for strategic reasons, or if market values improve during the period of time held, any fluctuations in estimated fair value will be reflected as a separate component of equity, net of tax. If securities so designated are sold, then the actual gains or losses realized are reported in current period earnings. The fully taxable equivalent ("FTE") yield on the total securities portfolio was 6.69% for the year ended December 31, 1996, compared to 6.22% for the prior year. The improvement in FTE yield resulted from higher yields for each category of investments. U.S. Treasuries improved from 6.05% to 6.50%, mortgage-backed securities increased from 6.60% to 6.94% and state and municipal securities grew from 8.94% to 8.99%. Management expects interest rates to remain relatively stable throughout 1997. A major investment strategy for the first half of 1997 will be to selectively replace lower-yielding securities with other high-quality U.S. Treasury and Federal agency obligations, with short and intermediate maturities. The Corporation's Asset/Liability Management Committee ("ALCO") will continually evaluate such strategies in consideration of actual economic and balance sheet developments. 21 - ------------------------------------------------------------------------------- TABLE 11 SECURITIES
DECEMBER 31, 1996 -------------------------------- CARRYING VALUE AVERAGE YIELD (3) -------------- ----------------- (DOLLARS IN THOUSANDS) U.S. Treasury, government and agency obliga- tions (1) Within one year............................ $ 568,228 6.31% One to five years.......................... 2,837,819 6.56 Five to ten years.......................... 152,960 6.55 After ten years............................ 1,288,616 7.21 ---------- ---- Total.................................... 4,847,623 6.70 ---------- ---- States and political subdivisions Within one year............................ 18,944 8.46 One to five years.......................... 90,759 8.81 Five to ten years.......................... 31,262 8.80 After ten years............................ 345 7.83 ---------- ---- Total.................................... 141,310 8.76 ---------- ---- Other securities Within one year............................ 100 6.24 One to five years.......................... 2,968 8.22 Five to ten years.......................... 185,556 6.68 ---------- ---- Total.................................... 188,624 6.70 ---------- ---- Securities with no stated maturity........... 83,950 8.22 ---------- ---- Total securities (2)..................... $5,261,507 6.78% ========== ====
- -------- (1) Included in U.S. Treasury, government and agency obligations are mortgage- backed securities totaling $1.7 billion classified as available for sale and disclosed at estimated fair value. These securities are included in each of the categories based upon final stated maturity dates. The original contractual lives of these securities range from five to 30 years; however, a more realistic average maturity would be substantially shorter because of the monthly return of principal on certain securities. (2) Includes securities held to maturity of $124.7 million disclosed at amortized cost and securities available for sale of $5.1 billion disclosed at estimated fair value. (3) Taxable equivalent basis as applied to amortized cost. - ------------------------------------------------------------------------------- LOANS AND LEASES Net loans and leases, including loans held for sale, totaled approximately $14.4 billion at the end of 1996. This represented an increase of $623.7 million in 1996 or 4.5%. This rate of growth includes the impact of $1.2 billion in mortgage loans securitizations. Excluding the impact of the mortgage loan securitizations, loans and leases, including loans held for sale, grew at a rate of 10.1% from December 31, 1995 to December 31, 1996. Average loans for the twelve months increased 3.1% over the prior year. Excluding the impact of the securitizations, average loans increased 7.9% compared with year-end 1995. The objective of these loan securitizations has been to maintain adequate regulatory liquidity requirements while using proceeds from maturities of lower-yielding U.S. Treasuries to fund higher-yielding consumer and commercial loans and to reduce short-term borrowed funds. 22 The net yield on loans has decreased from 9.23% for the twelve months ended December 1995 to 9.12% for the current year, attributable to overall market rates. A better indicator of the success of the balance sheet management strategies is the improvement in overall net interest margin (FTE) from 4.14% in 1995 to 4.45% for the current year. Southern National's long range lending strategy is to maintain a rate of internal growth which approximates that of its markets in the Carolinas and Virginia. Management believes that this will result in a rate of increase which will be sustainable and profitable. Average commercial loans increased at a rate of 7.4% during 1996 and yielded 9.0%. Average consumer loans grew 7.2% over the course of the year and yielded 10.5%. Average mortgage loans, including the impact of securitizations, decreased 6.9% during 1996, while yielding 7.9%. Excluding the impact of the securitizations, average mortgage loans increased 9.3%. The acquisition of Regional Acceptance Corporation ("Regional Acceptance") in the third quarter of 1996 is expected to increase consumer loan growth and change the composition of the loan portfolio to include a greater percentage of higher-yielding consumer loans. Regional Acceptance specializes in indirect financing for consumer purchases of mid-model and late-model used automobiles. Southern National concentrated efforts on expanding the leasing function throughout 1996. Municipal leasing, primarily tax-exempt leases with counties and municipalities, was stronger than in the prior year. The leasing function, which provides a quality stream of earnings, has developed numerous lease- based products and services that have been effectively marketed to current Southern National customers and noncustomers. End of period lease receivables, gross of unearned income, grew $200.8 million or 53.3%, during 1996. Management will seek to continue the current balance sheet strategies entering 1997. The trends in loan growth show increasing momentum in demand during the third and fourth quarters of 1996. Excluding the impact of the mortgage loan securitizations, end of period loans grew at an annualized rate of 12.3% during the fourth quarter of 1996 compared to the third quarter. Growth in average loans improved to 10.0% for the fourth quarter compared to the third quarter, with particular strength in commercial loans, which increased 14.3% over the same time frame. ASSET QUALITY The credit quality of the loan and lease portfolio remained relatively constant during 1996 compared to 1995. As reflected in Table 12--"Asset Quality," nonperforming assets ("NPAs") were $80.2 million at year end, up $4.3 million or 5.6% for the year. However, as a percentage of total assets, NPAs were .38% at December 31, 1996 compared to .37% at the end of the prior year. As a percentage of loans plus foreclosed properties, NPAs were .55% at December 31, 1996 compared to .54% at the end of 1995. The allowance for loan and lease losses as a percentage of loans and leases was 1.26% at December 31, 1996, compared to 1.26% at December 31, 1995. Loans 90 days or more past due and still accruing interest increased slightly during 1996 to a balance of $32.1 million compared to a December 31, 1995 balance of $29.1 million. These ratios reflect very consistent levels of asset quality during the year. Net charge-offs as a percentage of average loans and leases increased from .24% in 1995 to .32% in 1996, primarily as a result of higher charge-offs in consumer lending. Management considers a charge-off level of .32% to be within reasonable norms from an historical perspective. Regional Acceptance also experienced higher-than-expected net charge-offs in the last two quarters of 1996. These higher net charge-offs are indicative of the current nature of the used automobile financing industry. This level of net charge-offs is not expected to have a material impact on Southern National's consolidated financial condition or consolidated results of operations. Southern National assigns risk grades to all commercial loans in the portfolio. This assignment of loans to one of ten categories is based upon the relative strength of the repayment source. All significant loans in the four highest risk grades are reviewed monthly for appropriateness of risk grade, accrual status and loss reserves. Management does not anticipate any significant deterioration in asset quality levels during 1997. 23 The following table reflects relevant asset quality information for Southern National for the most recent three years. - ------------------------------------------------------------------------------- TABLE 12 ASSET QUALITY
DECEMBER 31, ------------------------- 1996 1995 1994 ------- ------- ------- (DOLLARS IN THOUSANDS) Nonaccrual loans and leases*........................ $59,717 $62,231 $48,545 Foreclosed property................................. 20,452 13,652 13,521 ------- ------- ------- Nonperforming assets................................ $80,169 $75,883 $62,066 ======= ======= ======= Loans 90 days or more past due and still accruing... $32,052 $29,094 $24,224 ======= ======= ======= ASSET QUALITY RATIOS Nonaccrual loans and leases as a percentage of loans and leases................................. .41% .45% .36% Nonperforming assets as a percentage of: Total assets.................................... .38 .37 .31 Loans and leases plus foreclosed property....... .55 .54 .47 Net charge-offs as a percentage of average loans and leases....................................... .32 .24 .14 Allowance for losses as a percentage of loans and leases........................................... 1.26 1.26 1.32 Ratio of allowance for losses to: Net charge-offs................................. 4.06X 5.30x 9.68x Nonaccrual loans and leases..................... 3.08 2.82 3.59
- -------- NOTE: Items referring to loans and leases are net of unearned income, gross of the allowance and include loans held for sale. * Includes $16.0 million of impaired loans at December 31, 1996. See Note A in the "Notes to Consolidated Financial Statements." - ------------------------------------------------------------------------------- DEPOSITS AND OTHER BORROWINGS Management's primary objectives for funding balance sheet activity are to provide adequate, stable, cost-effective sources of funds. Core deposits compose Southern National's primary funding source, despite trends away from traditional transaction and savings accounts by depositors. As depositors have sought greater returns in recent years, growth rates for deposits have typically not kept pace with asset growth. Southern National's total deposits at December 31, 1996, compared to year-end 1995, increased 1.8% to $15.0 billion. This modest increase was led by a 5.6% increase in noninterest- bearing demand deposits and a 10.6% increase in money rate savings accounts. These increases were offset somewhat by a 13.5% decrease in deposits in savings and interest checking accounts. Other time deposits, including individual retirement accounts and certificates of deposit, increased less than 1% and remain Southern National's largest component of total deposits at 54.9%. Average deposits increased 3.7% in 1996 to a balance of $14.8 billion. Management also used various other short-term borrowed funds to meet funding needs. Among these are Federal funds purchased, which composed 35.0% of total short-term borrowed funds and securities sold under repurchase agreements, which composed 29.4% of short-term borrowed funds at year end. Management also utilized master notes, U.S. Treasury tax and loan deposit notes and short-term Federal Home Loan Bank ("FHLB") advances to supplement short-term funding needs. In certain circumstances, management also used foreign deposits and, to a lesser degree, brokered certificates of deposit. Although average short-term borrowed funds decreased $1.1 billion or 36.1%, this was offset by a $538.0 million increase in average foreign deposits, which are classified as other time deposits. Management has diversified both short-term and long-term funding 24 sources and the shift to foreign deposits represents an effort to establish available credit lines with nonbank providers of such funds. Total short-term borrowed funds at year-end 1996 decreased $332.1 million or 12.8% compared to year-end 1995. The rates paid on average short-term borrowed funds decreased from 5.91% in 1995 to 5.27% during 1996. This decrease resulted from a decline in short-term money market rates as well as the increased availability of short-term funding sources providing management the ability to execute on a more cost-effective strategy. Management also employs long-term debt for additional funding, and management significantly increased reliance on longer-term funding sources during 1996. Southern National's total end of period outstanding long-term debt increased 48.3% to $2.1 billion. On average, long-term debt increased $731.0 million. Southern National's long-term debt consists primarily of FHLB advances, which composed 67.0% of total outstanding long-term debt at December 31, 1996. FHLB advances are the most cost-effective long-term funding source and the FHLB provides Southern National the flexibility to structure the debt to manage interest rate risk and liquidity as needed. In an effort to diversify long-term funding sources, management developed various debt programs, including a $2 billion senior and subordinated banknote program. The initial debt issuance was $225 million for five years at a fixed coupon rate of 5.70%. The remainder of the $424.8 million outstanding at year end was shorter-term floating rate banknotes. In addition to the $2 billion banknote program, Southern National also registered $1 billion in debt for future funding needs. On May 21, 1996, Southern National issued $250 million of 7.05% subordinated long-term notes which mature in 2003. The average rate paid on long-term debt during 1996 decreased from 6.26% for 1995 to 5.78% for 1996. Southern National continually considers liquidity needs in evaluating funding sources. The ultimate goal is to maintain funding flexibility, which will allow Southern National to react rapidly to opportunities brought about by growth and market volatility. Management will continue to focus on traditional core funding strategies during 1997, including targeting growth in noninterest-bearing deposits. - ------------------------------------------------------------------------------- TABLE 13 COMPOSITION OF AVERAGE DEPOSITS AND OTHER BORROWINGS
% CHANGE ---------------- 1996 V. 1995 V. 1996 1995 1994 1995 1994 --------------- --------------- --------------- ------- ------- (DOLLARS IN THOUSANDS) Savings, interest checking and MRS sweeps................. $ 3,156,994 17% $ 3,237,553 18% $ 3,433,750 20% (2.5)% (5.7)% Money rate savings...... 1,416,791 8 1,552,431 8 1,971,263 11 (8.7) (21.2) Other time deposits..... 8,346,545 44 7,715,365 42 7,155,207 41 8.2 7.8 ----------- --- ----------- --- ----------- --- Total interest-bearing deposits............... 12,920,330 69 12,505,349 68 12,560,220 72 3.3 (.4) Noninterest-bearing demand deposits........ 1,857,207 10 1,745,827 9 1,738,508 10 6.4 .4 ----------- --- ----------- --- ----------- --- Total deposits.......... 14,777,537 79 14,251,176 77 14,298,728 82 3.7 (.3) Short-term borrowed funds.................. 2,011,565 11 3,148,179 17 2,389,428 14 (36.1) 31.8 Long-term debt.......... 1,858,569 10 1,127,575 6 677,227 4 64.8 66.5 ----------- --- ----------- --- ----------- --- Total deposits and other borrowings............. $18,647,671 100% $18,526,930 100% $17,365,383 100% .6% 6.7 % =========== === =========== === =========== === ===== =====
- ------------------------------------------------------------------------------- ANALYSIS OF RESULTS OF OPERATIONS Consolidated net income for 1996 totaled $283.7 million, which generated primary earnings per share of $2.56 and fully diluted earnings per share of $2.54. Net income for the prior year was $186.3 million and net earnings for 1994 were $243.8 million. Primary earnings per share were $1.65 in 1995 and $2.21 in 1994, while fully diluted per share earnings were $1.62 and $2.16, respectively. 25 Management utilizes the return on average assets ratio to measure the profitability of each dollar of assets and to compare Southern National's performance to peers. The returns on average assets produced by the earnings discussed above were 1.38% for 1996, .91% for 1995 and 1.28% for 1994. Management's target return on average assets is 1.25%, which places Southern National among industry leaders. A similar measure of profitability is return on average common equity. Southern National's returns on average common equity were 17.21%, 11.84% and 17.07%, for the years ended December 31, 1996, 1995 and 1994, respectively. Southern National incurred significant nonrecurring expenses during both 1996 and 1995 which are reflected in the earnings and profitability ratios above. During the third quarter of 1996, Southern National recorded a one-time assessment by the Federal Deposit Insurance Corporation ("FDIC") which was charged to all financial institutions with deposits insured by the Savings Association Insurance Fund ("SAIF"). The impact of Southern National's assessment was approximately $33 million on a pre-tax basis. On an after-tax basis, the assessment totaled $21.3 million or $.19 per fully diluted share. Excluding the impact of the assessment, Southern National's net income for 1996 would have been $304.9 million or $2.73 per fully diluted share. Recurring earnings for 1996 provided returns of 1.48% on average assets and 18.51% on average common shareholders' equity. During 1995, Southern National incurred $108.0 million in pre-tax nonrecurring expenses relating to the merger between Southern National and BB&T Financial Corporation ("BB&T") and $19.8 million in securities losses resulting from a restructuring of the securities portfolio. These costs were offset somewhat by a $12.3 million gain on the sale of divested deposits made necessary by the merger. The net after-tax impact of these nonrecurring items and securities losses was to reduce net income by $76.3 million. Excluding the impact of these nonrecurring items, Southern National's net income for 1995 would have been $262.7 million, or $2.29 per fully diluted share. Recurring earnings for 1995 produced returns of 1.29% on average assets and 16.83% on average common shareholders' equity. On a recurring basis, Southern National's net income grew $42.3 million or 16.1% during 1996. Fully diluted earnings per share increased $.44 or 19.2%. Southern National accomplished many objectives which were established in conjunction with the merger of Southern National and BB&T. The success in achieving goals set by management led to the growth in recurring earnings. NET INTEREST INCOME Net interest income is Southern National's primary source of revenue. The amount of net interest income is influenced by a number of factors, including the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned and paid to obtain the asset-generating funds. The difference between rates earned on interest-earning assets (with an adjustment made to tax-exempt income to provide comparability with taxable income) and the cost of supporting funds is measured by the net yield. The accompanying table presents the dollar amount of changes in interest income and interest expense and distinguishes between the changes related to average outstanding balances of interest-earning assets and interest-bearing liabilities (volume) and the changes related to average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionately. 26 TABLE 14 NET INTEREST INCOME AND RATE/VOLUME ANALYSIS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AVERAGE BALANCES YIELD/RATE ------------------------------------- ------------------ 1996 1995 1994 1996 1995 1994 ----------- ----------- ----------- ---- ---- ---- (DOLLARS IN THOUSANDS) ASSETS Securities (1): U.S. Treasury, government and other (5)........... $ 5,024,926 $ 5,235,169 $ 5,171,260 6.62% 6.13% 5.74% States and political subdivisions................. 150,193 170,604 179,722 8.99 8.94 9.08 ----------- ----------- ----------- ---- ---- ---- Total securities (5).......................... 5,175,119 5,405,773 5,350,982 6.69 6.22 5.85 Other earning assets (2)............................. 13,631 44,384 130,670 5.65 5.75 3.97 Loans and leases, net of unearned income (1)(3)(4)(5) 14,190,985 13,768,629 12,456,509 9.12 9.23 8.42 ----------- ----------- ----------- ---- ---- ---- Total earning assets.......................... 19,379,735 19,218,786 17,938,161 8.47 8.37 7.62 ----------- ----------- ----------- ---- ---- ---- Non-earning assets............................ 1,194,335 1,185,084 1,134,455 ----------- ----------- ----------- Total assets............................. $20,574,070 $20,403,870 $19,072,616 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits: Savings, interest-checking and MRS sweeps......... $ 3,156,994 $ 3,237,553 $ 3,433,750 1.70 2.26 2.19 Money rate savings................................ 1,416,791 1,552,431 1,971,263 3.62 3.59 2.73 Other time deposits............................... 8,346,545 7,715,365 7,155,207 5.51 5.55 4.37 ----------- ----------- ----------- ---- ---- ---- Total interest-bearing deposits............... 12,920,330 12,505,349 12,560,220 4.37 4.46 3.52 Short-term borrowed funds............................ 2,011,565 3,148,179 2,389,428 5.27 5.91 4.33 Long-term debt....................................... 1,858,569 1,127,575 677,227 5.78 6.26 6.04 ----------- ----------- ----------- ---- ---- ---- Total interest-bearing liabilities............ 16,790,464 16,781,103 15,626,875 4.63 4.85 3.75 ----------- ----------- ----------- ---- ---- ---- Noninterest-bearing demand deposits........... 1,857,207 1,745,827 1,738,508 Other liabilities............................. 266,864 273,911 235,183 Shareholders' equity.......................... 1,659,535 1,603,029 1,472,050 ----------- ----------- ----------- Total liabilities and shareholders' equity. $20,574,070 $20,403,870 $19,072,616 =========== =========== =========== Average interest rate spread......................... 3.84 3.52 3.87 Net yield on earning assets.......................... 4.45% 4.14% 4.36% ==== ==== ==== Taxable equivalent adjustment........................
1996 V. 1995 --------------------------------- INCOME/EXPENSE CHANGE DUE TO --------------------------------- INCREASE --------------------- 1996 1995 1994 (DECREASE) RATE VOLUME --------- --------- --------- ---------- --------- ---------- (DOLLARS IN THOUSANDS) ASSETS Securities (1): U.S. Treasury, government and other (5)........... $ 332,725 $ 320,950 $ 296,933 $ 11,775 $ 25,009 $ (13,234) States and political subdivisions................. 13,503 15,255 16,323 (1,752) 83 (1,835) --------- --------- --------- ---------- --------- ---------- Total securities (5).......................... 346,228 336,205 313,256 10,023 25,092 (15,069) Other earning assets (2)............................. 771 2,552 5,184 (1,781) (41) (1,740) Loans and leases, net of unearned income (1)(3)(4)(5) 1,293,802 1,270,390 1,049,190 23,412 (15,224) 38,636 --------- --------- --------- ---------- --------- ---------- Total earning assets.......................... 1,640,801 1,609,147 1,367,630 31,654 9,827 21,827 Non-earning assets............................ Total assets............................. LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits: Savings, interest-checking and MRS sweeps......... 53,531 73,203 75,125 (19,672) (17,892) (1,780) Money rate savings................................ 51,226 55,664 53,874 (4,438) 463 (4,901) Other time deposits............................... 459,990 428,282 312,877 31,708 (3,098) 34,806 --------- --------- --------- ---------- --------- ---------- Total interest-bearing deposits............... 564,747 557,149 441,876 7,598 (20,527) 28,125 Short-term borrowed funds............................ 105,936 186,194 103,493 (80,258) (18,685) (61,573) Long-term debt....................................... 107,437 70,599 40,927 36,838 (5,790) 42,628 --------- --------- --------- ---------- --------- ---------- Total interest-bearing liabilities............ 778,120 813,942 586,296 (35,822) (45,002) 9,180 --------- --------- --------- ---------- --------- ---------- Noninterest-bearing demand deposits........... Other liabilities............................. Shareholders' equity.......................... Total liabilities and shareholders' equity. Average interest rate spread......................... Net yield on earning assets.......................... $ 862,681 795,205 $ 781,334 $ 67,476 $ 54,829 $ 12,647 ========= ========= ========= ========== ========= ========== Taxable equivalent adjustment........................ $ 34,188 $ 32,535 $ 28,088 ========= ========= =========
1995 v. 1994 --------------------------------------- Change due to INCREASE -------------------------- DECREASE) Rate Volume ---------- ----------- ------------ (DOLLARS IN THOUSANDS) ASSETS Securities (1): U.S. Treasury, government and other (5)........... $ 24,017 $ 20,309 $ 3,708 States and political subdivisions................. (1,068) (250) (818) ---------- ----------- ------------ Total securities (5).......................... 22,949 20,059 2,890 Other earning assets (2)............................. (2,632) 1,706 (4,338) Loans and leases, net of unearned income (1)(3)(4)(5) 221,200 105,149 116,051 ---------- ----------- ------------ Total earning assets.......................... 241,517 126,914 114,603 ---------- ----------- ------------ Non-earning assets............................ Total assets............................. LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits: Savings, interest-checking and MRS sweeps......... (1,922) 2,461 (4,383) Money rate savings................................ 1,790 14,683 (12,893) Other time deposits............................... 115,405 89,425 25,980 ---------- ----------- ------------ Total interest-bearing deposits............... 115,273 106,569 8,704 Short-term borrowed funds............................ 82,701 44,253 38,448 Long-term debt....................................... 29,672 1,526 28,146 ---------- ----------- ------------ Total interest-bearing liabilities............ 227,646 152,348 75,298 ---------- ----------- ------------ Noninterest-bearing demand deposits........... Other liabilities............................. Shareholders' equity.......................... Total liabilities and shareholders' equity. Average interest rate spread......................... Net yield on earning assets.......................... $ 13,871 $ (25,434) $ 39,305 ========== =========== ============ Taxable equivalent adjustment........................
- ----------------- (1) Yields related to securities, loans and leases exempt from both Federal and state income taxes, Federal income taxes only or state income taxes only are stated on a taxable equivalent basis assuming tax rates in effect for the periods presented. (2) Includes Federal funds sold and securities purchased under resale agreements or similar arrangements. (3) Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes. (4) Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income. (5) Includes assets which were held for sale or available for sale at amortized cost. 27 For 1996, net interest income on a fully taxable equivalent basis ("FTE") totaled $862.7 million, compared with $795.2 million in 1995 and $781.3 million in 1994. During 1996, there was improvement in interest income from investment securities, up $10.0 million, and from loans, up $23.4 million. During the same time frame, reduced interest rates and the use of more cost- effective funding sources drove total interest expense down $35.8 million. Comparing 1995 with 1994, net interest income increased $13.9 million. The taxable equivalent net yield on average earning assets is the primary measure used in evaluating the effectiveness of the management of earning assets and funding liabilities. The net yield on average earning assets was 4.45% in 1996, 4.14% in 1995 and 4.36% in 1994. The increase in margin during 1996 reflects management's efforts to restructure the balance sheet by securitizing mortgage loans and holding the resulting mortgage-backed securities in the securities available-for-sale portfolio instead of holding lower-yielding U.S. Treasuries, as discussed earlier. The yield on total earning assets increased 10 basis points, driven by higher volumes of average loans and higher rates earned on average investments. Also, management's use of more cost-effective funding strategies, such as growing core deposits, particularly noninterest-bearing deposits, and utilizing more stable FHLB advances and other longer-term debt, rather than more volatile short-term borrowed funds, contributed to the improved margin. The cost of total interest-bearing liabilities decreased 22 basis points because of significantly lower rates paid on all funding sources except money rate savings. The 22 basis point margin decline during 1995 was caused by aggressive pricing strategies for loans and deposits put in place by management following the merger of Southern National and BB&T in an effort to protect the customer base. While the total yield on interest-earning assets increased 75 basis points over 1994, the rates paid on deposits and other borrowings increased 110 basis points during the year. PROVISION FOR LOAN AND LEASE LOSSES A provision for loan and lease losses is charged against earnings in order to maintain the allowance for loan and lease losses at a level considered adequate by management to absorb potential losses existing in the loan portfolio. The amount of the provision is based on continuing evaluation of problem loans, analytical reviews of loan loss experience in relation to outstanding loans, management's judgment with respect to current and expected economic conditions and their impact on the existing loan portfolio. The provision recorded by Southern National in 1996 was $53.7 million, compared with $34.6 million in 1995 and $20.2 million in 1994. The increase in the provision for loan and lease losses was influenced by two factors: charge-offs and growth in loans. During recent years, Southern National has experienced unusually low levels of charge-offs. During 1995, many asset quality indicators began to return to historically normal levels. Also, growth in loans during 1995 and 1996 was relatively strong. At December 31, 1996 and 1995, the allowance was 1.26% of loans and leases outstanding. The coverage ratio of nonaccrual loans and leases was at 3.08 times, up slightly from the prior year ratio of 2.82 times. The allowance for loan and lease losses is tested for adequacy on a quarterly basis. Specific reserves are allocated to problem commercial loans of $1 million or more, assuming the most conservative repayment scenario. All other commercial loans are segregated into one of ten risk categories according to the relative strength of the borrower and the repayment sources. Reserve allocations are then determined by multiplying outstandings in each category by factors based on historical loan loss experience. Reserve allocations are derived for consumer loans based on product type, such as mortgage, retail, bankcard, etc. Allocations are determined by applying historical loss ratios to estimated outstandings, with adjustments made for current and anticipated business conditions. This approach, which relates the allowance to problem loans, is employed because changes in problem loans--both the level relative to outstandings and the mix by risk category--are leading indicators of changes in portfolio loss potential. 28 NONINTEREST INCOME Noninterest income includes service charges on deposit accounts, trust revenues, mortgage banking income, insurance commissions, gains and losses on securities transactions and other commissions and fees derived from banking and bank-related activities. Over the past five years, noninterest income has grown at a compound annual rate of 10.6%. An important element of the merger of Southern National and BB&T was the additional marketing capability provided by merging the operations of the banks and the ability to cross-sell the stronger services of the existing banks to the customers of the other banks, which would grow noninterest income. The primary strategic objective for 1996 was to achieve these enhancements in fee-based revenues, and management set a goal of 20% growth in earnings from noninterest income. Actual growth during 1996 was 28.7%. The more significant components of this increase are discussed below. Noninterest income for 1996 totaled $297.4 million, compared with $231.0 million in 1995 and $229.9 million in 1994. The $66.4 million increase during 1996 resulted from growth in all areas of fee-based income combined with gains on the sale of securities of $3.2 million compared with prior year losses on sales of securities of $18.6 million. These losses were also the primary factor contributing to the flat rate of growth in noninterest income during 1995 compared with 1994. The securities losses were composed primarily of the $19.8 million losses incurred in association with the securities restructuring undertaken in the first quarter of 1995. The impact of these securities losses was offset to an extent by a $12.3 million gain on the sale of divested deposits. This divestiture was necessary because of antitrust regulations associated with the Southern National merger with BB&T. The percentage of total revenues, calculated as net interest income plus noninterest income excluding securities gains or losses, derived from noninterest (fee-based) income for 1996 was 25.7%, up from 23.9% in 1995 and 22.5% during 1994. Management hopes to grow this percentage to 30% in coming years. Service charges on deposit accounts represent the largest single source of noninterest revenue. Such revenues totaled $107.6 million in 1996, an increase of $18.0 million or 20.0% from 1995. Service charges during 1995 totaled $89.6 million, which was a 5.3% increase compared with the prior year. The primary factor contributing to the significant growth in service charges on deposit accounts during 1996 was a change in the fee structure implemented during the first quarter. Deposit services are typically repriced annually to reflect current costs and competitive factors. Mortgage banking income (which includes normal servicing fees and profits and losses from the origination and sale of loans) increased $7.9 million or 30.1% to a total of $34.4 million for 1996. Mortgage banking income totaled $26.4 million in 1995 and $24.9 million in 1994. The primary components of the 1996 increase were servicing fees on loans sold, which increased $5.5 million, and increases in net gains on sales of mortgage loans because of the capitalization of mortgage servicing rights under SFAS No. 122. Agency insurance commissions, which include insurance commissions generated through Southern National's extensive agency network, increased approximately $6.8 million or 43.5% in 1996 to a total of $22.4 million. Agency insurance commissions totaled $15.6 million in 1995 and $13.8 million in 1994. The insurance agencies have become an increasingly important source of noninterest revenue for Southern National, and this trend is expected to continue in the future. Southern National currently maintains the largest independent insurance agency network in the Carolinas. During 1996, certain assets and liabilities of four insurance agencies in South Carolina were acquired with combined premiums totaling $65 million. These acquisitions, accounted for under the purchase method, increased agency insurance commissions during 1996. Southern National intends to continue to expand its insurance agency operations through both acquisitions and internally generated growth. Other insurance commissions, which include credit-related products offered through the banking network to borrowers, totaled $11.2 million during 1996, up 3.0% from the 1995 balance of $10.9 million. Such commissions totaled $10.4 million during 1994. 29 The offering of trust services has been a traditional service of Southern National. Trust income from corporate and personal trust services totaled $22.8 million in 1996. This was an increase of $4.2 million or 22.4% over income of $18.6 million in 1995, which in turn was an increase of $1.4 million or 8.4% over the $17.2 million earned in 1994. Managed assets totaled $5.0 billion at the end of 1996. Southern National also offers its own family of mutual funds and manages seven mutual funds with total assets in excess of $800 million, which provide investment alternatives both for trust clients and for other customers. The broker/dealer subsidiaries are the principal marketing agents of Southern National's proprietary mutual funds. Other nondeposit fees and commissions, including bankcard fees, increased by $14.2 million to a level of $68.8 million in 1996 compared with $54.6 million for 1995. During 1995, other nondeposit fees and commissions increased 13.2% from the 1994 income of $48.3 million. Major sources of nondeposit fees and commissions generating the increases include merchant discounts, up $5.4 million or 35.5% from the 1995 balance and up $7.5 million from the income recorded in 1994. Another significant component, investment brokerage commissions, increased $6.8 million during 1996 to a total of $14.7 million. Investment brokerage commissions increased 9.6% during 1995 to a total of $8.0 million. Other income decreased $6.8 million or 20.0% for 1996 because of a $12.3 million gain realized during the second quarter of 1995 on the divestiture of deposits which was undertaken to comply with antitrust restrictions following the Southern National merger with BB&T. Excluding the impact of this gain, other income would have increased $5.5 million. Other income in 1995 totaled $33.9 million, up 25.1% from the 1994 balance of $27.1 million. The ability to generate significant additional amounts of noninterest revenues in the future will be a requisite to the ultimate success of Southern National. Through its subsidiaries, Southern National will continue to focus on four primary areas--mortgage banking, trust, insurance and investment brokerage activities. Management has invested in the development of noninterest income products and services for delivery in future years and has targeted an overall growth rate of 20% per year. Southern National has also undertaken plans to develop a number of alternative delivery systems for products and services. During 1996, a PC- based home banking product called BB&T OnLine was introduced. Management believes that the service will be an effective tool both for individuals and small business customers. Southern National currently has plans to expand the ATM network to grow fee income and to provide added convenience to customers. Also, Southern National introduced a "loan-by-phone" service and developed an integrated small business lending process with expert systems and a well- trained human support system. Southern National currently has plans to open a "call center" during 1997 to provide greater customer service. Southern National will also continue to explore strategic acquisitions of insurance agencies, finance companies and other entities to improve noninterest income. 30 - ------------------------------------------------------------------------------- TABLE 15 NONINTEREST INCOME
% CHANGE ---------------- 1996 V. 1995 V. 1996 1995 1994 1995 1994 -------- -------- -------- ------- ------- (DOLLARS IN THOUSANDS) Service charges on deposits...... $107,581 $ 89,621 $ 85,106 20.0 % 5.3 % Mortgage banking income.......... 34,352 26,408 24,920 30.1 6.0 Trust income..................... 22,811 18,629 17,180 22.4 8.4 Agency insurance commissions..... 22,353 15,572 13,830 43.5 12.6 Other insurance commissions...... 11,189 10,866 10,413 3.0 4.4 Securities gains (losses), net... 3,206 (18,600) 3,074 NM NM Merchant discounts............... 20,574 15,189 7,665 35.5 98.2 Other bankcard income............ 7,851 9,259 10,006 (15.2) (7.5) Investment brokerage commissions..................... 14,722 7,951 7,256 85.2 9.6 Other bank service fees and commissions..................... 20,885 17,960 14,538 16.3 23.5 International income............. 3,206 2,895 2,600 10.7 11.3 Amortization of negative goodwill........................ 6,238 6,239 6,283 -- (.7) Other noninterest income......... 22,421 29,005 26,990 (22.7) 7.5 -------- -------- -------- ----- ---- Total noninterest income....... $297,389 $230,994 $229,861 28.7 % .5 % ======== ======== ======== ===== ====
- -------- NM--not meaningful. - ------------------------------------------------------------------------------- NONINTEREST EXPENSE Noninterest expense for 1996 decreased $27.2 million or 4.0% to a total of $654.1 million. This followed an increase of 15.5% in 1995 to a total of $681.2 million. Certain material, nonrecurring costs and expenses affecting noninterest expense were recorded during both 1996 and 1995. As discussed earlier, Southern National recorded a special, one-time SAIF assessment during the third quarter of 1996 totaling approximately $33 million on a pretax basis. During 1995, Southern National incurred $107.5 million of nonrecurring costs related to the merger of Southern National and BB&T. Excluding the impact of the nonrecurring items from both 1996 and 1995, noninterest expense would have increased $47.3 million or 8.2% from 1995 to 1996. The five-year compound rate of growth in noninterest expense has been 8.3%. An important objective following the merger of Southern National and BB&T was controlling costs. The combining companies expected to achieve significant cost savings through the elimination of redundant personnel and systems, which are among the benefits usually associated with an in-market merger. Through the implementation of a hiring freeze and an early retirement program, as well as by completing the conversion of the systems of the two companies during 1995, the cost savings have been achieved. Total personnel expense decreased $43.9 million or 12.7% in 1996 compared to 1995. The 1995 expense was 16.8% higher than personnel expense recorded in 1994. Total personnel expense includes salaries and wages, as well as pension and other employee benefits. The decrease during 1996 reflects $59.8 million of nonrecurring merger-related costs recorded in the prior year. These costs included severance pay, termination of employment contracts, early retirement packages and other related benefits. Excluding these nonrecurring charges, total personnel expense, the largest component of noninterest expense, would have increased $15.8 million or 5.5% to $302.4 million. The increase in recurring personnel costs reflects higher incentive-related compensation. Premiums paid to the FDIC for deposit insurance increased $19.8 million or 86.2% to a total of $42.8 million for 1996. For 1995, the expense decreased $9.7 million or 29.7%. As discussed earlier, Southern National 31 recorded $33 million of Federal deposit insurance expense during the third quarter of 1996 associated with a special assessment to recapitalize the SAIF. This assessment was offset by rate reductions on FDIC insurance expense which became effective during the latter part of 1995. The rate paid on insurance premiums increased from an annual rate of $.12 per $100 of deposits in 1990 to $.23 per $100 of deposits for the period beginning July 1, 1991. However, in 1995, the FDIC reduced the rates paid from $.23 per $100 to $.04 on deposits insured by the Bank Insurance Fund and on January 1, 1996, the FDIC eliminated the deposit insurance premium. Combined with continued flat deposit growth, this rate decrease resulted in significant savings on deposit insurance premiums during the third and fourth quarters of 1995, resulting in the decrease in expense from 1994. Net occupancy expense totaled $46.1 million in 1996. This represented a decrease of $3.1 million or 6.3% over the expense of $49.2 million incurred in 1995, which in turn was 11.2% greater than the expense of $44.3 million recorded in 1994. Furniture and equipment expense totaled $57.5 million in 1996, compared with $58.7 million in 1995 and $44.3 million in 1994. These fluctuations include the impact in 1995 of $10.4 million of nonrecurring charges relating to branch closings and the consolidation of bank operations and systems associated with the Southern National and BB&T merger. Combined occupancy and equipment expense, excluding nonrecurring charges, would have increased $6.1 million or 6.2% in 1996 compared to 1995. Depreciation of property and equipment purchased in connection with implementing the merger was a major component of the increase. Other expense increased only $1.2 million from 1995 to 1996, primarily because of an elevated level of merger-related expenses recorded during 1995. These merger-related expenses included operational charge-offs, branch and departmental supplies, donations, legal fees, accounting fees, printing costs, regulatory filing fees and professional services. Excluding the impact of these charges, other noninterest expenses would have increased $38.8 million or 23.3%. This increase was driven by several components. A primary strategic objective for 1996 was to increase BB&T brand identity. Southern National increased advertising and marketing expenditures to accomplish this objective. Advertising costs totaled $19.0 million during 1996, up from $11.5 million recorded in 1995 and $10.7 million recorded in 1994. As a result of this program, it is estimated that awareness of the BB&T brand increased 50%. Other costs include higher amortization of intangibles and mortgage servicing rights, which increased $2.2 million in 1996 because of lower interest rates, and conversion costs associated with the merger of Regional Acceptance. Many computer systems will incur data processing difficulties resulting from date codings of transactions after the year 1999. Southern National recognized expenses during 1996 to begin to upgrade certain computer software and operating systems to enable the systems to function properly in the year 2000. Southern National's computer systems are not programmed to consider the start of a new century, and the process of upgrading the systems' date recognition to make them year-2000 compliant will continue in the future. Management anticipates expenditures associated with this upgrade of at least $7 million to $8 million to be expensed as incurred over the next three years. 32 - ------------------------------------------------------------------------------- TABLE 16 NONINTEREST EXPENSE
% CHANGE ---------------- 1996 V. 1995 V. 1996 1995 1994 1995 1994 -------- -------- -------- ------- ------- (DOLLARS IN THOUSANDS) Salaries and wages............... $245,486 $286,321 $240,468 (14.3)% 19.1 % Pension and other employee bene- fits............................ 56,897 59,987 56,077 (5.2) 7.0 Net occupancy expense on bank premises........................ 46,103 49,220 44,281 (6.3) 11.2 Furniture and equipment expense.. 57,491 58,657 44,299 (2.0) 32.4 Federal deposit insurance premi- ums............................. 42,820 22,995 32,697 86.2 (29.7) Other insurance.................. 3,275 4,733 4,174 (30.8) 13.4 Foreclosed property expense...... 1,952 3,168 4,645 (38.4) (31.8) Amortization expense on intangibles and mortgage servicing rights................ 12,779 10,600 7,700 20.6 37.7 Software......................... 5,049 8,507 5,403 (40.6) 57.4 Telephone........................ 11,929 11,968 10,921 (.3) 9.6 Donations........................ 5,295 7,341 3,832 (27.9) 91.6 Advertising and public rela- tions........................... 18,956 11,466 10,688 65.3 7.3 Travel........................... 5,248 5,159 4,064 1.7 26.9 Professional services............ 19,564 20,462 12,247 (4.4) 67.1 Supplies......................... 11,429 17,786 10,207 (35.7) 74.3 Loan and lease expense........... 28,903 22,227 17,034 30.0 30.5 Deposit related expense.......... 12,282 10,677 11,755 15.0 (9.2) Other noninterest expenses....... 68,595 69,954 69,303 (1.9) .9 -------- -------- -------- Total noninterest expense...... $654,053 $681,228 $589,795 (4.0)% 15.5 % ======== ======== ========
- ------------------------------------------------------------------------------- PROVISION FOR INCOME TAXES Southern National's provision for income taxes during 1996 was $134.5 million, a 47.1% increase over the provision recorded in 1995. The provision for income taxes in 1994 totaled $129.3 million. The significant increase in the provision in 1996 reflects lower earnings in the prior year resulting from the merger-related costs discussed above. Excluding the impact of the SAIF assessment during 1996 and the merger-related costs during 1995, the provision for income taxes increased $15.7 million or 12.0% because of higher recurring pretax earnings. Because of its investments in tax-exempt loans and securities and certain tax planning strategies, the effective tax rates were actually 32.2% in 1996, 32.9% in 1995 and 34.6% in 1994. MARKET RISK MANAGEMENT The effective management of market risk is essential to achieving the Corporation's objectives. As a financial institution, Southern National's primary market risk exposure is interest rate risk. A prime objective in interest rate risk management is the avoidance of wide fluctuations in net interest income through balancing the impact of changes in interest rates on interest-sensitive assets and interest-sensitive liabilities. Management uses balance sheet repositioning as an efficient and cost-effective means of managing interest rate risk. This is accomplished through strategic pricing of asset and liability accounts. The expected result of strategic pricing is the development of appropriate maturity and repricing streams in those accounts to produce consistent net income during adverse interest rate environments. The ALCO monitors loan, investment and liability portfolios to ensure comprehensive management of interest rate risk on the balance sheet. These portfolios are analyzed for proper fixed-rate and variable-rate "mixes" given a specific interest rate outlook. 33 Asset/liability management activities are designed to achieve relatively stable net interest margins and assure liquidity by coordinating the volumes, maturities or repricings and interest rate sensitivities of earning assets, deposits and borrowed funds. It is the responsibility of the ALCO to determine and achieve the most appropriate size and mix of earning assets and interest- bearing liabilities, as well as ensure an adequate level of liquidity and capital, while achieving desired growth in earnings and total assets. The ALCO also sets policy guidelines and establishes long-term strategies with respect to interest rate exposure and liquidity. The ALCO meets regularly to review Southern National's interest rate and liquidity risk exposures in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to ensure that the potential impact on earnings and liquidity of fluctuations in interest rates is within conservative standards. Southern National also utilizes off-balance sheet financial instruments to manage interest rate sensitivity and net interest income. These instruments, commonly referred to as derivatives, primarily consist of interest rate swaps, caps, floors, financial forward and futures contracts and options written and purchased. Management accounts for these financial instruments as hedges when the following conditions are met: (1) the specific assets, liabilities, firm commitments or anticipated transactions (or an identifiable group of essentially similar items) to be hedged expose Southern National to interest rate risk or price risk; (2) the financial instrument reduces that exposure; (3) the financial instrument is designated as a hedge at inception; and (4) at the inception of the hedge and throughout the hedge period, there is a high correlation of changes in the fair value or the net interest income associated with the financial instrument and the hedged items. Southern National does not utilize derivatives for trading purposes. Derivative contracts are written in amounts referred to as notional amounts. Notional amounts do not represent amounts to be exchanged between parties and are not a measure of financial risks, but only provide the basis for calculating payments between the counterparties. On December 31, 1996, Southern National had outstanding interest rate swaps, caps and floors with notional amounts totaling $1.1 billion. The estimated fair value of open contracts used for risk management purposes at December 31, 1996, reflected pretax net unrealized gains of $5.8 million. Southern National's derivatives used in interest rate risk management are primarily used to hedge variable rate commercial loans, adjustable rate mortgage loans, retail certificates of deposit and fixed rate notes. These hedges contributed net interest expense of $154,200 in 1996, compared with net interest expense of $10.3 million in 1995 and net interest income of $900,000 in 1994. Southern National utilizes written covered over-the-counter call options on specific securities in the available-for-sale securities portfolio in order to enhance returns. If the securities decrease in value and the option expires unexercised, Southern National recognizes the premium as income. If the securities increase in value and the written call option is exercised, Southern National forfeits the appreciation on the securities exceeding the option exercise price. Southern National also utilizes over-the-counter purchased put options and net purchased put options (combination of purchased put option and written call option) in its mortgage banking activities. These options are used to hedge the mortgage warehouse and pipeline against increasing interest rates. Written call options are used in tandem with purchased put options to create a net purchased put option that reduces the cost of the hedge. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or reference rate. Credit risk arises when amounts receivable from a counterparty exceed those payable. The risk of loss with any counterparty is limited to a small fraction of the notional amount. Southern National deals only with national market makers with strong credit ratings in its derivatives activities. Southern National further mitigates the risk of loss by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. All of the derivative contracts to which Southern National is a party settle monthly, quarterly or semiannually. Accordingly, the amount of off-balance sheet credit exposure to which Southern National is exposed at any time is immaterial. Further, Southern National has netting agreements with the dealers with which it does business. Because of these netting agreements, Southern National had a minimal amount of off- balance sheet credit exposure at December 31, 1996. 34 SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair Value of Financial Instruments" requires, among other things, certain quantitative and qualitative disclosures with regard to the amounts, nature and terms of derivative financial instruments. See Note Q, "Derivatives and Off-Balance Sheet Financial Instruments," for the required quantitative disclosures. Southern National's interest rate sensitivity is illustrated in the following interest rate sensitivity gap table. The table reflects rate- sensitive positions at December 31, 1996, and is not necessarily reflective of positions throughout each year. The carrying amounts of interest-rate- sensitive assets and liabilities and the notional amounts of swaps and other derivative financial instruments are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. To reflect anticipated prepayments, certain asset and liability categories are included in the table based on estimated rather than contractual maturity dates. - ------------------------------------------------------------------------------- TABLE 17 INTEREST RATE SENSITIVITY GAP ANALYSIS DECEMBER 31, 1996
EXPECTED REPRICING OR MATURITY DATE ------------------------------------------------------------------------------------------ WITHIN ONE TO THREE TO AFTER FIVE ONE YEAR THREE YEARS FIVE YEARS YEARS TOTAL ----------------- ---------------- ---------------- ----------------- ---------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE ----------- ---- ---------- ---- ---------- ---- ---------- ----- ----------- ---- (DOLLARS IN THOUSANDS) ASSETS Securities and other interest-earning assets*............... $ 1,212,853 6.86% $1,618,464 6.55% $1,519,034 6.97% $ 892,146 7.05% $ 5,242,497 6.83% Federal funds sold and securities purchased under resale agreements or similar arrangements.......... 19,940 5.25 -- -- -- -- -- -- 19,940 5.25 Loans and leases....... 9,414,183 8.70 3,280,158 8.36 1,416,070 8.68 473,653 14.46 14,584,064 8.81 ----------- ---- ---------- ---- ---------- ---- ---------- ----- ----------- ---- TOTAL INTEREST-EARNING ASSETS................. 10,646,976 4,898,622 2,935,104 1,365,799 19,846,501 ----------- ---- ---------- ---- ---------- ---- ---------- ----- ----------- ---- LIABILITIES Time deposits.......... 6,693,613 5.37 1,289,270 6.00 209,652 6.22 22,686 6.28 8,215,221 5.49 Savings and interest checking**............ -- -- 825,756 1.56 275,252 1.56 275,252 1.56 1,376,260 1.56 Money rate savings**... 1,686,009 3.30 1,686,009 3.30 -- -- -- -- 3,372,018 3.30 Federal funds purchased............. 793,075 5.27 -- -- -- -- -- -- 793,075 5.27 Other borrowings....... 2,491,821 5.14 141,427 6.38 506,633 5.74 382,114 5.07 3,521,995 5.27 ----------- ---- ---------- ---- ---------- ---- ---------- ----- ----------- ---- TOTAL INTEREST-BEARING LIABILITIES............ 11,664,518 3,942,462 991,537 680,052 17,278,569 ----------- ---------- ---------- ---------- ----------- ASSET-LIABILITY GAP..... (1,017,542) 956,160 1,943,567 685,747 ----------- ---------- ---------- ---------- DERIVATIVES AFFECTING INTEREST RATE SENSITIVITY Pay fixed interest rate swaps................. 288,629 5.35 (268,817) 5.31 (15,520) 5.27 (4,292) 5.98 Receive fixed interest rate swaps............ (450,000) 5.36 200,000 6.11 -- -- 250,000 6.90 Basis swaps............ (250,000) 5.51 250,000 5.53 -- -- -- -- Floors................. (105,000) -- 105,000 -- -- -- -- -- ----------- ---------- ---------- ---------- INTEREST RATE SENSITIVITY GAP........ $(1,533,913) $1,242,343 $1,928,047 $ 931,455 =========== ========== ========== ========== CUMULATIVE INTEREST RATE SENSITIVITY GAP........ $(1,533,913) $ (291,570) $1,636,477 $2,567,932 =========== ========== ========== ==========
- -------- * Securities based on amortized cost. ** Projected runoff of non-maturity deposits was computed based upon decay rate assumptions developed by bank regulators to assist banks in addressing FDICIA rule 305. - ------------------------------------------------------------------------------- 35 INFLATION AND CHANGING INTEREST RATES The majority of assets and liabilities of financial institutions are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Fluctuations in interest rates and the efforts of the Board of Governors of the Federal Reserve ("FRB") to regulate money and credit conditions have a greater effect on a financial institution's profitability than do the effects of higher costs for goods and services. Through its balance sheet management function, Southern National is positioned to respond to changing interest rates and inflationary trends. Simulation Analysis takes into account the current contractual agreements that Southern National has made with its customers on deposits, borrowings, loans, investments and any commitments to enter into those transactions. Management monitors Southern National's interest sensitivity by means of a computer-based asset/liability model that incorporates current volumes and rates, maturity streams, repricing opportunities and anticipated growth. The model calculates an earnings estimate based on current portfolio balances and rates, less any balances that are scheduled to reprice or mature. Balances and rates that will replace the previous balances and any anticipated growth are added. This level of detail is needed to correctly simulate the effect that changes in interest rates and anticipated balances will have on the earnings of Southern National. This method is subject to the assumptions that underlie the process, but it provides a better illustration of true earnings potential than other analyses such as static or dynamic gap. The asset/liability management process involves various analyses. Management determines the most likely outlook for the economy and interest rates by analyzing environmental factors including regulatory changes, monetary and fiscal policies and the overall state of the economy. Southern National's current and prospective liquidity position, current balance sheet volumes and projected growth, accessibility of funds for short-term needs and capital maintenance are all considered, given the current environmental situation. Management proceeds by analyzing interest rate sensitivity, risk-based capital requirements and results from past strategies to develop a strategy to meet performance goals. The following table represents the sensitivity position of Southern National as of a point in time. This position can be modified by management within a short time period if necessary. This tabular data does not reflect the impact of a change in the credit quality of Southern National's assets and liabilities. To attempt to quantify the potential change in net interest income, given a change in interest rates, various interest rate scenarios are applied to the projected balances, maturities and repricing opportunities. The resulting change in net interest income reflects the level of sensitivity that net income has in relation to changing interest rates. - ------------------------------------------------------------------------------- TABLE 18 INTEREST SENSITIVITY SIMULATION ANALYSIS
INTEREST ANNUALIZED RATE PERCENTAGE SCENARIO CHANGE IN -------- NET INTEREST LINEAR PRIME INCOME ----------- ----- ------------ +3.00% 11.25% (1.97)% +1.50 9.75 (1.32) Most likely 8.25 -- -1.50 6.75 (0.05) -3.00 5.25 (0.21)
- ------------------------------------------------------------------------------- Management has established parameters for asset/liability management which prescribe a maximum impact on net interest income of 3% for a 150 basis point change over six months from the most likely interest rate scenario, and no more than a maximum 6% for a 300 basis point change over 12 months. It is management's 36 ongoing objective to effectively manage the impact of changes in interest rates and minimize the resulting effect on earnings as evidenced by the preceding table. LIQUIDITY Liquidity represents a bank's continuing ability to meet its funding needs, primarily deposit withdrawals, timely repayment of borrowings and other liabilities and funding of loan commitments. In addition to its level of liquid assets, many other factors affect a bank's ability to meet liquidity needs, including access to additional funding sources, total capital position and general market conditions. Traditional sources of liquidity include proceeds from maturity of securities, repayment of loans and growth in core deposits. Federal funds purchased, repurchase agreements and other short-term borrowed funds supplement these traditional sources. Management believes liquidity obtainable from these sources is adequate to meet current requirements. Total cash and cash equivalents decreased to $659.7 million at December 31, 1996 compared to $705.7 million in 1995 and $671.8 million in 1994. Net cash provided by operating activities for the year increased by $74.5 million to $327.4 million from $253.0 million in 1995, a decrease of $261.2 million from 1994. Cash provided by operating activities in 1994 was $514.1 million. The 1996 increase was primarily the result of significantly higher net income and cash flows from mortgage banking activities. Net cash flows used in investing activities increased from $570.6 million in 1995 to $712.9 million in 1996. Cash used in investing activities during 1995 decreased $983.5 million from $1.6 billion in 1994. The primary factor creating the current year increase in cash flows used in investing activities was an $888.3 million increase in cash flows used in lending activities offset by a $752.5 million increase in cash flows provided by investing activities. Cash flows provided by financing activities decreased to $339.5 million in 1996 primarily because of a $160.1 million increase in cash flows used in the redemption of common stock offset by a $194.7 million increase in cash flows provided by long-term debt. Cash flows provided by financing activities were $852.2 million in 1994 because of increases in short-term borrowed funds. CAPITAL ADEQUACY AND RESOURCES The maintenance of appropriate levels of capital is a management priority. Overall capital adequacy is monitored on an ongoing basis by management and reviewed regularly by the Board of Directors. Southern National's principal capital planning goals are to provide an adequate return to shareholders while retaining a sufficient base from which to provide future growth and compliance with all regulatory standards. Shareholders' equity grew 1.0% in 1996. Additional equity has come from the retention of earnings and from new shares of stock issued under employee benefit and stock option plans and the dividend reinvestment plan. The modest growth in total shareholders' equity during the year reflects current year earnings, reduced by resources used for the redemption of 6.8 million shares of common stock and the declaration of $111.3 million in common and preferred dividends. 4.3 million of the shares repurchased were used to meet the requirements of the conversion of preferred stock, which was redeemed on March 29, 1996. Southern National adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in 1994. The provisions of this statement require securities classified as available for sale to be carried at estimated fair value with net unrealized appreciation or depreciation recorded as an adjustment to shareholders' equity. At the end of 1996, Southern National had recorded cumulative net unrealized appreciation of $11.8 million, net of tax. 37 - ------------------------------------------------------------------------------- TABLE 19 CAPITAL--COMPONENTS AND RATIOS
DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- (DOLLARS IN THOUSANDS) Tier 1 capital.................................... $1,666,481 $1,630,645 Tier 2 capital.................................... 426,662 155,036 ---------- ---------- Total regulatory capital.......................... $2,093,143 1,785,681 ========== ========== Risk-based capital ratios: Tier 1 capital.................................. 11.7% 13.2% Total regulatory capital........................ 14.7 14.4 Tier 1 leverage ratio........................... 8.0 7.9
- ------------------------------------------------------------------------------- Traditionally, Southern National has been considered to be strongly capitalized. The ratio of shareholders' equity to year-end assets was 8.1% at the end of 1996, compared with 8.3% a year earlier. While management views the equity-to-assets ratio as the principal indicator of capital strength, additional measures are used by regulators. Bank holding companies and their subsidiaries are subject to risk-based capital measures. The risk-based capital ratios measure the relationship of capital to a combination of balance sheet and off-balance sheet risk. The values of both balance sheet and off- balance sheet items are adjusted to reflect these risks. Tier 1 capital is required to be at least 4% of risk-weighted assets, and total capital must be at least 8% of risk-weighted assets. The Tier 1 capital ratio for Southern National at the end of 1996 was 11.7%, and the total capital ratio was 14.7%. At the end of 1995, those ratios were 13.2% and 14.4%, respectively. Another measure used by regulators is the leverage ratio, which is the ratio of tangible equity to tangible assets. The minimum required leverage ratio for a well-capitalized bank is 3%, while the leverage ratio for Southern National was 8.0% at the end of 1996 and 7.9% at the end of 1995. - ------------------------------------------------------------------------------- TABLE 20 SELECTED EQUITY DATA AND RATIOS
1996 1995 1994 ------ ------ ------ Book value per common share at year end............... $15.82 $15.04 $13.44 Book value per common share percentage increase over prior year end....................................... 5.19% 11.90% 6.41% Common dividends per share as a percentage increase over prior year...................................... 16.28 16.22 15.63 Equity at year end to year end: Total assets........................................ 8.14 8.29 7.64 Net loans and leases*............................... 12.01 12.42 11.69 Deposits............................................ 11.56 11.65 10.66 Equity and long-term debt........................... 45.73 55.29 62.62
- -------- * Amounts are net of unearned income and the allowance for loan and lease losses and include loans held for sale. - ------------------------------------------------------------------------------- STOCK AND DIVIDENDS The management of Southern National continually monitors capital for adequacy to provide a foundation for future asset growth and to promote investor and depositor confidence. At the end of 1996, Southern National 38 had 109.3 million shares of common stock issued and outstanding compared to 109.2 million shares outstanding at the previous year end. Southern National's ability to pay dividends is primarily dependent on earnings from operations, the adequacy of capital and the availability of liquid assets for distribution. Southern National's ability to replenish liquid assets available for distribution is primarily dependent on the ability of the banking subsidiaries to pay dividends to Southern National. Historically, Southern National's cash dividends have been approximately one third of earnings resulting from management's goal to retain sufficient capital to support future growth and to meet regulatory requirements while providing a competitive return on investment to shareholders. Southern National's common dividend payout ratio, computed by dividing dividends per common share by earnings available per common share, was 39.1% in 1996. Excluding the impact of the nonrecurring charges discussed in "Analysis of Results of Operations," the dividend payout ratio would have been 36.4%. Southern National's quarterly cash dividend per common share was increased 17.4% after the second quarter to $.27 per common share. This increase marked the 24th consecutive year that cash dividends have been increased. A discussion of dividend restrictions is included in Note N--"Regulatory Requirements and Other Restrictions." On January 11, 1996, Southern National announced a plan to repurchase up to 4.3 million shares of common stock. On February 28, 1996, Southern National announced that these shares would be used in the anticipated conversion of the outstanding preferred stock which was redeemed on March 29, 1996, at the price of $104.05 per share. Southern National's common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "SNB." Southern National's common stock was held by approximately 42,900 holders of record at December 31, 1996. The accompanying table, "Quarterly Common Stock Summary," sets forth the high, low and last sales prices for the common stock as reported on the NYSE Composite Tape and the cash dividends paid per share of common stock for each of the last eight quarters. - ------------------------------------------------------------------------------- TABLE 21 QUARTERLY COMMON STOCK SUMMARY
1996 1995 ------------------------------ ------------------------------ SALES PRICES SALES PRICES -------------------- DIVIDENDS -------------------- DIVIDENDS HIGH LOW LAST PAID HIGH LOW LAST PAID ------ ------ ------ --------- ------ ------ ------ --------- Quarter Ended March 31....... $29.75 $25.88 $27.75 $ .23 $22.38 $18.88 $19.88 $.20 June 30........ 31.75 28.88 31.75 .23 24.13 19.88 24.00 .20 September 30... 33.88 28.63 33.25 .27 27.13 23.63 26.25 .23 December 31.... 36.75 33.38 36.25 .27 27.00 25.63 26.25 .23 Year......... 36.75 25.88 36.25 1.00 27.13 18.88 26.25 .86
- ------------------------------------------------------------------------------- FOURTH QUARTER RESULTS Net income for the fourth quarter of 1996 was $79.7 million, compared to earnings of $72.3 million for the prior year. On a per share basis, fully diluted net income was $.72 for the quarter compared to $.63 a year ago. Annualized returns on average assets and average equity were 1.51% and 18.54%, respectively, for the fourth quarter. Southern National showed improved net interest income of $214.0 million for the fourth quarter of 1996 compared to $195.9 million for the same period during 1995. The increased earnings also resulted from higher noninterest income, which totaled $80.4 million for the fourth quarter, up from $62.1 million from the fourth quarter of 1995. Southern National's noninterest expense was $163.2 million, up from the $141.3 million recorded in the fourth quarter of the prior year. 39 The provision for loan and lease losses increased steadily and significantly from the first quarter of 1995 through the fourth quarter of 1996. The increase resulted from ongoing growth in the loan portfolio and higher net charge-offs. The $19.8 million net securities losses reflected in the first quarter of 1995 resulted from a restructuring of the securities portfolio which was undertaken to conform the investment policies and portfolios of Southern National and BB&T after the merger. Noninterest income grew significantly during the past two years as reflected in Table 22. This growth has resulted from higher revenues from service charges on deposits, insurance commissions, investment brokerage commissions and mortgage banking income. The ability of Southern National to cross-sell products and services to the new customer base following the merger provided much of the growth in fee-based income. Noninterest expense fluctuated significantly on a quarterly basis in the past two years as reflected in Table 22. As discussed earlier, Southern National incurred significant nonrecurring expenses in both 1995 and 1996. During 1995, Southern National recorded $107.5 million of nonrecurring merger- related expenses in noninterest expense. On a quarterly basis, such amounts totaled $83.4 million, $14.9 million, $6.5 million and $2.7 million for the first, second, third and fourth quarters, respectively. During 1996, Southern National incurred approximately $33 million in Federal deposit insurance expense as part of a special, one-time SAIF assessment. This expense was recorded during the third quarter of 1996. Excluding the impact of this assessment, Southern National's noninterest expense grew steadily each quarter of 1996, primarily driven by increased advertising and public relations expense and higher amortization of intangibles and mortgage servicing rights. 40 The accompanying table, "Quarterly Financial Summary--Unaudited," presents condensed information relating to eight quarters in the period ended December 31, 1996. - ------------------------------------------------------------------------------- TABLE 22 QUARTERLY FINANCIAL SUMMARY--UNAUDITED
1996 1995 ------------------------------------------------ ----------------------------------------------- FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- CONSOLIDATED SUMMARY OF OPERATIONS Net interest income FTE................... $ 223,284 $ 215,925 $ 215,769 $ 207,703 $ 204,100 $ 198,400 $ 197,840 $ 194,865 FTE adjustment......... 9,326 8,348 8,446 8,068 8,611 8,514 7,958 7,452 Provision for loan and lease losses.......... 15,500 13,500 13,261 11,400 11,317 7,933 7,742 7,640 Securities gains (losses), net......... 2,663 705 (154) (8) 131 1,114 -- (19,845) Other noninterest income................ 77,731 74,217 73,238 68,997 61,947 61,611 68,505 57,531 Noninterest expense.... 163,204 187,734 153,471 149,644 141,319 147,121 161,952 231,628 Provision for income taxes................. 35,968 25,299 37,508 35,729 32,650 32,971 28,784 (2,942) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss)...... $ 79,680 $ 55,966 $ 76,167 $ 71,851 $ 72,281 $ 64,586 $ 59,909 $ (10,435) =========== =========== =========== =========== =========== =========== =========== =========== Fully diluted net income (loss) per share................. $ .72 $ .50 $ .68 $ .64 $ .63 $ .56 $ .52 $ (.11) =========== =========== =========== =========== =========== =========== =========== =========== SELECTED AVERAGE BALANCES Assets................. $21,031,881 $20,703,073 $20,400,678 $20,154,199 $20,579,829 $20,745,290 $20,409,207 $19,930,321 Securities, at amortized cost........ 5,408,963 5,353,806 4,975,231 4,957,943 5,321,514 5,452,924 5,466,584 5,382,220 Loans and leases *..... 14,326,427 14,145,593 14,269,580 14,021,351 14,051,563 14,020,701 13,698,285 13,347,077 Total earning assets... 19,746,603 19,514,382 19,255,591 18,996,854 19,425,295 19,504,658 19,212,426 18,776,112 Deposits............... 15,018,071 14,993,074 14,589,355 14,504,637 14,221,698 14,211,266 14,305,800 14,266,875 Short-term borrowed funds................. 1,881,838 1,823,310 2,129,143 2,215,462 3,029,962 3,297,130 3,336,221 2,972,965 Long-term debt......... 2,161,321 1,977,109 1,779,639 1,511,577 1,376,756 1,309,932 910,946 905,484 Total interest-bearing liabilities........... 17,133,286 16,939,964 16,649,842 16,433,353 16,738,813 17,113,131 16,852,509 16,459,062 Shareholders' equity... 1,709,689 1,642,720 1,631,951 1,653,414 1,680,616 1,623,677 1,580,953 1,541,939
- -------- * Loans and leases are net of unearned income and include loans held for sale. - ------------------------------------------------------------------------------- 41 SIX-YEAR FINANCIAL SUMMARY AND SELECTED RATIOS
FIVE-YEAR COMPOUND 1996 1995 1994 1993 1992 1991 GROWTH RATE ----------- ----------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SUMMARY OF OPERATIONS Interest income......... $ 1,606,613 $ 1,576,612 $ 1,339,542 $ 1,212,986 $ 1,218,407 $ 1,252,172 5.1% Interest expense........ 778,120 813,942 586,296 509,110 592,675 746,400 .8 ----------- ----------- ----------- ----------- ----------- ----------- Net interest income..... 828,493 762,670 753,246 703,876 625,732 505,772 10.4 Provision for loan and lease losses........... 53,661 34,632 20,181 54,558 63,584 76,922 (6.9) ----------- ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan and lease losses.. 774,832 728,038 733,065 649,318 562,148 428,850 12.6 Noninterest income...... 297,389 230,994 229,861 223,229 187,541 179,419 10.6 Noninterest expense..... 654,053 681,228 589,795 667,441 513,649 438,617 8.3 ----------- ----------- ----------- ----------- ----------- ----------- Income before income taxes.................. 418,168 277,804 373,131 205,106 236,040 169,652 19.8 Provision for income taxes.................. 134,504 91,463 129,289 78,925 84,322 51,640 21.1 ----------- ----------- ----------- ----------- ----------- ----------- Income before cumulative effect of changes in accounting principles.. 283,664 186,341 243,842 126,181 151,718 118,012 19.2 Less: cumulative effect of changes in accounting principles, net of income taxes -- -- -- 33,792 -- -- NM ----------- ----------- ----------- ----------- ----------- ----------- Net income.............. $ 283,664 $ 186,341 $ 243,842 $ 92,389 $ 151,718 $ 118,012 19.2 =========== =========== =========== =========== =========== =========== PER COMMON SHARE Average shares outstanding (000's) Primary................ 110,486 109,777 108,143 104,317 97,610 89,195 4.4 Fully diluted.......... 111,836 114,802 113,194 110,201 105,277 92,620 3.8 Primary earnings Income before cumulative effect..... $ 2.56 $ 1.65 $ 2.21 $ 1.16 $ 1.51 $ 1.32 14.2 Less: cumulative effect................ -- -- -- .33 -- -- NM ----------- ----------- ----------- ----------- ----------- ----------- Net income............. $ 2.56 $ 1.65 $ 2.21 $ .83 $ 1.51 $ 1.32 14.2 =========== =========== =========== =========== =========== =========== Fully diluted Income before cumulative effect..... $ 2.54 $ 1.62 $ 2.16 $ 1.16 $ 1.44 $ 1.28 14.7 Less: cumulative effect................ -- -- -- .33 -- -- NM ----------- ----------- ----------- ----------- ----------- ----------- Net income............. $ 2.54 $ 1.62 $ 2.16 $ .83 $ 1.44 $ 1.28 14.7 =========== =========== =========== =========== =========== =========== Cash dividends declared............... $ 1.00 $ .86 $ .74 $ .64 $ .50 $ .46 16.8 Shareholders' equity.... 15.82 15.04 13.44 12.63 12.71 11.64 6.3 AVERAGE BALANCE SHEETS Securities at carrying value.................. $ 5,176,841 $ 5,394,372 $ 5,340,070 $ 4,670,213 $ 3,998,587 $ 3,336,542 9.2 Loans and leases *...... 14,008,824 13,591,113 12,290,880 11,087,053 10,069,318 9,123,809 9.0 Other assets............ 1,388,405 1,418,385 1,441,666 1,369,128 1,339,256 1,251,716 2.1 ----------- ----------- ----------- ----------- ----------- ----------- Total assets........... $20,574,070 $20,403,870 $19,072,616 $17,126,394 $15,407,161 $13,712,067 8.5 =========== =========== =========== =========== =========== =========== Deposits................ $14,777,537 $14,251,176 $14,298,728 $13,546,050 $12,601,590 $11,398,365 5.3 Other liabilities....... 2,278,429 3,422,090 2,624,611 1,590,357 1,453,887 1,238,147 13.0 Long-term debt.......... 1,858,569 1,127,575 677,227 597,519 153,064 142,359 67.2 Common shareholders' equity................. 1,644,376 1,530,684 1,397,907 1,318,325 1,132,815 933,196 12.0 Preferred shareholders' equity................. 15,159 72,345 74,143 74,143 65,805 -- NM ----------- ----------- ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity.. $20,574,070 $20,403,870 $19,072,616 $17,126,394 $15,407,161 $13,712,067 8.5 =========== =========== =========== =========== =========== =========== PERIOD END BALANCES Total assets............ $21,246,562 $20,636,430 $19,971,602 $18,927,837 $16,016,224 $14,475,718 8.0 Deposits................ 14,953,914 14,684,056 14,314,154 14,594,952 13,044,173 12,166,090 4.2 Long-term debt.......... 2,051,767 1,383,935 910,755 837,241 423,211 417,050 37.5 Shareholders' equity.... 1,729,169 1,711,342 1,525,548 1,420,790 1,275,877 1,030,257 10.9 SELECTED PERFORMANCE RATIOS Rate of return on: Average total assets... 1.38% .91% 1.28% .54% .98% .86% Average common shareholders' equity.. 17.21 11.84 17.07 6.61 12.99 12.65 Dividend payout......... 39.06 52.12 33.48 77.11 33.11 34.85 Average equity to average assets......... 8.07 7.86 7.72 8.13 7.78 6.81
- -------- * Loans and leases are net of unearned income and the allowance for losses. Amounts include loans held for sale. NM--Not meaningful. 42 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of Southern National is responsible for the preparation of the financial statements, related financial data and other information in this Annual Report on Form 10-K. The financial statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's estimates and judgment where appropriate. Financial information appearing throughout this Annual Report on Form 10-K is consistent with the financial statements. Southern National's accounting system, which records, summarizes and reports financial transactions, is supported by an internal control structure which provides reasonable assurance that assets are safeguarded and that transactions are recorded in accordance with Southern National's policies and established accounting procedures. As an integral part of the internal control structure, Southern National maintains a professional staff of internal auditors who monitor compliance with and assess the effectiveness of the internal control structure. The Audit Committee of Southern National's Board of Directors, composed solely of outside directors, meets regularly with Southern National's management, internal auditors and independent public accountants to review matters relating to financial reporting, internal control structure and the nature, extent and results of the audit effort. The independent public accountants and the internal auditors have access to the Audit Committee with or without management present. The financial statements have been audited by Arthur Andersen LLP, independent public accountants, who render an independent opinion on management's financial statements. Their appointment was recommended by the Audit Committee, approved by the Board of Directors and ratified by the shareholders. Their examination provides an objective assessment of the degree to which Southern National's management meets its responsibility for financial reporting. Their opinion on the financial statements is based on auditing procedures which include reviewing the internal control structure to determine the timing and scope of audit procedures and performing selected tests of transactions and records as they deem appropriate. These auditing procedures are designed to provide a reasonable level of assurance that the financial statements are fairly presented in all material respects. John A. Allison Scott E. Reed Sherry A. Kellett Chairman and Chief Financial Officer Controller Chief Executive Officer 43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Southern National Corporation: We have audited the accompanying consolidated balance sheets of Southern National Corporation, (a North Carolina corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principals used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Southern National Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As explained in Note A to the consolidated financial statements, effective January 1, 1995, the Company changed its method of accounting for mortgage servicing rights. Arthur Andersen LLP Charlotte, North Carolina, January 14, 1997. 44 SOUTHERN NATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 ----------- ----------- ASSETS Cash and due from banks............................. $ 638,748 $ 585,527 Interest-bearing deposits with banks................ 1,046 1,172 Federal funds sold and securities purchased under resale agreements or similar arrangements.......... 19,940 118,977 Securities available for sale....................... 5,136,789 5,201,344 Securities held to maturity (market value: $128,410 in 1996 and $159,886 in 1995)...................... 124,718 153,969 Loans held for sale................................. 219,469 245,280 Loans and leases, net of unearned income............ 14,364,595 13,706,711 Allowance for loan and lease losses................ (183,932) (175,588) ----------- ----------- Loans and leases, net............................ 14,180,663 13,531,123 ----------- ----------- Premises and equipment, net......................... 319,082 313,858 Other assets........................................ 606,107 485,180 ----------- ----------- Total assets..................................... $21,246,562 $20,636,430 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand deposits................ $ 1,990,415 $ 1,885,725 Savings and interest checking...................... 1,376,260 1,591,488 Money rate savings................................. 3,372,018 3,049,810 Other time deposits................................ 8,215,221 8,157,033 ----------- ----------- Total deposits................................... 14,953,914 14,684,056 Short-term borrowed funds........................... 2,263,303 2,595,416 Long-term debt...................................... 2,051,767 1,383,935 Accounts payable and other liabilities.............. 248,409 261,681 ----------- ----------- Total liabilities................................ 19,517,393 18,925,088 ----------- ----------- Shareholders' equity: Preferred stock, $5 par, 5,000,000 shares authorized, none issued and outstanding at December 31, 1996 and 733,869 at December 31, 1995.............................................. -- 3,669 Common stock, $5 par, 300,000,000 shares authorized, issued and outstanding 109,297,489 at December 31, 1996 and 109,151,655 at December 31, 1995.............................................. 546,487 545,758 Additional paid-in capital......................... 134,758 269,404 Retained earnings.................................. 1,038,067 865,658 Loan to employee stock ownership plan and unvested restricted stock.................................. (1,952) (4,314) Net unrealized appreciation on securities available for sale, net of tax of $8,247 in 1996 and $20,013 in 1995........................................... 11,809 31,167 ----------- ----------- Total shareholders' equity....................... 1,729,169 1,711,342 ----------- ----------- Total liabilities and shareholders' equity....... $21,246,562 $20,636,430 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 45 SOUTHERN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 ---------- ---------- ---------- INTEREST INCOME Interest and fees on loans and leases..... $1,282,521 $1,261,658 $1,042,553 Interest and dividends on securities...... 323,360 312,423 291,805 Interest on short-term investments........ 732 2,531 5,184 ---------- ---------- ---------- Total interest income................... 1,606,613 1,576,612 1,339,542 ---------- ---------- ---------- INTEREST EXPENSE Interest on deposits...................... 564,747 557,149 441,876 Interest on short-term borrowed funds..... 105,936 186,194 103,493 Interest on long-term debt................ 107,437 70,599 40,927 ---------- ---------- ---------- Total interest expense.................. 778,120 813,942 586,296 ---------- ---------- ---------- NET INTEREST INCOME......................... 828,493 762,670 753,246 Provision for loan and lease losses....... 53,661 34,632 20,181 ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES........................... 774,832 728,038 733,065 ---------- ---------- ---------- NONINTEREST INCOME Service charges on deposits............... 107,581 89,621 85,106 Mortgage banking income................... 34,352 26,408 24,920 Trust income.............................. 22,811 18,629 17,180 Agency insurance commissions.............. 22,353 15,572 13,830 Other insurance commissions............... 11,189 10,866 10,413 Bankcard fees............................. 28,425 24,448 17,671 Other nondeposit fees and commissions..... 40,410 30,186 30,594 Securities gains (losses), net............ 3,206 (18,600) 3,074 Other income.............................. 27,062 33,864 27,073 ---------- ---------- ---------- Total noninterest income................ 297,389 230,994 229,861 ---------- ---------- ---------- NONINTEREST EXPENSE Personnel expense......................... 302,383 346,308 296,545 Occupancy and equipment expense........... 103,594 107,877 88,580 Federal deposit insurance expense......... 42,820 22,995 32,697 Other expense............................. 205,256 204,048 171,973 ---------- ---------- ---------- Total noninterest expense............... 654,053 681,228 589,795 ---------- ---------- ---------- EARNINGS Income before income taxes................ 418,168 277,804 373,131 Provision for income taxes................ 134,504 91,463 129,289 ---------- ---------- ---------- NET INCOME.................................. 283,664 186,341 243,842 Preferred dividend requirements........... 610 5,079 5,198 ---------- ---------- ---------- Income applicable to common shares........ $ 283,054 $ 181,262 $ 238,644 ========== ========== ========== PER COMMON SHARE Net income: Primary................................. $ 2.56 $ 1.65 $ 2.21 ========== ========== ========== Fully Diluted........................... $ 2.54 $ 1.62 $ 2.16 ========== ========== ========== Cash dividends declared................... $ 1.00 $ .86 $ .74 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 46 SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
SHARES OF ADDITIONAL RETAINED TOTAL COMMON PREFERRED COMMON PAID-IN EARNINGS SHAREHOLDERS' STOCK STOCK STOCK CAPITAL AND OTHER* EQUITY ----------- --------- -------- ---------- ---------- ------------- BALANCE, DECEMBER 31, 1993, AS PREVIOUSLY REPORTED............... 100,823,294 $ 3,850 $504,116 $ 275,426 $ 615,334 $1,398,726 Merger with Regional Acceptance Corporation accounted for under the pooling of interests method...... 5,791,500 -- 28,957 (9,823) 2,930 22,064 ----------- ------- -------- --------- ---------- ---------- BALANCE, DECEMBER 31, 1993, AS RESTATED...... 106,614,794 3,850 533,073 265,603 618,264 1,420,790 ADD (DEDUCT) Net income............. -- -- -- -- 243,842 243,842 Common stock issued.... 2,480,938 -- 12,405 26,161 (36) 38,530 Redemption of common stock................. (1,086,485) -- (5,432) (18,130) -- (23,562) Net unrealized depreciation on securities available for sale.............. -- -- -- -- (72,584) (72,584) Cash dividends declared by merged companies... -- -- -- -- (51,652) (51,652) Cash dividends declared by Southern National: Common stock........... -- -- -- -- (30,156) (30,156) Preferred stock........ -- -- -- -- (5,198) (5,198) Other.................. -- -- -- 2,165 3,373 5,538 ----------- ------- -------- --------- ---------- ---------- BALANCE, DECEMBER 31, 1994................... 108,009,247 3,850 540,046 275,799 705,853 1,525,548 ADD (DEDUCT) Net income............. -- -- -- -- 186,341 186,341 Common stock issued.... 3,030,923 -- 15,155 33,663 -- 48,818 Redemption of common stock................. (1,993,351) -- (9,967) (37,344) -- (47,311) Preferred stock cancellations and conversions........... 104,836 (181) 524 (2,714) -- (2,371) Net unrealized appreciation on securities available for sale.............. -- -- -- -- 103,751 103,751 Cash dividends declared by Southern National: Common stock........... -- -- -- -- (101,483) (101,483) Preferred stock........ -- -- -- -- (5,079) (5,079) Other.................. -- -- -- -- 3,128 3,128 ----------- ------- -------- --------- ---------- ---------- BALANCE, DECEMBER 31, 1995................... 109,151,655 3,669 545,758 269,404 892,511 1,711,342 ADD (DEDUCT) Net income............. -- -- -- -- 283,664 283,664 Common stock issued.... 2,584,625 -- 12,922 55,258 -- 68,180 Redemption of common stock................. (6,773,483) -- (33,867) (173,520) -- (207,387) Preferred stock cancellations and conversions........... 4,334,692 (3,669) 21,674 (18,005) -- -- Net unrealized depreciation on securities available for sale.............. -- -- -- -- (19,358) (19,358) Cash dividends declared by Southern National: Common stock........... -- -- -- -- (110,645) (110,645) Preferred stock........ -- -- -- -- (610) (610) Other.................. -- -- -- 1,621 2,362 3,983 ----------- ------- -------- --------- ---------- ---------- BALANCE, DECEMBER 31, 1996................... 109,297,489 $ -- $546,487 $ 134,758 $1,047,924 $1,729,169 =========== ======= ======== ========= ========== ==========
- -------- * Other includes net unrealized appreciation (depreciation) on securities available for sale, unvested restricted stock and a loan to the employee stock ownership plan. The accompanying notes are an integral part of these consolidated financial statements. 47 SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
1996 1995 1994 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................. $ 283,664 $ 186,341 $ 243,842 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses.... 53,661 34,632 20,181 Depreciation of premises and equipment............................. 39,852 36,264 35,730 Amortization of intangibles and mortgage servicing rights............. 12,779 10,600 7,700 Accretion of negative goodwill......... (6,238) (6,310) (1,114) Amortization of unearned stock compensation.......................... 2,450 3,128 1,711 Discount accretion and premium amortization on securities, net....... 2,168 (27,193) (571) Loss (gain) on sales of securities, net................................... (3,206) 18,600 (3,074) Loss (gain) on sales of loans and mortgage loan servicing rights, net... (8,293) 2,379 1,327 Loss (gain) on disposals of premises and equipment, net.................... 178 3,971 (1,759) Loss on foreclosed property and other real estate, net...................... 519 4,129 169 Proceeds from sales of loans held for sale.................................. 1,343,123 789,164 596,249 Purchases of loans held for sale....... (429,523) (311,059) (33,351) Origination of loans held for sale, net of principal collected............ (879,496) (589,413) (272,115) Decrease (increase) in: Accrued interest receivable........... 21,104 (19,415) (24,207) Other assets.......................... (104,688) 16,791 (79,612) Increase (decrease) in: Accrued interest payable.............. 4,424 10,992 2,880 Accounts payable and other liabilities.......................... (5,044) 89,377 20,142 ----------- ----------- ----------- Net cash provided by operating activities.......................... 327,434 252,978 514,128 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale.................... 593,567 1,290,237 772,597 Proceeds from maturities of securities available for sale.................... 2,129,525 1,087,926 792,590 Purchases of securities available for sale.................................. (1,871,172) (2,531,842) (1,490,117) Proceeds from maturities of securities held to maturity...................... 31,296 290,300 460,987 Purchases of securities held to maturity.............................. (2,228) (8,103) (862,317) Leases made to customers............... (72,390) (18,091) (44,379) Principal collected on leases.......... 48,222 14,620 41,661 Loan originations, net of principal collected............................. (1,283,633) (458,303) (1,191,968) Purchases of loans..................... (232,236) (189,997) (27,864) Net cash acquired in transactions accounted for under the purchase method................................ 1,887 -- 2,262 Purchases and originations of mortgage servicing rights...................... (24,302) (16,751) (2,948) Proceeds from disposals of premises and equipment............................. 7,314 16,373 6,897 Purchases of premises and equipment.... (61,548) (58,404) (71,175) Proceeds from sales of foreclosed property.............................. 14,661 11,979 27,413 Proceeds from sales of other real estate held for development or sale... 8,127 1,728 9,519 Other, net............................. -- (2,287) 22,696 ----------- ----------- ----------- Net cash used in investing activities.......................... (712,910) (570,615) (1,554,146) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits.... 269,858 369,902 (280,798) Net (decrease) increase in short-term borrowed funds........................ (332,107) (392,180) 1,136,146 Proceeds from long-term debt........... 1,586,766 2,945,052 356,439 Repayments of long-term debt........... (918,934) (2,471,872) (282,925) Net proceeds from common stock issued.. 47,462 43,781 23,668 Redemption of common stock............. (207,387) (47,311) (23,562) Preferred stock cancellations and conversions........................... -- (2,371) -- Cash dividends paid on common and preferred stock....................... (106,124) (93,465) (76,805) ----------- ----------- ----------- Net cash provided by financing activities.......................... 339,534 351,536 852,163 ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...................... (45,942) 33,899 (187,855) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................... 705,676 671,777 859,632 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR.................................. $ 659,734 $ 705,676 $ 671,777 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest............................... $ 773,043 $ 803,377 $ 583,705 Income taxes........................... 133,510 116,361 147,619 Noncash financing and investing activities: Transfer of securities from held to maturity to available for sale........ -- 1,560,412 -- Transfer of loans to foreclosed property.............................. 19,568 9,567 20,358 Transfer of fixed assets to other real estate owned.......................... 10,466 21,846 -- Common stock issued upon conversion of debentures............................ -- 4,896 -- Restricted stock issued................ 88 -- -- Securitization of mortgage loans....... 817,268 354,882 7,497 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 48 SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Southern National Corporation ("Southern National" or "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. Branch Banking and Trust Company ("BB&T-NC"), Branch Banking and Trust Company of South Carolina ("BB&T-SC") and Branch Banking and Trust Company of Virginia ("BB&T-VA") (collectively, the "Banks" or the "Subsidiaries") comprise the Parent Company's principal subsidiaries. The accounting and reporting policies of Southern National Corporation and Subsidiaries are in accordance with generally accepted accounting principles and conform to general practices within the banking industry. The following is a summary of the more significant policies. NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements of Southern National include the accounts of the Parent Company and its subsidiaries. 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 material transactions accounted for as poolings of interests (See Note B.) Results of operations of companies acquired in transactions accounted for as purchases are included from the dates of acquisition. Certain amounts for prior years have been reclassified to conform with statement presentations for 1996. The reclassifications have no effect on either shareholders' equity or net income as previously reported. Nature of Operations Southern National is a multi-bank holding company headquartered in Winston- Salem, North Carolina. Southern National conducts its operations in North Carolina, South Carolina and Virginia primarily through its commercial banking subsidiaries and, to a lesser extent, through its other subsidiaries. Southern National's subsidiaries provide a full range of traditional commercial banking services and additional services including investment brokerage, insurance and leasing. Substantially all of Southern National's loans are to businesses and individuals in the Carolinas and Virginia. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks, 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. Accordingly, the carrying amount of such instruments is considered a reasonable estimate of fair value. 49 Securities Southern National classifies investment securities in one of three categories: held to maturity, available for sale and trading. Debt securities acquired with both the intent and ability to be held to maturity are classified as held to maturity and reported at amortized cost. Gains or losses realized from the sale of securities held to maturity, if any, are determined by specific identification and are included in noninterest income. Securities, which may be used to meet liquidity needs arising from unanticipated deposit and loan fluctuations, changes in regulatory capital and investment requirements, or unforeseen changes in market conditions, including interest rates, market values or inflation rates, are classified as available for sale. Securities available for sale are reported at estimated fair value, with unrealized gains and losses reported as a separate component of shareholders' equity, net of tax. Gains or losses realized from the sale of securities available for sale are determined by specific identification and are included in noninterest income. Trading account securities, of which none were held on December 31, 1996 and 1995, are selected according to fundamental and technical analyses that identify potential market movements. Trading account securities are positioned to take advantage of such movements and are reported at fair value. Market adjustments, fees, gains or losses and interest income earned on trading account securities are included in noninterest income. Gains or losses realized from the sale of trading securities are determined by specific identification. During the fourth quarter of 1995, Southern National transferred $1.6 billion of securities which were previously classified as held to maturity under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" to the available-for-sale category. The Financial Accounting Standards Board ("FASB") provided enterprises the opportunity to make a one-time reassessment of the classification of all investment securities held at that time, such that the reclassification of any security from the held-to-maturity category would not call into question the enterprise's intent to hold other debt securities to maturity in the future. Management anticipates that this classification will allow more flexibility in the day-to-day management of the overall portfolio than the prior classifications. Loans Held for Sale Loans held for sale are reported at the lower of cost or market value on an aggregate loan basis. Gains or losses realized on the sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold, adjusted for any yield differential and a normal servicing fee. Any resulting deferred premium or discount is amortized, as an adjustment of servicing income, over the estimated lives of the loans using the level-yield method. Loans and Lease Receivables Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or until the loans are repaid are reported at their outstanding principal balances adjusted for any deferred fees or costs and unamortized premiums or discounts. The net amount of nonrefundable loan origination fees, including commitment fees and certain direct costs associated with the lending process are deferred and amortized to interest income over the contractual lives of the loans using methods which approximate level-yield, with adjustments for prepayments as they occur. If the loan commitment expires unexercised, the income is recognized upon expiration of the commitment. Discounts and premiums are amortized to interest income over the estimated life of the loans using methods which approximate level-yield. Commercial loans and substantially all installment loans accrue interest on the unpaid balance of the loans. Lease receivables consist primarily of direct financing leases on rolling stock, equipment and real property. Lease receivables are stated at 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. 50 As of January 1, 1995, Southern National adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which was amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." SFAS No. 114, as amended, 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 if the loan is collateral-dependent. A loan is impaired when, based on current information and events, it is probable that Southern National will be unable to collect all amounts due according to the contractual terms of the loan agreement. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Southern National had previously measured the allowance for credit losses using methods similar to those prescribed in SFAS No. 114. As a result of adopting these statements, no additional allowance for loan losses was required as of January 1, 1995. The total recorded investment for impaired loans at December 31, 1996, was $16.0 million, offset by a valuation allowance of $2.2 million, which resulted in a net carrying value of $13.8 million. There were no investments in impaired loans which did not have a related valuation allowance. The average recorded investment in impaired loans during 1996 totaled $20.0 million. Southern National recognizes no interest income on loans that are impaired. Cash receipts for both principal and interest are applied directly to principal. Southern National's policy is to disclose as impaired loans all commercial loans, greater than $250,000, that are on nonaccrual status. Substantially all other loans made by Southern National are excluded from the scope of SFAS No. 114 as they are large groups of smaller balance homogeneous loans (residential mortgage and consumer installment) that are collectively evaluated for impairment. Allowance for Losses The provision for loan and lease losses charged to noninterest expense is the estimated amount required to maintain the allowance for loan and lease losses at a level adequate to cover estimated incurred losses related to loans and leases currently outstanding. The primary factors considered in determining the allowance are the distribution of loans by risk class, the amount of the allowance specifically allocated to nonperforming loans and other problem loans, prior years' loan loss experience, economic conditions in Southern National's market areas and the growth of the credit portfolio. While management uses the best information available in establishing the allowance for losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or if required by regulators based upon information at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates. Nonperforming Assets Nonperforming assets include loans and leases on which interest is not being accrued and foreclosed property. Foreclosed property consists of real estate and other assets acquired through customers' loan defaults. Commercial and unsecured consumer loans and leases are generally placed on nonaccrual status when concern exists that principal or interest is not fully collectible, or when any portion of principal or interest becomes 90 days past due, whichever occurs first. Mortgage loans and most other consumer loans past due 90 days or more may remain on accrual status if management determines that concern over the collectability of principal and interest is not significant. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction to the remaining principal balance when concern exists as to the ultimate collection of the principal. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and when concern no longer exists as to the collectability of principal or interest. 51 Assets acquired as a result of foreclosure are valued at the lower of cost or fair value, and carried thereafter at the lower of cost or fair value less estimated costs to sell the asset. Cost is the sum of unpaid principal, accrued but unpaid interest and acquisition costs associated with the loan. Any excess of unpaid principal over fair value at the time of foreclosure is charged to the allowance for losses. Generally, such properties are appraised annually and the carrying value, if greater than the fair value, less costs to sell, is adjusted with a charge to income. Routine maintenance costs, declines in market value and net losses on disposal are included in other noninterest expense. Premises and Equipment Premises, equipment, capital leases and leasehold improvements are stated at cost less accumulated depreciation or amortization. Depreciation is computed principally using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the lesser of the lease terms or the estimated useful lives of the improvements. Capitalized leases are amortized by the same methods as premises and equipment over the estimated useful lives or the lease term, whichever is lesser. Obligations under capital leases are amortized using the interest method to allocate payments between principal reduction and interest expense. Income Taxes The operating results of Southern National and its subsidiaries are included in a consolidated Federal income tax return. Each subsidiary pays its calculated portion of Federal income taxes to Southern National, or receives payment from Southern National to the extent that tax benefits are realized. Deferred income taxes have been provided where different accounting methods have been used for reporting for income tax purposes and for financial reporting purposes. Deferred tax assets and liabilities are recognized based on future tax consequences of the differences arising from their carrying values and respective tax bases. In the event of changes in the tax laws, deferred tax assets and liabilities are adjusted in the period of the enactment of those changes, with effects included in income. The operating results of acquired institutions were included in their respective income tax returns prior to consummation of the acquisitions. Derivatives and Off-Balance Sheet Instruments Southern National utilizes a variety of derivative financial instruments to manage various financial risks. These instruments include financial forward and futures contracts, options written and purchased, interest rate caps and floors and interest rate swaps. Management accounts for these financial instruments as hedges when the following conditions are met: (1) the specific assets, liabilities, firm commitments or anticipated transactions (or an identifiable group of essentially similar items) to be hedged expose Southern National to interest rate risk or price risk; (2) the financial instrument reduces that exposure; (3) the financial instrument is designated as a hedge at inception; and (4) at the inception of the hedge and throughout the hedge period, there is a high correlation of changes in the fair value or the net interest income associated with the financial instrument and the hedged items. The net interest payable or receivable on interest rate swaps, caps and floors that are designated as hedges is accrued and recognized as an adjustment to the interest income or expense of the related asset or liability. For interest rate forwards, futures and options qualifying as a hedge, gains and losses are deferred and are recognized in income as an adjustment of yield. Gains and losses from early terminations of derivatives are deferred and amortized as yield adjustments over the shorter of the remaining term of the hedged asset or liability or the remaining term of the derivative instrument. Upon disposition or settlement of the asset or liability being hedged, deferral accounting is discontinued and any gains or losses are recognized in income. Derivative financial instruments that fail to qualify as a hedge are carried at fair value with gains and losses recognized in current earnings. Southern National utilizes written covered over-the-counter call options on specific securities in the available-for-sale securities portfolio in order to enhance returns. Fees received are deferred and recognized in 52 noninterest income upon exercise or expiration. Written options are carried at estimated fair value. Unrealized and realized gains and losses on written call options are included with securities gains and losses. Southern National also utilizes over-the-counter purchased put options and net purchased put options (combination of purchased put option and written call option) in its mortgage banking activities. These options are used to hedge the mortgage warehouse and pipeline against increasing interest rates. Written call options are used in tandem with purchased put options to create a net purchased put option that reduces the cost of the hedge. Net unrealized gains and losses on purchased put options and net purchased put options are carried with loans held for sale at the lower of cost or market on an aggregate basis. Realized gains and losses on purchased put options and net purchased put options are included in mortgage banking income. Per Share Data Primary net income per common share has been computed by dividing net income applicable to common shares by the weighted average number of shares of common stock and common stock equivalents of dilutive stock options outstanding during the years. Fully diluted net income per common share has been computed by dividing net income, as adjusted for the interest expense related to convertible debt, by the weighted average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the years. Other potentially dilutive securities include the number of shares issuable upon conversion of the preferred stock. Restricted stock grants are considered as issued for purposes of calculating net income per share. Weighted average numbers of shares were as follows:
1996 1995 1994 ----------- ----------- ----------- Primary.................................. 110,486,127 109,776,710 108,142,988 Fully diluted............................ 111,836,200 114,801,843 113,193,681
Intangible Assets The cost in excess of the fair value of net assets acquired in transactions accounted for as purchases (goodwill), premiums paid on acquisitions of deposits (core deposit intangibles) and other identifiable intangible assets are included in other assets in the "Consolidated Balance Sheets." Such assets are being amortized on straight-line or accelerated bases over periods ranging from 5 to 15 years. At December 31, 1996, Southern National had $54.4 million recorded as goodwill and $9.0 million as core deposit and other intangibles, net of amortization. Negative goodwill is created when the fair value of the net assets purchased exceeds the purchase price. Such balances are included in other liabilities in the "Consolidated Balance Sheets" and are being amortized over periods ranging from 10 to 15 years. At December 31, 1996, Southern National had negative goodwill totaling $39.2 million, net of amortization. Mortgage Servicing Rights Amounts paid to acquire the right to service certain mortgage loans are capitalized and amortized over the estimated lives of the loans to which they relate. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights," which amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." SFAS No. 122 requires that mortgage banking enterprises recognize, as separate assets, rights to service mortgage loans for others, however those servicing rights are acquired. The statement further requires mortgage banking enterprises to assess their capitalized mortgage servicing rights for impairment based on the fair value of those rights. Southern National elected, in the third quarter of 1995, to adopt this statement effective as of January 1, 1995. The impact of the adoption of this statement resulted in additional mortgage banking income of $7.0 million, before taxes, or $.04 per fully diluted share, after taxes, during 1995. SFAS No. 122 prohibits retroactive application to prior years. At December 31, 1996, Southern National had capitalized mortgage servicing rights totaling $37.1 million. 53 Changes in Accounting Principles and Effects of New Accounting Pronouncements During 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement establishes accounting standards for long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and to be disposed of. The statement requires such assets to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Any resulting impairment loss is required to be reported in the period in which the recognition criteria are first applied and met. Southern National adopted the provisions of the statement on January 1, 1996. The implementation did not have a material impact on the consolidated financial position or consolidated results of operations. In October of 1995, the FASB issued SFAS No. 123, "Accounting for Stock- Based Compensation," which establishes financial accounting and reporting standards for stock-based compensation plans. The statement defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages the adoption of that method of accounting. However, the statement also allows entities to continue to account for such plans under Accounting Principles Board ("APB") Opinion No. 25. Entities electing to remain with the accounting in Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in the statement had been applied. Southern National adopted the statement effective January 1, 1996 and elected to continue to account for stock-based compensation plans under the provisions of Opinion No. 25. Therefore, the implementation of the statement did not have an impact on Southern National's consolidated financial position or consolidated results of operations. The required pro forma disclosures relating to SFAS No. 123 are presented in Note J. In June of 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which provides accounting and reporting standards for such transactions based on consistent application of a financial components approach. This approach recognizes the financial and servicing assets an entity controls and the liabilities it has incurred, as well as derecognizes financial assets when control has been surrendered and liabilities when they are extinguished. The statement requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value, if practicable. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of transfer. In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." This statement allows the implementation of certain provisions of SFAS No. 125 to be deferred for one year. Southern National adopted SFAS No. 125, as amended by SFAS No. 127, effective January 1, 1997. Management does not anticipate that the adoption of these statements will have a material impact on Southern National's consolidated financial position or consolidated results 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 values of these assets acquired and liabilities assumed, at acquisition, were as follows:
1996 1995 1994 -------- ----- -------- (DOLLARS IN THOUSANDS) Fair value of net assets acquired................ $ 1,394 $ -- $ 6,203 Purchase price................................... (22,256) -- (15,016) -------- ----- -------- Excess of purchase price over net assets ac- quired.......................................... $(20,862) $ -- $ (8,813) ======== ===== ========
During the first quarter of 1996, Southern National redeemed all outstanding shares of Convertible Preferred Stock. This transaction, a noncash financing activity, resulted in the conversion of 733,869 shares of preferred stock into 4,334,692 shares of common stock. 54 Income and Expense Recognition Items of income and expense are recognized using the accrual basis of accounting, except for some immaterial amounts. NOTE B. ACQUISITIONS AND MERGERS Completed Mergers and Acquisitions On June 1, 1994, Southern National completed the acquisition of McLean, Brady & McLean Agency, Inc. ("McLean") by the issuance of 38,823 shares of Southern National common stock. In conjunction with the acquisition of McLean, Southern National recorded $1.1 million of expiration rights which are being amortized over 10 years. On June 6, 1994, Southern National completed the acquisition of Leasing Associates, Inc. by the issuance of 97,876 shares of Southern National common stock. On November 1, 1994, Southern National completed the acquisition of Prime Rate Premium Finance Corporation, Inc. and related interests, Agency Technologies, Inc. and IFCO, Inc. ("Prime Rate") by the issuance of 590,406 shares of Southern National common stock. In conjunction with the acquisition of Prime Rate, Southern National recorded $8.8 million of goodwill which is being amortized over 15 years. On June 30, 1996, Southern National completed the purchase of certain fixed assets and expiration rights from the James R. Lingle Agency of Florence, South Carolina. In conjunction with the purchase, Southern National recorded expiration rights totaling $1.7 million which are being amortized over 15 years. On August 28, 1996, Southern National became a majority shareholder of AutoBase Information Systems, Inc. ("AutoBase"), through the purchase of 51% of AutoBase's outstanding common stock. In conjunction with this investment, Southern National recorded $1.2 million in goodwill which is being amortized over 15 years. During November 1996, Southern National completed the acquisitions of three insurance agencies in South Carolina. On November 7, 1996, Southern National completed the acquisition of the William Goldsmith Agency Inc., ("Goldsmith") of Greenville, South Carolina through the issuance of 70,207 shares of common stock. On November 13, 1996, Southern National completed the acquisition of the C. Dan Joyner Insurance Agency ("Joyner"), based in Greenville, South Carolina through the issuance of 48,120 shares of common stock. Boyle-Vaughan Associates, Inc. ("Boyle-Vaughan"), based in Columbia, South Carolina was acquired on November 22, 1996 through the issuance of 492,063 shares of common stock. In conjunction with the purchase of these agencies, Southern National recorded $17.9 million in goodwill, which is being amortized over 15 years. These acquisitions were accounted for under the purchase method of accounting. The above-discussed acquisitions were accounted for under the purchase method of accounting, and, therefore, the financial information contained herein includes data relevant to the acquirees since the date of acquisition. The pro forma effects of 1996 purchases, as if they had been acquired as of the beginning of the year, are not material. On June 30, 1994, Southern National completed the acquisition of L.S.B. Bancshares Inc., of Lexington, S.C. and its wholly-owned subsidiaries, The Lexington State Bank and The Community Bank of South Carolina ("LSB"). The transaction was accounted for as a pooling-of-interests, and, accordingly, the consolidated financial statements include the results of LSB for all periods presented. The merger was consummated through the issuance of 5,707,694 shares of Southern National common stock. At the date of acquisition, LSB had assets of approximately $707,000. On February 28, 1995, Southern National and BB&T Financial Corporation ("BB&T") completed a merger. The transaction was accounted for as a pooling- of-interests in which BB&T shareholders received 1.45 55 shares of the common stock of the resulting company for each share of BB&T stock held. On January 10, 1995, Southern National acquired Commerce Bank (subsequently, BB&T-VA) through the issuance of 5,210,476 shares of Southern National common stock for all of the outstanding stock of Commerce Bank. On September 1, 1996, Southern National completed the acquisition of Regional Acceptance Corporation of Greenville, N.C. ("Regional Acceptance") in a transaction accounted for as a pooling-of-interests. Regional Acceptance's shareholders received .3861 shares of Southern National's common stock for each share of common stock held. Southern National issued 5.85 million shares in exchange for all of the outstanding stock of Regional Acceptance. Prior to the consummation of the Merger, Regional Acceptance recorded total revenues and net income of $26.0 million and $4.5 million, respectively. The following presentation reflects key line items on an historical basis for Southern National and Regional Acceptance and on a pro forma combined basis assuming the merger was effective as of and for the periods presented.
HISTORICAL BASIS SOUTHERN NATIONAL ---------- SOUTHERN AS ORIGINALLY REGIONAL NATIONAL REPORTED ACCEPTANCE RESTATED ----------------- ---------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 Net interest income................ $ 741,549 $ 21,121 $ 762,670 Net income......................... 178,133 8,208 186,341 Net earnings per share Primary........................... 1.66 .55 1.65 Fully diluted..................... 1.64 .55 1.62 Assets............................. 20,492,929 143,501 20,636,430 Deposits........................... 14,684,056 -- 14,684,056 Shareholders' equity............... 1,674,063 37,279 1,711,342 1994 Net interest income................ $ 736,766 $ 16,480 $ 753,246 Net income......................... 236,872 6,970 243,842 Net earnings per share Primary........................... 2.26 .46 2.21 Fully diluted..................... 2.21 .46 2.16 Assets............................. 19,855,063 116,539 19,971,602 Deposits........................... 14,314,154 -- 14,314,154 Shareholders' equity............... 1,496,477 29,071 1,525,548
Pending Mergers and Acquisitions On August 22, 1996, Southern National announced plans to acquire Fidelity Financial Bankshares Corporation ("Fidelity") in a transaction to be accounted for as a purchase. Fidelity's shareholders will receive .7137 shares of Southern National common stock for each share of Fidelity stock held. The transaction, which closed in the first quarter of 1997, was valued at $59.4 million on August 22, 1996. On November 4, 1996, Southern National and United Carolina Bancshares Corporation ("UCB") jointly announced the signing of an agreement to merge. The transaction will be accounted for as a pooling-of-interests in which UCB shareholders will receive 1.135 shares of Southern National's common stock in exchange for each share of UCB common stock held. The market transaction has an indicated total value of $985 million based on the November 1, 1996 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 1997. 56 On January 23, 1997, Southern National announced plans to acquire Refloat, Inc. of Mount Airy, North Carolina, and its principal subsidiary, Sheffield Financial Corp., a finance company in Clemmons, North Carolina that specializes in loans to small commercial lawn care businesses across the country. On February 4, 1997, Southern National announced plans to acquire Phillips Factors Corporation and its subsidiaries, Phillips Financial Corporation and Phillips Acceptance Corporation, all of High Point, North Carolina. Phillips Financial Corporation, which will operate as an autonomous subsidiary of Southern National, purchases and manages receivables in the temporary staffing industry nationwide. It also provides payroll processing services to that industry. Phillips Factors Corporation buys and manages account receivables primarily in the furniture, textiles and home furnishings-related industries. NOTE C. SECURITIES The amortized costs and approximate fair values of securities were as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------------------------- ------------------------------------- GROSS GROSS UNREALIZED UNREALIZED AMORTIZED --------------- ESTIMATED AMORTIZED --------------- ESTIMATED COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE ---------- ------- ------- ---------- ---------- ------- ------- ---------- (DOLLARS IN THOUSANDS) Securities held to matu- rity: U.S. Treasury, govern- ment and agency obli- gations............... $ 6,283 $ -- $ 4 $ 6,279 $ 9,461 $ -- $ 172 $ 9,289 States and political subdivisions.......... 118,435 3,835 139 122,131 144,508 6,194 105 150,597 ---------- ------- ------- ---------- ---------- ------- ------- ---------- Total securities held to maturity........... 124,718 3,835 143 128,410 153,969 6,194 277 159,886 ---------- ------- ------- ---------- ---------- ------- ------- ---------- Securities available for sale: U.S. Treasury, govern- ment and agency obli- gations............... 3,111,323 15,452 11,150 3,115,625 4,013,272 54,400 7,249 4,060,423 States and political subdivisions.......... 22,885 166 176 22,875 20,612 257 96 20,773 Mortgage-backed securi- ties.................. 1,709,951 29,406 13,642 1,725,715 973,339 8,415 4,027 977,727 Equity and other secu- rities................ 272,574 2 2 272,574 142,942 3 524 142,421 ---------- ------- ------- ---------- ---------- ------- ------- ---------- Total securities avail- able for sale......... 5,116,733 45,026 24,970 5,136,789 5,150,165 63,075 11,896 5,201,344 ---------- ------- ------- ---------- ---------- ------- ------- ---------- Total securities....... $5,241,451 $48,861 $25,113 $5,265,199 $5,304,134 $69,269 $12,173 $5,361,230 ========== ======= ======= ========== ========== ======= ======= ==========
Securities with a book value of approximately $3.0 billion and $2.4 billion at December 31, 1996 and 1995, 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, 1996 and 1995, there was no concentration of investments in obligations of states and political subdivisions that were secured by or payable from the same taxing authority or revenue source and that exceeded ten percent of shareholders' equity. Proceeds from sales of securities during 1996, 1995 and 1994 were $593.6 million, $1.3 billion and $772.6 million, respectively. Gross gains of $5.4 million, $2.7 million and $3.6 million and gross losses of $2.2 million, $21.3 million and $527,000 were realized on those sales in 1996, 1995 and 1994, respectively. 57 The amortized cost and estimated fair value of the securities portfolio at December 31, 1996, 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. For purposes of the maturity table, mortgage- backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted average contractual maturities of underlying collateral.
DECEMBER 31, 1996 ----------------------------------------- HELD TO MATURITY AVAILABLE FOR SALE ------------------- --------------------- ESTIMATED ESTIMATED AMORTIZED FAIR AMORTIZED FAIR DEBT SECURITIES COST VALUE COST VALUE --------------- --------- --------- ---------- ---------- (DOLLARS IN THOUSANDS) Due in one year or less.......... $ 24,778 $ 24,811 $ 561,818 $ 562,494 Due after one year through five years........................... 80,620 83,147 2,853,004 2,848,723 Due after five years through ten years........................... 19,270 20,399 351,612 350,507 Due after ten years.............. 50 53 1,266,349 1,291,115 -------- -------- ---------- ---------- Total debt securities.......... $124,718 $128,410 $5,032,783 $5,052,839 ======== ======== ========== ==========
NOTE D. LOANS AND LEASES Loans and leases were composed of the following:
DECEMBER 31, ----------------------- 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Loans-- Commercial, financial and agricultural............ $ 2,375,121 $ 2,098,306 Real estate--construction and land development.... 1,228,043 949,513 Real estate--mortgage............................. 8,513,945 8,671,941 Consumer.......................................... 1,830,519 1,716,399 ----------- ----------- Loans held for investment....................... 13,947,628 13,436,159 ----------- ----------- Leases............................................ 576,991 376,152 ----------- ----------- Total loans and leases.......................... 14,524,619 13,812,311 Less: unearned income......................... 160,024 105,600 ----------- ----------- Loans and leases, net of unearned income........ $14,364,595 $13,706,711 =========== ===========
The net investment in direct financing leases was $470.5 million and $315.5 million at December 31, 1996 and 1995, respectively. Southern National had loans held for sale at December 31, 1996 and 1995 totaling $219.5 million and $245.3 million, respectively. Southern National's only significant concentration of credit at December 31, 1996 occurred in real estate loans, which totaled $10.0 billion. However, this amount was not concentrated in any specific market or geographic area other than the Banks' primary market. 58 The following table provides an analysis of loans made to the directors and executive officers of Southern National and all significant subsidiaries and their interests, which in the aggregate exceeded $60,000 at any time during 1996. 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, 1995.......................... $ 98,338 Additions........................................... 62,441 Repayments.......................................... 19,514 -------- BALANCE, DECEMBER 31, 1996.......................... $141,265 ========
NOTE E. ALLOWANCE FOR LOSSES An analysis of the allowance for losses is presented in the following table:
DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Balance, January 1............................. $175,588 $174,102 $170,788 Provision for losses charged to expense........ 53,661 34,632 20,181 Allowances of purchased companies.............. -- -- 1,119 -------- -------- -------- Subtotal..................................... 229,249 208,734 192,088 -------- -------- -------- Loans charged-off.............................. (59,484) (44,727) (31,567) Recoveries..................................... 14,167 11,581 13,581 -------- -------- -------- Net charge-offs.............................. (45,317) (33,146) (17,986) -------- -------- -------- Balance, December 31........................... $183,932 $175,588 $174,102 ======== ======== ========
At December 31, 1996, 1995 and 1994, loans not currently accruing interest totaled $64.4 million, $66.2 million and $48.5 million, respectively. Loans 90 days or more past due and still accruing interest totaled $32.1 million, $29.1 million and $24.2 million, at December 31, 1996, 1995 and 1994, respectively. The gross interest income that would have been earned during 1996 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 $5.5 million. Foreclosed property was $18.8 million, $13.7 million and $13.5 million at December 31, 1996, 1995 and 1994, respectively. NOTE F. PREMISES AND EQUIPMENT
DECEMBER 31, ----------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Land and land improvements................................ $ 49,178 $ 47,158 Buildings and building improvements....................... 230,122 224,730 Furniture and equipment................................... 240,917 235,149 Capitalized leases on premises and equipment.............. 3,804 4,257 -------- -------- 524,021 511,294 Less--accumulated depreciation and amortization........... 204,939 197,436 -------- -------- Net premises and equipment.............................. $319,082 $313,858 ======== ========
Depreciation expense, which is included in occupancy and equipment expense, was $39.9 million, $36.3 million and $35.7 million in 1996, 1995 and 1994, respectively. 59 Southern National has noncancellable leases covering certain premises and equipment. Total rent expense applicable to operating leases was $24.5 million, $29.4 million and $22.4 million for 1996, 1995 and 1994, respectively. Future minimum lease payments for operating and capitalized leases for years subsequent to 1996 are as follows:
LEASES --------------------- OPERATING CAPITALIZED --------- ----------- (DOLLARS IN THOUSANDS) Year ended December 31: 1997............................................... $ 17,588 $ 465 1998............................................... 17,005 465 1999............................................... 16,260 465 2000............................................... 15,906 465 2001............................................... 15,050 465 2002 and years later............................... 97,853 5,316 -------- ------ Total minimum lease payments......................... $179,662 7,641 ======== Less--amount representing interest................... 4,080 ------ Present value of net minimum payments on capitalized leases (Note I)..................................... $3,561 ======
NOTE G. LOAN SERVICING Mortgage loans serviced for others are not included in the accompanying "Consolidated Balance Sheets." The unpaid principal balances of mortgage loans serviced for others were $6.7 billion and $5.4 billion at December 31, 1996 and 1995, respectively. The following is a summary of capitalized mortgage servicing rights, net of accumulated amortization and adjustments necessary to present the balances at the lower of cost or estimated fair value, which are included in the "Consolidated Balance Sheets:"
CAPITALIZED MORTGAGE SERVICING RIGHTS ---------------- 1996 1995 ------- ------- (DOLLARS IN THOUSANDS) Balance, January 1,........................................ $18,265 $ 4,670 Amount capitalized....................................... 24,302 16,751 Amortization expense..................................... (5,203) (2,761) Change in valuation allowance............................ (290) (395) ------- ------- Balance, December 31,...................................... $37,074 $18,265 ======= =======
60 Capitalized mortgage servicing rights are being amortized on a disaggregated loan basis using an accelerated method over the estimated life of the servicing income. The servicing rights portfolio is analyzed each quarter to identify possible impairment using a disaggregated discounted cash flow methodology that is stratified by predominant risk characteristics. These characteristics include stratification based on interest rates in intervals of 150 basis points, type of loan and maturity of loan. Following is an analysis of the aggregate changes in the valuation allowances for mortgage servicing rights in 1996 and 1995:
VALUATION ALLOWANCE FOR MORTGAGE SERVICING RIGHTS ---------------------- (DOLLARS IN THOUSANDS) Balance, January 1, 1995.............................. $ -- Additions........................................... 395 ------ Balance, December 31, 1995............................ 395 ------ Additions........................................... 1,184 Reductions.......................................... (894) ------ BALANCE, DECEMBER 31, 1996............................ $ 685 ======
NOTE H. SHORT-TERM BORROWED FUNDS
1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Federal funds purchased............................. $ 743,075 $ 812,165 Term Federal funds purchased........................ 50,000 350,000 Securities sold under agreements to repurchase...... 664,457 689,517 Master notes........................................ 566,225 396,273 U.S. Treasury tax and loan deposit notes payable.... 86,938 63,588 Short-term Federal Home Loan Bank advances.......... 150,000 175,000 Other short-term borrowed funds..................... 2,608 108,873 ----------- ----------- Total short-term borrowed funds................... $ 2,263,303 $ 2,595,416 =========== ===========
Federal funds purchased represent unsecured borrowings from other banks and generally mature daily. Term Federal funds purchased are identical to Federal funds; however, maturities vary and are greater than one day. 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). Short-term Federal Home Loan Bank advances are typically unsecured and generally mature daily. 61 NOTE I. LONG-TERM DEBT
DECEMBER 31, ----------------------- 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) $5 million Industrial Revenue Bond, dated 1984, se- cured by premises with a net book value of $5,708,000 at December 31, 1996, due in quarterly installments of $83,340 through the second quarter 1999, and one final installment of $82,940 in 1999. Interest rate is variable--76.99% of prime--6.352% at December 31, 1996............................... $ 1,000 $ 1,250 Capitalized leases, varying maturities to 2028 with rates from 8.11% to 12.65%. This represents the un- amortized balances due on leases of various facili- ties............................................... 3,561 4,125 Medium-term bank notes, unsecured, varying maturi- ties to 2001 with rates from 5.31% to 5.70%........ 424,794 201,979 Advances from Federal Home Loan Bank, varying matu- rities to 2016 with rates from 1.00% to 8.95%...... 1,373,795 1,175,830 $250 million Subordinated Notes, unsecured, dated May 21, 1996, maturing May 23, 2003 with an inter- est rate of 7.05%*................................. 248,019 -- Other mortgage indebtedness......................... 598 751 ----------- ----------- $ 2,051,767 $ 1,383,935 =========== ===========
- -------- * Subordinated notes qualify under the risk-based capital guidelines as Tier 2 supplementary capital. Excluding the capitalized leases set forth in Note F, future debt maturities total $2.0 billion and are $550.5 million, $339.6 million, $175.5 million, $111.7 million, and $418.4 million for the next five years. The maturities for 2002 and later years are $452.5 million. NOTE J. SHAREHOLDERS' EQUITY The authorized capital stock of Southern National consists of 300,000,000 shares of common stock, $5 par value, and 5,000,000 shares of preferred stock, $5 par value. At December 31, 1996, 109,297,489 shares of common stock and no shares of preferred stock were issued and outstanding. 62 Stock Option Plans At December 31, 1996, Southern National had the following stock-based compensation plans: the 1994 and the 1995 Omnibus Stock Incentive Plans ("Omnibus Plans"), the Incentive Stock Option Plan ("ISOP"), the Non-Qualified Stock Option Plan ("NQSOP") and the Non-Employee Directors' Stock Option Plan ("Directors' Plan"), which are described below. Southern National accounts for these plans under Accounting Principles Board ("APB") Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined based on the fair value at the grant dates for awards under those plans, consistent with the method of SFAS No. 123, Southern National's pro forma net income and pro forma earnings per share would have been as follows:
1996 1995 -------- -------- Net income: As reported.............................................. $283,664 $186,341 Pro Forma................................................ 281,282 186,028 Primary EPS: As reported.............................................. 2.56 1.65 Pro Forma................................................ 2.54 1.65 Fully Diluted EPS: As reported.............................................. 2.54 1.62 Pro Forma................................................ 2.52 1.62
The SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995; therefore, the weighted average fair value of options granted prior to that date has not been calculated. The fair value of each option grant was estimated on the date of grant using the Black- Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 3.5% for both years; expected volatility of 20% for both years; risk free interest rates of 6.46% and 5.65%; and expected lives of 6.76 years and 6.06 years. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. In April 1994 and May 1995, the shareholders approved the Omnibus Plans which cover the award of incentive stock options, non-qualified stock options, shares of restricted stock, performance shares and stock appreciation rights. In April 1996, the shareholders approved an amendment to the 1995 Omnibus Plan that increased the maximum number of shares issuable under the terms of the plan to 6,000,000 shares. The combined shares issuable under both Omnibus Plans is 10,000,000. The Omnibus Plans are intended to allow Southern National to recruit and retain employees with ability and initiative and to associate the employees' interests with those of Southern National and its shareholders. At December 31, 1996, 2,187,207 incentive stock options at prices ranging from $5.8828 to $36.625 and 2,056,395 non-qualified stock options at prices ranging from $.01 to $23.3655 were outstanding. The stock options vest over 3 years and have a 10 year term. The ISOP and the NQSOP were established to retain key officers and key management employees and to offer them the incentive to use their best efforts on behalf of Southern National. The plans, which expire on December 19, 2000, further provide for up to 1,101,000 shares of common stock to be reserved for the granting of options, which have a four year vesting schedule and must be exercised within ten years from the date granted. Incentive stock options granted must have an exercise price equal to at least 100% of the fair market value of common stock on the date granted, and the non-qualified stock options must have an exercise price equal to at least 85% of the fair market value on the date granted. At December 31, 1996, options to purchase 348,660 shares of common stock at prices ranging from $9.50 to $16.75 were outstanding pursuant to the NQSOP. At December 31, 1996, options to purchase 157,329 shares of common stock at an exercise price of $19.777 were outstanding pursuant to the ISOP. 63 The 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. The plan 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 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, 1996, options to purchase 291,143 shares of common stock at prices ranging from $12.7155 to $22.07 were outstanding pursuant to the Directors' Plan. Southern National also has options outstanding from companies acquired in prior years. These options, which have not been included in the plans described above, totaled 297,067 as of December 31, 1996, with option prices ranging from $2.6667 to $23.7069. A summary of the status of the Company's stock option plans at December 31, 1996, 1995 and 1994 and changes during the years then ended is presented below:
1996 1995 1994 -------------------- -------------------- -------------------- WTD. AVG. WTD. AVG. WTD. AVG. EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- --------- --------- --------- --------- --------- Outstanding at beginning of year................ 5,766,004 $18.18 5,068,067 $15.53 4,546,234 $13.38 Granted................. 102,321 25.73 1,292,163 25.73 1,178,149 19.52 Exercised............... (482,954) 12.40 (548,511) 11.40 (601,492) 6.87 Forfeited or Expired.... (47,570) 15.65 (45,715) 19.22 (54,824) 18.58 --------- ------ --------- ------ --------- ------ Outstanding at end of year................... 5,337,801 $18.86 5,766,004 $18.18 5,068,067 $15.53 ========= ====== ========= ====== ========= ====== Options exercisable at year-end............... 4,343,933 $17.41 4,133,341 $15.68 2,564,531 $12.53
The weighted average fair value of options granted was $6.89 and $5.12 per option at December 31, 1996 and 1995, respectively. The following table summarizes information about the options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------- ------------------------ WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE EXERCISE PRICES AT 12/31/96 LIFE PRICE 12/31/96 PRICE --------------- ----------- ----------- --------- -------------- --------- $.01 1,497 4.7yrs $ 0.01 1,497 $ 0.01 $ 2.67 to $ 3.79 37,516 7.1 3.33 37,516 3.33 $ 4.97 to $ 7.45 23,778 0.9 7.26 23,778 7.26 $ 7.71 to $10.22 343,182 4.0 9.14 343,182 9.14 $11.72 to $17.50 1,848,284 4.6 14.32 1,848,284 14.32 $18.13 to $26.75 3,050,035 7.9 22.84 2,087,892 21.87 $28.88 to $36.63 33,509 9.6 33.89 1,784 29.63 --------- --- ------ --------- ------ 5,337,801 6.5yrs $18.86 4,343,933 $17.41 ========= === ====== ========= ======
64 Shareholder Rights Plan On January 17, 1997, pursuant to the Rights Agreement approved by the Board of Directors, Southern National distributed to shareholders one preferred stock purchase right for each share of Southern National's common stock then outstanding. Initially, the rights, which expire in 10 years, are not exercisable and are not transferable apart from the common stock. The rights will become exercisable only if a person or group acquires 20% or more of Southern National's common stock, or Southern National's Board of Directors determines, pursuant to the terms of the Rights Agreement, that any person or group that has acquired 10% or more of Southern National's common stock is an "Adverse Person." Each right would then enable the holder to purchase 1/100th of a share of a new series of Southern National preferred stock at an initial exercise price of $145.00. The Board of Directors will be entitled to redeem the rights at $.01 per right under certain circumstances specified in the Rights Agreement. Under the terms of the Rights Agreement, if any person or group becomes the beneficial owner of 25% or more of Southern National's common stock, with certain exceptions, or if the Board of Directors determines that any 10% or more stockholder is an "Adverse Person," each right will entitle its holder (other than the person triggering exercisability of the rights) to purchase, at the right's then-current exercise price, shares of Southern National's common stock having a value of twice the right's exercise price. In addition, if after any person or group has become a 20% or more stockholder, Southern National is involved in a merger or other business combination transaction with another person in which its common stock is changed or converted, or sells 50% or more of its assets or earning power to another person, each right will entitle its holder to purchase, at the right's then-current exercise price, shares of common stock of such other person having a value of twice the right's exercise price. NOTE K. INCOME TAXES The provision for income taxes was composed of the following:
1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Current expense: Federal..................................... $128,583 $102,548 $137,459 State....................................... 2,289 3,785 10,567 -------- -------- -------- 130,872 106,333 148,026 Deferred expense (benefit).................... 3,632 (14,870) (18,737) -------- -------- -------- Provision for income taxes.................... $134,504 $ 91,463 $129,289 ======== ======== ======== The reasons for the difference between the provision for income taxes and the amount computed by applying the statutory Federal income tax rate to income before income taxes were as follows: 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Federal income taxes at statutory rates of 35%.......................................... $146,359 $ 97,232 $130,596 Tax-exempt income from securities, loans and leases less related non-deductible interest expense...................................... (7,158) (6,503) (6,597) State income taxes, net of Federal tax bene- fit.......................................... 1,793 2,096 4,136 Other, net.................................... (6,490) (1,362) 1,154 -------- -------- -------- Provision for income taxes.................... $134,504 $ 91,463 $129,289 ======== ======== ======== Effective income tax rate..................... 32.2% 32.9% 34.6% ======== ======== ========
65 The tax effects of temporary differences that gave rise to significant portions of the net deferred tax assets (liabilities) in the Consolidated Balance Sheets were:
DECEMBER 31, ------------------------ 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Deferred tax assets: Allowance for losses........................... $ 70,476 $ 66,438 Deferred compensation.......................... 16,945 17,817 Postretirement benefits other than pensions.... 11,280 10,651 Other.......................................... 16,344 16,610 ----------- ----------- Total tax deferred assets........................ 115,045 111,516 ----------- ----------- Deferred tax liabilities: Tax accounting method changes.................. (6,599) (10,493) Depreciation................................... (18,765) (15,390) Net unrealized appreciation on securities available for sale............................ (8,248) (20,014) Lease financing................................ (15,623) (13,558) Pension plan contribution...................... (6,363) (3,705) Other.......................................... (13,504) (9,067) ----------- ----------- Total tax deferred liabilities................... (69,102) (72,227) ----------- ----------- Net deferred tax asset........................... $ 45,943 $ 39,289 =========== ===========
The deferred tax assets have been determined to be realizable, and, accordingly, a valuation allowance was not required. At December 31, 1996, there were no operating losses, income tax credits or alternative minimum tax credit carryforwards. Securities transactions resulted in income tax expense (benefits) of $1.1 million, ($7.1 million) and $1.2 million related to securities gains (losses) for the years ended December 31, 1996, 1995 and 1994, respectively. NOTE L. BENEFIT PLANS Southern National has various employee benefit plans and arrangements. Employees of acquired entities typically participate in existing Southern National plans upon consummation of the acquisitions. Credit is usually 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 are superseded 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 table discloses expenses relating to employee benefit plans on a restated basis.
1996 1995* 1994* ------- ------- ------- (DOLLARS IN THOUSANDS) Defined benefit plans............................... $ 9,919 $15,632 $10,705 Defined contribution and ESOP plans................. 10,252 9,235 9,502 ------- ------- ------- Total expense related to benefit plans............ $20,171 $24,867 $20,207 ======= ======= =======
-------- * Amounts restated for material acquisitions accounted for as poolings-of- interests. 66 Retirement Plans Prior to the merger of Southern National and BB&T, both companies had noncontributory defined benefit plans covering substantially all employees. Benefits were based on years of service, age at retirement and the employee's compensation as defined. Effective January 1, 1996, Southern National's and BB&T's pension plans were merged into a single noncontributory defined benefit pension plan. This plan covers substatntially all employees of the merged institution. Benefits are based on years of service, age at retirement and the employee's compensation during the five highest consecutive years of earnings within the last ten years of employment. Southern National's contributions to the plan were in amounts between the minimum required for funding standard account purposes and the maximum deductible for Internal Revenue Service purposes. Supplemental retirement benefits are provided to certain key officers under supplemental executive retirement plans ("SERPs"), which are not qualified under the Internal Revenue Code. Although technically unfunded plans, insurance policies on the lives of the covered employees partially fund future benefits. Net periodic pension cost, which is included in employee benefits expense, consisted of the following components in 1996, 1995 and 1994.
1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Service cost................................... $ 8,860 $ 9,658 $ 9,431 Interest cost.................................. 11,755 10,864 9,504 Actual return on assets........................ (18,498) (25,226) 711 Early retirement............................... -- 3,372 -- Net amortization and deferral and other........ 7,453 16,414 (10,699) -------- -------- -------- Net periodic pension cost.................... $ 9,570 $ 15,082 $ 8,947 ======== ======== ========
The following table sets forth the plans' funded status at December 31, 1996 and 1995.
PLANS FOR WHICH PLANS FOR WHICH ASSETS EXCEED ACCUMULATED BENEFITS ACCUMULATED BENEFITS EXCEED ASSETS ---------------------- ---------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Accumulated benefit obliga- tion Vested benefits........... $ (120,396) $ (104,000) $ -- $ -- Nonvested benefits........ (3,107) (3,566) -- -- ---------- ---------- ---------- --------- $ (123,503) $ (107,566) $ -- $ -- ========== ========== ========== ========= Projected benefit obligation at December 31............. $ (161,157) $ (140,394) $ (11,483) $ (9,929) Plan assets at fair value... 162,126 129,574 -- -- ---------- ---------- ---------- --------- Plan assets in excess of (less than) projected bene- fit obligation............. 969 (10,820) (11,483) (9,929) Unrecognized transition amount..................... (5,345) (6,162) 321 364 Unrecognized prior service cost....................... (6,699) (7,503) 3,314 3,313 Unrecognized net loss....... 16,951 16,717 3,233 3,214 Minimum liability adjust- ment....................... -- -- (620) (2,597) ---------- ---------- ---------- --------- Prepaid (accrued) pension cost included in other assets (other liabilities)............... $ 5,876 $ (7,768) $ (5,235) $ (5,635) ========== ========== ========== =========
67 Actuarial assumptions used in calculating these amounts were:
1996 1995 1994 ---- ---- ------- Rate of increase in future compensation............... 5.5% 5.5% 4.8-6.0% Weighted average discount rate........................ 7.5 7.5 7.8 Weighted average expected long-term rate of return on assets............................................... 8.0 8.0 8.0-9.0
Plan assets consist primarily of investments in mutual funds consisting of equity investments, obligations of the U.S. Treasury and Federal agencies and corporations. Plan assets included $11.2 million and $7.9 million of Southern National common stock at December 31, 1996 and 1995, respectively. Postretirement Benefits Prior to merger, both Southern National and BB&T revised their retiree health care plans in preparation for the implementation of SFAS No. 106, "Accounting for Postretirement Benefits Other Than Pensions." Effective January 1, 1996, both plans were merged into a single plan. The new plan covers employees retiring after December 31, 1995 who are eligible for participation in the Southern National pension 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 periodically reviewed for adjustment. The plan provides flexible benefits to retirees which may also be used for dependents. The following table sets forth the components of the retiree benefit plan and the amount recognized in the consolidated financial statements at December 31, 1996, 1995 and 1994.
1996 1995 1994 -------- -------- --------- NET PERIODIC POSTRETIREMENT BENEFIT COST: Service cost.............................. $ 739 $ 972 $ 990 Interest cost............................. 2,029 2,248 1,841 Amortization of net loss and other........ -- 156 104 -------- -------- --------- Total expense........................... $ 2,768 $ 3,376 $ 2,935 ======== ======== ========= RECONCILIATION OF FUNDED STATUS: Accumulated postretirement benefit obliga- tion..................................... $(29,046) $(30,735) $ (27,590) Unrecognized net loss..................... 69 3,348 1,356 -------- -------- --------- Accrued postretirement benefit costs in- cluded in other liabilities............ $(28,977) $(27,387) $ (26,234) ======== ======== ========= Actuarial assumptions used in calculating these amounts were: 1996 1995 1994 -------- -------- --------- Annual rate of increase in the per capita cost of health care claims Current year.............................. 11.0% 8.0-11.0% 10.0-12.0% Final constant amount..................... 5.0 4.75-5.0 5.0 Annual decrease........................... 1.0 .8-1.0 1.0 General inflation rate...................... 4.0 4.0 4.0 Weighted average discount rate.............. 7.5 7.5 7.8 Impact of 1% increase in assumed health care cost on: Net periodic benefit cost................. 3.0 2.0-3.0 0.0-1.0 Expected postretirement benefit obliga- tion..................................... 5.0 3.0-4.0 1.1-3.0
68 401-k Savings Plan Prior to 1996, Southern National had an Employee Stock Ownership Plan which allowed all employees to acquire common stock in Southern National by contributing up to 15% of their salaries to the plan. Southern National matched 100% of each employee's contributions, up to a maximum of 6% of the employee's salary. BB&T had a Savings and Thrift Plan which permitted eligible employees to make contributions up to 16% of base compensation, with matching contributions up to 4% of the employee's base compensation. Effective January 1, 1996, Southern National's Employee Stock Ownership Plan was merged into the former BB&T Savings and Thrift Plan to form the Southern National Corporation 401-k Savings Plan. The new plan permits employees to contribute up to 16% of their compensation. Southern National matches up to 6% of the employee's compensation with a 100% matching contribution. Settlement Agreements In connection with the merger of Southern National and BB&T, two executive officers of Southern National agreed to retire during 1995. Southern National entered into settlement agreements with both executive officers to settle existing employment contracts. One of the settlement agreements provides for annual payments of $1,655,000 less the company-provided portion of certain benefits payable under existing benefit plans. The payments continue for the life of the officer and his current wife but in no event for a period of less than fifteen years. The executive officer has agreed not to compete in a defined geographic area for fifteen years and to serve as a consultant to the merged company for five years. The settlement agreement with the other executive officer provides for annual payments of $312,000 for ten years or until death. The present value of future payments to be made pursuant to these agreements was recorded in 1995. Other There are various other employment contracts, deferred compensation arrangements and covenants not to compete with selected members of management and certain retirees. NOTE M. COMMITMENTS AND CONTINGENCIES Southern National is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, options written, standby letters of credit and financial guarantees, interest rate caps and floors written, interest rate swaps and forward and futures contracts. Southern National's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. Southern National uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
CONTRACT OR NOTIONAL AMOUNT AT DECEMBER 31, ----------------------- 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Financial instruments whose contract amounts repre- sent credit risk: Commitments to extend, originate or purchase credit.......................................... $ 6,042,999 $ 4,372,503 Standby letters of credit and financial guaran- tees written.................................... 200,222 138,911 Commercial letters of credit..................... 19,811 27,742 Financial instruments whose notional or contract amounts exceed the amount of credit risk: Commitments to sell loans and securities......... 213,991 261,000 Foreign exchange contracts....................... 103,506 109,747
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 69 clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Southern National evaluates each customer's creditworthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by Southern National upon extension of credit, is based on management's evaluation of the creditworthiness of the counterparty. Standby letters of credit and financial guarantees written are conditional commitments issued by Southern National to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers, and letters of credit are collateralized when necessary. Forward commitments to sell mortgage loans and mortgage-backed securities are contracts for delayed delivery of securities in which Southern National agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities' values and interest rates. Legal Proceedings 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 legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that the liabilities arising from these proceedings will not have a materially adverse effect on the consolidated financial position or consolidated results of operations of Southern National. NOTE N. REGULATORY REQUIREMENTS AND OTHER RESTRICTIONS Southern National is required by the Board of Governors of the Federal Reserve System to maintain reserve balances based on certain percentages of deposit types subject to various adjustments. At December 31, 1996, these reserves amounted to $73.0 million. Subject to restrictions imposed by state laws and federal regulations, the Boards of Directors of the subsidiary banks could have declared dividends from their retained earnings up to $818.1 million at December 31, 1996. The subsidiary banks are prohibited from paying dividends from their capital stock and paid-in capital accounts and are required by regulatory authorities to maintain minimum capital levels. Southern National was in compliance with these requirements at December 31, 1996. Southern National is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on Southern National's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Southern National must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance- sheet items as calculated under regulatory accounting practices. Southern National's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. See Table 19 in "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional disclosure concerning regulatory capital requirements. 70 NOTE O. PARENT COMPANY FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS)
1996 1995 ---------- ---------- ASSETS Cash and due from banks................................ $ 5,860 $ 5,318 Interest-bearing bank balances......................... 587,330 396,331 Investment securities.................................. 20,074 17,870 Investment in banking subsidiaries..................... 1,742,214 1,523,981 Investment in other subsidiaries....................... 51,538 41,408 Premises............................................... 5,708 5,879 Receivables from subsidiaries and other assets......... 182,441 161,881 ---------- ---------- Total assets......................................... $2,595,165 $2,152,668 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowed funds.............................. $ 566,225 $ 396,273 Dividends payable...................................... 29,521 24,389 Accounts payable and accrued liabilities............... 21,231 19,414 Long-term debt......................................... 249,019 1,250 ---------- ---------- Total liabilities.................................... 865,996 441,326 ---------- ---------- Total shareholders' equity........................... 1,729,169 1,711,342 ---------- ---------- Total liabilities and shareholders' equity........... $2,595,165 $2,152,668 ========== ==========
CONDENSED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
1996 1995 1994 --------- --------- -------- INCOME Dividends from subsidiaries................... $ 125,708 $ 226,386 $138,201 Interest and other income from subsidiaries... 31,411 17,269 13,291 Interest on investment securities............. 1,850 900 1,560 Other income.................................. 7,835 6,143 3,595 --------- --------- -------- Total income................................ 166,804 250,698 156,647 --------- --------- -------- EXPENSES Interest expense.............................. 33,845 17,859 12,393 Occupancy expense............................. 171 171 172 Other expenses................................ 6,297 23,126 6,927 --------- --------- -------- Total expenses.............................. 40,313 41,156 19,492 --------- --------- -------- Income before income tax benefit and equity in undistributed earnings of subsidiaries......... 126,491 209,542 137,155 Income tax benefit.............................. 354 6,140 433 --------- --------- -------- Income before equity in undistributed earnings of subsidiaries................................ 126,845 215,682 137,588 Net income of subsidiaries (less than) in excess of dividends from subsidiaries................. 156,819 (29,341) 106,254 --------- --------- -------- NET INCOME...................................... $ 283,664 $ 186,341 $243,842 ========= ========= ========
71 CONDENSED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
1996 1995 1994 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................. $ 283,664 $ 186,341 $ 243,842 Adjustments to reconcile net income to net cash provided by operating activities: Net income of subsidiaries (less than) in excess of dividends from subsidiaries...... (156,819) 29,341 (106,254) Depreciation of premises and equipment...... 171 171 172 Amortization of unearned compensation....... 2,450 3,172 1,711 Discount accretion and premium amortiza- tion....................................... 192 (298) 83 Loss (gain) on sales of securities.......... (9) 100 -- Loss on disposals of other real estate owned...................................... -- 240 -- Loss on disposal of premises and equipment.. -- 29 -- (Increase) decrease in other assets......... 103,440 (146,243) 39,640 Increase (decrease) in accounts payable and accrued liabilities........................ 1,817 6,011 (955) --------- --------- --------- Net cash provided by operating activities.. 234,906 78,864 178,239 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale................................... 14 87 10,128 Proceeds from maturities of securities available for sale......................... -- 63,500 65,002 Purchases of securities available for sale.. (2,300) (2,601) (63,177) Proceeds from sales of securities held to maturity................................... -- 520 -- Repayment of note from bank subsidiary...... -- -- 30,000 Sale of savings bank subsidiary to bank sub- sidiary.................................... -- -- 58,883 Proceeds from sales of premises and equip- ment....................................... -- 79 -- Investment in subsidiaries.................. (68,625) (264) (67,492) Advances to subsidiaries.................... (306,857) -- -- Repayment of advances to subsidiaries....... 182,875 -- -- Other....................................... -- -- (32,328) --------- --------- --------- Net cash (used in) provided by investing activities................................ (194,893) 61,321 1,016 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in long-term debt... 247,625 (7,333) (53,333) Net increase in short-term borrowed funds... 169,952 142,004 95,614 Repayment of advance from bank subsidiary... -- -- (58,250) Net proceeds from common stock issued....... 47,462 43,781 23,668 Redemption of common stock.................. (207,387) (47,311) (23,562) Preferred stock cancellations and conver- sions...................................... -- (2,371) -- Cash dividends paid on common and preferred stock...................................... (106,124) (93,465) (76,805) Other....................................... -- -- 1,656 --------- --------- --------- Net cash provided by (used in) financing activities................................ 151,528 35,305 (91,012) --------- --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS.... 191,541 175,490 88,243 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................................ 401,649 226,159 137,916 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR..... $ 593,190 $ 401,649 $ 226,159 ========= ========= =========
NOTE P. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires Southern National to disclose the estimated fair value of its on- and off-balance sheet financial instruments. A financial instrument is defined by SFAS No. 107 as cash, evidence of an ownership interest in an entity or a contract that creates a contractual obligation or right to deliver to or receive cash or another financial instrument from a second entity on potentially favorable or unfavorable terms. Fair value estimates are made at a point in time, based on relevant market data and information about the financial instrument. SFAS No. 107 specifies that fair values should be calculated based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership of a 72 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, 1996 and 1995. Cash and cash equivalents: For these short-term instruments, the carrying amounts are a reasonable estimate of fair values. Securities: Fair values for securities are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities. Loans receivable: The fair values for loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms and credit quality. The carrying amounts of accrued interest approximate fair values. Deposit liabilities: The fair values for demand deposits, interest-checking accounts, savings accounts and certain money market accounts are, by definition, equal to the amount payable on demand at the reporting date, i.e., their carrying amounts. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to aggregate expected maturities. Short-term borrowed funds: The carrying amounts of Federal funds purchased, borrowings under repurchase agreements, master notes and other short-term borrowed funds approximate their fair values. Long-term debt: The fair values of long-term debt are estimated based on quoted market prices for similar instruments or by using discounted cash flow analyses, based on Southern National's current incremental borrowing rates for similar types of instruments. Interest rate swap agreements: The fair values of interest rate swaps (used for hedging purposes) are the estimated amounts that Southern National would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Commitments to extend credit, standby letters of credit and financial guarantees written: The fair values of commitments are estimated using the fees charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair values also consider the difference between current levels of interest rates and the committed rates. The fair values of guarantees and letters of credit are estimated based on fees currently charged for similar agreements. Other off-balance sheet instruments: The fair values for off-balance sheet instruments (futures, forwards, options, and commitments to sell or purchase financial instruments) are estimated based on quoted prices, if available. For instruments for which there are no quoted prices, fair values are estimated using current settlement values or pricing models. 73
1996 1995 ------------------------ ------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Financial assets: Cash and cash equiva- lents................... $ 659,734 $ 659,734 $ 705,676 $ 705,676 Securities available for sale.................... 5,136,789 5,136,789 5,201,344 5,201,344 Securities held to matu- rity.................... 124,718 128,410 153,969 159,886 Loans and leases Loans.................. 14,113,609 14,109,547 13,636,450 13,735,361 Leases................. 470,455 N/A 315,541 N/A Allowance for losses... (183,932) N/A (175,588) N/A ----------- ----------- Net loans and leases.............. $14,400,132 $13,776,403 =========== =========== Financial liabilities: Deposits................. $14,953,914 14,994,860 $14,684,056 14,717,187 Short-term borrowed funds................... 2,263,303 2,263,303 2,595,416 2,595,416 Long-term debt........... 2,048,206 2,144,364 1,379,810 1,385,634 Capitalized leases....... 3,561 N/A 4,125 N/A - ------------------------------------------------------------------------------- NOTIONAL/ NOTIONAL/ CONTRACT FAIR CONTRACT FAIR AMOUNT VALUE AMOUNT VALUE ----------- ----------- ----------- ----------- Unrecognized financial in- struments: Interest rate swaps, caps and floors.............. $ 1,144,114 $ 5,775 $ 743,413 $ (6,067) Commitments to extend, originate or purchase credit.................. 6,042,999 (11,251) 4,372,503 (7,654) Standby and commercial letters of credit and financial guarantees written................. 220,033 (3,300) 166,653 (2,500) Commitments to sell loans and securities.......... 213,991 733 261,000 (3,232) Foreign exchange con- tracts.................. 103,506 312 109,747 -- Option contracts pur- chased.................. 14,000 142 8,000 -- Option contracts writ- ten..................... 14,000 -- 8,000 (160)
- -------- N/A--Not applicable. NOTE Q. DERIVATIVES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Interest rate volatility often increases to the point that balance sheet repositioning through the use of account repricing and other on-balance sheet strategies cannot occur rapidly enough to avoid adverse net income effects. At those times, off-balance sheet or synthetic hedges are utilized. During 1996, management used interest rate swaps, caps and floors to supplement balance sheet repositioning. Such actions were designed to lower the interest sensitivity of Southern National toward a neutral position. Interest rate swaps are contractual agreements between two parties to exchange a series of cash flows representing interest payments. A swap allows both parties to transform the repricing characteristics of an asset or liability from a fixed to a floating rate, a floating rate to a fixed rate, or one floating rate to another floating rate. The underlying principal positions are not affected. Swap terms generally range from one year to ten years depending on the need. At December 31, 1996, derivatives with a total notional value of $1.1 billion, with terms ranging up to seven years, were outstanding. 74 The following tables set forth certain information concerning Southern National's interest rate swaps at December 31, 1996: INTEREST RATE SWAPS, CAPS AND FLOORS DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
NOTIONAL RECEIVE PAY FAIR TYPE AMOUNT RATE RATE VALUE ---- ----------- ----------- ----------- ---------- Receive fixed swaps........... $ 485,000 6.60% 5.50% $ 6,698 Pay fixed swaps............... 304,114 5.50 5.43 (25) Basis swaps................... 250,000 5.53 5.51 (1,251) Floors........................ 105,000 -- -- 353 ---------- -------- -------- ---------- Total......................... $1,144,114 6.02% 5.48% $ 5,775 ========== ======== ======== ========== RECEIVE PAY FIXED BASIS SWAPS YEAR-TO-DATE ACTIVITY FIXED SWAPS SWAPS AND FLOORS TOTAL --------------------- ----------- ----------- ----------- ---------- Balance, December 31, 1995.... $ 140,000 $353,413 $250,000 $ 743,413 Additions..................... 450,000 2,015 105,000 557,015 Maturities/amortizations...... (105,000) (51,314) -- (156,314) ---------- -------- -------- ---------- Balance, December 31, 1996.... $ 485,000 $304,114 $355,000 $1,144,114 ========== ======== ======== ========== ONE YEAR ONE TO FIVE FIVE TO 10 ATURITY SCHEDULEM OR LESS YEARS YEARS TOTAL - ----------------- ----------- ----------- ----------- ---------- Receive fixed swaps........... $ 35,000 $200,000 $250,000 $ 485,000 Pay fixed swaps............... 15,485 284,337 4,292 304,114 Basis swaps................... -- 250,000 -- 250,000 Floors........................ -- 105,000 -- 105,000 ---------- -------- -------- ---------- Total......................... $ 50,485 $839,337 $254,292 $1,144,114 ========== ======== ======== ==========
As of December 31, 1996, unearned income from new swap transactions initiated during 1996 was $6.4 million. There were no unamortized deferred gains or losses from terminated transactions remaining at year end. Active transactions resulted in pretax net expenses of $300,000. In addition to interest rate swaps, Southern National utilizes written covered over-the-counter call options on specific securities in the available- for-sale portfolio in order to enhance returns. During 1996, options were written on securities totaling $375.0 million. Option fee income was $1.1 million for 1996. There were no unexercised options outstanding at December 31, 1996 or 1995. Southern National also utilizes over-the-counter purchased put options and net purchased put options (combination of purchased put option and written call option) in its mortgage banking activities. These options are used to hedge the mortgage warehouse and pipeline against increasing interest rates. Written call options are used in tandem with purchased put options to create a net purchased put option that reduces the cost of the hedge. At December 31, 1996, net purchased put option contracts with a notional value of $14.0 million were outstanding. The $1.1 billion of derivatives used in interest rate risk management are primarily used to hedge variable rate commercial loans, adjustable rate mortgage loans, retail certificates of deposit and fixed rate notes. Southern National does not utilize derivatives for trading purposes. 75 Although off-balance sheet derivative financial instruments do not expose Southern National to credit risk equal to the notional amount, such agreements generate credit risk to the extent of the fair value gain in an off-balance sheet derivative financial instrument if the counterparty fails to perform. Such risk is minimized based on the quality of the counterparties and the consistent monitoring of these agreements. The counterparties to these transactions were large commercial banks and investment banks. Annually, the counterparties are reviewed for creditworthiness by Southern National's credit policy group. Where appropriate, master netting agreements are arranged or collateral is obtained in the form of rights to securities. At December 31, 1996, Southern National's interest rate swaps, caps and floors reflected an unrealized gain of $5.8 million. Other risks associated with interest-sensitive derivatives include the impact on fixed positions during periods of changing interest rates. Indexed amortizing swaps' notional amounts and maturities change based on certain interest rate indices. Generally, as rates fall, the notional amounts decline more rapidly, and as rates increase notional amounts decline more slowly. Under unusual circumstances, financial derivatives also increase liquidity risk, which could result from an environment of rising interest rates in which derivatives produce negative cash flows while being offset by increased cash flows from variable rate loans. Such risk is considered insignificant due to the relatively small derivative positions held by Southern National. At December 31, 1996, Southern National had no indexed amortizing swaps outstanding. 76 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, AS OF MARCH 17, 1997. Southern National Corporation (Registrant) /s/ John A. Allison, IV By: _________________________________ JOHN A. ALLISON, IV CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED AS OF MARCH 17, 1997. /s/ John A. Allison, IV _____________________________________ JOHN A. ALLISON, IV CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER /s/ Scott E. Reed _____________________________________ SCOTT E. REED SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER /s/ Sherry A. Kellett _____________________________________ SHERRY A. KELLETT EXECUTIVE VICE PRESIDENT AND CONTROLLER A Majority of the Directors of the Registrant are included. /s/ Paul B. Barringer _____________________________________ PAUL B. BARRINGER DIRECTOR /s/ W. R. Cuthbertson, Jr. _____________________________________ W. R. CUTHBERTSON, JR. DIRECTOR /s/ Ronald E. Deal _____________________________________ RONALD E. DEAL DIRECTOR 77 /s/ A. J. Dooley, Sr. _____________________________________ A. J. DOOLEY, SR. DIRECTOR /s/ Joe L. Dudley, Sr. _____________________________________ JOE L. DUDLEY, SR. DIRECTOR /s/ Tom D. Efird _____________________________________ TOM D. EFIRD DIRECTOR /s/ O. William Fenn, Jr. _____________________________________ O. WILLIAM FENN, JR. DIRECTOR /s/ Paul S. Goldsmith _____________________________________ PAUL S. GOLDSMITH DIRECTOR /s/ Lloyd Vincent Hackley _____________________________________ LLOYD VINCENT HACKLEY DIRECTOR /s/ Ernest F. Hardee _____________________________________ ERNEST F. HARDEE DIRECTOR /s/ Richard Janeway, M.D. _____________________________________ RICHARD JANEWAY, M.D. DIRECTOR /s/ J. Ernest Lathem, M.D. _____________________________________ J. ERNEST LATHEM, M.D. DIRECTOR 78 /s/ James H. Maynard _____________________________________ JAMES H. MAYNARD DIRECTOR /s/ Joseph A. McAleer, Jr. _____________________________________ JOSEPH A. MCALEER, JR. DIRECTOR /s/ Albert O. McCauley _____________________________________ ALBERT O. MCCAULEY DIRECTOR /s/ James Dickson McLean, Jr. _____________________________________ JAMES DICKSON MCLEAN, JR. DIRECTOR /s/ Charles E. Nichols _____________________________________ CHARLES E. NICHOLS DIRECTOR /s/ L. Glenn Orr, Jr. _____________________________________ L. GLENN ORR, JR. DIRECTOR /s/ A. Winniett Peters _____________________________________ A. WINNIETT PETERS DIRECTOR /s/ Richard L. Player, Jr. _____________________________________ RICHARD L. PLAYER, JR. DIRECTOR /s/ C. Edward Pleasants, Jr. _____________________________________ C. Edward Pleasants, Jr. DIRECTOR 79 /s/ Nido R. Qubein _____________________________________ NIDO R. QUBEIN DIRECTOR /s/ A. Tab Williams, Jr. _____________________________________ A. TAB WILLIAMS, JR. DIRECTOR 80 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION ------- ----------- -------- 2(a) Agreement and Plan of Incorporated herein by reference Reorganization dated as of July to Registration No. 33-57681. 29, 1994 and amended and restated as of October 22, 1994 between Southern National and BB&T. 2(b) Plan of Merger as of July 29, Incorporated herein by reference 1994 as amended and restated on to Registration No. 33-57861. October 22, 1994 between Southern National and BB&T. 2(c) Agreement and Plan of Filed herewith. Reorganization dated as of November 1, 1996 between Southern National Corporation and United Carolina Bancshares Corporation, as amended. 3(a) Amended and Restated Articles of Filed herewith. Incorporation of Southern National Corporation, as amended. 3(b) Bylaws of Southern National Incorporated herein by reference Corporation, as amended. to Exhibit 3.2 of the Registration Statement on Form S-4 filed June 29, 1989 (No. 33-29586.) 4(a) Articles of Amendment to Amended Included in Exhibit 3(a). and Restated Articles of Incorporation of Southern National Corporation related to Junior Participating Preferred Stock. 4(b) Rights Agreement dated as of Incorporated herein by reference December 17, 1996 between to Exhibit 1 to the registration Southern National Corporation statement on Form 8-A dated and Branch Banking and Trust January 10, 1997. Company, Rights Agent. 4(c) Subordinated Indenture Incorporated herein by reference (including Form of Subordinated to Exhibit 4(d) of Registration Debt Security) between Southern No. 333-029899. National Corporation and State Street Bank and Trust Company, Trustee, dated as of May 24, 1996. 4(d) Senior Indenture (including Form Incorporated herein by of Senior Debt Security) reference to Exhibit 4(c) between Southern National of Registration Corporation and State Street No. 333-02899. Bank and Trust Company, Trustee, dated as of May 24, 1996. 10(a)* Death Benefit Only Plan, Dated Incorporated herein by April 23, 1990, by and between reference to Registration Branch Banking and Trust No. 33-33984. Company (as successor to Southern National Bank of North Carolina) and L. Glenn Orr, Jr. 10(b)* Non-Employee Directors' Deferred Filed herewith. Compensation and Stock Option Plan of Southern National Corporation. 10(c)* Southern National Corporation Incorporated herein by 1994 Omnibus Stock Incentive reference to Registration Plan. No. 33-57865. 10(d)* Settlement and Non-Compete Incorporated herein by Agreement, dated February 28, reference to Registration 1995, by and between Southern No. 33-56437. National Corporation and L. Glenn Orr, Jr. 10(e)* Settlement Agreement, Waiver and Incorporated herein by General Release dated September reference to Registration 19, 1994, by and between No. 33-56437. Southern National Corporation, Branch Banking and Trust Company (as successor to Southern National Bank of North Carolina) and Gary E. Carlton.
81
EXHIBIT NO. DESCRIPTION LOCATION ------- ----------- -------- 10(f) Southern National Corporation Savings Incorporated herein by and Thrift Plan. reference to Registration No. 33-57867. 10(g)* Southern National Corporation 1995 Filed herewith. Omnibus Stock Incentive Plan. 10(h)* Form of Branch Banking and Trust Incorporated by reference Company to the identified exhibit Long-Term Incentive Plan. under Southern National Corporation's (as successor to BB&T Financial Corporation) Form 10-Q, filed May 14, 1991. 10(i)* Form of Branch Banking and Trust Incorporated by reference Company to the identified exhibit Executive Incentive Compensation under Southern National Plan. Corporation's (as successor to BB&T Financial Corporation) Form 10-K, filed February 22, 1985. 10(j)* Southern National Deferred Filed herewith. Compensation Plan for Key Executives 10(k)* Southern National Supplemental Filed herewith. Executive Retirement Plan 10(l)* Branch Banking and Trust Supplemental Filed herewith. Executive Retirement Plan 11 Statement re Computation of Earnings Filed herewith. Per Share. 21 Subsidiaries of the Registrant. Filed herewith. 22 Proxy Statement for the 1997 Annual Future filing incorporated Meeting by reference pursuant to of Shareholders, dated April 22, the General Instruction G(3). 1997. 23(a) Consent of Independent Public Filed herewith. Accountants. 23(b) Opinion of Independent Public Filed herewith. Accountants. 27 Financial Data Schedule. Filed as an exhibit to the electronically-filed document as required.
- -------- * Management compensatory plan or arrangement. 82 EX-2.C 2 AGREEMENT AND PLAN OF REORGANIZATION Exhibit 2(c) AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION UNITED CAROLINA BANCSHARES CORPORATION and SOUTHERN NATIONAL CORPORATION
TABLE OF CONTENTS ----------------- Page ---- ARTICLE I DEFINITIONS..............................................................................................1 ARTICLE II THE MERGER...............................................................................................6 2.1 Merger..........................................................................................6 ------ 2.2 Filing; Plan of Merger..........................................................................6 ---------------------- 2.3. Effective Time..................................................................................6 -------------- 2.4 Closing.........................................................................................6 ------- 2.5 Effect of Merger................................................................................7 ---------------- 2.6 Further Assurances..............................................................................7 ------------------ 2.7 Merger Consideration............................................................................7 -------------------- 2.8 Conversion of Shares; Payment of Merger Consideration...........................................8 ----------------------------------------------------- 2.9 Dissenting Shares...............................................................................9 ----------------- 2.10 Conversion of Stock Options.....................................................................9 --------------------------- 2.11 Merger of Subsidiary...........................................................................11 -------------------- 2.12 Anti-Dilution..................................................................................11 ------------- ARTICLE III REPRESENTATIONS AND WARRANTIES OF UCB...................................................................11 3.1 Capital Structure..............................................................................11 ----------------- 3.2 Organization, Standing and Authority...........................................................12 ------------------------------------ 3.3 Ownership of Subsidiaries......................................................................12 -------------------------- 3.4 Organization, Standing and Authority of the Subsidiaries.......................................12 -------------------------------------------------------- 3.5 Authorized and Effective Agreement.............................................................12 ---------------------------------- 3.6 Securities Filings.............................................................................13 ------------------ 3.7 Financial Statements; Minute Books.............................................................13 ---------------------------------- 3.8 Material Adverse Change........................................................................14 ----------------------- 3.9 Absence of Undisclosed Liabilities.............................................................14 ---------------------------------- 3.10 Properties.....................................................................................14 ---------- 3.11 Environmental Matters..........................................................................14 --------------------- 3.12 Allowance for Loan Losses......................................................................15 ------------------------- 3.13 Tax Matters....................................................................................15 ----------- 3.14 Employees; Compensation; Benefit Plans.........................................................16 -------------------------------------- 3.15 Certain Contracts..............................................................................20 ----------------- 3.16 Legal Proceedings; Regulatory Approvals........................................................20 --------------------------------------- 3.17 Compliance with Laws...........................................................................21 -------------------- 3.18 Brokers and Finders............................................................................21 ------------------- 3.19 Loans..........................................................................................21 ----- 3.20 Repurchase Agreements..........................................................................21 ---------------------
3.21 Deposit Accounts...............................................................................22 ---------------- 3.22 Related Party Transactions.....................................................................22 -------------------------- 3.23 Certain Information............................................................................22 ------------------- 3.24 Accounting, Tax and Regulatory Matters.........................................................22 -------------------------------------- 3.25 State Takeover Laws............................................................................23 ------------------- 3.26 Derivatives Contracts..........................................................................23 --------------------- 3.27 Fairness Opinion...............................................................................23 ---------------- ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SNC..................................................................................................23 4.1 Capital Structure of SNC.......................................................................23 ------------------------ 4.2 Organization, Standing and Authority of SNC....................................................23 ------------------------------------------- 4.3 Authorized and Effective Agreement.............................................................24 ---------------------------------- 4.4 Organization, Standing and Authority of SNC Subsidiaries.......................................24 -------------------------------------------------------- 4.5 Securities Documents...........................................................................25 -------------------- 4.6 Financial Statements...........................................................................25 -------------------- 4.7 Material Adverse Change........................................................................25 ----------------------- 4.8 Legal Proceedings; Regulatory Approvals........................................................25 --------------------------------------- 4.9 Absence of Undisclosed Liabilities.............................................................26 ---------------------------------- 4.10 Allowance for Loan Losses......................................................................26 ------------------------- 4.11 Tax Matters....................................................................................26 ----------- 4.12 Compliance with Laws...........................................................................26 -------------------- 4.13 Certain Information............................................................................27 ------------------- 4.14 Accounting, Tax and Regulatory Matters.........................................................27 -------------------------------------- 4.15 Share Ownership................................................................................27 --------------- ARTICLE V COVENANTS...............................................................................................27 5.1 Shareholders' Meetings.........................................................................27 ---------------------- 5.2 Registration Statement; Joint Proxy Statement/Prospectus.......................................28 -------------------------------------------------------- 5.3 Plan of Merger; Reservation of Shares..........................................................28 ------------------------------------- 5.4 Additional Acts................................................................................29 --------------- 5.5 Best Efforts...................................................................................29 ------------ 5.6 Certain Accounting Matters.....................................................................29 -------------------------- 5.7 Access to Information..........................................................................29 --------------------- 5.8 Press Releases.................................................................................30 -------------- 5.9 Forbearances of UCB............................................................................30 ------------------- 5.10 Employment Agreements..........................................................................33 --------------------- 5.11 Affiliates.....................................................................................33 ---------- 5.12 Employee Benefit Plans.........................................................................33 ---------------------- 5.13 Directors and Officers Protection..............................................................34 --------------------------------- 5.14 Forbearances of SNC............................................................................35 -------------------
5.15 Assumption of Agreement by Acquiror............................................................35 ----------------------------------- 5.16 Reports........................................................................................36 ------- 5.17 Exchange Listing...............................................................................36 ---------------- ARTICLE VI CONDITIONS PRECEDENT....................................................................................36 6.1 Conditions Precedent --SNC and UCB.............................................................36 ---------------------------------- 6.2 Conditions Precedent -- UCB....................................................................38 --------------------------- 6.3 Conditions Precedent -- SNC ...................................................................38 --------------------------- ARTICLE VII TERMINATION, WAIVER AND AMENDMENT.......................................................................40 7.1 Termination....................................................................................40 ----------- 7.2 Effect of Termination..........................................................................43 --------------------- 7.3 Survival of Representations, Warranties and Covenants..........................................43 ----------------------------------------------------- 7.4 Waiver.........................................................................................43 ------ 7.5 Amendment or Supplement........................................................................44 ----------------------- ARTICLE VIII MISCELLANEOUS...........................................................................................44 8.1 Expenses.......................................................................................44 -------- 8.2 Entire Agreement...............................................................................44 ---------------- 8.3 No Assignment..................................................................................45 ------------- 8.4 Notices........................................................................................45 ------- 8.5 Captions.......................................................................................46 -------- 8.6 Counterparts...................................................................................46 ------------ 8.7 Governing Law..................................................................................46 ------------- 8.8 Predecessor Agreement..........................................................................46 ---------------------
AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION ("Reorganization Agreement" or "Agreement"), dated as of November 1, 1996, between UNITED CAROLINA BANCSHARES CORPORATION ("UCB"), a North Carolina corporation having its principal office at Whiteville, North Carolina, and SOUTHERN NATIONAL CORPORATION ("SNC"), a North Carolina corporation having its principal office at Winston-Salem, North Carolina; R E C I T A L S: - - - - - - - - The parties desire that UCB shall be merged with and into SNC (said transaction being hereinafter referred to as the "Merger") pursuant to a plan of merger (the "Plan of Merger") substantially in the form set forth in Articles of Merger attached as Annex A hereto ("Articles of Merger"), and the parties desire to provide for certain undertakings, conditions, representations, warranties and covenants in connection with the transactions contemplated hereby. NOW, THEREFORE, in consideration of the premises and of the mutual representations, warranties, covenants and agreements herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions ----------- When used herein, the capitalized terms set forth below shall have the following meanings: "Bank Holding Company Act" shall mean the Bank Holding Company Act of 1956, as amended. "Business Day" shall mean all days other than Saturdays, Sundays and Federal Reserve holidays. "Closing Date" shall mean the date specified pursuant to Section 2.4 as the date on which the parties hereto shall close the transactions contemplated herein. "Code" shall mean the Internal Revenue Code of 1986, as amended. 1 "Commission" shall mean the Securities and Exchange Commission. "CRA" shall mean the Community Reinvestment Act of 1977, as amended. "Disclosed" shall mean disclosed in a Securities Document filed with the Commission or in the UCB Disclosure Letter. "Effective Time" shall mean the time specified in Section 2.3 as the Effective Time of the Merger. "Environmental Claim" means any written notice from any governmental authority or third party alleging potential liability (including, without limitation, potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries or penalties) arising out of, based upon, or resulting from the presence, or release into the environment, of any Materials of Environmental Concern. "Environmental Laws" means all applicable federal, state and local laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, that relate to pollution or protection of human health or the environment. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "FDIA" shall mean the Federal Deposit Insurance Act, as amended. "FDIC" shall mean the Federal Deposit Insurance Corporation. "Federal Reserve Board" shall mean the Board of Governors of the Federal Reserve System. "Financial Statements" shall mean (a) with respect to SNC, (i) the consolidated balance sheets (including related notes and schedules, if any) of SNC as of December 31, 1995, 1994, and 1993, and the related consolidated statements of income, shareholders' equity and cash flows (including related notes and schedules, if any) for each of the three years ended December 31, 1995, 1994, and 1993, as filed by SNC in Securities Documents and (ii) the consolidated balance sheets of SNC (including related notes and schedules, if any) and the related consolidated statements of income, shareholders' equity and cash flows (including related notes and schedules, if any) included in Securities Documents filed by SNC with respect to periods ended subsequent to December 31, 1995, and (b) with respect to UCB, (i) the consolidated balance sheets (including related notes and schedules, if any) of UCB as of December 31, 1995, 1994, and 1993, and the related consolidated statements of income, changes in shareholders' equity and cash flows (including related notes and schedules, if any) for each of the three years ended December 31, 1995, 1994, and 1993 as filed by UCB in Securities Documents and (ii) the consolidated balance sheets of UCB (including related 2 notes and schedules, if any) and the related consolidated statements of income, changes in shareholders' equity and cash flows (including related notes and schedules, if any) included in Securities Documents filed by UCB with respect to periods ended subsequent to December 31, 1995. "Joint Proxy Statement/Prospectus" shall mean the joint proxy statement and prospectus, together with any supplements thereto, sent to shareholders of UCB and the shareholders of SNC to solicit their votes in connection with this Agreement and the Plan of Merger. "Material Adverse Effect" on SNC or UCB shall mean an event, change, or occurrence which, individually or together with any other event, change or occurrence, has a material adverse effect on (i) the financial condition, results of operations, business or business prospects of SNC and the SNC Subsidiaries, taken as a whole, or UCB and the Subsidiaries, taken as a whole, or (ii) the ability of SNC or UCB to perform its obligations under this Agreement or to consummate the Merger and the other transactions contemplated by this Agreement, provided that "Material Adverse Effect" shall not be deemed to include the impact of (a) actions and omissions of a party (or any of its affiliates) taken with the prior informed consent of the other party in contemplation of the transactions contemplated hereby, and (b) the direct effects of compliance with this Agreement on the operating performance of the parties, including expenses incurred by the parties in consummating the transactions contemplated by this Agreement. "Materials of Environmental Concern" means pollutants, contaminants, wastes, toxic substances, petroleum and petroleum products and any other materials regulated under Environmental Laws. "NCBCA" shall mean the North Carolina Business Corporation Act as amended. "NYSE" shall mean the New York Stock Exchange, Inc. "Registration Statement" shall mean the registration statement of SNC with respect to the SNC Common Stock to be issued in the Merger as declared effective by the Commission under the Securities Act. "Rights" shall mean warrants, options, rights, convertible securities and other arrangements or commitments which obligate an entity to issue or dispose of any of its capital stock or other ownership interests, and stock appreciation rights, performance units and similar stock-based rights whether or not they obligate the issuer thereof to issue stock or other securities or to pay cash. "Securities Act" shall mean the Securities Act of 1933, as amended. "Securities Documents" shall mean all reports, proxy statements, registration statements and all similar documents filed, or required to be filed, pursuant to the Securities Laws. 3 "Securities Laws" shall mean the Securities Act; the Exchange Act; the Investment Company Act of 1940, as amended; the Investment Advisers Act of 1940, as amended; the Trust Indenture Act of 1939 as amended; and the rules and regulations of the Commission promulgated thereunder. "SNC Common Stock" shall mean the shares of common stock, par value $5.00 per share, of SNC. "SNC Option Agreement" shall mean the Option Agreement dated as of even date herewith under which SNC has an option to purchase shares of UCB, which shall be executed immediately following execution of this Reorganization Agreement. "SNC Subsidiaries" shall mean the Subsidiaries of SNC, which shall include any corporation, bank, savings association, or other organization acquired as a Subsidiary of SNC in the future and held as a Subsidiary by SNC at the Effective Time. "Stock Option Plan" shall mean, collectively or singularly, UCB's 1986 Key Employee Stock Option Plan; 1995 Stock Option and Incentive Award; Stock Option Policy for Nonemployee Directors of Triad Bank; Triad Bank Employees' Stock Option Plan (Non-qualified); Seaboard Savings Bank, Inc., SSB 1993 Nonstatutory Stock Option Plan for Directors; Seaboard Savings Bank, Inc., SSB 1993 Incentive Stock Option Plan; and Bank of Iredell 1987 Employee Nonqualified Stock Option Program. "Stock Option" shall mean, collectively, any option, granted under the Stock Option Plan and unexercised on the date hereof, to acquire shares of UCB Common Stock, aggregating 357,577 shares. "Subsidiaries" shall mean all those corporations, associations, or other business entities of which the entity in question either owns or controls 50% or more of the outstanding equity securities either directly or through an unbroken chain of entities as to each of which 50% or more of the outstanding equity securities is owned directly or indirectly by its parent (provided, there shall not be included any such entity the equity securities of which are owned or controlled in a fiduciary capacity). "TILA" shall mean the Truth in Lending Act, as amended. "UCB Common Stock" shall mean the shares of common stock, par value $4.00 per share, of UCB. "UCB Disclosure Letter" shall mean the written information entitled "UCB Disclosure Letter" dated the date of this Agreement and delivered not later than ten days after the execution of this Agreement by UCB to SNC, and describing in reasonable detail the matters contained therein. Each disclosure made therein shall be in existence on the date of this Agreement and shall specifically reference each Section of this Agreement under which such disclosure is made. 4 Information disclosed with respect to one Section shall not be deemed to be disclosed for purposes of any other Section not specifically referenced. "UCB Option Agreement" shall mean the Option Agreement dated as of even date herewith under which UCB has an option to purchase shares of SNC, which shall be executed immediately following execution of this Reorganization Agreement. "UCB Subsidiaries" shall mean the Subsidiaries of UCB, which shall include any corporation, bank, savings association, or other organization acquired as a Subsidiary of UCB in the future and held as a Subsidiary by UCB at the Effective Time. 1.2 Terms Defined Elsewhere ----------------------- The capitalized terms set forth below are defined in the following sections: Agreement Introduction Articles of Merger Recitals Average Closing Price Section 7.1(i) Closing Section 2.4 Closing Date Section 2.4 Closing Value Section 2.7 Constituent Corporations Section 2.1 Determination Date Section 7.1(i) Dissenting Shareholder Section 2.9 Dissenting Shares Section 2.9 Employee Section 5.12 Exchange Ratio Section 2.7 Index Group Section 7.1(i) Maximum Amount Section 5.13(b) Merger Recitals Merger Consideration Section 2.7 PBGC Section 3.14(b)(iv) Plan Section 3.14(b)(i) Plan of Merger Recitals Reorganization Agreement Introduction SNC Introduction SNC Option Plan Section 2.10(c) SNC Ratio Section 7.1(A)(2) Surviving Corporation Section 2.1(a) UCB Introduction UCB-SC Section 3.4 5 ARTICLE II THE MERGER 2.1 Merger ------ SNC and UCB are constituent corporations (the "Constituent Corporations") to the Merger as contemplated by the NCBCA. At the Effective Time: (a) UCB shall be merged with and into SNC in accordance with the applicable provisions of the NCBCA, with SNC being the surviving corporate entity (hereinafter sometimes referred to as the "Surviving Corporation"). (b) The separate existence of UCB shall cease and the Merger shall in all respects have the effect provided for in Section 2.5. (c) The Articles of Incorporation of SNC at the Effective Time shall become the Articles of Incorporation of the Surviving Corporation. (d) The Bylaws of SNC at the Effective Time shall become the Bylaws of the Surviving Corporation. 2.2 Filing; Plan of Merger ---------------------- The Merger shall not become effective unless this Agreement and the Plan of Merger are duly approved by a vote of a majority of the outstanding shares of each of UCB (subject in the case of UCB to the provisions of Article X of its Articles of Incorporation) and SNC entitled to be voted. Upon fulfillment or waiver of the conditions specified in Article VI and provided that this Agreement has not been terminated pursuant to Article VII, the Constituent Corporations will cause the Articles of Merger to be executed and filed with the Office of the Secretary of State of North Carolina. The Plan of Merger is incorporated herein by reference, and adoption of this Agreement by the Boards of Directors of the Constituent Corporations and approval by the shareholders of the Constituent Corporations shall constitute adoption and approval of the Plan of Merger. 2.3 Effective Time -------------- The Merger shall be effective at the day and hour specified in the Articles of Merger filed with the Secretary of State of North Carolina (herein sometimes referred to as the "Effective Time"). 2.4 Closing ------- The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the executive offices of SNC, BB&T Financial Center, 200 West Second Street, Winston-Salem, North Carolina, at 11:00 a.m. on the Business Day designated by SNC which is within thirty 6 days following the satisfaction of the conditions to Closing set forth in Article VI, or such later date as the parties may otherwise agree (the "Closing Date"). 2.5 Effect of Merger ---------------- From and after the Effective Time, the separate existence of UCB shall cease, and the Surviving Corporation shall thereupon and thereafter, to the extent consistent with its Articles of Incorporation, possess all the rights, privileges, immunities, and franchises, of a public as well as of a private nature, of each of the Constituent Corporations; and all property, real, personal and mixed, and all debts due on whatever account, and all other choses in action, and all and every other interest of or belonging to or due to each of the Constituent Corporations shall be taken and deemed to be transferred to and vested in the Surviving Corporation without further act or deed; and the title to any real estate or any interest therein vested in either of the Constituent Corporations shall not revert or be in any way impaired by reason of the Merger. The Surviving Corporation shall thenceforth be responsible and liable for all the liabilities, obligations and penalties of each of the Constituent Corporations; and any claim existing or action or proceeding, civil or criminal, pending by or against either of the Constituent Corporations may be prosecuted as if the Merger had not taken place, or the Surviving Corporation may be substituted in its place; and any judgment rendered against either of the Constituent Corporations may be enforced against the Surviving Corporation. Neither the rights of creditors nor any liens upon the property of either of the Constituent Corporations shall be impaired by reason of the Merger. 2.6 Further Assurances ------------------ If, at any time after the Effective Time, the Surviving Corporation shall consider or be advised that any further deeds, assignments or assurances in law or any other actions are necessary, desirable or proper to vest, perfect or confirm of record or otherwise, in the Surviving Corporation, the title to any property or rights of the Constituent Corporations acquired or to be acquired by reason of, or as a result of, the Merger, the Constituent Corporations agree that such Constituent Corporations and their proper officers and directors shall and will execute and deliver all such proper deeds, assignments and assurances in law and do all things necessary, desirable or proper to vest, perfect or confirm title to such property or rights in the Surviving Corporation and otherwise to carry out the purpose of this Agreement, and that the proper officers and directors of the Surviving Corporation are fully authorized and directed in the name of the Constituent Corporations or otherwise to take any and all such actions. 2.7 Merger Consideration -------------------- As used herein, the term "Merger Consideration" shall mean the whole shares of SNC Common Stock to be exchanged for each share of UCB Common Stock issued and outstanding as of the Effective Time, and cash (without interest) to be payable in exchange for any fractional share 7 of SNC Common Stock which would otherwise be exchanged for a share of UCB Common Stock. The number of shares of SNC Common Stock to be issued in exchange for each issued and outstanding share of UCB Common Stock shall be in the ratio of 1.135 shares of SNC Common Stock for each share of UCB Common Stock issued and outstanding (subject to possible adjustment pursuant to Section 7.1(h), the "Exchange Ratio"). The value of any fractional share shall be determined by multiplying the fractional part of such share of SNC Common Stock by the market value of one share of SNC Common Stock at the Effective Time, which shall be the closing price of such common stock on the NYSE-Composite Transactions List (as reported by The Wall Street Journal or, if not reported thereby, any other authoritative source selected by SNC) on the first trading day preceding the Effective Time. No such holder will be entitled to dividends, voting rights, or any other rights as a shareholder in respect of any fractional shares. 2.8 Conversion of Shares; Payment of Merger Consideration ----------------------------------------------------- (a) At the Effective Time, by virtue of the Merger and without any action on the part of UCB or the holders of record of UCB Common Stock, each share of UCB Common Stock issued and outstanding immediately prior to the Effective Time shall be converted into and shall represent the right to receive, upon surrender of the certificate representing such share of UCB Common Stock (as provided in paragraph (d) below), the Merger Consideration. (b) Each share of the common stock of SNC issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding. (c) Until surrendered, each outstanding certificate which prior to the Effective Time represented one or more shares of UCB Common Stock shall be deemed upon the Effective Time for all purposes to represent only the right to receive the Merger Consideration as described in this Section 2.8. No interest will be paid or accrued on the Merger Consideration upon the surrender of the certificate or certificates representing shares of UCB Common Stock. With respect to any certificate for UCB Common Stock that has been lost or destroyed, the Surviving Corporation shall pay the Merger Consideration attributable to such certificate upon receipt of a surety bond or other adequate indemnity and evidence reasonably satisfactory to it of ownership of the shares represented thereby. After the Effective Time, no transfer of the shares of UCB Common Stock outstanding immediately prior to the Effective Time shall be made on the stock transfer books of the Surviving Corporation. (d) Promptly after the Effective Time, SNC shall cause to be delivered or mailed to each UCB shareholder a form of letter of transmittal and instructions for use in effecting the surrender of the certificates which, immediately prior to the Effective Time, represented any shares of UCB Common Stock in exchange for the Merger Consideration. Upon surrender of such certificates, together with such letter of transmittal duly executed and completed in accordance with the instructions thereto, and such other documents as may be reasonably requested, SNC shall promptly cause the transfer to the persons entitled thereto of the Merger Consideration. 8 (e) The Surviving Corporation shall pay any dividends or other distributions with a record date prior to the Effective Time which have been declared or made by UCB in respect of shares of UCB Common Stock in accordance with the terms of this Agreement and which remain unpaid at the Effective Time. To the extent permitted by law, former shareholders of record of UCB shall be entitled to vote after the Effective Time at any meeting of SNC shareholders the number of whole shares of SNC Common Stock into which their respective shares of UCB Common Stock are converted, regardless of whether such holders have exchanged their certificates representing UCB Common Stock for certificates representing SNC Common Stock in accordance with the provisions of this Agreement. Whenever a dividend or other distribution is declared by SNC on the SNC Common Stock, the record date for which is at or after the Effective Time, the declaration shall include dividends or other distributions on all shares of SNC Common Stock issuable pursuant to this Agreement, but after the Effective Time no dividend or other distribution payable to the holders of record of SNC Common Stock as of any time subsequent to the Effective Time shall be delivered to the holder of any certificate until such holder surrenders such certificate for exchange as provided in this Section 2.8. Upon surrender of such certificate, both the SNC Common Stock certificate and any undelivered dividends and cash payments payable hereunder (without interest) shall be delivered and paid with respect to each share represented by such certificate. 2.9 Dissenting Shares ----------------- Any UCB shareholder who shall have dissented from the Merger in accordance with the NCBCA and who has properly exercised such shareholder's rights to demand payment of the value of the Shareholder's shares (the "Dissenting Shares") as provided in the NCBCA (the "Dissenting Shareholder") shall thereafter have only such rights, if any, as are provided a Dissenting Shareholder in accordance with the NCBCA and shall have no rights under Sections 2.7 and 2.8; provided, however, that if a Dissenting Shareholder shall withdraw (in accordance with the NCBCA) the demand for such appraisal or shall become ineligible for such appraisal, then such Dissenting Shareholder's Dissenting Shares automatically shall cease to be Dissenting Shares and shall be converted into and represent only the right to receive from the Surviving Corporation the Merger Consideration provided for in Section 2.7 upon surrender of the certificate representing the Dissenting Shares. 2.10 Conversion of Stock Options --------------------------- (a) At the Effective Time, each Stock Option then outstanding, whether or not then exercisable, shall be converted into and become rights with respect to SNC Common Stock, and SNC shall assume each Stock Option, in accordance with the terms of the Stock Option Plan and stock option agreement, or other agreement, by which it is evidenced, except that from and after the Effective Time (i) SNC and its Compensation Committee shall be substituted for UCB and the Committee of UCB's Board of Directors administering the Stock Option Plan, (ii) each Stock Option assumed by SNC may be exercised solely for shares of SNC Common Stock, (iii) the number of shares of SNC Common Stock subject to such Stock Option shall be the number of whole shares of SNC (omitting any fractional share) determined by multiplying the number of shares of UCB 9 Common Stock subject to such Stock Option immediately prior to the Effective Time by the Exchange Ratio, and (iv) the per share exercise price under each such Stock Option shall be adjusted by dividing the per share exercise price under each such Stock Option by the Exchange Ratio and rounding up to the nearest cent. In addition, notwithstanding the provisions of clauses (iii) and (iv) of the first sentence of this Section 2.10(a), each Stock Option which is an "incentive stock option" shall be adjusted as required by Section 424 of the Code, and the Regulations promulgated thereunder, so as to continue as an incentive stock option under Section 424(a) of the Code, and so as not to constitute a modification, extension, or renewal of the option, within the meaning of Section 424(h) of the Code. SNC and UCB agree to take all necessary steps to effectuate the foregoing provisions of this Section 2.10. (b) As soon as practicable after the Effective Time, SNC shall deliver to the participants in the Stock Option Plan an appropriate notice setting forth such participant's rights pursuant thereto, and the grants pursuant to such Stock Option Plan shall continue in effect on the same terms and conditions (subject to the adjustments required by Section 2.10(a) after giving effect to the Merger). SNC shall comply with the terms of the Stock Option Plan to ensure, to the extent required by and subject to the provisions of such Stock Option Plan, that Stock Options which qualified as incentive stock options prior to the Effective Time continue to qualify as incentive stock options after the Effective Time. At or prior to the Effective Time, SNC shall take all corporate action necessary to reserve for issuance sufficient shares of SNC Common Stock for delivery upon exercise of Stock Options assumed by it in accordance with this Section 2.10. As soon as practicable after the Effective Time, SNC shall file a registration statement on Form S-3 or Form S-8, as the case may be (or any successor or other appropriate forms), with respect to the shares of SNC Common Stock subject to Stock Options and shall use its reasonable efforts to maintain the effectiveness of such registration statements (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such options remain outstanding. With respect to those individuals who subsequent to the Merger will be subject to the reporting requirements under Section 16(a) of the Exchange Act, where applicable, SNC shall administer the Stock Option Plan assumed pursuant to this Section 2.10 in a manner that complies with Rule 16b-3 promulgated under the Exchange Act to the extent necessary to preserve for such individuals the benefits of Rule 16b-3 to the extent such benefits were available to them prior to the Effective Time. UCB hereby represents that the Stock Option Plan in its current form complies with Rule 16b-3 to the extent, if any, required as of November 1, 1996. (c) Notwithstanding the foregoing provisions of this Section 2.10, SNC may at its election substitute as of the Effective Time options under the Southern National Corporation 1995 Omnibus Stock Incentive Plan (the "SNC Option Plan") for all or a part of the Stock Options, subject to the following conditions: (i) the requirements of Section 2.10(a)(iii) and (iv) shall be met; (ii) such substitution shall not constitute a modification, extension or renewal of any of the Stock Options which are incentive stock options; (iii) the substituted options shall continue in effect on the same terms and conditions as the Stock Option Plan or other document granting the Stock Option; and (iv) each grant of a substitute option shall have been specifically approved in advance by the full Board of Directors of SNC or by a committee consisting solely of "non-employee" directors as defined in 10 Rule 16b-3. As soon as practicable following the Effective Time, SNC shall deliver to the participants receiving substitute options under the SNC Option Plan an appropriate notice setting forth such participant's rights pursuant thereto. SNC has reserved under the SNC Option Plan adequate shares of SNC Common Stock for delivery upon exercise of any such substituted options. SNC hereby represents that the SNC Option Plan in its current form complies with Rule 16b-3 to the extent, if any, required as of November 1, 1996. 2.11 Merger of Subsidiary -------------------- In the event that SNC shall request, UCB shall cooperate in taking such actions, and shall cooperate in causing the UCB Subsidiaries to take such actions, as may be required in order to effect, at the Effective Time, the merger of one or more of the UCB Subsidiaries with and into, in each case, one of the SNC Subsidiaries. 2.12 Anti-Dilution ------------- In the event SNC changes the number of shares of SNC Common Stock issued and outstanding prior to the Effective Time as a result of a stock split, stock dividend or other similar recapitalization, and the record date thereof (in the case of a stock dividend) or the effective date thereof (in the case of a stock split or similar recapitalization for which a record date is not established) shall be prior to the Effective Time, the Exchange Ratio shall be proportionately adjusted. ARTICLE III REPRESENTATIONS AND WARRANTIES OF UCB Except as otherwise Disclosed, UCB represents and warrants to SNC as follows: 3.1 Capital Structure ----------------- The authorized capital stock of UCB consists of 40,000,000 shares of UCB Common Stock, and 2,000,000 shares of preferred stock, par value $10.00 per share. As of the date hereof, 24,266,175 shares of UCB Common Stock are issued and outstanding, and no other shares of capital stock of UCB, common or preferred, are issued and outstanding. All outstanding shares of UCB Common Stock have been duly authorized and are validly issued, fully paid and nonassessable. No other classes of capital stock of UCB are authorized. No shares of capital stock have been reserved for any purpose, except for (i) 357,577 shares of UCB Common Stock in connection with the Stock Option Plan, (ii) 4,828,960 shares of UCB Common Stock in connection with the SNC Option Agreement, (iii) 2,500,000 shares of UCB Common Stock in connection with its 401(k) plan; and (iv) 900,000 shares of UCB Common Stock in connection with its Long-Term Incentive Plan. Except as set forth herein, there are no Rights authorized, issued or outstanding with respect to the capital stock of UCB. Holders of UCB Common Stock do not have preemptive rights. 11 3.2 Organization, Standing and Authority ------------------------------------ UCB is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina with full corporate power and authority to carry on its business as now conducted and to own, lease and operate its assets. UCB is not required to be qualified to do business in any other state of the United States or foreign jurisdiction. UCB is registered as a bank holding company under the Bank Holding Company Act. 3.3 Ownership of Subsidiaries -------------------------- Except as Disclosed in the UCB Disclosure Letter, UCB does not own, directly or indirectly, any outstanding capital stock or other voting securities or ownership interests of any corporation, partnership, joint venture, or other organization which would constitute a Subsidiary, except for the UCB Subsidiaries. The outstanding shares of capital stock of the UCB Subsidiaries are validly issued and outstanding, fully paid and nonassessable, and all such shares are directly or indirectly owned by UCB free and clear of all liens, claims and encumbrances or preemptive rights of any person. No Rights are authorized, issued or outstanding with respect to the capital stock of the UCB Subsidiaries, and there are no agreements, understandings or commitments relating to the right of UCB to vote or to dispose of said shares. None of the shares of capital stock of the UCB Subsidiaries has been issued in violation of the preemptive rights of any person. 3.4 Organization, Standing and Authority of the Subsidiaries -------------------------------------------------------- Each UCB Subsidiary which is an insured depository institution is a state- chartered, non-member commercial bank. Each of the UCB Subsidiaries is validly existing and in good standing under the laws of its state of organization. Each of the UCB Subsidiaries has full power and authority to carry on its business as now conducted, and is duly qualified to do business in its state of organization. No UCB Subsidiary is required to be qualified to do business in any other state of the United States or foreign jurisdiction other than such UCB Subsidiary's state of organization, or is engaged in any activities that have not been Disclosed. 3.5 Authorized and Effective Agreement ---------------------------------- (a) UCB has all requisite corporate power and authority to enter into and (subject to receipt of all necessary governmental approvals and the receipt of approval of the UCB shareholders of this Agreement and the Plan of Merger) to perform all of its obligations under this Reorganization Agreement, the Articles of Merger, the UCB Option Agreement and the SNC Option Agreement. The execution and delivery of this Reorganization Agreement, the Articles of Merger and said Option Agreements, and consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action in respect thereof, except in the case of this Agreement and the Plan of Merger, the approval of UCB shareholders pursuant to and to the extent required by applicable law. This Agreement and the Plan of Merger constitute legal, valid and binding obligations of UCB, and each is enforceable against UCB in accordance with its 12 terms, in each such case subject to (i) bankruptcy, fraudulent transfer, insolvency, moratorium, reorganization, conservatorship, receivership, or other similar laws from time to time in effect relating to or affecting the enforcement of rights of creditors of FDIC insured institutions or the enforcement of creditors' rights generally; and (ii) general principles of equity, and except that the availability of equitable remedies or injunctive relief is within the discretion of the appropriate court. (b) Neither the execution and delivery of this Agreement, the Articles of Merger, the UCB Option Agreement or the SNC Option Agreement, nor consummation of the transactions contemplated hereby or thereby, nor compliance by UCB with any of the provisions hereof or thereof, shall (i) conflict with or result in a breach of any provision of the articles of incorporation or by-laws of UCB or any UCB Subsidiary, (ii) subject to receipt of any required consents or approvals, constitute or result in a breach of any term, condition or provision of, or constitute a default under, or give rise to any right of termination, cancellation or acceleration with respect to, or result in the creation of any lien, charge or encumbrance upon any property or asset of UCB or any UCB Subsidiary pursuant to, any note, bond, mortgage, indenture, license, agreement or other instrument or obligation, or (iii) subject to receipt of all required governmental approvals, violate any order, writ, injunction, decree, statute, rule or regulation applicable to UCB or any UCB Subsidiary. 3.6 Securities Filings ------------------ UCB has timely filed all Securities Documents required by the Securities Laws since December 31, 1993. UCB shall Disclose to SNC a true and complete copy of each Securities Document filed by UCB with the Commission after December 31, 1993 and prior to the date hereof, which are all of the Securities Documents that UCB was required to file during such period. As of their respective dates of filing, such Securities Documents complied in all material respects with the Securities Laws as then in effect, and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.7 Financial Statements; Minute Books ---------------------------------- The Financial Statements of UCB fairly present or will fairly present, as the case may be, the consolidated financial position of UCB and the UCB Subsidiaries as of the dates indicated and the consolidated results of operations, changes in shareholders' equity and statements of cash flows for the periods then ended (subject, in the case of unaudited interim statements, to normal year-end audit adjustments that are not material in amount or effect) in conformity with generally accepted accounting principles applicable to financial institutions applied on a consistent basis. The minute books of UCB and each of the UCB Subsidiaries contain or will contain at Closing legally sufficient records of all meetings and other corporate actions of its shareholders and Board of Directors (including committees of its Board of Directors). 13 3.8 Material Adverse Change ----------------------- Since December 31, 1995, UCB and the UCB Subsidiaries have not incurred any material liability except as disclosed in the most recent UCB Financial Statements, or entered into any transactions with affiliates, other than in the ordinary course of business consistent with past practices, nor has there been any change, or any event involving a prospective change, in the business, financial condition or results of operations of UCB and the UCB Subsidiaries which has had, or is reasonably likely to have, a Material Adverse Effect on UCB. 3.9 Absence of Undisclosed Liabilities ---------------------------------- Neither UCB nor any UCB Subsidiary has any liability (contingent or otherwise) that is material to UCB on a consolidated basis or that, when combined with all other similar liabilities, would be material to UCB on a consolidated basis, except as disclosed in the most recent Financial Statements of UCB and except for liabilities made in the ordinary course of its business since the date of UCB's most recent Financial Statements. 3.10 Properties ---------- (a) UCB and the UCB Subsidiaries have good and marketable title, free and clear of all liens, encumbrances, charges, defaults or equitable interests, to all of the properties and assets, real and personal, reflected on the consolidated balance sheet included in the Financial Statements of UCB as of December 31, 1995 or acquired after such date, except (i) liens for current taxes not yet due and payable, (ii) pledges to secure deposits and other liens incurred in the ordinary course of banking business, (iii) such imperfections of title, easements and encumbrances, if any, as are not material in character, amount or extent, or (iv) dispositions and encumbrances for adequate consideration in the ordinary course of business. (b) All leases and licenses pursuant to which UCB or any UCB Subsidiary, as lessee or licensee, leases or licenses rights to real or personal property, are valid and enforceable in accordance with their respective terms. 3.11 Environmental Matters --------------------- Except as Disclosed: (a) UCB and the UCB Subsidiaries are in compliance with all Environmental Laws. Neither UCB nor any UCB Subsidiary has received any communication alleging that UCB or the UCB Subsidiary is not in such compliance, and there are no present circumstances that would prevent or interfere with the continuation of such compliance. (b) UCB has not received notice of any pending, and there are no pending or, to the best of UCB's knowledge, threatened, legal, administrative, arbitral or other proceedings, asserting 14 Environmental Claims or other claims, causes of action or governmental investigations of any nature, seeking to impose, or that could result in the imposition of, any liability arising under any Environmental Laws upon (i) UCB or any UCB Subsidiary, (ii) any person or entity whose liability for any Environmental Claim UCB or any UCB Subsidiary has or may have retained or assumed, either contractually or by operation of law, (iii) any real or personal property owned or leased by UCB or any UCB Subsidiary, or any real or personal property which UCB or any UCB Subsidiary has or is judged to have managed or supervised or participated in the management of, or (iv) any real or personal property in which UCB or any UCB Subsidiary holds a security interest securing a loan recorded on the books of UCB or any UCB Subsidiary. Neither UCB nor any UCB Subsidiary is subject to any agreement, order, judgment, decree or memorandum by or with any court, governmental authority, regulatory agency or third party imposing any such liability. (c) UCB and the UCB Subsidiaries are in compliance in all material respects with all recommendations contained in any environmental audits, analyses and surveys relating to all real and personal property owned or leased by UCB or any UCB Subsidiary and all real and personal property which UCB or any UCB Subsidiary has or is judged to have managed or supervised or participated in the management of. (d) There are no past or present actions, activities, circumstances, conditions, events or incidents that could reasonably form the basis of any Environmental Claim or other claim or action or governmental investigation that could result in the imposition of any liability arising under any Environmental Laws against UCB or any UCB Subsidiary or against any person or entity whose liability for any Environmental Claim UCB or any UCB Subsidiary has or may have retained or assumed, either contractually or by operation of law. 3.12 Allowance for Loan Losses ------------------------- The allowance for loan losses reflected on the consolidated balance sheets included in the Financial Statements of UCB is or will be in the opinion of UCB's management adequate in all material respects as of their respective dates, under the requirements of generally accepted accounting principles and applicable regulatory requirements and guidelines as they apply to banks and bank holding companies, to provide for reasonably anticipated losses on outstanding loans net of recoveries. 3.13 Tax Matters ----------- (a) UCB and the UCB Subsidiaries, and each of their predecessors, have timely filed (or requests for extensions have been timely filed and any such extensions have been granted and have not expired) all federal, state and local (and, if applicable, foreign) tax returns required by applicable law to be filed by them (including, without limitation, estimated tax returns, income tax returns, information returns, and withholding and employment tax returns) and have paid, or where payment is not required to have been made, have set up an adequate reserve or accrual for the payment of, all taxes required to be paid in respect of the periods covered by such returns and, as of the Effective 15 Time, will have paid, or where payment is not required to have been made, will have set up an adequate reserve or accrual for the payment of, all taxes for any subsequent periods ending on or prior to the Effective Time. Neither UCB nor any UCB Subsidiary will have any material liability for any such taxes in excess of the amounts so paid or reserves or accruals so established. (b) Except as Disclosed, all federal, state and local (and, if applicable, foreign) tax returns filed by UCB and the UCB Subsidiaries are complete and accurate in all material respects. Neither UCB nor any UCB Subsidiary is delinquent in the payment of any tax, assessment or governmental charge. No deficiencies for any tax, assessment or governmental charge have been proposed, asserted or assessed (tentatively or otherwise) against UCB or any UCB Subsidiary which have not been settled and paid. There are currently no agreements in effect with respect to UCB or any UCB Subsidiary to extend the period of limitations for the assessment or collection of any tax. No audit examination or deficiency or refund litigation with respect to such returns is pending. 3.14 Employees; Compensation; Benefit Plans. -------------------------------------- (a) Compensation. UCB shall have Disclosed a complete and correct ------------ list of the name, age, position, rate of compensation and any incentive compensation arrangements, bonuses or commissions or fringe or other benefits, whether payable in cash or in kind, of each director, shareholder, independent contractor, consultant and agent of UCB and of each UCB Subsidiary and each other person (other than an employee as such) to whom UCB or any UCB Subsidiary pays or provides, or has an obligation, agreement (written or unwritten), policy or practice of paying or providing, retirement, health, welfare or other benefits of any kind or description whatsoever. (b) Employee Benefit Plans. ---------------------- (i) UCB shall have Disclosed an accurate and complete list of all Plans, as defined below, contributed to, maintained or sponsored by UCB or any UCB Subsidiary, to which UCB or any UCB Subsidiary is obligated to contribute or has any liability or potential liability, whether direct or indirect, including all Plans contributed to, maintained or sponsored by each member of the controlled group of corporations, within the meaning of Sections 414(b), 414(c), 414(m) and 414(o) of the Code, of which UCB or any UCB Subsidiary is a member. For purposes of this Agreement, the term "Plan" shall mean a plan, arrangement, agreement or program described in the foregoing provisions of this Section 3.14(b)(i) and which is: (A) a profit-sharing, deferred compensation, bonus, stock option, stock purchase, pension, retainer, consulting, retirement, severance, welfare or incentive plan, agreement or arrangement, whether or not funded and whether or not terminated, (B) an employment agreement, (C) a personnel policy or fringe benefit plan, policy, program or arrangement providing for benefits or perquisites to current or former employees, officers, directors or agents, whether or not funded, and whether or not terminated, including without limitation benefits relating to automobiles, clubs, vacation, child care, parenting, sabbatical, sick leave, 16 severance, medical, dental, hospitalization, life insurance and other types of insurance, or (D) any other employee benefit plan as defined in Section 3(3) of ERISA, whether or not funded and whether or not terminated. (ii) Except as Disclosed, neither UCB nor any UCB Subsidiary contributes to, has an obligation to contribute to or otherwise has any liability or potential liability with respect to (A) any multiemployer plan as defined in Section 3(37) of ERISA, (B) any plan of the type described in Sections 4063 and 4064 of ERISA or in section 413 of the Code (and regulations promulgated thereunder), or (C) any plan which provides health, life insurance, accident or other "welfare-type" benefits to current or future retirees or former employees or directors, their spouses or dependents, other than in accordance with Section 4980B of the Code or applicable state continuation coverage law. (iii) Except as Disclosed, none of the Plans obligates UCB or any UCB Subsidiary to pay separation, severance, termination or similar-type benefits solely as a result of any transaction contemplated by this Agreement or solely as a result of a "change in control," as such term is used in Section 280G of the Code (and regulations promulgated thereunder). (iv) Each Plan has been maintained, funded and administered in compliance in all respects with its own terms and in compliance in all respects with all applicable laws and regulations, including but not limited to ERISA and the Code. No actions, suits, claims, complaints, charges, proceedings, hearings, examinations, investigations, audits or demands with respect to the Plans (other than routine claims for benefits) are pending or threatened, and there are no facts which could give rise to or be expected to give rise to any actions, suits, claims, complaints, charges, proceedings, hearings, examinations, investigations, audits or demands. No Plan that is subject to the funding requirements of Section 412 of the Code or Section 302 of ERISA has incurred any "accumulated funding deficiency" as such term is defined in such Sections of ERISA and the Code, whether or not waived, and each Plan has always fully met the funding standards required under Title I of ERISA and Section 412 of the Code. No liability to the Pension Benefit Guaranty Corporation ("PBGC") (except for routine payment of premiums) has been or is expected to be incurred with respect to any Plan that is subject to Title IV of ERISA, no reportable event (as such term is defined in Section 4043 of ERISA) has occurred with respect to any such Plan, and the PBGC has not commenced or threatened the termination of any Plan. None of the assets of UCB or any UCB Subsidiary is the subject of any lien arising under Section 302(f) of ERISA or Section 412(n) of the Code, 17 neither UCB nor any UCB Subsidiary has been required to post any security pursuant to Section 307 of ERISA or Section 401(a)(29) of the Code, and there are no facts which could be expected to give rise to such lien or such posting of security. No event has occurred and no condition exists that would subject UCB or any UCB Subsidiary to any tax under Sections 4971, 4972, 4977 or 4979 of the Code or to a fine or penalty under Section 502(c) of ERISA. (v) Each Plan that is intended to be qualified under Section 401(a) of the Code, and each trust (if any) forming a part thereof, has received a favorable determination letter from the Internal Revenue Service as to the qualification under the Code of such Plan and the tax exempt status of such related trust, and nothing has occurred since the date of such determination letter that could adversely affect the qualification of such Plan or the tax exempt status of such related trust. (vi) No underfunded "defined benefit plan" (as such term is defined in Section 3(35) of ERISA) has been, during the five years preceding the Closing Date, transferred out of the controlled group of corporations (within the meaning of Sections 414(b), (c), (m) and (o) of the Code) of which UCB or any UCB Subsidiary is a member or was a member during such five-year period. (vii) As of the Closing Date, the fair market value of the assets of each Plan that is a tax qualified defined benefit plan equals or exceeds the present value of all vested and non-vested liabilities thereunder determined in accordance with reasonable actuarial methods, factors and assumptions applicable to a defined benefit plan on an ongoing basis. With respect to each Plan that is subject to the funding requirements of Section 412 of the Code and Section 302 of ERISA, all required contributions for all periods ending prior to or as of the Closing Date (including periods from the first day of the then-current plan year to the Closing Date and including all quarterly contributions required in accordance with Section 412(m) of the Code) shall have been made. With respect to each other Plan, all required payments, premiums, contributions, reimbursements or accruals for all periods ending prior to or as of the Closing Date shall have been made. No tax qualified Plan has any material unfunded liabilities. (viii) No prohibited transaction (which shall mean any transaction prohibited by Section 406 of ERISA and not exempt under Section 408 of ERISA or Section 4975 of the Code, whether by statutory, class or individual exemption) has occurred with respect to any Plan which would result in the 18 imposition, directly or indirectly, of any excise tax, penalty or other liability under Section 4975 of the Code or Section 409 or 502(i) of ERISA. Neither UCB, nor to the best knowledge of UCB any UCB Subsidiary, nor any trustee, administrator or other fiduciary of any Plan, nor to the best knowledge of UCB any agent of any of the foregoing has engaged in any transaction or acted or failed to act in a manner which could subject UCB or any UCB Subsidiary to any material liability for breach of fiduciary duty under ERISA or any other applicable law. (ix) With respect to each Plan, all reports and information required to be filed with any government agency or distributed to Plan participants and their beneficiaries have been duly and timely filed or distributed. (x) UCB and each UCB Subsidiary has been and is presently in compliance with all of the requirements of Section 4980B of the Code. (xi) Neither UCB nor any UCB Subsidiary has a liability as of December 31, 1995, under any Plan that, to the extent disclosure is required under generally accepted accounting principles, is not reflected on the consolidated balance sheet included in the Financial Statements of UCB as of December 31, 1995 or otherwise Disclosed. (xii) Neither the consideration nor implementation of the transactions contemplated under this Agreement will increase (A) UCB's or any UCB Subsidiary's obligation to make contributions or any other payments to fund benefits accrued under the Plans as of the date of this Agreement or (B) the benefits accrued or payable with respect to any participant under the Plans (except to the extent benefits may be deemed increased by accelerated vesting). (xiii) With respect to each Plan, UCB has Disclosed or made available true, complete and correct copies of (A) all documents pursuant to which the Plans are maintained, funded and administered, including summary plan descriptions, (B) the three most recent annual reports (Form 5500 series) filed with the Internal Revenue Service (with attachments), (C) the three most recent actuarial reports, if any, (D) the three most recent financial statements, (E) all governmental filings for the last three years, including without limitation, excise tax returns and reportable events filings, and (F) all governmental rulings, determinations, and opinions (and pending requests for governmental rulings, determinations, and opinions) during the past three years. 19 3.15 Certain Contracts ----------------- (a) Except as Disclosed, neither UCB nor any UCB Subsidiary is a party to, is bound or affected by, or receives benefits under (i) any agreement, arrangement or commitment, the default of which would have a Material Adverse Effect, whether or not made in the ordinary course of business (other than loans or loan commitments made or certificates or deposits received in the ordinary course of the banking business), or any agreement restricting its business activities, including without limitation agreements or memoranda of understanding with regulatory authorities, (ii) any agreement, indenture or other instrument relating to the borrowing of money by UCB or any UCB Subsidiary or the guarantee by UCB or any UCB Subsidiary of any such obligation, which cannot be terminated within less than 30 days after the Closing Date by UCB or any UCB Subsidiary (without payment of any penalty or cost, except with respect to Federal Home Loan Bank advances), (iii) any agreement, arrangement or commitment relating to the employment of a consultant or the employment, election or retention in office of any present or former director or officer, which cannot be terminated within less than 30 days after the Closing Date by UCB or any UCB Subsidiary (without payment of any penalty or cost), or that provides benefits which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving UCB of the nature contemplated by this Agreement or the SNC Option Agreement, (iv) any contract, agreement or understanding with a labor union, in each case whether written or oral, or (v) any agreement or plan, including any stock option plan, stock appreciation rights plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the SNC Option Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement or the SNC Option Agreement. Each agreement, arrangement and commitment Disclosed pursuant to this Section 3.15(a) is in full force and effect. (b) Neither UCB nor any UCB Subsidiary is in default, which default would have a Material Adverse Effect or would adversely affect the transactions contemplated herein, under any agreement, commitment, arrangement, lease, insurance policy, or other instrument, whether entered into in the ordinary course of business or otherwise and whether written or oral, and there has not occurred any event that, with the lapse of time or giving of notice or both, would constitute such a default. 3.16 Legal Proceedings; Regulatory Approvals --------------------------------------- There are no actions, suits, claims, governmental investigations or proceedings instituted, pending or threatened against UCB or any UCB Subsidiary or against any asset, interest, or right of UCB or any UCB Subsidiary, or against any officer, director or employee of any of them that in any such case, if decided adversely, would reasonably be expected to have a Material Adverse Effect. There are no actions, suits or proceedings instituted, pending or threatened against any present or former director or officer of UCB or any UCB Subsidiary that would reasonably be expected to give rise to a claim against UCB or any UCB Subsidiary for indemnification. There are no actual or 20 threatened actions, suits or proceedings which present a claim to restrain or prohibit the transactions contemplated herein or in the SNC Option Agreement. To the best knowledge of UCB, no fact or condition relating to UCB or any UCB Subsidiary exists (including without limitation noncompliance with the CRA) that would prevent UCB or SNC from obtaining all of the federal and state regulatory approvals contemplated herein. 3.17 Compliance with Laws -------------------- Each of UCB and each UCB Subsidiary is in compliance in all material respects with all statutes and regulations (including, but not limited to, the CRA, TILA and regulations promulgated thereunder, and other consumer banking laws) applicable and material to the conduct of its business, and neither UCB nor any UCB Subsidiary has received notification that has not lapsed, been withdrawn or abandoned by any agency or department of federal, state or local government (i) asserting a violation or possible violation of any such statute or regulation which violation would reasonably be expected to have a Material Adverse Effect on UCB, (ii) threatening to revoke any license, franchise, permit or government authorization, or (iii) restricting or in any way limiting its operations. Neither UCB nor any UCB Subsidiary is subject to any regulatory or supervisory cease and desist order, agreement, directive, memorandum of understanding or commitment, and none of them has received any communication requesting that it enter into any of the foregoing. 3.18 Brokers and Finders ------------------- Neither UCB nor any UCB Subsidiary, nor any of their respective officers, directors or employees, has employed any broker, finder or financial advisor or incurred any liability for any fees or commissions in connection with the transactions contemplated herein, in the Plan of Merger or in the SNC Option Agreement, except for fees to accountants and lawyers and an obligation to Wheat First Butcher Singer as Disclosed for investment banking services. 3.19 Loans ----- To the best of UCB's knowledge, substantially all of the loans on the books and records of the UCB Subsidiaries are valid and properly documented. Neither the terms of such loans, nor any of the loan documentation, nor the manner in which such loans have been administered and serviced, violates in any material respect any federal, state or local law, rule, regulation or ordinance applicable thereto, including without limitation, the TILA, Regulations O and Z of the Federal Reserve Board, the CRA, the Equal Credit Opportunity Act, as amended, and state laws, rules and regulations relating to consumer protection, installment sales and usury. 3.20 Repurchase Agreements --------------------- With respect to all agreements currently outstanding pursuant to which UCB or any UCB Subsidiary has purchased securities subject to an agreement to resell, UCB or the UCB Subsidiary has a valid, perfected first lien or security interest in the securities or other collateral securing such 21 agreement, and the value of such collateral equals or exceeds the amount of the debt secured thereby. With respect to all agreements currently outstanding pursuant to which UCB or any UCB Subsidiary has sold securities subject to an agreement to repurchase, neither UCB nor the UCB Subsidiary has pledged collateral materially in excess of the amount of the debt secured thereby. Neither UCB nor any UCB Subsidiary has pledged collateral materially in excess of the amount required under any interest rate swap or other similar agreement currently outstanding. 3.21 Deposit Accounts ---------------- The deposit accounts of the UCB Subsidiaries that are insured depository institutions are insured by the FDIC to the maximum extent permitted by federal law, and the UCB Subsidiaries have paid all premiums and assessments and filed all reports required to have been paid or filed under the FDIA. 3.22 Related Party Transactions -------------------------- UCB has Disclosed all transactions, investments and loans, including loan guarantees, to which UCB or any UCB Subsidiary is a party with any director, executive officer or 5% shareholder of UCB or any person, corporation, or enterprise controlling, controlled by or under common control with any of the foregoing. All such transactions, investments and loans are on terms no less favorable to UCB than could be obtained from unrelated parties. 3.23 Certain Information ------------------- When the Joint Proxy Statement/Prospectus is mailed, and at the time of the meeting of shareholders of UCB to vote upon the Plan of Merger, the Joint Proxy Statement/Prospectus and all amendments or supplements thereto, with respect to all information set forth therein provided by UCB, (i) shall comply in all material respects with the applicable provisions of the Securities Laws, and (ii) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. 3.24 Accounting, Tax and Regulatory Matters -------------------------------------- Neither UCB nor any UCB Subsidiary has taken or agreed to take any action which would or could reasonably be expected to (i) cause the business combination contemplated hereby not to be accounted for as a pooling-of- interests (except to the extent actions taken pursuant to the terms of this Agreement could have such affect) or not to constitute a reorganization under Section 368 of the Code, or (ii) materially impede or delay receipt of any consents of regulatory authorities referred to in Section 5.4(b) or result in failure of the condition in Section 6.3(b). 22 3.25 State Takeover Laws ------------------- UCB and each UCB Subsidiary have taken all necessary action to exempt the transactions contemplated by this Agreement from any applicable moratorium, fair price, business combination, control share or other anti-takeover laws included in Sections 55-9-101 et seq. and 55-9A-01 et seq. of the NCBCA. 3.26 Derivatives Contracts --------------------- Neither UCB nor any UCB Subsidiary is a party to or has agreed to enter into an exchange-traded or over-the-counter swap, forward, future, option, cap, floor, or collar financial contract, or any other interest rate or foreign currency protection contract not included on its balance sheets in the Financial Statements, which is a financial derivative contract (including various combinations thereof), except as Disclosed. 3.27 Fairness Opinion ---------------- UCB has received from Wheat First Butcher Singer an opinion that, as of November 1, 1996, the Exchange Ratio is fair to the shareholders of UCB from a financial point of view. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SNC SNC represents and warrants to UCB as follows: 4.1 Capital Structure of SNC ------------------------ The authorized capital stock of SNC consists of (i) 5,000,000 shares of preferred stock, par value $5.00 per share, of which no shares are issued and outstanding, and (ii) 300,000,000 shares of SNC Common Stock, of which 109,112,010 shares were issued and outstanding on September 30, 1996. All outstanding shares of SNC Common Stock have been duly authorized and are validly issued, fully paid and nonassessable. The shares of SNC Common Stock reserved as provided in Section 5.3 are free of any Rights and have not been reserved for any other purpose, and such shares are available for issuance as provided pursuant to the Plan of Merger. Holders of SNC Common Stock do not have preemptive rights. 4.2 Organization, Standing and Authority of SNC ------------------------------------------- SNC is a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina, with full corporate power and authority to carry on its business as now conducted and to own, lease and operate its assets, and is duly qualified to do business in the 23 states of the United States where its ownership or leasing of property or the conduct of its business requires such qualification and where failure to so qualify would have a Material Adverse Effect. SNC is registered as a bank holding company under the Bank Holding Company Act. 4.3 Authorized and Effective Agreement ---------------------------------- (a) SNC has all requisite corporate power and authority to enter into and (subject to receipt of all necessary government approvals and receipt of required approval of shareholders of SNC of this Agreement and the Plan of Merger) perform all of its obligations under this Agreement, the SNC Option Agreement and the UCB Option Agreement. The execution and delivery of this Reorganization Agreement, the Articles of Merger and said Option Agreements, and consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action in respect thereof on the part of SNC, except in the case of this Agreement and the Plan of Merger, the approval of SNC shareholders pursuant to and to the extent required by applicable law or regulation. This Agreement and the Plan of Merger attached hereto constitute legal, valid and binding obligations of SNC, and each is enforceable against SNC in accordance with its terms, in each case subject to (i) bankruptcy, insolvency, moratorium, reorganization, conservatorship, receivership or other similar laws in effect from time to time relating to or affecting the enforcement of the rights of creditors; and (ii) general principles of equity, and except that the availability of remedies or injunctive relief is within the discretion of the appropriate court. (b) Neither the execution and delivery of this Agreement, the SNC Option Agreement or the UCB Option Agreement, nor consummation of the transactions contemplated hereby or thereby, nor compliance by SNC with any of the provisions hereof or thereof shall (i) conflict with or result in a breach of any provision of the articles of incorporation or bylaws of SNC or any SNC Subsidiary, (ii) constitute or result in a breach of any term, condition or provision of, or constitute a default under, or give rise to any right of termination, cancellation or acceleration with respect to, or result in the creation of any lien, charge or encumbrance upon any property or asset of SNC or any SNC Subsidiary pursuant to any note, bond, mortgage, indenture, license, agreement or other instrument or obligation, which would have a material adverse effect on the business, operations or financial condition of SNC and the SNC Subsidiaries taken as a whole, or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to SNC or any SNC Subsidiary. 4.4 Organization, Standing and Authority of SNC Subsidiaries -------------------------------------------------------- Each of the SNC Subsidiaries is duly organized, validly existing and in good standing under applicable laws. SNC owns, directly or indirectly, all of the stock of each of the SNC Subsidiaries. Each of the SNC Subsidiaries (i) has full power and authority to carry on its business as now conducted and (ii) is duly qualified to do business in the states of the United States and foreign jurisdictions where its ownership or leasing of property or the conduct of its business requires such qualification and where failure to so qualify would have a Material Adverse Effect on SNC. 24 4.5 Securities Documents -------------------- SNC (and BB&T Financial Corporation prior to its merger with SNC) has timely filed all Securities Documents required by the Securities Laws since December 31, 1993. As of their respective dates of filing, such Securities Documents complied in all material respects with the Securities Laws as then in effect, and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.6 Financial Statements -------------------- The Financial Statements of SNC fairly present or will fairly present, as the case may be, the consolidated financial position of SNC and the SNC Subsidiaries as of the dates indicated and the consolidated results of operations, changes in shareholders' equity and changes in cash flows for the periods then ended (subject, in the case of unaudited interim statements, to normal year-end audit adjustments that are not material in amount or effect) in conformity with generally accepted accounting principles applicable to financial institutions applied on a consistent basis. 4.7 Material Adverse Change ----------------------- Since December 31, 1995, SNC and the SNC Subsidiaries have not incurred any material liability except as disclosed on the most recent SNC Financial Statements, or entered into any transactions with affiliates, other than in the ordinary course of business consistent with past practices, nor has there been any change, or any event involving a prospective change, in the business, financial condition or results of operations of SNC and the SNC Subsidiaries which has had, or is reasonably likely to have, a Material Adverse Effect on SNC. 4.8 Legal Proceedings; Regulatory Approvals --------------------------------------- There are no actions, suits, claims, governmental investigations or proceedings instituted, pending or threatened against SNC or any SNC Subsidiary or against any asset, interest, or right of SNC or any SNC Subsidiary, or against any officer, director or employee of any of them that in any such case, if decided adversely, would reasonably be expected to have a Material Adverse Effect. There are no actions, suits or proceedings instituted, pending or threatened against any present or former director or officer of SNC or any SNC Subsidiary that would reasonably be expected to give rise to a claim against SNC or any SNC Subsidiary for indemnification. There are no actual or threatened actions, suits or proceedings which present a claim to restrain or prohibit the transactions contemplated herein, in the Plan of Merger or the UCB Option Agreement. To the best knowledge of SNC, no fact or condition relating to SNC or any SNC Subsidiary exists (including without limitation noncompliance with the CRA) that would prevent UCB or SNC from obtaining all of the federal and state regulatory approvals contemplated herein. 25 4.9 Absence of Undisclosed Liabilities ---------------------------------- Neither SNC nor any of the SNC Subsidiaries has any liability (contingent or otherwise) that is material to SNC on a consolidated basis or that, when combined with all similar liabilities, would be material to SNC on a consolidated basis, except as disclosed in the Financial Statements of SNC and except for liabilities made in the ordinary course of its business since the date of SNC's most recent Financial Statements. 4.10 Allowance for Loan Losses ------------------------- The allowance for loan losses reflected on the consolidated balance sheets included in the Financial Statements of SNC is or will be in the opinion of SNC's management adequate in all material respects as of their respective dates, under the requirements of generally accepted accounting principles and applicable regulatory requirements and guidelines as they apply to banks and bank holding companies, to provide for reasonably anticipated losses on outstanding loans net of recoveries. 4.11 Tax Matters ----------- (a) SNC and the SNC Subsidiaries, and each of their predecessors, has timely filed all federal, state and local (and, if applicable, foreign) tax returns required by applicable law to be filed by them (including, without limitation, estimated tax returns, income tax returns, information returns, and withholding and employment tax returns) and have paid, or have set up an adequate reserve or accrual for the payment of, all taxes required to be paid as shown on such returns and, as of the Effective Time, will have paid, or where payment is not required to have been made, will have set up an adequate reserve or accrual for the payment of, all taxes for any subsequent periods ending on or prior to the Effective Time. SNC will not, to SNC's knowledge, have any material liability for any such taxes in excess of the amounts so paid or reserves or accruals so established. (b) All federal, state and local (and, if applicable, foreign) tax returns filed by SNC and the SNC Subsidiaries are complete and accurate in all material respects. Neither SNC nor any SNC Subsidiary is delinquent in the payment of any tax, assessment or governmental charge, and has not failed to file any tax return which is currently past due. No deficiencies for any tax, assessment or governmental charge have been proposed, asserted or assessed (tentatively or otherwise) against SNC or any SNC Subsidiary which have not been settled and paid. There currently are no agreements in effect with respect to SNC or any SNC Subsidiary to extend the period of limitations for the assessment or collection of any tax. 4.12 Compliance with Laws -------------------- Each of SNC and the SNC Subsidiaries is in compliance with all statutes and regulations (including, but not limited to, the CRA, TILA and regulations promulgated thereunder and other consumer banking laws) applicable and material to the conduct of its business, and neither SNC nor 26 any of the SNC Subsidiaries has received any notification that has not lapsed, been withdrawn or abandoned from any agency or department of federal, state or local government (i) asserting a violation or possible violation of any such statute or regulation, and which violation would reasonably likely have a Material Adverse Effect on SNC, (ii) threatening to revoke any license, franchise, permit or government authorization, or (iii) restricting or in any way limiting its operations. Neither SNC nor any of the SNC Subsidiaries is subject to any regulatory or supervisory cease and desist order, agreement, directive or memorandum of understanding, and none of them has received any communication requesting that they enter into any of the foregoing. 4.13 Certain Information ------------------- When the Joint Proxy Statement/Prospectus is mailed, and at all times subsequent to such mailing up to and including the time of the meeting of shareholders of SNC to vote on the Merger, the Joint Proxy Statement/Prospectus and all amendments or supplements thereto, with respect to all information set forth therein relating to SNC, (i) shall comply in all material respects with the applicable provisions of the Securities Laws, and (ii) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. 4.14 Accounting, Tax and Regulatory Matters -------------------------------------- Neither SNC nor the SNC Subsidiaries have taken or agreed to take any action which would or could reasonably be expected to (i) cause the business combination contemplated hereby not to be accounted for as a pooling of interests or not to constitute a reorganization under Section 368 of the Code, or (ii) materially impede or delay receipt of any consents of regulatory authorities referred to in Section 5.4(b) or result in failure of the condition in Section 6.3(b). 4.15 Share Ownership --------------- As of the date of this Agreement, SNC does not own (except in a fiduciary capacity) any shares of UCB Common Stock. ARTICLE V COVENANTS 5.1 Shareholders' Meetings ---------------------- UCB shall submit this Reorganization Agreement and the Plan of Merger to its shareholders for approval at a meeting to be held as soon as practicable, and by approving execution of this Agreement the Board of Directors of UCB agrees that it shall, at the time the Joint Proxy Statement/Prospectus is mailed to the shareholders of UCB, recommend that UCB's shareholders vote for such approval; provided, that the Board of Directors of UCB may withdraw or refuse to make such recommendation only if the Board of Directors shall determine in good faith that such 27 recommendation would violate its fiduciary duty to its shareholders following (i) the consideration of written advice of legal counsel that making such recommendation or the failure to withdraw or modify such recommendation would constitute a breach of the fiduciary duties of such Board to shareholders of UCB, and (ii) the withdrawal by Wheat First Butcher Singer in writing of its opinion referred to in Section 3.27 or delivering to the UCB Board of Directors of written advice from Wheat First Butcher Singer that the Exchange Ratio is not fair or is inadequate to the shareholders of UCB from a financial point of view. SNC shall submit this Reorganization Agreement and the Plan of Merger to its shareholders for approval at a meeting to be held as soon as practicable, and by approving execution of this Agreement the Board of Directors of SNC agrees that it shall, at the time the Joint Proxy Statement/Prospectus is mailed to the shareholders of SNC, recommend that SNC's shareholders vote for such approval. 5.2 Registration Statement; Joint Proxy Statement/Prospectus -------------------------------------------------------- As promptly as practicable after the date hereof, SNC shall prepare and file the Registration Statement with the Commission. UCB will furnish to SNC the information required to be included in the Registration Statement with respect to its business and affairs before it is filed with the Commission and again before any amendments are filed, and shall have the right to review and consult with SNC on the form of, and any characterizations of such information included in, the Registration Statement prior to the filing with the Commission. SNC shall use its best efforts to cause such Registration Statement to be declared effective under the Securities Act. Such Registration Statement, at the time it becomes effective and on the Effective Time, shall in all material respects conform to the requirements of the Securities Act and the applicable rules and regulations of the Commission. SNC shall take all actions required to register or obtain exemptions from such registration for the SNC Common Stock to be issued in connection with the transactions contemplated by this Agreement and the Plan of Merger under applicable state "Blue Sky" securities laws, as appropriate. The Registration Statement shall include the form of Joint Proxy Statement/Prospectus. SNC and UCB shall use their best efforts to cause the Joint Proxy Statement/Prospectus to be approved by the SEC for mailing to the UCB and SNC shareholders, and such Joint Proxy Statement/Prospectus shall, on the date of mailing, conform in all material respects to the requirements of the Securities Laws and the applicable rules and regulations of the SEC thereunder. SNC and UCB shall cause the Joint Proxy Statement/Prospectus to be mailed to shareholders in accordance with all applicable notice requirements under the Securities Laws and the NCBCA. 5.3 Plan of Merger; Reservation of Shares ------------------------------------- At the Effective Time, the Merger shall be effected in accordance with the Plan of Merger. In this connection, SNC undertakes and agrees to pay or cause to be paid when due the number of shares of SNC Common Stock to be distributed pursuant to Section 2.7 and any cash required to be paid for fractional shares. SNC has reserved for issuance such number of shares of SNC Common Stock as shall be necessary to pay the consideration to be distributed to the UCB shareholders as contemplated in Section 2.8, required in connection with the UCB Option Agreement, and as 28 otherwise required herein. If at any time the aggregate number of shares of SNC Common Stock available for issuance hereunder shall not be sufficient to effect the Merger, SNC shall take all appropriate action as may be required to increase the amount of the authorized SNC Common Stock. 5.4 Additional Acts --------------- (a) UCB agrees to cooperate in taking such actions as may be reasonably necessary to modify the structure of, or to substitute parties to (so long as such substitute is SNC or a SNC Subsidiary) the transactions contemplated hereby, provided that such modifications do not adversely affect the economic benefits of such transactions or otherwise abrogate the covenants and other agreements contained in this Agreement. (b) As promptly as practicable after the date hereof, SNC and UCB shall submit notice or applications for prior approval of the transactions contemplated herein to the Federal Reserve Board, and any other federal, state or local government agency, department or body to which notice is required or from which approval is required for consummation of the Merger and the other transactions contemplated hereby. UCB and SNC each represents and warrants to the other that all information concerning it and its directors, officers and shareholders and concerning any SNC Subsidiary included (or submitted for inclusion) in any such application shall be true, correct and complete in all material respects as of the date presented. 5.5 Best Efforts ------------ SNC and UCB shall use, and shall cause each of their respective Subsidiaries to use, its best efforts in good faith to (i) furnish such information as may be required in connection with and otherwise cooperate in the preparation and filing of the documents referred to in Sections 5.2 and 5.4 or elsewhere herein, and (ii) take or cause to be taken all action necessary or desirable on its part to fulfill the conditions in Article VI and to consummate the transactions herein contemplated at the earliest practicable date. Neither SNC nor UCB shall take, or cause, or to the best of its ability permit to be taken, any action that would substantially delay or impair the prospects of completing the Merger pursuant to this Agreement and the Plan of Merger. 5.6 Certain Accounting Matters -------------------------- UCB shall cooperate with SNC concerning accounting and financial matters necessary or appropriate to facilitate the Merger (taking into account SNC's policies, practices and procedures), including without limitation issues arising in connection with record keeping, loan classification, valuation adjustments, levels of loan loss reserves and other accounting practices. 5.7 Access to Information --------------------- UCB and the UCB Subsidiaries will keep SNC advised, and SNC and the SNC Subsidiaries will keep UCB advised, of all material developments relevant to their business and to consummation 29 of the Merger. Upon reasonable notice, UCB and the UCB Subsidiaries shall afford to representatives of SNC, and SNC and the SNC Subsidiaries shall afford to representatives of UCB, access, during normal business hours during the period prior to the Effective Time, to all of their respective properties, books, contracts, commitments and records and, during such period, shall make available all information concerning their business as may be reasonably requested. No investigation pursuant to this Section 5.7 shall affect or be deemed to modify any representation or warranty made by, or the conditions to the obligations hereunder of, either party hereto. As of the date hereof, UCB and SNC have entered into confidentiality agreements relating to the information to be provided pursuant to this Agreement. 5.8 Press Releases -------------- SNC and UCB shall agree with each other as to the form and substance of any press release related to this Agreement and the Plan of Merger or the transactions contemplated hereby and thereby, and consult with each other as to the form and substance of other public disclosures related thereto; provided, that nothing contained herein shall prohibit either party, following notification to the other party, from making any disclosure which in the opinion of its counsel is required by law. 5.9 Forbearances of UCB ------------------- Except with the prior written consent of SNC, between the date hereof and the Effective Time, UCB shall not, and shall cause each of the UCB Subsidiaries not to: (a) carry on its business other than in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, or establish or acquire any new Subsidiary or engage in any new activity; (b) declare, set aside, make or pay any dividend or other distribution in respect of its capital stock, other than regularly scheduled quarterly dividends of $.18 per share of UCB Common Stock payable on record dates and in amounts consistent with past practices; provided that any dividend declared or payable on the shares of UCB Common Stock for the quarterly period during which the Effective Time occurs shall, unless otherwise agreed upon in writing by SNC and UCB, be declared with a record date prior to the Effective Time only if the normal record date for payment of the corresponding quarterly dividend to holders of SNC Common Stock is before the Effective Time; (c) issue any shares of its capital stock, except pursuant to the Stock Option Plan and the SNC Option Agreement; (d) issue, grant or authorize any Rights or effect any recapitalization, reclassification, stock dividend, stock split or like change in capitalization; 30 (e) amend its articles of incorporation or bylaws; impose or permit imposition, of any lien, charge or encumbrance on any share of stock held by it in any UCB Subsidiary, or permit any such lien, charge or encumbrance to exist; or waive or release any material right or cancel or compromise any debt or claim other than in the ordinary course of business; (f) merge with any other entity or permit any other entity to merge into it, or consolidate with any other entity; acquire control over any other entity; or liquidate, sell or otherwise dispose of any assets or acquire any assets, other than in the ordinary course of its business consistent with past practices; (g) fail to comply in any material respect with any laws, regulations, ordinances or governmental actions applicable to it and to the conduct of its business; (h) increase the rate of compensation of any of its directors, officers or employees, or pay or agree to pay any bonus to, or provide any other employee benefit or incentive to, any of its directors, officers or employees, except in the ordinary course of business consistent with past practices; (i) enter into or substantially modify (except as may be required by applicable law or regulation) any pension, retirement, stock option, stock purchase, stock appreciation right, savings, profit sharing, deferred compensation, consulting, bonus, group insurance or other employee benefit, incentive or welfare contract, plan or arrangement, or any trust agreement related thereto, in respect of any of its directors, officers or other employees; provided, that this subparagraph shall not prevent renewals of any of the foregoing consistent with past practice, except for contemplated changes in UCB's Flexible Benefit Plan; (j) solicit or encourage inquiries or proposals with respect to, furnish any information relating to, or participate in any negotiations or discussions concerning, any acquisition or purchase of all or a substantial portion of the assets of, or a substantial equity interest in, UCB or any UCB Subsidiary or any business combination with UCB or any UCB Subsidiary other than as contemplated by this Agreement; or authorize any officer, director, agent or affiliate of UCB or any UCB Subsidiary to do any of the above; or fail to notify SNC immediately if any such inquiries or proposals are received, any such information is requested or required, or any such negotiations or discussions are sought to be initiated; provided, that this paragraph (j) shall not apply to furnishing information, negotiations or discussions following an unsolicited offer if, as a result of such offer, UCB is advised in writing by legal counsel that the failure so to furnish information or negotiate would constitute a breach of the fiduciary duties of UCB's Board of Directors to its shareholders; (k) enter into (i) any material agreement, arrangement or commitment not made in the ordinary course of business, (ii) any agreement, indenture or other instrument not made in the ordinary course of business relating to the borrowing of money by UCB or a UCB 31 Subsidiary or guarantee by UCB or a UCB Subsidiary of any obligation, (iii) any agreement, arrangement or commitment relating to the employment or severance of a consultant or the employment, severance, election or retention in office of any present or former director, officer or employee (this clause shall not apply to the election of directors by shareholders in the normal course, and the election of officers by directors in the normal course terminable at will except to the extent otherwise provided in an agreement, arrangement or commitment Disclosed); or (iv) any contract, agreement or understanding with a labor union; (l) change its lending, investment or asset liability management policies in any material respect, except as may be required by applicable law, regulation, or directives, and except that after approval of the Agreement and the Plan of Merger by its shareholders UCB shall cooperate in good faith with SNC to adopt policies, practices and procedures consistent with those utilized by SNC, effective on or before the Closing Date; (m) change its methods of accounting in effect at December 31, 1995, except as required by changes in generally accepted accounting principles concurred in by SNC's independent certified public accountants, which concurrence shall not be unreasonably withheld, or change any of its methods of reporting income and deductions for federal income tax purposes from those employed in the preparation of its federal income tax returns for the year ended December 31, 1995, except as required by changes in law or regulation; (n) incur any commitments for capital expenditures or obligation to make capital expenditures in excess of $250,000, for any one expenditure, or $2,000,000, in the aggregate; (o) incur any indebtedness other than deposits from customers or otherwise in the ordinary course of business; (p) take any action which would or could reasonably be expected to (i) cause the business combination contemplated hereby not to be accounted for as a pooling of interests or not to constitute a reorganization under Section 368 of the Code, in either case as determined by SNC, (ii) result in any inaccuracy of a representation or warranty herein which would allow for a termination of this Agreement, or (iii) cause any of the conditions precedent to the transactions contemplated by this Agreement to fail to be satisfied; (q) dispose of any material assets other than in the ordinary course of business; or (r) agree to do any of the foregoing. 5.10 Employment Agreements --------------------- 32 SNC shall enter into employment agreements with those UCB employees and on the terms as agreed by SNC and UCB prior to the date hereof, which shall supersede presently existing employment agreements. 5.11 Affiliates ---------- UCB shall use reasonable efforts to cause all persons who are affiliates of UCB to deliver to SNC promptly following this Agreement a written agreement providing that such person will not dispose of SNC Common Stock received in the Merger except in compliance with the Securities Act and the rules and regulations promulgated thereunder and except as consistent with qualifying the transactions contemplated hereby for pooling of interests accounting treatment, and in any event shall cause such affiliates to deliver to SNC such written agreement prior to the Effective Time. 5.12 Employee Benefit Plans ---------------------- (a) Each employee of UCB and UCB Subsidiaries at the Effective Time (herein "Employee") shall become an employee of SNC or a SNC Subsidiary immediately following the Effective Time, upon substantially the same terms and conditions as in effect immediately preceding the Effective Time. Each Employee, as an employee of SNC or one of the SNC Subsidiaries shall be eligible to receive bonus or incentive, retirement, severance, group hospitalization, medical, life, disability and other benefits comparable to those provided to similarly situated employees of SNC or the SNC Subsidiary. For purposes of administering all plans and benefits of SNC or a SNC Subsidiary, service with UCB and the UCB Subsidiaries by each Employee shall be deemed to be service with SNC or the SNC Subsidiaries for participation and vesting purposes only (subject to paragraph (c) of this Section 5.12). (b) SNC shall cause the 401(k) plan of UCB to be merged with the 401(k) plan maintained by SNC and the SNC Subsidiaries, and the account balances of the Employees who are participants in the UCB plan shall be transferred to the accounts of such Employees under the SNC 401(k) plan. Following such merger and transfer, such accounts shall be governed and controlled by the terms of the SNC 401(k) plan as in effect from time to time (and subject to SNC's right to terminate such plan). (c) The parties anticipate that SNC shall cause the tax qualified defined benefit pension plan of UCB to be merged with the tax qualified defined benefit plan of SNC. If such merger occurs, the SNC pension plan will provide future benefit accruals under the SNC pension plan for the Employees which will not be less than the benefits which would be accrued under the "fresh start formula without wear away" as described in Treasury Regulation (S) 1.401(a)(4)- 13(c)(4)(i) (that is, the accrued benefit of each Employee who becomes a participant in the SNC pension plan incident to such plan merger will equal the sum of the benefit accrued to the Effective Time under the UCB pension plan plus the future benefit accrued under the SNC pension plan). For purposes of applying the SNC pension plan following such merger, service with UCB of an Employee shall be deemed 33 to be service with SNC for the purposes of determining eligibility and vesting, but not for the purpose of determining benefit accruals following the Effective Time. (d) UCB's Long Term Incentive Plan, Director Deferred Compensation Plan and Triad Bank Long Term Incentive Plan shall be frozen as of the Effective Time, and SNC shall assume as of the Effective Time all obligations under such plans as then accrued. SNC shall following the Effective Time administer such plans in accordance with their respective terms, except that no further rights or benefits shall accrue to participants and no further employees or directors shall be permitted to participate in either or both of such plans. SNC shall assume and continue in effect the UCB Supplemental Retirement Plan for the benefit of current participants therein. 5.13 Directors and Officers Protection --------------------------------- (a) SNC shall indemnify, defend, and hold harmless the present and former directors, officers, employees, and agents of UCB and the UCB Subsidiaries (each, an "Indemnified Party") against all liabilities arising out of actions or omissions arising out of the Indemnified Party's service or services as directors, officers, employees, or agents of UCB or, at UCB's request, of another corporation, partnership, joint venture, trust, or other enterprise occurring at or prior to the Effective Time (including the transactions contemplated by this Agreement) to the fullest extent permitted under North Carolina Law and by UCB's Articles of Incorporation and Bylaws as in effect on the date hereof, whether or not SNC is insured against any such matter. Without limiting the foregoing, in any case in which approval by SNC is required to effectuate any indemnification, SNC shall direct, at the election of the Indemnified Party, that the determination of any such approval shall be made by independent counsel mutually agreed upon between SNC and the Indemnified Party. (b) SNC shall use its reasonable efforts to (i) cause the directors and officers of UCB immediately prior to the Effective Time to be covered under its then existing directors' and officers' liability insurance policy providing full coverage for acts occurring prior to the Effective Time; or (ii) to maintain in effect for a period of three years after the Effective Time UCB's existing directors' and officers' liability insurance policy (provided that SNC may substitute therefor (A) policies of at least the same coverage and amounts containing terms and conditions which are substantially no less advantageous or (B) with the consent of UCB given prior to the Effective Time, any other policy) with respect to claims arising from facts or events which occurred prior to the Effective Time and covering persons who are currently covered by such insurance; provided, that neither SNC nor the Surviving Corporation shall be obligated to make annual premium payments for such three year period in respect of such policy (or coverage replacing such policy) which exceed, for the portion related to UCB's directors and officers, 150% of the annual premium payments on UCB's current policy in effect as of the date of this Agreement (the "Maximum Amount"). If the amount of the premiums necessary to maintain or procure such insurance coverage exceeds the Maximum Amount, SNC shall use its reasonable efforts to maintain the most advantageous policies of directors' and officers' liability insurance obtainable for a premium equal to the Maximum Amount. 34 (c) If SNC or the Surviving Corporation or any successors or assigns shall consolidate with or merge into any other entity and shall not be the continuing or surviving person of such consolidation or merger or shall transfer all or substantially all of its assets to any entity, then and in each case, proper provision shall be made so that the successor and assigns of SNC or the Surviving Corporation shall assume the obligations set forth in this Section 5.13. (d) The provisions of this Section 5.13 are intended to be for the benefit of and shall be enforceable by, each indemnified director and officer and their respective heirs and representatives. 5.14 Forbearances of SNC ------------------- Except with the prior written consent of UCB, which consent shall not be arbitrarily or unreasonably withheld, between the date hereof and the Effective Time, neither SNC nor any SNC Subsidiary shall: (a) exercise the UCB Option Agreement other than in accordance with its terms, or dispose of the shares of UCB Common Stock issuable upon exercise of the option rights conferred thereby other than as permitted or contemplated by the terms thereof; or (b) enter into a merger or other business combination transaction with any other corporation or person in which SNC would not be the surviving or continuing entity after the consummation thereof; (c) sell or lease all or substantially all of the assets and business of any SNC Subsidiary; (d) carry on its business other than in the usual, regular and ordinary course in substantially the same manner as heretofore conducted; (e) fail to comply in any material respect with any laws, regulations, ordinances or governmental actions applicable to it and to the conduct of its business; or (f) take any action which would or might be expected to (i) cause the business combination contemplated hereby not to be accounted for as a pooling- of-interest or not to constitute a reorganization under Section 368 of the Code, (ii) result in any inaccuracy of a representation or warranty herein which would allow for termination of this Agreement, or (iii) cause any of the conditions precedent to the transactions contemplated by this agreement to fail to be satisfied. 5.15 Assumption of Agreement by Acquiror ----------------------------------- It shall be a condition precedent to SNC entering into any agreement whereby SNC shall (i) consolidate with or merge into any other entity and shall not be the continuing or surviving person of such consolidation or merger, or (ii) transfer all or substantially all of its assets to any entity, that 35 proper provision shall be made so that the successor and assigns of SNC shall specifically agree to assume SNC's obligations under this Agreement. 5.16 Reports ------- Each of UCB and SNC shall file (and shall cause the UCB Subsidiaries and the SNC Subsidiaries, respectively, to file), between the date of this Agreement and the Effective Time, all reports required to be filed by it with the Commission and any other regulatory authorities having jurisdiction over such party, and shall deliver to SNC or UCB, as the case may be, copies of all such reports promptly after the same are filed. If financial statements are contained in any such reports filed with the Commission, such financial statements will fairly present the consolidated financial position of the entity filing such statements as of the dates indicated and the consolidated results of operations, changes in shareholders' equity, and cash flows for the periods then ended in accordance with generally accepted accounting procedures (subject in the case of interim financial statements to normal recurring year-end adjustments that are not material). As of their respective dates, such reports filed with the Commission will comply in all material respects with the Securities Laws and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Any financial statements contained in any other reports to a regulatory authority other than the Commission shall be prepared in accordance with requirements applicable to such reports. 5.17 Exchange Listing ---------------- SNC shall use its reasonable efforts to list, prior to the Effective Time, on the NYSE, subject to official notice of issuance, the shares of SNC Common Stock to be issued to the holders of UCB Common Stock pursuant to the Merger, and SNC shall give all notices and make all filings with the NYSE required in connection with the transactions contemplated herein. ARTICLE VI CONDITIONS PRECEDENT 6.1 Conditions Precedent -- SNC and UCB ----------------------------------- The respective obligations of SNC and UCB to effect the transactions contemplated by this Agreement shall be subject to satisfaction or waiver of the following conditions at or prior to the Effective Time: (a) All corporate action necessary to authorize the execution, delivery and performance of this Reorganization Agreement and the Plan of Merger, the UCB Option Agreement and the SNC Option Agreement, and consummation of the transactions contemplated hereby and thereby shall have been duly and validly taken, including without 36 limitation the approval of the shareholders of SNC and UCB of the Agreement and the Plan of Merger, in each case as set forth in Section 2.2; (b) The Registration Statement (including any post-effective amendments thereto) shall be effective under the Securities Act, and SNC shall have received all state securities or "Blue Sky" permits or other authorizations, or confirmations as to the availability of an exemption from registration requirements as may be necessary, and no proceedings shall be pending or to the knowledge of SNC threatened by the Commission or any state "Blue Sky" securities administration to suspend the effectiveness of such Registration Statement; and the SNC Common Stock to be issued as contemplated in the Plan of Merger shall have either been registered or be subject to exemption from registration under applicable state securities laws; (c) The parties shall have received all regulatory approvals required in connection with the transactions contemplated by this Reorganization Agreement, all notice periods and waiting periods required after the granting of any such approvals shall have passed, and all such approvals shall be in effect; (d) None of SNC, any of the SNC Subsidiaries, UCB or any of the UCB Subsidiaries shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the transactions contemplated by this Reorganization Agreement; (e) UCB and SNC shall have received an opinion of SNC's legal counsel, in form and substance satisfactory to UCB and SNC, substantially to the effect that the Merger will constitute one or more reorganizations under Section 368 of the Code and that the shareholders of UCB will not recognize any gain or loss to the extent that such shareholders exchange shares of UCB Common Stock for shares of SNC Common Stock; (f) SNC shall have received letters, dated as of the date of filing of the Registration Statement with the Commission and as of the Effective Time, addressed to SNC, in form and substance reasonably satisfactory to SNC, from Arthur Andersen, LLP to the effect that the transactions contemplated herein will qualify for pooling-of-interest accounting treatment; and (g) The shares of SNC Common Stock issuable pursuant to the Merger shall have been approved for listing on the NYSE, subject to official notice of issuance. 6.2 Conditions Precedent -- UCB --------------------------- The obligations of UCB to effect the transactions contemplated by this Agreement shall be subject to the satisfaction of the following additional conditions at or prior to the Effective Time, unless waived by UCB pursuant to Section 7.4: 37 (a) All representations and warranties of SNC shall be assessed as of the date of this Agreement and as of the Effective Time as though made on and as of the Effective Time (or on the date designated in the case of any representation and warranty which specifically relates to an earlier date), except as otherwise contemplated by this Reorganization Agreement or consented to in writing by UCB. The representations and warranties of SNC set forth in Section 4.1 shall be true and correct (except for inaccuracies which are de minimis in amount). The representations and warranties of SNC set forth in Section 4.14 shall be true and correct in all material respects. There shall not exist inaccuracies in the representations and warranties of SNC set forth in this Agreement (including the representations and warranties set forth in Sections 4.1 and 4.14) such that the aggregate effect of such inaccuracies has, or is reasonably likely to have, a Material Adverse Effect on SNC; provided that, for purposes of this sentence only, those representations and warranties which are qualified by references to "material" or "Material Adverse Effect" shall be deemed not to include such qualifications; (b) SNC shall have performed in all material respects all obligations and complied in all material respects with all covenants required by this Agreement; (c) SNC shall have delivered to UCB a certificate, dated the Closing Date and signed by its Chairman or President or an Executive Vice President, to the effect that the conditions set forth in Sections 6.1(a), 6.1(b), 6.1(c), 6.2(a) and 6.2(b), to the extent applicable to SNC, have been satisfied and that there are no actions, suits, claims, governmental investigations or procedures instituted, pending or, to the best of such officer's knowledge, threatened that reasonably may be expected to have a Material Adverse Effect on SNC or that present a claim to restrain or prohibit the transactions contemplated herein or in the Plan of Merger; (d) UCB shall have received opinions of counsel to SNC in the form reasonably acceptable to UCB's legal counsel; and (e) All approvals of the transactions contemplated herein from the Federal Reserve Board and any other state or federal government agency, department or body, the approval of which is required for the consummation of the Merger, shall have been received and all waiting periods with respect to such approvals shall have expired. 6.3 Conditions Precedent -- SNC --------------------------- The obligations of SNC to effect the transactions contemplated by this Agreement shall be subject to satisfaction of the following additional conditions at or prior to the Effective Time, unless waived by SNC pursuant to Section 7.4: (a) All representations and warranties of UCB shall be assessed as of the date of this Agreement and as of the Effective Time as though made on and as of the Effective Time (or on the date designated in the case of any representation and warranty which specifically relates to an earlier date), except as otherwise contemplated by this Reorganization Agreement or consented to in writing 38 by SNC. The representations and warranties of UCB set forth in Section 3.1 shall be true and correct (except for inaccuracies which are de minimis in amount). The representations and warranties of UCB set forth in Section 3.24 shall be true and correct in all material respects. There shall not exist inaccuracies in the representations and warranties of UCB set forth in this Agreement (including the representations and warranties set forth in Sections 3.1 and 3.24) such that the aggregate effect of such inaccuracies has, or is reasonably likely to have, a Material Adverse Effect on UCB; provided that, for purposes of this sentence only, those representations and warranties which are qualified by references to "material" or "Material Adverse Effect" shall be deemed not to include such qualifications; (b) No regulatory approval shall have imposed any condition or requirement which, in the reasonable opinion of the Board of Directors of SNC, would so materially adversely affect the business or economic benefits to SNC of the transactions contemplated by this Agreement as to render consummation of such transactions inadvisable or unduly burdensome; provided, that (i) SNC has used its reasonable efforts to cause such conditions or restrictions to be removed or modified as appropriate; (ii) notwithstanding the foregoing, in the event that such consent is conditioned or restricted as a result of a regulatory or legal issue resulting from other acquisitions by SNC, whether announced before or after the date of this Agreement, or otherwise unrelated to UCB, SNC shall not be entitled to refuse to consummate the Merger on the basis set forth in this sentence; and (iii) any required disposition of deposits shall be deemed acceptable if the dollar amount of deposits required to be divested does not exceed the upper range of estimates first disclosed to the public by SNC following the execution of this Agreement; (c) UCB shall have performed in all material respects all obligations and complied in all material respects with all covenants required by this Agreement; (d) UCB shall have delivered to SNC a certificate, dated the Closing Date and signed by its Chairman or President, to the effect that the conditions set forth in Sections 6.1(a), 6.1(c), 6.3(a) and 6.3(c), to the extent applicable to UCB, have been satisfied and that there are no actions, suits, claims, governmental investigations or procedures instituted, pending or, to the best of such officer's knowledge, threatened that reasonably may be expected to have a Material Adverse Effect on UCB or that present a claim to restrain or prohibit the transactions contemplated herein or in the Plan of Merger; (e) SNC shall have received opinions of counsel to UCB in the form reasonably acceptable to SNC's legal counsel; (f) SNC shall have received the written agreements from affiliates as specified in Section 5.11; and (g) The holders of no more than 9.0% of the UCB Common Stock shall have given written notice of their intent to demand payment for their shares and shall not have voted for the Merger, pursuant to Article 13 of the NCBCA. 39 ARTICLE VII TERMINATION, WAIVER AND AMENDMENT 7.1 Termination ----------- This Agreement may be terminated: (a) At any time prior to the Effective Time, by the mutual consent in writing of the parties hereto. (b) At any time prior to the Effective Time, by either party (i) in the event of a material breach by the other party of any covenant or agreement contained in this Agreement, or (ii) in the event of an inaccuracy of any representation or warranty of the other party contained in this Agreement, which inaccuracy would provide the nonbreaching party the ability to refuse to consummate the Merger under the applicable standard set forth in Section 6.2(a) in the case of UCB and Section 6.3(a) in the case of SNC; and, in the case of (i) or (ii), if such breach has not been cured by the earlier of 30 days following written notice of such breach to the party committing such breach or the Effective Time. (c) At any time prior to the Effective Time, by either party hereto in writing, if any of the conditions precedent to the obligations of the other party to consummate the transactions contemplated hereby cannot be satisfied or fulfilled prior to the Closing Date, and the party giving the notice is not in breach of any of its representations, warranties, covenants or undertakings herein. (d) At any time, by either party hereto in writing, if any of the applications for prior approval referred to in Section 5.4 are denied, and the time period for appeals and requests for reconsideration has run. (e) At any time, by either party hereto in writing, if the shareholders of SNC or of UCB do not approve the Agreement and the Plan of Merger. (f) At any time following September 30, 1997, by either party hereto in writing, if the Effective Time has not occurred by the close of business on such date, and the party giving the notice is not in breach of any of its representations, warranties, covenants or undertakings herein. (g) At any time prior to 11:59 p.m. on January 10, 1997 by SNC in writing, if SNC determines in its sole good faith judgment, through review of information Disclosed by UCB, the performance of its due diligence or otherwise, that the financial condition, results of operations, business or business prospects of UCB and of the UCB Subsidiaries, taken as a whole, are materially adversely different from SNC's reasonable expectations with respect thereto based on information that has been Disclosed in a Securities Document filed with the Commission since January 1, 1996 and its knowledge of the operations of banks; provided that SNC shall inform UCB upon such 40 termination as to the reasons for SNC's determination; and, provided further, that this Section 7.1(g) shall not limit in any way the due diligence investigation of UCB and the UCB Subsidiaries which SNC may perform or otherwise affect any other rights which SNC has after the date hereof under the terms of this Agreement. (h) By UCB, if its board of directors determines by a vote of a majority of the members of its entire board, at any time during the ten-day period commencing two days after the Determination Date, if either: (A) both of the following conditions are satisfied: (1) the Average Closing Price shall be less than $28.50; and (2) (i) the quotient obtained by dividing the Average Closing Price by $33.50 (such number being referred to herein as the "SNC Ratio") shall be less than (ii) the quotient obtained by dividing the Index Price on the Determination Date by the Index Price on the Starting Date and subtracting 0.15 from the quotient in this clause (A)(2)(ii); or -- (B) the Average Closing Price shall be less than $27.00; subject, however, to the following four sentences. If UCB refuses to consummate the Merger pursuant to this Section 7.1(h), it shall give prompt written notice thereof to SNC, which notice shall specify which of clauses (A) or (B) is applicable (or if both would be applicable, which clause is being invoked); provided, that such notice of election to terminate may be withdrawn at any time within the aforementioned ten-day period. During the five-day period commencing with its receipt of such notice, SNC shall have the option, in the case of a failure to satisfy the condition in clause (A), to elect to increase the Exchange Ratio to equal the quotient obtained by dividing $32.35 by the Average Closing Price. During such five-day period, SNC shall have the option, in the case of a failure to satisfy the condition in clause (B), to elect to increase the Exchange Ratio to equal the quotient obtained by dividing $30.65 by the Average Closing Price. The election contemplated by either of the two preceding sentences shall be made by giving notice to UCB of such election and the revised Exchange Ratio, whereupon no termination shall have occurred pursuant to this Section 7.1(h) and this Agreement shall remain in effect in accordance with its terms (except as the Exchange Ratio shall have been so modified), and any references in this Agreement to "Exchange Ratio" shall thereafter be deemed to refer to the Exchange Ratio as adjusted pursuant to this Section 7.1(h). For purposes of this Section 7.1(h), the following terms shall have the meanings indicated: 41 "Average Closing Price" shall mean the average of the daily closing sales prices per share of SNC Common Stock as reported on the NYSE-Composite Transactions List (as reported by The Wall Street Journal or, if not reported thereby, another authoritative source as chosen by SNC) for the ten consecutive full trading days in which such shares are traded on the NYSE ending at the close of trading on the Determination Date. "Determination Date" shall mean the date on which SNC shall receive consent to the Merger from the Federal Reserve Board. "Index Group" shall mean the 19 bank holding companies listed below, the common stocks of all of which shall be publicly traded and as to which there shall not have been, since the Starting Date and before the Determination Date, any public announcement of a proposal for such company to be acquired or for such company to acquire another company or companies in transactions with a value exceeding 25% of the acquiror's market capitalization. In the event that any such company or companies are removed from the Index Group, the weights (which have been determined based upon the number of shares of outstanding common stock) redistributed proportionately for purposes of determining the Index Price. The 19 bank holding companies and the weights attributed to them are as follows:
Bank Holding Companies % Weighting ----------------------------------- ----------- AmSouth Bancorporation 2.41 Barnett Banks, Inc. 8.12 CoreStates Financial Corp 9.38 Comerica Incorporated 4.56 First Bank System, Inc. 5.75 Fifth Third Bancorp 4.50 First of America Bank Corp. 2.57 Firstar Corporation 3.19 Huntington Bancshares Inc. 6.13 Mellon Bank Corporation 5.49 Mercantile Bancorporation, Inc. 2.55 National City Corporation 9.45 Northern Trust Corporation 2.37 Regions Financial Corporation 2.66 SouthTrust Corporation 4.08 SunTrust Banks, Inc. 9.48
42 Summit Bancorp. 3.89 U.S. Bancorp 6.41 Wachovia Corporation 7.01 Total 100.00% ======
"Index Price" on a given date shall mean the weighted average (weighted in accordance with the factors listed above) of the closing sales prices of the companies composing the Index Group (reported as provided with respect to the Average Closing Price). "Starting Date" shall mean November 1, 1996. If any company belonging to the Index Group or SNC declares or effects a stock dividend, reclassification, recapitalization, split-up, combination, exchange of shares, or similar transaction between the Starting Date and the Determination Date, the prices for the common stock of such company or SNC shall be appropriately adjusted for the purposes of applying this Section 7.1(h). 7.2 Effect of Termination --------------------- In the event this Agreement and the Plan of Merger is terminated pursuant to Section 7.1, both this Agreement and the Plan of Merger shall become void and have no effect, except that (i) the provisions hereof relating to confidentiality and expenses set forth in Sections 5.7 and 8.1, respectively, shall survive any such termination and (ii) a termination pursuant to Section 7.1(b) shall not relieve the breaching party from liability for an uncured breach of the covenant, agreement, understanding, representation or warranty giving rise to such termination. The SNC Option Agreement and the UCB Option Agreement shall be governed by their own terms. 7.3 Survival of Representations, Warranties and Covenants ----------------------------------------------------- All representations, warranties and covenants in this Agreement or the Plan of Merger or in any instrument delivered pursuant hereto or thereto shall expire on, and be terminated and extinguished at, the Effective Time, other than covenants that by their terms are to be performed after the Effective Time, provided that no such representations, warranties or covenants shall be deemed to be terminated or extinguished so as to deprive SNC or UCB (or any director, officer or controlling person thereof) of any defense at law or in equity which otherwise would be available against the claims of any person, including, without limitation, any shareholder or former shareholder of either SNC or UCB, the aforesaid representations, warranties and covenants being material inducements to consummation by SNC and UCB of the transactions contemplated herein. 43 7.4 Waiver ------ Except with respect to any required regulatory approval, each party hereto, by written instrument signed by an executive officer of such party, may at any time (whether before or after approval of the Agreement and the Plan of Merger by the UCB shareholders) extend the time for the performance of any of the obligations or other acts of the other party hereto and may waive (i) any inaccuracies of the other party in the representations or warranties contained in this Agreement, the Plan of Merger or any document delivered pursuant hereto or thereto, (ii) compliance with any of the covenants, undertakings or agreements of the other party, or satisfaction of any of the conditions precedent to its obligations, contained herein or in the Plan of Merger, or (iii) the performance by the other party of any of its obligations set out herein or therein; provided that no such extension or waiver, or amendment or supplement pursuant to Section 7.5, executed after approval by the UCB shareholders of this Agreement and the Plan of Merger shall reduce either the number of shares of SNC Common Stock into which each share of UCB Common Stock shall be converted in the Merger or the payment terms for fractional interests. 7.5 Amendment or Supplement ----------------------- This Agreement or the Plan of Merger may be amended or supplemented at any time in writing by mutual agreement of SNC and UCB, subject to the proviso to Section 7.4. ARTICLE VIII MISCELLANEOUS 8.1 Expenses -------- Each party hereto shall bear and pay all costs and expenses incurred by it in connection with the transactions contemplated by this Reorganization Agreement, including fees and expenses of its own financial consultants, accountants and counsel; provided, however, that the filing fees and the printing costs incurred in connection with the Registration Statement and the Joint Proxy Statement/Prospectus shall be borne 70% by SNC and 30% by UCB. 8.2 Entire Agreement ---------------- This Agreement, the SNC Option Agreement and the UCB Option Agreement contain the entire agreement between the parties with respect to the transactions contemplated hereunder and thereunder and supersede all arrangements or understandings with respect thereto, written or oral, entered into on or before November 1, 1996, other than documents referred to herein or therein, and a certain letter agreement dated the date hereof between the parties. The terms and conditions of this Agreement and said Option Agreements shall inure to the benefit of and be binding upon the parties hereto and thereto and their respective successors. Nothing in this Agreement or said Option Agreements, expressed or implied, is intended to confer upon any party, other than the parties hereto and thereto, and their respective successors, any rights, remedies, obligations or liabilities. 44 8.3 No Assignment ------------- Neither of the parties hereto may assign any of its rights or obligations under this Reorganization Agreement to any other person, except upon the prior written consent of the other party. 8.4 Notices ------- All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by nationally recognized overnight express courier or by facsimile transmission, addressed or directed as follows: If to UCB: Ronald C. Monger Executive Vice President Chief Financial Officer United Carolina Bancshares 127 West Webster Street Post Office Box 632 Whiteville, North Carolina 28472 Fax No.: 910-642-1330 With a required copy to: Howard V. Hudson, Jr. General Counsel and Secretary United Carolina Bancshares 127 West Webster Street Post Office Box 632 Whiteville, North Carolina 28472 Fax No.: 910-642-1276 and Frank M. Conner, III Alston & Bird 601 Pennsylvania Avenue, N.W. North Building, Suite 250 Washington, D.C. 20004 Fax No.: 202-508-3333 45 If to SNC: Southern National Corporation 200 West Second Street Winston-Salem, North Carolina 27101 Attention: Scott E. Reed Fax No.: 910-733-0340 With a required copy to: Womble Carlyle Sandridge & Rice 200 West Second Street Winston-Salem, North Carolina 27101 Attention: Mr. William A. Davis, II Fax No.: 910-733-8364 Any party may by notice change the address to which notice or other communications to it are to be delivered. 8.5 Captions -------- The captions contained in this Agreement are for reference only and are not part of this Agreement. 8.6 Counterparts ------------ This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 8.7 Governing Law ------------- This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina applicable to agreements made and entirely to be performed within such jurisdiction, except to the extent federal law may be applicable. 8.8 Predecessor Agreement --------------------- On November 1, 1996, the parties hereto executed Agreement and Plan of Reorganization (the "Predecessor Agreement"). Following execution of the Predecessor Agreement, the parties have agreed to certain changes, all of which are reflected in this Amended and Restated Agreement. This Amended and Restated Agreement amends and supersedes the Predecessor Agreement in its entirety from the date of its execution, and the Predecessor Agreement shall have no further force and effect. 46 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have caused this Amended and Restated Agreement to be executed in counterparts by their duly authorized officers, all as of the day and year first above written. SOUTHERN NATIONAL CORPORATION By ------------------------------------- Title: ------------------------------- UNITED CAROLINA BANCSHARES CORPORATION By ------------------------------------- Title: ------------------------------- 47 EX-3.A 3 AMENDED AND RESTATED ARTICLES OF INCORPORATION Exhibit 3(a) [SEAL OF STATE OF NORTH CAROLINA DEPARTMENT OF THE SECRETARY OF STATE APPEARS HERE] - -------------------------------------------------------------------------------- To all whom these presents shall come, Greetings: I, Rufus L. Edmisten, Secretary of State of the State of North Carolina, do hereby certify the following and hereto attached to be a true copy of ARTICLES OF RESTATEMENT OF SOUTHERN NATIONAL CORPORATION the original of which is now on file and a matter of record in this office. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal at the City of Raleigh, this 3rd day of August, 1993. [SEAL OF STATE OF NORTH CAROLINA DEPARTMENT OF THE SECRETARY OF STATE APPEARS HERE] /s/ Rufus L. Edmisten Secretary of State ARTICLES OF RESTATEMENT Pursuant to (S) 55-10-06 and (S) 55-10-07 of the General Statutes of North Carolina, the undersigned corporation hereby submits the following for the purpose of amending and restating in full its Articles of Incorporation, 1. The name of the corporation is: Southern National Corporation, a North Carolina corporation. 2. The text of the Amended and Restated Articles of Incorporation is attached as Exhibit A. --------- 3. The Amended and Restated Articles of Incorporation contain amendments requiring shareholder approval that were adopted by the Board of Directors of the corporation on June 17, 1993 and were approved by shareholder action on April 20, 1993 and May 17, 1993 as required by Chapter 55 of the North Carolina General Statutes. 4. These Articles are to be effective upon filing. This the 17th day of June, 1993. SOUTHERN NATIONAL CORPORATION By: /s/ David L. Craven, Senior --------------------------------- David L. Craven, Senior Vice President, General Counsel and Secretary "EXHIBIT #6" AMENDED AND RESTATED ARTICLES OF INCORPORATION OF SOUTHERN NATIONAL CORPORATION ARTICLE I The name of the Corporation is Southern National Corporation. ARTICLE II The period of duration of the Corporation shall be unlimited and perpetual. ARTICLE III The purposes for which the Corporation is organized are: (a) To act as a holding company; to operate, serve and conduct business as a holding company of one or more banks and other corporations; to acquire and own shares of stock or other interests in other businesses and corporations of any lawful character including without limitation, banks, insurance agencies, mortgage loan and servicing businesses, data processing businesses, factoring businesses and other financially related businesses; to furnish services of all types to and for such banks, corporations and businesses; and as shareholder or as owner of other interests in such banks, corporations and businesses, to exercise all rights, powers and privileges of ownership incident thereto. (b) To itself operate insurance agencies; to make and acquire mortgage loans and render mortgage loan services; to render data processing services; to render factoring services; to operate consumer and small loan businesses and to make, acquire and service consumer and small loans; to organize, operate and manage mutual funds; to render travel services; to operate credit card businesses; to acquire, own and lease all types of equipment and property; to engage in farming and forestry; to render farm and forestry management and agency services and to engage in and operate all types of farming, agricultural and forestry businesses; to lend its own money; to act as agent or broker in procuring and making loans; and to render financial, management and business services of all types. (c) To engage in, operate, conduct, perform or participate in every kind of financial, commercial, agricultural, mercantile, manufacturing, industrial, mining, transportation or other enterprise, business, work, contract, undertaking, venture, or operation. (d) To carry on any other business to any extent and in any manner not prohibited by the laws of North Carolina, or, where the Corporation may seek to do business elsewhere, by local laws; and to engage in, operate and conduct any business which may be deemed adapted, directly or indirectly, to add to the profits of its principal businesses or to increase the value of its assets. -2- (e) To do all and everything necessary, suitable, expedient or proper for the accomplishment of any of the objects and purposes herein enumerated, or incidental to the powers herein named, or incidental to the protection or benefit of the Corporation, and, in general, to carry on any lawful business necessary or incidental to the attainment of the objects or purposes of the Corporation, or which may be conveniently carried on in connection with any of the business of the Corporation, with all the powers now or hereafter conferred by the laws of North Carolina upon corporations of like character. ARTICLE IV The Corporation shall have the authority to issue 120,000,000 shares of Common Stock, par value $5 each, and 5,000,000 shares of Preferred Stock, par value $5 each. The designations of each class are as follows: a) The first class is Common Stock in the amount of 120,000,000 shares, par value $5 each share. b) The second class is Preferred Stock in the amount of 5,000,000 shares, par value $5 each share. The Preferred Stock may be issued from time to time in one or more series, and authority is expressly vested in the Board of Directors without action of shareholders to divide the Preferred stock into series, to provide for the issuance thereof, and to fix and determine the relative rights, voting powers, preferences, limitations and designations of the shares of any series so established. -3- Authority is expressly vested in the Board of Directors, without limitation, to determine: (1) The number of shares to constitute such series and the distinctive designation thereof; (2) The dividend rate, conditions and time of accrual and payment thereof, and the dividend preferences, if any, between the classes of stock and between the series of Preferred Stock; (3) Whether dividends shall be cumulative and, if, so, the date from which dividends on each such series shall accumulate; (4) Whether, and to what extent, the holders of one or more series of Preferred Stock shall enjoy voting rights, if any, in addition to those prescribed by law; (5) Whether, and upon what terms, Preferred Stock will be convertible into or exchangeable for shares of any class or any other series of the same class; and (6) Whether, and upon what terms, the Preferred Stock, will be redeemable, and the preference, if any, to which the Preferred Stock will be entitled in the event of voluntary liquidation, dissolution or winding up of the Corporation. 63/4% Cumulative Convertible Preferred Stock, Series A. The Corporation has - ------------------------------------------------------ designated 770,000 shares of the authorized but unissued shares of the Corporation's Preferred stock, par value $5.00 per share, as 63/4% Cumulative Convertible Preferred Stock, Series A (the "Series A Preferred Stock"). The terms of the Series A Preferred Stock, in the respect in which the shares of such series may vary from shares of any and all other series of Preferred Stock, are as follows: -4- (1) Stated Value. The Series A Preferred Stock shall have a stated value ------------ of $100.00 per share. (2) Dividends and Distributions. --------------------------- (a) The holders of shares of Series A Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors, out of assets of the Corporation legally available for payment, cash dividends, accruing from the date of issuance, at the annual rate of $6.75 per share, and no more, payable quarterly on February 15, May 15, August 15, and November 15 of each year (each quarterly period ending on any such date being hereinafter referred to as a "dividend period"), commencing May 15, 1992. The initial dividend for the period commencing February 11, 1992 to, but not including, May 15, 1992, will be $1.7625 per share and will be payable on May 15, 1992. The date of initial issuance of shares of Series A Preferred Stock is hereinafter referred to as the "Issue Date." Dividends payable on the Series A Preferred Stock (i) for any period less than a full dividend period, shall be computed on the basis of a 360-day year consisting of twelve 30-day months and (ii) for each full dividend period, shall be computed by dividing the annual dividend rate by four. Each such dividend will be payable to holders of record as they appear on the stock register of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates, as shall be fixed by the Board of Directors. -5- (b) Dividends on shares of Series A Preferred Stock shall be cumulative from the date of issue whether or not there shall be funds legally available for payment thereof. Accumulations of dividends on Series A Preferred Stock shall not bear interest. The Corporation shall not (i) declare or pay or set apart for payment any dividends or distributions on any stock ranking as to dividends junior to the Series A Preferred Stock (other than dividends paid in shares of capital stock ranking junior to the Series A Preferred Stock as to dividends and upon liquidation, dissolution or winding up or options, warrants or rights to subscribe for such junior stock) or (ii) make any purchase or redemption of, or any sinking fund payment for the purchase or redemption of, any stock ranking as to dividends on a parity with or junior to the Series A Preferred Stock (except by conversion into or exchange for capital stock of the Corporation ranking junior to the Series A Preferred Stock as to dividends and upon liquidation, dissolution or winding up) unless all dividends payable on all outstanding shares of Series A Preferred Stock for all past dividend periods shall have been paid in full or declared and a sufficient sum set apart for payment thereof; provided, however, that any moneys theretofore deposited in any -------- ------- sinking fund with respect to any Preferred Stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such Preferred Stock in accordance with the terms of such sinking fund regardless of whether at the time of such application all -6- dividends payable on all outstanding shares of Series A Preferred Stock shall have been paid in full or declared and a sufficient sum set apart for payment thereof. (c) All dividends declared on shares of Series A Preferred Stock and any other class of Preferred Stock or series thereof ranking on a parity as to dividends with the Series A Preferred Stock shall be declared pro rata, so that the amount of dividends per share on the Series A Preferred Stock and such other Preferred Stock for the same dividend period, or for the dividend period of the Series A Preferred Stock ending within the dividend period of such other stock, shall, in all cases, bear to each other the same ratio that accured dividends per share on shares of the Series A Preferred Stock and such other stock bear to each other. (3) Liquidation Preferences. ----------------------- (a) In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the holders of Series A Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to shareholders an amount equal to $100.00 per share plus an amount equal to any accrued and unpaid dividends thereon to but excluding the date of such distribution, and no more, before any distribution shall be made to the holders of any class of stock of the Corporation ranking junior to the Series A Preferred Stock as to liquidation payments, but the holders of Series A Preferred Stock shall not be entitled to -7- receive such distribution until the liquidation preference of any other shares of the Corporation's capital stock ranking senior to the Series A Preferred Stock with respect to rights upon liquidation, dissolution or winding up shall have been paid (or a sufficient sum set aside for payment thereof) in full. (b) In the event the assets of the Corporation available for distribution to shareholders upon any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full the amounts payable with respect to the Series A Preferred Stock and any other shares of Preferred Stock of the Corporation ranking on a parity with the Series A Preferred Stock as to the distribution of assets, the holders of the Series A Preferred Stock and the holders of such other Preferred Stock shall share ratably in any distribution of assets of the Corporation in proportion to the full respective preferential amounts to which they are entitled. (c) The merger or consolidation of the Corporation into or with any other corporation, the merger or consolidation of any other Corporation into or with the Corporation or the sale, lease or conveyance of all or part of the property or business of the Corporation shall not be deemed a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this Paragraph 3. -8- (4) Redeption. --------- (a) The Corporation, at its option, may redeem any or all shares of Series A Preferred Stock at any time on or after March 1, 1996, at the redeption prices set forth below, plus an amount equal to accrued and unpaid dividends thereon to but excluding the date of redemption (the "Redemption Price"):
Twelve month period begginning March 1, Redemption Price ------------------- ---------------- 1996............................. $104.050 1997............................. 103.375 1998............................. 102.700 1999............................. 102.025 2000............................. 101.350 2001............................. 101.675 2002 and thereafter ............. 100.00
(b) If less than all the outstanding shares of Series A Preferred Stock are to be redeemed, the shares to be redeemed shall be selected pro rata as nearly as practicable or by lot, or by such other method as the Board of Directors may determine to be equitable (with adjustments to avoid fractional shares). (c) Notice of an redemption shall be given by first class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the date fixed for redemption to the holders of record of the shares of Series A Preferred Stock to be redeemed, at their respective addresses appearing on the books of the Corporation. Notice so mailed shall be conclusively presumed to have been duly given whether or not actually received. Such notice shall state: (i) the date fixed for redemption; (ii) the Redemption Price; (iii) that the holder has the right to convert -9- such shares into Common Stock until the close of business on the redemption date; (iv) the then-effective conversion price and the place where certificates for such shares may be surrendered for conversion; (v) if less than all the shares held by such holder are tobe redeemed, the number of shares to be redeemed form such holder; (vi) the place where certificates for such shares are to be surrendered for payment of the Redemption Price; and (vii) that after such date fixed for redemption the shares to be redeemed shall not accrue dividends. (d) At the option of the Corporation, if notice of redemption is mailed as aforesaid, and if prior to the date fixed for redemption funds sufficient to pay in full the Redemption Price are deposited in trust, for the account of the holders of the shares to be redeemed, with a bank or trust company named in such notice doing business in the Borough of Manhattan, the City of New York, State of New York or the State of North Carolina and having capital surplus and undivided profits of at least $50 million (which bank or trust company also may be the transfer agent and/or paying agent for the Series A Preferred Stock) notwithstanding the fact that any certificate(s) for shares called for redemption shall not have been surrendered for cancellation, on and after such date of deposit the shares represented thereby so called for redemption shall be deemed to be no longer outstanding, and all rights of the holders of such shares as shareholders of the Corporation shall cease, except the right of the holders thereof to convert such shares in accordance 10 with the provisions of Paragraph 5 at any time prior to the close of business on the redemption date and the right of the holders thereof to receive out of the funds so deposited in trust the Redemption Price, without interest, upon such surrender of the certificate(s) representing such shares. Any funds so deposited with such bank or trust company in respect of shares of Series A Preferred Stock converted before the close of business on the redemption date shall be returned to the Corporation upon such conversion. Any funds so deposited with such bank or trust company which shall remain unclaimed by the holders of shares called for redemption at the end of two years after the redemption date shall be repaid to the Corporation, on demand, and thereafter the holder of any such shares shall look only to the Corporation for the payment, without interest, of the Redemption Price. (e) Any provision of this Paragraph 4 to the contrary notwithstanding, in the event that any quarterly dividend payable on the Series A Preferred Stock shall be in arrears and until all such dividends in arrears shall have been paid or declared and set apart for payment, the Corporation shall not redeem any shares of Series A Preferred Stock unless all outstanding shares of Series A Preferred Stock are simultaneously redeemed and shall not purchase or otherwise acquire any shares of Series A Preferred Stock except in accordance with a purchase offer made by the Corporation on the same terms to all holders of record of Series A Preferred Stock. -11- (5) Conversion Rights. The holders of shares of Series A Preferred ----------------- Stock shall have the right, at their option, to convert such shares into shares of Common Stock on the following terms and conditions: (a) Shares of Series A Preferred Stock shall be convertible at any time on the basis of their stated value into fully paid and nonassessable shares of Common Stock at a conversion price of $16.93 per share of Common Stock (the "Conversion Price"). The Conversion Price shall be subject to adjustment from time to time as hereinafter provided. No payment or adjustment shall be made on account of any accrued and unpaid dividends on shares of Series A Prefered Stock surrendered for conversion prior to the record date for the determination of shareholders entitled to such dividends or on account of any dividends on the shares of Common Stock issued upon such conversion subsequent to the record date for the determination of shareholders entitled to such dividends. If any shares of Series A Preferred Stock shall be called for redemption, the right to convert the shares designated for redemption shall terminate at the close of business on the date fixed for redemption unless default is made in the payment of the Redemption Price. In the event of default in the payment of the Redemption Price. In the event of default in the payment of the Redemption Price, the right to convert the shares designated for redemption shall terminate at the close of business on the date that such default is cured. -12- (b) To convert shares of Series A Preferred Stock into Common Stock, the holder thereof shall surrender the certificate therefor, duly endorsed if the Corporation shall so require, or accompanied by appropriate instruments of transfer satisfactory to the Corporation, at the office of the Transfer Agent for the Series A Preferred Stock, or at such other office as may be designated by the Corporation, together with written notice that such holder irrevocably elects to convert such shares. Such notice shall also state the name and address in which such holder wishes the certificate for the shares of Common Stock issuable upon conversion to be issued. As soon as practicable after receipt of the certificate representing the shares of Series A Preferred Stock to be converted and the notice of election to convert the same, the Corporation shall issue and deliver at said office a certificate or certificates for the number of whole shares of Common Stock issuable upon conversion of the shares of Series A Preferred Stock surrendered for conversion, together with a cash payment in lieu of any fraction of a share, as hereinafter provided, to the person entitled to receive the same. Shares of Series A Preferred Stock shall be deemed to have been converted immediately prior to the close of business on the date such shares are surrendered for conversion and notice of election to convert the same is received by the Corporation in accordance with the foregoing provisions, and the person entitled to receive the Common Stock issuable upon such -13- conversion shall be deemed for all purposes to be the record holder of such Common Stock as of such date. (c) In the case of any share of Series A Preferred Stock that is converted after any record date with respect to the payment of a dividend on the Series A Preferred Stock and on or prior to the date on which such dividend is payable by the Corporation (the "Dividend Due Date") the dividend due on such Dividend Due Date shall be payable on such Dividend Due Date to the holder of record of such shares as of such preceding record date notwithstanding such conversion. Shares of Series A Preferred Stock surrendered for conversion during the period from the close of business on any record date with respect to the payment of a dividend on the Series A Preferred Stock next preceding any Dividend Due Date to the opening of business on such Dividend Due Date shall (except in the case of shares of Series A Preferred Stock which have been called for redemption on a redemption date within such period) be accompanied by payment in next-day funds or other funds acceptable to the Corporation of an amount equal to the dividend payable on such Dividend Due Date on the shares of Series A Preferred Stock being surrendered for conversion. The dividend with respect to a share of Series A Preferred Stock called for redemption on a redemption date during the period from the close of business on any record date with respect to the payment of a dividend on the Series A Preferred Stock next preceding any Dividend Due Date to the opening of business on such Dividend Due Date shall be payable on such -14- Dividend Due Date to the holder of record of such share of such dividend record date notwithstanding the conversion of such share of Series A Preferred Stock after such record date and prior to such Dividend due Date, and the holder converting such share of Series A Preferred Stock need not include a payment of such dividend amount upon surrender of such share of Series A Preferred Stock for conversion. Except as provided in this paragraph, no payment or adjustment shall be made upon any conversion on account of any dividends accrued on shares of Series A Preferred Stock surrendered for conversion or on account of any dividends on the shares of Common Stock issued upon conversion. (d) No fractional shares of Common Stock shall be issued upon conversion of any shares of Series A Preferred Stock. If more than one share of Series A Preferred Stock is surrendered at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares so surrendered. If the conversion of any shares of Series A Preferred Stock results in a fractional share of Common Stock, the Corporation shall pay cash in lieu thereof in an amount equal to such fraction multiplied by the closing price, as defined in subsection (vi) of Paragraph 5(e) below, on the date on which the shares of Series A Preferred Stock were duly surrendered for conversion, or if such date is not a trading date, on the next succeeding trading date. -15- (e) The Conversion Price shall be adjusted from time to time as follows: (i) In case the Corporation shall pay or make a dividend or other distribution on shares of Common Stock in Common Stock, the Conversion Price in effect at the opening of business on the date following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the date following the date fixed for such determination. For purposes of this subsection, the number of shares of Common Stock at any time outstanding shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. (ii) In case the Corporation shall issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share (determined as provided in subsection (vi) below) of the Common Stock on the date fixed for the determination of shareholders entitled to receive such rights or warrants (other than pursuant -16- to a dividend reinvestment plan), the Conversion Price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this subsection (ii), the number of shares of Common Stock at anytime outstanding shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. (iii) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the -17- Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (iv) In case the Corporation shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences of its indebtedness or assets (including securities, but excluding any rights or warrants referred to in subsection (ii) above, any dividend or distribution paid in cash out of the retained earnings of the Corporation and any dividend or distribution referred to in subsection (i) above), the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the date fixed for the determination of shareholders entitled to receive such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in subsection (vi) below) of the Common Stock on the date fixed for such determination less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive and shall be described in a statement filed with the Transfer Agent) of the portion of the evidences of indebtedness or assets so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share -18- of the Common Stock, such adjustment to become effective immediately prior to the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such distribution. (v) The reclassification of Common Stock into securities other than Common Stock (other than any reclassification upon a consolidation or merger to which Paragraph 5(g) below applies) shall be deemed to involve (A) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of shareholders entitled to receive such distribution" within the meaning of subsection (iv) above), and (B) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision or combination becomes effective" within the meaning of subsection (iii) above). (vi) For the purpose of any computation under subsections (ii) and (iv) above, the current market price per share of Common Stock on any day shall be deemed to be the average of the daily closing prices for the ten consecutive trading days selected by the Board of Directors commencing not more than 20 trading days before and ending not later than the -19- day in question. The closing price for each day shall be the reported last sale price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange or, if the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Association of Securities Dealers Automated Quotation National Market System or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted on such National Market System, the average of the closing bid and asked prices in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose. (vii) No adjustment in the Conversion Price for the Series A Preferred Shares shall be required unless such adjustment would require and increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this paragraph (vii) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. -20- (f) Whenever the Conversion Price shall be adjusted as herein provided (i) the Corporation shall forthwith make available at the office of the Transfer Agent for the Series A Preferred Stock a statement describing in reasonable detail the adjustment, the facts requiring such adjustment and the method of calculation used; and (ii) the Corporation shall cause to be mailed by first class mail, postage prepaid, as soon as practicable to each holder of record of shares of Series A Preferred Stock a notice stating that the Conversion Price has been adjusted and setting forth the adjusted Conversion Price. (g) In the case of any consolidation or merger to which the Corporation is a party and as a result of which holders of Common Stock shall be entitled to receive securities, cash or other property with respect to or in exchange for such Common Stock, or in case of any sale or conveyance to another corporation of the property of the Corporation as an entirety or substantially as an entirety, or in case of any reclassification or change in outstanding shares of Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value, or as a result of a subdivision or combination of the Common Stock), there will be no adjustment of the Conversion Price but the holder of each share of Series A Preferred Stock then outstanding will have the right thereafter to convert such share into the kind and amount of securities, cash or other property which such holder would have owned or have been entitled to receive immediately after such consolidation or -21- merger, sale or conveyance or reclassification or change had such share been converted immediately prior to the effective date of such consolidation or merger, sale or conveyance or reclassification or change. The adjustments described in this paragraph shall be subject to further adjustments as appropriate paragraph shall be subject to further adjustments as appropriate that shall be as nearly equivalent as may be practicable to the relevant adjustments provided for in Paragraph 5(e) and this paragraph 5(g). If, in the case of any such consolidation, merger, sale or conveyance, the stock or other securities and property receivable thereupon by a holder of shares of Common Stock includes shares of stock, securities or other property or assets (including cash) of an entity other than the successor or acquiring entity, as the case may be, in such consolidation, merger, sale or conveyance, then the Corporation shall enter into an agreement with such other entity for the benefit of the holders of Series A Preferred Stock that shall contain such provisions to protect the interests of such holders as the Board of Directors shall reasonably consider necessary by reason of the foregoing. The provisions of this Paragraph 5(g) shall similarly apply to successive consolidations, mergers, sales, exchanges, reclassifications or changes. (h) The Corporation shall pay any taxes that may be payable in respect of the issuance of shares of Common Stock upon conversion of shares of Series A Preferred Stock, but the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance of -22- shares of Common Stock in any name other than that in which the shares of Series A Preferred Stock so converted are registered, and the Corporation shall not be required to issue or deliver any such shares unless and until the person requesting such issuance shall have paid to the Corporation the amount of any such taxes, or shall have established to the satisfaction of the Corporation that such taxes have been paid. (i) The Corporation may make such reductions in the Conversion Price, in addition to those required by subsections (i) through (iv) of Paragraph 5(e) above, as it considers to be advisable in order that any event treated for federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. (j) The Corporation shall at all times reserve and keep available out of its authorized but unissued Common Stock the full number of shares of Common Stock issuable upon the conversion of all shares of Series A Preferred Stock then outstanding. (k) In the event that: (i) the Corporation shall declare a dividend or any other distribution of its Common Stock, payable otherwise than in cash out of retained earnings; or (ii) the Corporation shall authorize the granting to the holders of its Common Stock of rights to subscribe for or purchase any shares of capital stock of any class or of any other rights; or -23- (iii) the Corporation shall propose to effect any consolidation of the Corporation with or merger of the Corporation with or into any other corporation or a sale of the assets of the Corporation substantially as an entirety which would result in an adjustment under Paragraph 5(g); the Corporation shall cause to be mailed to the holders of record of Series A Preferred Stock at least 20 days prior to the applicable date hereinafter specified a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined or (y) the date on which such consolidation, merger or sale is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such consolidation, merger or sale. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, consolidation, merger or sale. (6) Voting Rights. Other than as required by applicable law, the Series A ------------- Preferred Stock shall not have any voting powers either general or special, except that: (a) Unless the vote or consent of the holders of a greater number of shares shall then be required by -24- law, the consent of the holders of at least two-thirds of all of the shares of the Series A Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of Series A Preferred Stock shall vote together as a separate class, shall be necessary to (i) authorize, create or issue, or increase the authorized or issued amount of, any class or series of stock ranking prior to the Series A Preferred Stock with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up, (ii) authorize, create or issue, or increase the authorized or issued amount of, any class or series of stock (including any class or series of Preferred Stock) which ranks on a parity with the Series A Preferred Stock as to dividends and upon liquidation, dissolution or winding up ("Parity Stock") unless the Articles of Incorporation creating or authorizing such class or series provide that if in any case the stated dividends or amounts payable upon liquidation, dissolution or winding up are not paid in full on the Series A Preferred Stock and all outstanding shares of Parity Stock, the shares of all Parity Stock shall share ratably in the payment of dividends, including accumulations (if any) in accordance with the sums -25- which would be payable on all Parity Stock if all dividends in respect of all shares of Parity Stock were paid in full, and on any distribution of assets upon liquidation, dissolution or winding up ratably in accordance with the sums which would be payable in respect of all shares of Parity Stock if all sums payable were discharged in full, or (iii) amend, alter or repeal the provisions of the Articles of Incorporation, whether by merger, consolidation or otherwise, so as to materially and adversely affect any right, preference, privilege or voting power of such shares of Series A Preferred Stock or the holders thereof; provided, however, that any increase in the amount of the authorized Preferred Stock or any outstanding series of Preferred Stock or any other capital stock of the Corporation, or the creation and issuance of other series of Preferred Stock including Series A Preferred Stock, or of any other capital stock of the Corporation, in each case ranking on a parity with or junior to the Series A Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. -26- (b) Whenever, at any time or times, dividends payable on the shares of Series A Preferred Stock shall be in arrears in an amount equal to at least six full quarterly dividends, whether or not consecutive, on shares of the Series A Preferred Stock at the time outstanding, the holders of the outstanding shares of Series A Preferred Stock shall have the exclusive right, voting separately as a class together with all other series of cumulative Preferred Stock upon which like voting rights have been conferred and are exercisable, to elect two directors of the Corporation at the Corporation's next annual meeting of shareholders and at each subsequent annual meeting of shareholders. At elections for such directors, each holder of Series A Preferred Stock shall be entitled to one vote for each share held. Upon the vesting of such right of the holders of Series A Preferred Stock, the maximum authorized number of members of the Board of Directors shall automatically be increased by two. The rights of the holders of the Series A Preferred Stock, voting separately as a class (either alone or together with the holders of shares of all other series of cumulative Preferred Stock upon which like voting rights have been conferred and are exercisable) to elect members of the Board of Directors of the Corporation as aforesaid shall continue until such time. -27- as all dividends accumulated on the Series A Preferred Stock shall have been paid in full, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. (c) Each director elected pursuant to Paragraph (b) shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term all dividends accumulated on the Series A Preferred Stock shall have been paid in full. If the office of any director elected by the holders of Series A Preferred Stock voting as a class becomes vacant by reason of death, resignation, retirement, disqualification, removal from office, or otherwise, the remaining director elected by the holders of the Series A Preferred Stock voting as a class may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. Whenever the term of office of the directors elected by and the special voting powers vested in the holders of Series A Preferred Stock as provided in this Section shall have expired, the number of directors shall be such number as may be provided for in the Articles of Incorporation -28- or Bylaws irrespective of any increase made pursuant to the provisions of this section. (7) Reacquired Shares. Shares of Series A Preferred Stock converted, ----------------- redeemed, or otherwise purchased or acquired by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock without designation as to series. (8) No Sinking Fund. Shares of Series A Preferred Stock are not subject --------------- to the operation of a sinking fund. ARTICLE V The number of directors of the Corporation may be fixed by the Bylaws, but shall not be less than three. The Board of Directors shall be divided into three classes each class to be as nearly equal in number as possible. At each annual meeting of the stockholders, the successors of the directors of the class whose terms expire in that year shall be elected to hold office for the term of three years, so that the term of office of one class of directors shall expire each year. Directors may be removed from office, prior to the expiration of their term, only for cause and only by the affirmative vote of the holders of not less than a majority of the shares of stock outstanding and entitled to vote for the election of directors. Notwithstanding any other provision of these Articles of Incorporation or the Bylaws of the Corporation (and in addition to any other vote that may be required by law, these Articles of Incorporation or the -29- Bylaws of the Corporation), the affirmative vote of the holders of not less than two-thirds of all the shares of stock outstanding and entitled to vote thereon shall be required to amend, alter, change or repeal this Article V of these Articles of Incorporation. ARTICLE VI In addition to the general powers granted corporations under the laws of the State of North Carolina, the Corporation shall have full power and authority to do the following: (d) To acquire, by purchase or otherwise, the goodwill, business, property rights, franchises and assets of every kind, with or without undertaking either wholly or in part the liabilities, of any person, firm, association or corporation; and to acquire any property or business as a going concern or otherwise (i) by purchase of the assets thereof wholly or in part, (ii) by acquisition of the shares of any part thereof, or (iii) in any other manner, and to pay for the same in cash or in shares or bonds or other evidences of indebtedness of the Corporation, or otherwise; to hold, maintain and operate, or in any manner dispose of, the whole or any part of the goodwill, business, rights and property so acquired, and to conduct in any lawful manner the whole or any part of any business so acquired; and to exercise all the powers necessary or convenient in and about the management of such business. -30- (e) To subscribe or cause to be subscribed for, and to take, purchase and otherwise acquire, own, hold, use, sell, assign, transfer, exchange, distribute and otherwise dispose of, the whole or any part of the shares of the capital stock, bonds, coupons, mortgage, deeds of trust, debentures, securities, obligations, evidences of indebtedness, notes, goodwill, rights, assets and property of any and every kind, or any part thereof, of any other corporation or corporations, association or associations, firm or firms, or person or persons, together with shares, rights, units or interest in, or in respect of, any trust estate, now or hereafter existing, and whether created by the laws of the State of North Carolina or any other state, territory or country; and to operate, manage and control such properties, or any of them either in the name of the Corporation, and while the owners of any of said shares of capital stock to exercise all the rights, powers and privileges of ownership of every kind and description, including the right to vote thereon, with power to designate some person or persons for that purpose from time to time, and to the same extent as natural persons might or could do. (f) To promote or aid in any manner, financially or otherwise, any person, firm, corporation or association of which any shares of stock, bonds, notes, debentures or other securities or evidences of indebtedness are held directly or indirectly by the Corporation, and for this purpose to guarantee the contracts, -31- dividends, shares, bonds, debentures, notes and other obligations of such other persons, firms, corporations or associations; and to do any other act or things designed to protect, preserve, improve or enhance the value of such shares, bonds, notes, debentures or other securities or evidences of indebtedness. (g) To acquire by purchase, subscription, exchange, or in any other lawful manner, and to hold, receive, use, mortgage, pledge, sell, assign, transfer, exchange, dispose of, and otherwise deal in and with securities (which term, for the purpose of this Article VI, includes, without limitation of the generality thereof, shares of stock, other shares, bonds, debentures, notes, mortgages, or other obligations, and certificates, receipts, warrants, or other instruments representing rights or options to receive, purchase or subscribe for any of the same, or representing any other rights or interests therein or in any property or assets) created or issued by any persons, firms, associations, trusts, partnerships, corporations, joint ventures, syndicates, or governments or subdivisions thereof; to pay for securities (as defined in this Article VI) (i) in cash, (ii) by exchange of shares of stock, bonds or other evidences of indebtedness of the Corporation for such securities acquired, (iii) in cash and by such exchange of shares of stock, bonds or evidences of indebtedness, or (iv) in any other lawful manner; and to exercise, as owner or holder of any such securities as herein defined, any and all rights, powers and privileges in respect thereof. -32- ARTICLE VII No holder of: (a) any shares of stock of any class of the Corporation, common or preferred, or (b) any options, rights or warrants to purchase any stock, or (c) any shares or obligations convertible into shares of any class shall be entitled as of right as such holder to purchase or to subscribe for any unissued shares of any class nor any increased shares to be issued by reason of any increase in the authorized capital stock of the Corporation, or any bonds, certificates of indebtedness, debentures, or other securities convertible into shares of stock of the Corporation or carrying any right to purchase shares of stock of any class, whether now or hereafter authorized; and no such holder shall have any preemptive or preferential right to purchase or to subscribe for any unissued, additional or increased shares or any such bonds, certificates of indebtedness, debentures or other securities; but any such unissued, additional or increased shares of stock, and any such bonds, certificates of indebtedness, debentures or other securities convertible into shares of stock or carrying any right to purchase shares may be issued, sold, exchanged or disposed of from time to time by authority of the Board of Directors of the Corporation to such persons, firms, or corporations and for such consideration and upon such terms as the Board of Directors in the exercise of its discretion shall from time to time determine and deem advisable. -33- ARTICLE VIII The Board of Directors of the Corporation shall have power by vote of a majority of the directors then holding office and without the assent or vote of the shareholders to adopt, make, alter, amend and rescind the Bylaws of the Corporation. ARTICLE IX To the fullest extent permitted by the North Carolina Business Corporation Act, as the same exists or may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation, its shareholders or otherwise for monetary damage for breach of his duty as a director. Any repeal or modification of this Article IX shall be prospective only and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification. -34- STATE OF [SEAL OF NORTH CAROLINA APPEARS HERE] NORTH Department of The CAROLINA Secretary of State - -------------------------------------------------------------------------------- To all whom these presents shall come, Greetings: I, ELAINE F. MARSHALL, Secretary of State of the State of North Carolina, do hereby certify the following and hereto attached to be a true copy of ARTICLES OF AMENDMENT OF SOUTHERN NATIONAL CORPORATION the original of which was filed in this office on the 14th day of January, 1997. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal at the City of Raleigh, this 14th day of January, 1997. [SEAL OF THE STATE OF NORTH CAROLINA APPEARS HERE] /s/ Elaine F. Marshall Secretary of State - -------------------------------------------------------------------------------- ARTICLES OF AMENDMENT WITH RESPECT TO THE SERIES B JUNIOR PARTICIPANT PREFERRED STOCK OF SOUTHERN NATIONAL CORPORATION (Pursuant to Sections 55-6-02 and 55-10-06 of the North Carolina Business Corporations Act) Southern National Corporation, a North Carolina corporation (the "Corporation"), hereby submits these Articles of Amendment for the purpose of amending its Articles of Incorporation to determine the preferences, limitations, and relative rights (within the limits set forth in Section 55-6-01 of the North Carolina Business Corporation Act) of a new series of Preferred Stock, par value $5 per share: (1) The name of the Corporation is Southern National Corporation. (2) Pursuant to authority granted by Article IV of the Amended and Restated Articles of Incorporation of the Corporation and in accordance with the provisions of Section 55-6-02 of the North Carolina Business Corporation Act, the Board of Directors of the Corporation duly adopted on December 17, 1996, the following amendment to the Articles of Incorporation of the Corporation: 1. Designation and Amount. The shares of such series shall be designated as ---------------------- "Series B Junior Participating Preferred Stock" and the number of shares constituting such series initially shall be 2,000,000. Such number of shares may be increased or decreased by the Board of Directors; provided, -------- that no decrease shall reduce the number of shares of Series B Junior Participating Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series B Junior Participating Preferred Stock. 2. Dividends and Distributions. --------------------------- (a) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series B Junior Participating Preferred Stock with -2- respect to dividends, the holders of shares of Series B Junior Participating Preferred Stock, in preference to the holders of Common Stock, par value $5 per share, of the Corporation (the "Common Stock") and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of February, May, August and November in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series B Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or , with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series B Junior Participating Preferred Stock. In the event the Corporation shall on or at any time after December 17, 1996 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine or consolidate the outstanding shares of Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series B Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series B Junior Participating Preferred Stock as provided in paragraph (a) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, subject to the requirements of applicable law and the Articles of -3- Incorporation, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series B Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series B Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series B Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series B Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series B Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share- by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series B Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 60 days prior to the date fixed for the payment thereof. 3. Voting Rights. The holders of shares of Series B Junior Participating ------------- Preferred Stock shall have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each share of Series B Junior Participating Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time on or after the Rights Declaration Date (i) declare any dividend on Common -4- Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine or consolidate the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series B Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided herein, in any other amendment to the Articles of Incorporation of the Corporation or by law, the holders of shares of Series B Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one group on all matters submitted to a vote of shareholders of the Corporation. (c) Except as set forth herein, holders of Series B Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 4. Certain Restrictions. -------------------- (a) Whenever quarterly dividends or other dividends or distributions payable on the Series B Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series B Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, redeem or purchase or otherwise acquire for consideration, or make any other distributions on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Junior Participating Preferred Stock: (ii) declare or pay dividends on, redeem or purchase or otherwise acquire for consideration, or make any other distributions on - 5 - any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series B Junior Participating Preferred Stock, provided that there may be declared and paid ratably dividends on the Series B Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; and provided further that the Corporation may at any time redeem or purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series B Junior Participating Preferred Stock; (iii) purchase or otherwise acquire for consideration any shares of Series B Junior Participating Preferred Stock, or redeem or purchase or otherwise acquire any shares of stock ranking on a parity with the Series B Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation (for the account of such subsidiary) to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. (c) No dividend shall be declared and paid, or set apart for payment on, any share of the Series B Junior Participating Preferred Stock or any share of any other series of Preferred Stock or any share of any class of stock, or series thereof, ranking on a parity with this Series as to dividends, for any dividend period unless at the same time a like proportionate dividend for the same dividend period, ratably in - 6 - proportion to the respective dividends applicable thereto, shall be declared and paid, or set apart for payment on, all shares of this Series and all shares of all other series of Preferred Stock and all shares of any class, or series thereof, ranking on a parity with this Series as to dividends, then issued and outstanding and entitled to receive dividends. 5. Reacquired Shares. Any shares of Series B Junior Participating ----------------- Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock, subject to the conditions and restrictions on issuance set forth herein, in the Articles of Incorporation of the Corporation (including Articles of Amendment duly adopted in accordance with the North Carolina Business Corporation Act), creating a series of Preferred Stock or any similar stock, or as otherwise required by law. 6. Liquidation, Dissolution or Winding Up. -------------------------------------- (a) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series B Junior Participating Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series B Liquidation Preference"). Following the payment of the full amount of the Series B Liquidation Preference, no additional distributions shall be made to the holders of shares of Series B Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series B Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph (c) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series B Liquidation Preference and the Common Adjustment in respect to all - 7 - outstanding shares of Series B Junior Participating Preferred Stock and Common Stock, respectively, holders of Series B Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to one (1) respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (b) In the event, however, that there are not sufficient assets available to permit payment in full of the Series B Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series B Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (c) In the event the Corporation shall at any time on or after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (d) Neither the sale, lease or conveyance of all or substantially all of the property or business of the Corporation, nor the merger, consolidation or statutory share exchange of the Corporation into or with any other corporation or the merger, consolidation or statutory share exchange of any other corporation into or with the Corporation, shall be deemed to be a liquidation, dissolution or winding-up, voluntary or involuntary, for the purposes of this Paragraph 6. 7. Statutory Share Exchange, Merger Consolidation, etc. In case the --------------------------------------------------- Corporation shall enter into any statutory share exchange, merger, consolidation, combination or other transaction in which - 8 - the shares of Common Stock are exchanged for or changed into other stock securities, cash and/or any other property, then in any such case the shares of Series B Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time on or after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine or consolidate the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series B Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8. No Redemption. The shares of Series A Junior Participating ------------- Preferred Stock shall not be redeemable. 9. Ranking. The Series B Junior Participating Preferred Stock shall ------- rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. 10. Amendment. The Articles of Incorporation of the Corporation shall --------- not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series B Junior Participating Preferred Stock so as to affect them adversely, except in accordance with the provisions of Section 55-10-04 of the North Carolina Business Corporation Act, or as otherwise permitted by law. 11. Fractional Shares. Series B Junior Participating Preferred Stock ----------------- may be issued in fractions of a share (which shall be integral multiples of one one-hundredth of a share of Series B Junior Participating Preferred Stock), which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, - 9 - participate in distributions and to have the benefit of all other rights of holders of Series B Junior Participating Preferred Stock. * * * This 10th day of January 1997. SOUTHERN NATIONAL CORPORATION By: /s/ Kelly S. King -------------------------- Name: Kelly S. King Title: President EX-10.B 4 NON-EMPLOYEE DIRECTORS' DEFERRED COMPENSATION Exhibit 10(b) SOUTHERN NATIONAL CORPORATION NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN Adopted By Action of Board of Directors December 19, 1991 SOUTHERN NATIONAL CORPORATION NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN Southern National Corporation ("SNC"), a North Carolina corporation, whose principal office is located at 500 North Chestnut Street, Lumberton, North Carolina 28358, hereby adopts this Non-Employee Directors' Stock Option Plan, in order to provide incentives for highly qualified non-employee directors to continue their best efforts on behalf of SNC and to share in the ownership and growth of SNC as well as its subsidiaries ("Subsidiaries"). The adoption of this stock option plan for non-employee directors is, subject to shareholder approval, to become effective December 19, 1991. ------------------------------------------- 1. Purpose. (a) The purpose of this Non-Employee Directors' Stock Option Plan (the "Plan"), is to promote the interests of Southern National Corporation ("SNC") and its Subsidiaries, by affording an incentive to non-employee directors of SNC to remain on the Board and to use their best efforts on its behalf, and further aid SNC and its Subsidiaries in attracting, maintaining, and developing capable management of a caliber required to insure SNC's continued success, through means of an offer to such persons of an opportunity to acquire or increase their proprietary interest in SNC through the granting of non-qualified options to purchase SNC's Common Stock pursuant to the terms of the Plan ("Options"). Such Options are intended not to qualify as incentive stock options within the meaning of (S) 422 of the Internal Revenue Code of 1986, as amended, (the "Code") and shall be so construed. (b) Consistent with the purpose of the Plan as recited herein, there are certain income tax considerations that will result by the election to receive Options under this Plan in lieu of Board compensation otherwise receivable by directors of SNC. Under current Treasury Regulations neither the election to receive Options in lieu of cash compensation nor the actual grant of Options will result in the receipt of taxable income by the Participant or the allowance of a deduction by SNC for income tax purposes. However, Participants who receive Options in lieu of cash compensation will realize ordinary income at the tine of exercise of any Option in an amount measured by the excess of the market value of the Option shares on the date of exercise over the Option price. To the extent that any Participant realizes such ordinary income, SNC will be entitled to a corresponding deduction for income tax purposes, at that time. 2. Definitions. The singular shall include the plural and vice-versa, and the use of one gender shall be deemed to include the other whenever appropriate. a. Non-Employee Director. Shall mean any active member of 1 the Board of Directors of Southern National Corporation, who at the time a grant of Options is made under this Plan is not an employee of SNC or any Subsidary thereof. A director emeritus shall not be considered as an active Board member for purposes of this definition. b. Beneficiary. Any person (including a trust) who may, under any Non- Employee Director's will or under the laws of descent and distribution, succeed to the Non-Employee Director's right to exercise any Option by reason of the person's death. c. Option. Non-Employee Director's right to purchase one or more shares of SNC Common Stock, as granted and determined in accordance with provision of this Plan. d. Option Price. The amount to be paid by a Non-Employee Director for the purchase of shares of SNC Common Stock pursuant to the exercise of an Option, as determined pursuant to paragraph 8, hereof. e. Participant. Any Non-Employee Director of SNC who becomes eligible to participate in this Plan under paragraph 6, hereof. f. Legal Disability. Legal Disability shall mean that because of injury or sickness, the Participant cannot perform each of the material duties of his regular occupation and can not perform his functions as an active Board member. g. SNC Common Stock. Southern National Corporation's $5 par value common stock registered pursuant to the Securities Act of 1933 (the "Act") specifically for purposes of this Plan. h. Board. The Board shall mean the Board of Directors of Southern National Corporation. 3. Shares Subject to the Plan. (a) The shares of SNC Common Stock to be delivered upon exercise of Options granted under the Plan shall be made available, at the discretion of the Board of Directors of SNC, from the authorized, unissued and registered shares of SNC's $5.00 par value Common Stock. Such stock shall be the subject of a registration statement to be filed on Form S-8 or other appropriate registration statement form, by SNC with the Securities and Exchange Commission ("Commission"), and applicable state securities regulators, and which is anticipated to be made effective thereafter. Further, the Board of Directors shall have the authority to take any action related to this Plan which may be required in connection with the registration of the SNC Common Stock as well as the listing of such stock upon the New York Stock 2 Exchange, the principal exchange for the trading of SNC's common stock. (b) Subject to adjustments made pursuant to provisions of paragraph 12, the aggregate number of shares which may be issued upon exercise of all Options which may be granted under this Plan shall not exceed 400,000 shares SNC Common Stock. (c) In the event that any Option granted under the Plan expires or terminates for any reason whatsoever without having been exercised in full, the shares subject to, but not delivered under such Option, shall become available for other Options to the same Participant or other Non-Employee Directors without decreasing the aggregate number of shares which may be granted under the Plan or, shall be available for any other lawful corporate purpose. (d) All Options shall be granted on the condition that the Participant shall not resell any SNC Common Stock purchased by the exercise of an Option except in compliance with all applicable state and federal securities laws and regulations. Each Participant shall, prior to any transfer of SNC Common Stock purchased through the exercise of an Option, advise SNC of the proposed transfer and demonstrate, to the satisfaction of the Board, that such transfer is in compliance with such laws and regulations. 4. Option Agreements. (a) Each Option granted under the Plan shall be evidenced by an Option Agreement which shall be signed by a duly authorized officer of SNC and by the Participant, and which shall contain such provisions as may be approved by the Committee (as defined in paragraph 5). (b) The Option Agreements shall constitute binding contracts between SNC and the Participant, and upon acceptance of any such Option Agreement, each party shall be bound by the terms and restrictions of this Plan and of the Option Agreements. Any Option Agreement utilized for the purpose of granting Options to Participants under this Plan shall specify that such Options are non-qualified stock options and they are not intended to qualify as incentive stock options within the meaning of (S) 422 of the Code, as amended, and shall be so construed. (c) The terms of the Option Agreements shall be in accordance with this Plan, but may include additional provisions and restrictions, provided that the same are not inconsistent with the Plan. 5. Administration of the Plan. The Board of Directors is hereby authorized to administer the Plan. However, this compensation committee ("Committee"), previously appointed by the SNC Board, is hereby delegated by the Board to administer this Plan and such Committee shall serve at the pleasure of the Board and 3 shall consist of not less than three (3) members of the Board. The Committee shall have full power and authority to construe, interpret, and administer the Plan and may from time to time adopt such rules and regulations for carrying out this Plan. Provided further, the Committee shall have exclusive jurisdiction to fix such other provisions of the Option Agreement as the Committee may deem necessary or desirable consistent with the terms of this Plan, and to determine all other questions relating to the administration of the Plan. The interpretation of any provisions of this Plan by the Committee shall be final, conclusive, and binding upon all persons and the Board shall place into effect the determination of the Committee. 6. Eligibility. Any and all active Non-Employee Directors of SNC shall be eligible to receive Options as Participants. If and when a Non-Employee Director becomes inactive or becomes a director emeritus, Options previously granted pursuant to this Plan shall remain exercisable the same as if the inactive director or director emeritus was at all times an active Non-Employee Director. At such time as a Non-Employee Director's or a director emeritus's service terminates for any reason whatsoever, then that Participant or his heirs and successors, shall have the right to exercise any Option granted to that Participant for a time period ending on the earlier of (i) the third anniversary of the Participant's termination; or (ii) the expiration date of the term of the Option(s) as provided in the Option Agreement. Nothing contained in this Plan shall be construed to limit the right of SNC to grant Options otherwise than under the Plan for any proper and lawful corporate purpose, including but not limited to, Options granted to employee or Non-Employee Directors. 7. Terms of the Options. (a) The Participants' total compensation for services as a Non-Employee Director shall consist of a combination of the annual retainer received by each Board member and the sum of all Board meeting fees received by Board members (respectively, "Retainer Fee" and "Meeting Fees"). Each Non-Employee Director may elect under this Plan, to defer 0%, 50% or 100% of his Retainer Fee for each calendar year for the application of that amount towards the grant of Options. In addition, each Non-Employee Director may elect under this Plan, to defer 0%, 50% or 100% of his Meeting Fees for each calendar year for the application of that amount towards the grant of Options. (b) Each Non-Employee Director shall make an irrevocable election in writing on a form to be approved by the Committee, to receive Options in lieu of all or a designated percentage of his Retainer Fee, on or before December 31, of the year preceding the calendar year for which the Retainer Fee applies. As to the deferral of the Meeting Fees, a separate irrevocable election in writing on a form approved by the Committee shall be made to receive Options in lieu of all or a designated percentage of the Meeting Fees, on or before December 31 of the year preceding the calendar year during which 4 the Meeting Fees will be earned. For purposes of this Plan, Meeting Fees shall include all fees or other compensation received for meetings of the Board or committees thereof. (c) On July 1, following the beginning of the calendar year for which an election has been made pursuant to this paragraph 6, Options shall be granted to any Non-Employer Director for the elected portion of his Retainer Fee for that calendar year. On that same date, Options shall be granted to any Non-Employee Director who has so elected, for the elected portion of the Meeting Fees actually earned by the Participant in the first six (6) month period of the applicable calendar year. For the second six (6) months of the applicable calendar year, Options shall be granted to Non-Employer Directors for the elected portion of the second six (6) months' Meeting Fees, on December 31 of the applicable calendar year. For purposes of this subparagraph 7(c), the following definitions shall apply in making the above calculations: (i) The elected portion of the Meeting Fees earned in the first six (6) months of the calendar year shall be defined as the fraction of the Meeting Fees that the Non-Employer Director elected to defer, multiplied by the cash attendance fee for each Board meeting, multiplied by the number of Board meetings actually attended by that director in the first six (6) months of the applicable calendar year; and (ii) The elected portion of the Meeting Fees earned in the second six (6) months of the calendar year shall be defined as the fraction of the Meeting Fees that the Non-Employer Director elected to defer, multiplied by the cash attendance fee for each Board meeting, multiplied by the number of Board meetings actually attended in the second six (6) months of the applicable calendar year. (d) For purposes of determining the number of shares to be the subject of Options granted in accordance with this Plan, the number of Option shares will be equal to the elected portion of the Non-Employee Director's Retainer, the elected portion of the Meeting Fees earned in the first six (6) months of the calendar year and the elected portion of the Meeting Fees earned in the second six (6) months of the calendar year, divided by 25% of the "Average Market Value" of SNC's common stock on the date of each grant. The Average Market Value of SNC's common stock on the date of grant shall be determined by computing the average of the closing prices of SNC common stock as reported by the New York Stock Exchange for the thirty (30) consecutive full trading days of SNC's common stock prior to the actual date of grant. (e) Fractional shares of SNC Common Stock shall not be granted under this Plan and any remaining amount of elected Retainer Fees 5 and Meeting Fees will be paid to each Non-Employee Director in cash, on the date or dates Option grants are made in accordance with this Plan. 8. Option Exercise Price and Term. (a) The price at which shares of SNC Common Stock may be purchased under an Option granted pursuant to this Plan shall be equal to 75% of the market value of SNC's Common Stock on the date of the grant. Market value of SNC's Common Stock for purposes of determining the exercise price shall be determined in accordance with the provisions of subparagraph 7(d) of this Plan. (b) Except as provided in paragraph 6 hereof, Options granted in accordance with this Plan may be exercised during the period commencing on a date six (6) months from the date of grant and ending on the date ten (10) years from the date of the grant. 9. Exercise of Options. (a) No shares shall be delivered pursuant to the exercise of any Option until the requirement of such laws and regulations as may be deemed by the Committee to be applicable to them are satisfied and until payment in full in cash, or in SNC Common Stock as provided in subparagraph 9(b), below, of the Option price for such Options is received by SNC. No Participant, or legal representative, or distributee of a Participant shall be deemed to be a holder of any shares subject to any Option unless and until the certificate or certificates for such shares have been issued and delivered. The Participant's rights to exercise any Option is further subject to the terms and conditions of the Option Agreement to be entered into by and between SNC or its Subsidiaries and the Participant. (b) Options may be exercised by payment of the Option price in full (i) in cash, (ii) by surrender of SNC common stock having a fair market value as of the date of exercise, equal to the Option price of SNC Common Stock to be purchased or (iii) a combination of cash and SNC common stock. Provided however, any Non-Employee Director intending to surrender SNC common stock in full or partial payment for the Option price shall first obtain prior approval of the Board and may not surrender SNC common stock as full or partial payment unless the SNC common stock to be surrendered has been beneficially owned by the Non-Employee Director for a minimum of six (6) months prior to such surrender. (c) In the event there is a "change of control" of SNC within the meaning of the Act during the term of the Plan or during the term of Options granted pursuant to the Plan, all Options granted under this Plan shall become immediately exercisable in full. 10. Other Terms and Conditions. This Plan shall be governed by and construed in accordance with the laws of the State of North Carolina. 6 11. Transferability of Options. An Option granted under the Plan may not be transferred except by will or the laws of descent and distribution, and during the lifetime of the Participant to whom granted, may be exercised only by such Participant, or the Participant's legal representative in the event the participant becomes legally disabled. 12. Capital Adjustments Effecting Stock. In the event of a capital adjustment resulting from a stock dividend, stock split, reorganization, merger, consolidation, or a combination or exchange of shares, the number of shares of SNC Common Stock subject to this Plan and the number of shares under Option shall be adjusted consistent with such capital adjustment. The Option price of any share under Option shall be adjusted so that there will be no change in the aggregate purchase price payable under exercise of any such Option. The granting of an Option pursuant to this Plan shall not affect in any way the right or power of SNC to make adjustments, reorganizations, reclassification, or changes of its capital or business structures or to merge consolidate, dissolve, liquidate, or sell or transfer all or any part of its business or assets. 13. Amendments, Suspension, or Termination of the Plan. (a) The Board shall have the right, at any time, to amend, suspend or terminate the Plan in any respect which it may deem to be in the best interests of SNC, provided, however, no amendments shall be made in the Plan without the approval of the stockholders of SNC which: (i) materially increase the benefits accruing to Participants under the Plan; (ii) materially increase the number of securities which may be issued under the Plan; or (iii) materially modify the requirements as to eligibility for participation in the Plan; (b) In no event shall any modification effect outstanding Options or any unexercised rights thereunder, or in anyway impair the rights of any Option holder without his consent; and (c) In no event shall the formula which determines the Option price and terms, as set forth in paragraphs 7 and 8 of this Plan, be amended more than once every six (6) months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. 14. Effective Date, Term, and Approval. Subject to approval of the stockholders of SNC at the annual meeting to be held on April 22, 1992, or such other date to be established by the Board, the Plan shall take effect on December 19, 1991, the date the Plan was adopted by the Board of Directors of SNC. This Plan will terminate on December 18, 2001 and no Options may be granted under the Plan after that date, unless an earlier termination date is fixed by action of the Board, but any Option granted prior 7 thereto may be exercised in accordance with its terms. The Plan and all Options granted pursuant to it are subject to all laws, approvals, requirements and regulations of any governmental authority which may be applicable thereto and, notwithstanding any revisions of the Plan or Option Agreement, the holder of an Option shall not be entitled to exercise his Option nor shall SNC be obligated to issue any shares to the holder if such exercise or issuance shall constitute a violation, by the holder or SNC, of any provisions of any such approval requirements, law or regulation. IN WITNESS WHEREOF, Southern National Corporation has caused these presents to be executed by its duly authorized officer on this _________ day of December, 1991. SOUTHERN NATIONAL CORPORATION ATTEST: By: (SEAL) ---------------------------- L. Glenn Orr, Jr. (SEAL) Chairman of the Board, - ---------------------------- President and Chief Secretary Executive Officer 8 EX-10.G 5 SOUTHERN NATIONAL CORPORATION 1995 OMNIBUS STOCK Exhibit 10(g) SOUTHERN NATIONAL CORPORATION 1995 OMNIBUS STOCK INCENTIVE PLAN Effective April 10, 1995 SOUTHERN NATIONAL CORPORATION 1995 OMNIBUS STOCK INCENTIVE PLAN --------------------------------- ARTICLE I DEFINITIONS ----------- 1.01. AGREEMENT means a written agreement (including any amendment or --------- supplement thereto) between SNC and a Participant specifying the terms and conditions of an award of Restricted Stock or Performance Shares or an Option or SAR granted to such Participant. 1.02. Applicable Percentage means the same percentage, in multiples of 5%, by --------------------- which the Performance Share Value during a Valuation Period exceeds the Fair Market Value of SNC Common Stock on the date that a Performance Share award was granted. The Applicable Percentage cannot be less than zero but can exceed 100%. 1.03. Board means the Board of Directors of SNC. ----- 1.04. Code means the Internal Revenue Code of 1986, as amended. ---- 1.05. Committee means the Compensation Committee of the Board appointed to --------- administer the Plan. 1.06. Corresponding SAR means an SAR that is granted in relation to a ----------------- particular Option and that can be exercised only upon the surrender to SNC, unexercised, of that portion of the Option to which the SAR relates. 1.07. Date of Exercise means (i) with respect to an Option, the date that the ---------------- Option price is received by SNC and (ii) with respect to an SAR, the date that the notice of exercise is received by SNC. 1.08. Fair Market Value means, on any given date, the closing price of SNC ----------------- Common Stock as reported on the New York Stock Exchange. If SNC Common Stock was not traded on the New York Stock Exchange on such date, then Fair Market ----------- Value is determined with reference to the next preceding day that SNC Common - ----- Stock was so traded. 1.09. Initial Value means, with respect to an SAR, the Fair Market Value of one ------------- share of SNC Common Stock on the date of grant, as set forth in an Agreement. 1.10. Legal Disability means that a Participant is permanently and totally ---------------- disabled within the meaning of Code section 22(e)(3). 1.11. Option means a stock option that entitles the holder to purchase from SNC ------ a stated number of shares of SNC Common Stock at the price set forth in an Agreement. 1.12. Participant means an employee of SNC or of a Subsidiary, including an ----------- employee who is a member of the Board, or a non-employee who satisfies the requirements of Article IV and is selected by the Committee to receive a Restricted Stock or Performance Share award, an Option, an SAR, or a combination thereof. 1.13. Performance Share means an award, in the amount determined by the ----------------- Committee and specified in an Agreement, stated with reference to a specified number of -2- shares of SNC Common Stock, that entitles the holder to receive shares of SNC Common Stock, a cash payment, or a combination of SNC Common Stock and cash, in accordance with the provisions of Article X. The Committee, in its discretion, will determine whether a Performance Share will be settled with shares of SNC Common Stock, cash or a combination of SNC Common Stock and cash. 1.14. Performance Share Value means the lowest Fair Market Value of SNC Common ----------------------- Stock during a Valuation Period. 1.15. Plan means the Southern National Corporation 1995 Omnibus Stock Incentive ---- Plan. 1.16. Restricted Stock means shares of SNC Common Stock awarded to a ---------------- Participant under Article IX. Shares of SNC Common Stock shall cease to be Restricted Stock when, in accordance with the terms of the applicable Agreement, they become transferable and free of substantial risks of forfeiture. 1.17. Retirement means that a Participant has separated from service on or ---------- after his earliest early retirement date established under a tax-qualified pension or profit sharing plan maintained by SNC or a Subsidiary in which he participates. 1.18. SAR means a stock appreciation right that entitles the holder to receive, --- with respect to each share of SNC Common Stock encompassed by the exercise of such SAR, the -3- amount determined by the Committee and specified in an Agreement. In the absence of such a determination, the holder shall be entitled to receive, with respect to each share of SNC Common Stock encompassed by the exercise of such SAR, the excess of the Fair Market Value on the Date of Exercise over the Initial Value. References to "SARs" include both Corresponding SARs and SARs granted independently of Options, unless the context requires otherwise. 1.19. SNC means Southern National Corporation. --- 1.20. SNC Common Stock means the common stock, $5.00 par value, of SNC. ---------------- 1.21. Subsidiary means any "subsidiary corporation" as such term is defined in ---------- Code section 424. 1.22. Valuation Period means the period beginning on January 1 and ending on ---------------- the following December 31 beginning with the January 1 following the date of a Performance Share award and during each of the four calendar years thereafter. There shall be five Valuation Periods with respect to each Performance Share award. ARTICLE II PURPOSES -------- The Plan is intended to assist SNC in recruiting and retaining employees with ability and initiative by enabling employees to participate in its future success and to associate their interests with those of SNC and -4- its shareholders. The Plan is intended to permit the award of shares of Restricted Stock, the award of Performance Shares, the grant of SARs, and the grant of both Options qualifying under Code section 422 ("incentive stock options") and Options not so qualifying. No Option that is intended to be an incentive stock option shall be invalid for failure to qualify as an incentive stock option. The proceeds received by SNC from the sale of SNC Common Stock pursuant to this Plan shall be used for general corporate purposes. ARTICLE III ADMINISTRATION -------------- Except as provided in this Article III, the Plan shall be administered by the Committee. The Committee shall have authority to award Restricted Stock and Performance Shares and to grant Options and SARs upon such terms (not inconsistent with the provisions of this Plan) as the Committee may consider appropriate. Such terms may include conditions (in addition to those contained in this Plan) on the exercisability of all or any part of an Option or SAR or on the transferability or forfeitability of Restricted Stock. Notwithstanding any such condition, the Committee may, in its discretion, accelerate the time at which any Option or SAR may be -5- exercised or the time at which Restricted Stock may become transferable or nonforfeitable. In addition, the Committee shall have complete authority to interpret all provisions of this Plan; to prescribe the form of Agreements; to adopt, amend, and rescind rules and regulations pertaining to the administration of the Plan; and to make all other determinations necessary or advisable for the administration of this Plan. The express grant in the Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee. Any decision made, or action taken, by the Committee or in connection with the administration of this Plan shall be final and conclusive. No member of the Committee shall be liable for any act done in good faith with respect to this Plan or any Agreement, or Option, SAR, Restricted Stock award or Performance Share award. All expenses of administering this Plan shall be borne by SNC. The Committee, in its discretion, may delegate to one or more officers of SNC, all or part of the Committee's authority and duties with respect to Participants who are not subject to the reporting and other provisions of Section 16 of the Securities Exchange Act of 1934, as in effect from time to time. In the event of such delegation, and as to matters encompassed by the delegation, references in the Plan to the Committee shall -6- be interpreted as a reference to the Committee's delegate or delegates. The Committee may revoke or amend the terms of a delegation at any time but such action shall not invalidate any prior actions of the Committee's delegate or delegates that were consistent with the terms of the Plan. ARTICLE IV ELIGIBILITY ----------- 4.01. General. Any employee of SNC or of any Subsidiary (including any ------- corporation that becomes a Subsidiary after the adoption of this Plan) is eligible to participate in this Plan if the Committee, in its sole discretion, determines that such person has contributed or can be expected to contribute to the profits or growth of SNC or a Subsidiary. Any such employee may be awarded shares of Restricted Stock or Performance Shares or may be granted one or more Options, SARs, or Options and SARs. A Director of SNC who is an employee of SNC or a Subsidiary may be awarded shares of Restricted Stock and Performance Shares and may be granted Options or SARs under this Plan. Further, the Committee may from time to time in its sole discretion award shares of Restricted Stock and Performance Shares and may grant Options or SARs to non-employees or non-key employees in conjunction with mergers and acquisition transactions. A member of -7- the Committee may not participate in this Plan during the time that his participation would prevent the Committee from being "disinterested" for purposes of Securities and Exchange Commission Rule 16b-3 as in effect from time to time. 4.02. Grants. The Committee will designate individuals to whom shares of ------ Restricted Stock and Performance Shares are to be awarded and to whom Options and SARs are to be granted and will specify the number of shares of SNC Common Stock subject to each award or grant. An Option may be granted with or without a related SAR. An SAR may be granted with or without a related Option. All shares of Restricted Stock and Performance Shares awarded, and all Options and SARS granted, under this Plan shall be evidenced by Agreements which shall be subject to the applicable provisions of this Plan and to such other provisions as the Committee may adopt. No Participant may be granted incentive stock options or related SARs (under all incentive stock option plans of SNC and its Subsidiaries) which are first exercisable in any calendar year for stock having an aggregate Fair Market Value (determined as of the date an option is granted) exceeding $100,000. In addition, no Participant may be granted Options and SARs that are not related to an Option in any calendar year for more than 30,000 shares of SNC Common -8- Stock. For purposes of the preceding sentence an Option and related SAR shall be treated as a single award. ARTICLE V STOCK SUBJECT TO PLAN --------------------- 5.01. Source of Shares. Upon the award of shares of Restricted Stock and when ----------------- a Performance Share is earned, SNC may issue authorized but unissued SNC Common Stock. Upon the exercise of an Option or SAR, SNC may deliver to the Participant (or the Participant's broker if the Participant so directs), authorized but unissued SNC Common Stock. 5.02. Maximum Number of Shares. The maximum aggregate number of shares of SNC ------------------------- Common Stock that may be issued pursuant to the exercise of Options and SARs and the award of Restricted Stock and the settlement of Performance Shares under this Plan is two million, subject to increases and adjustments as provided in this Article V and Article XI. 5.03. Replenishment. The maximum number of shares authorized for issuance under -------------- this Plan under Section 5.02 shall be increased each calendar year by 3% (the Replenishment Percentage) of the amount, if any, by which the total number of shares of SNC Common Stock outstanding as of the last day of such calendar year exceeds the total number of shares of SNC Common Stock -9- outstanding as of the first day of such calendar year. Provided, however, that: (i) in no event shall the total number of shares authorized for issuance under this Plan exceed 10% of authorized and outstanding SNC Common Stock as of the time of any replenishment adjustment and (ii) for calendar year 1995, the first day of the calendar year shall be deemed to be May 23, 1995 (the date of SNC's 1995 annual shareholders' meeting). The issuance of shares of SNC Common Stock under this Plan and the application of Article XI shall be disregarded for purposes of applying the preceding sentence. 5.04. Incentive Stock Options. Sections 5.02 and 5.03 to the contrary ----------------------- notwithstanding, the maximum aggregate number of shares of SNC Common Stock that may be issued pursuant to the exercise of Options that are incentive stock options granted under this Plan is two million, subject to adjustment as ----------- provided in Article XI. 5.05. Forfeitures, etc. If an Option or SAR is terminated, in whole or in part, ----------------- for any reason other than its exercise, the number of shares of SNC Common Stock allocated to the Option of SAR or portion thereof may be reallocated to other Options, SARs, Restricted Stock, and Performance Share awards to be granted under this Plan. Any shares of Restricted Stock that are forfeited may be reallocated to other Options, SARs or Restricted Stock awards to be granted under this Plan. -10- ARTICLE VI OPTION PRICE ------------ The price per share for SNC Common Stock purchased on the exercise of an Option shall be determined by the Committee on the date of grant; provided, however, that the price per share for SNC Common Stock purchased on the exercise of any non-incentive stock option shall not be less than eighty-five percent (85%) of the Fair Market Value on the date the Option is granted. The price per share for SNC Common Stock purchased on the exercise of any incentive stock option shall not be less than one hundred percent (100%) of the Fair Market Value on the date the Option is granted. ARTICLE VII EXERCISE OF OPTIONS ------------------- 7.01. Maximum Option or SAR Period. The maximum period in which an Option or ---------------------------- SAR may be exercised shall be determined by the Committee on the date of grant except that no Option that is an incentive stock option and any Corresponding SAR that relates to such Option shall be exercisable after the expiration of ten years from the date the Option or SAR was granted. The terms of any Option or SAR may provide that it is exercisable for a period less than such maximum period. -11- 7.02. Nontransferability. Any Option or SAR granted under this Plan shall be ------------------ nontransferable except by will or by the laws of descent and distribution. In the event of any such transfer, the Option and any Corresponding SAR that relates to such Option must be transferred to the same person or persons or entity or entities. During the lifetime of a Participant to whom an Option or SAR is granted, the Option or SAR may be exercised only by the Participant. No right or interest of a Participant in any Option or SAR shall be liable for, or subject to, any lien, obligation, or liability of such Participant. ARTICLE VIII METHOD OF EXERCISE ------------------ 8.01. Exercise. An Option or SAR granted under this Plan shall be deemed to -------- have been exercised on the Date of Exercise. Subject to the provisions of Articles VII and XII, an Option or SAR may be exercised in whole at any time or in part from time to time at such times and in compliance with such requirements as the Committee shall determine; provided, however, that a Corresponding SAR that is related to an incentive stock option may be exercised only to the extent that the related Option is exercisable and only when the Fair Market Value exceeds the option price of the related Option. An Option or SAR -12- granted under this Plan may be exercised with respect to any number of whole shares less than the full number of whole shares for which the Option or SAR could be exercised. A partial exercise of an Option or SAR shall not affect the right to exercise the Option or SAR from time to time in accordance with this Plan and the applicable Agreement with respect to remaining shares subject to the Option or related to the SAR. The exercise of either an Option or Corresponding SAR shall result in the termination of the other to the extent of the number of shares with respect to which the Option or Corresponding SAR is exercised. 8.02. Payment. Unless otherwise provided by the Agreement, payment of the ------- Option price shall be made in cash or a cash equivalent acceptable to the Committee. If the Agreement provides, payment of all or part of the Option price may be made by surrendering shares of SNC Common Stock to SNC. If SNC Common Stock is used to pay all or part of the Option price, the shares surrendered must have a Fair Market Value (determined as of the day preceding the Date of Exercise) that is not less than such price or part thereof. 8.03. Determination of Payment of Cash and/or SNC Common Stock Upon Exercise ---------------------------------------------------------------------- of SAR. At the Committee's discretion, the amount payable as a result of the - ------ exercise of an SAR may be settled in cash, SNC Common Stock, or a -13- combination of cash and SNC Common Stock. A fractional share shall not be deliverable upon the exercise of an SAR but a cash payment will be made in lieu thereof. 8.04. Shareholder Rights. No Participant shall have any rights as a stockholder ------------------ with respect to shares subject to an Option or SAR until the Date of Exercise of such Option or SAR. ARTICLE IX RESTRICTED STOCK ---------------- 9.01. Award. In accordance with the provisions of Article IV, the Committee ----- will designate each individual to whom an award of Restricted Stock is to be made and will specify the number of shares of SNC Common Stock covered by the award. 9.02. Vesting. The Committee, on the date of the award, may prescribe that a ------- Participant's rights in the Restricted Stock shall be forfeitable or otherwise restricted for a period of time set forth in the Agreement. By way of example and not of limitation, the restrictions may postpone transferability of the shares or may provide that the shares will be forfeited if the Participant separates from the service of SNC and its Subsidiaries before the expiration of a stated term or if SNC, SNC and its Subsidiaries or the Participant fail to achieve stated objectives. -14- 9.03. Shareholder Rights. Prior to their forfeiture in accordance with the terms ------------------ of the Agreement and while the shares are Restricted Stock, a Participant will have all rights of a shareholder with respect to Restricted Stock, including the right to receive dividends and vote the shares; provided, however, that (i) a Participant may not sell, transfer, pledge, exchange, hypothecate, or other- wise dispose of Restricted Stock, (ii) SNC shall retain custody of the certificates evidencing shares of Restricted Stock, and (iii) the Participant will deliver to SNC a stock poser, endorsed in blank, with respect to each award of Restricted Stock. The limitations set forth in the preceding sentence shall not apply after the shares cease to be Restricted Stock. ARTICLE X PERFORMANCE SHARE AWARDS 10.01. Award. In accordance with the provisions of Article IV, the Committee ------ will designate individuals to whom an award of Performance Shares is to be granted and will specify the number of shares of SNC Common Stock covered by the award. The number of shares of SNC Common Stock covered by a Performance Share award is merely a target; the number of shares of SNC Common Stock earned and issued under a Performance Share award may be more or less than the target based on the Applicable Percentage. -15- 10.02. Earning the Award. A Performance Share award will be earned based on the ------------------ Performance Share Value during each of the five Valuation Periods following the date of award. The number of shares of SNC Common Stock earned under a Performance Share award as of the end of a Valuation Period will be equal to the product of (i) the number of shares covered by the Performance Share award and (ii) the Applicable Percentage; provided, however, that such product shall be reduced by the number of shares of SNC Common Stock earned or, in the case of a cash payment, the number of shares represented by the payment, in a prior Valuation Period with respect to the same Performance Share Award. 10.03. Employment. Section 10.02 to the contrary notwithstanding, a ----------- Participant's right to earn additional shares of SNC Common Stock or cash payments under Performance Share awards shall terminate if the Participant's employment with SNC and its Subsidiaries ends for reasons other than death, Legal Disability or Retirement. The preceding sentence shall not affect a Participant's right to receive shares of SNC Common Stock or cash payments that were earned in a Valuation Period that ended before the Participant's termination of employment. If a Participant's employment with SNC and its Subsidiaries ends on account of death, Legal Disability or Retirement, the Participant (or the -16- Participant's estate in the case of his death), shall be entitled to receive shares of SNC Common stock or cash payment to the extent that Performance Shares are earned in Valuation Periods preceding the Participant's termination of employment and the next following Valuation Period. 10.04. Issuance of Shares. To the extent that a Performance Share award is ------------------ settled with SNC Common Stock, the shares of SNC Common Stock earned in accordance with Section 10.02 shall be issued to the Participant as soon as practicable after the end of the Valuation Period; provided, however, that no shares shall be issued unless the Committee certifies the number of shares of SNC Common Stock earned by the Participant during that Valuation Period. A fractional share shall not be issuable under this Article X but instead will be settled in cash. 10.05. Settlement in Cash. To the extent that Performance Share award is ------------------ settled in cash, the payment will be made in a single sum as soon as practicable after the end of the Valuation Period; provided, however, that no payment shall be made unless the Committee certifies the amount earned by the Participant during that Valuation Period. To the extent that a Performance Share award is settled in cash, the amount of cash payable under a Performance Share award shall equal the Fair Market Value -17- number of shares of SNC Common Stock earned during the Valuation Period on the date that the Committee certifies the Participant's right to receive the payment. 10.06. Shareholder Rights. No Participant shall, as a result of receiving an ------------------ award of Performance Shares, have any rights as a shareholder until and to the extent that the award of Performance Shares is earned and SNC Common Stock is issued to the Participant. A Participant may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of a Performance Share award or the right to receive payment thereunder other than by will or the laws of descent and distribution. ARTICLE XI ADJUSTMENT UPON CHANGE IN SNC COMMON STOCK ------------------------------------------ The maximum number of shares that may be issued pursuant to the exercise of Options and SARs and the award of Restricted Stock and the settlement of Performance Shares under this Plan and the Replenishment Percentage in Section 5.03 shall be proportionately adjusted, and the terms of outstanding Restricted Stock awards, Performance Share Awards, Options, and SARs shall be adjusted, as the Committee shall determine to be equitably required in the event that (a) SNC (i) effects one or more stock dividends, stock split-ups, subdivisions or consolidations of shares or (ii) engages -18- in a transaction to which Code section 424 applies or (b) there occurs any other event which, in the judgment of the Committee necessitates such action. Any determination made under this Article XI by the Committee shall be final and conclusive. The issuance by SNC of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of SNC convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, outstanding awards of Restricted Stock, Performance Shares, Options or SARs. The Committee may award shares of Restricted Stock and Performance Shares, may grant Options, and may grant SARs in substitution for stock awards, stock options, stock appreciation rights, or similar awards held by an individual who becomes an employee of SNC or a Subsidiary in connection with a transaction described in the first paragraph of this Article XI. Notwithstanding any provision of the Plan (other than the limitation of Article V), the terms of such substituted Restricted Stock and Performance Share awards and Option or SAR -19- grants shall be as the Committee, in its discretion, determines is appropriate. ARTICLE XII COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES ----------------------------------------------------- No Option or SAR shall be exercisable, no SNC Common Stock shall be issued, no certificates for shares of SNC Common Stock shall be delivered, and no payment shall be made under this Plan except in compliance with all applicable federal and state laws and regulations (including, without limitation, withholding tax requirements) and the rules of all domestic stock exchanges on which SNC's shares may be listed. SNC shall have the right to relay on an opinion of its counsel as to such compliance. Any share certificate issued to evidence SNC Common Stock for which shares of Restricted Stock are awarded, Performance Shares were earned or for which an Option or SAR is exercised may bear such legends and statements as the Committee may deem advisable to assure compliance with federal and state laws and regulations. No Option or SAR shall be exercisable, no SNC Common Stock shall be issued, no certificate for shares shall be delivered, and no payment shall be made under this Plan until SNC has obtained such consent or approval as the Committee may deem advisable from regulatory bodies having jurisdiction over such matters. -20- ARTICLE XIII GENERAL PROVISIONS ------------------ 13.01. Effect on Employment. Neither the adoption of this plan, its operation, -------------------- nor any documents describing or referring to this plan (or any part thereof) shall confer upon any employee any right to continue in the employ of SNC or a Subsidiary or in any way affect any right and power of SNC or a Subsidiary to terminate the employment of any employee at any time with or without assigning a reason therefor. 13.02. Unfunded Plan. The Plan, insofar as it provides for grants, shall be ------------- unfunded, and SNC shall not be required to segregate any assets that may at any time be represented by grants under this Plan. Any liability of SNC to any person with respect to any grant under this Plan shall be based solely upon any contractual obligations that may be created pursuant to this Plan. No such obligation of SNC shall be deemed to be secured by any pledge of, or other encumbrance on, any property of SNC. 13.03. Rules of Construction. Headings are given to the articles and sections of --------------------- this Plan solely as a convenience to facilitate reference. The reference to any statute, regulation, or other provision of the law shall be construed to refer to any amendment to or successor of such provision of the law. -21- 13.04. Employee Status. For purposes of determining the applicability of Code --------------- section 422 (relating to incentive stock options), or in the event that the terms of any Option or SAR provide that it may be exercised or that awards of Restricted Stock or Performance Shares may become vested or earned only during employment or within a specified period of time after termination of employment, the Committee may decide to what extent leaves of absence for governmental or military service, illness, temporary disability, or other reasons shall not be deemed interruption of continuous employment. ARTICLE XIV AMENDMENT --------- The Board may amend or terminate this Plan from time to time; provided, however, that no amendment may become effective until shareholder approval is obtained if (i) the amendment increases the aggregate number of shares of SNC Common Stock that may be issued under the Plan or (ii) the amendment changes the class of individuals eligible to become Participants. No amendment shall, without a Participant's consent, adversely affect any rights of such Participant under any outstanding Restricted Stock or Performance Share award or under any Option or SAR outstanding at the time such amendment is made. -22- ARTICLE XV DURATION OF PLAN ---------------- No shares of Restricted Stock or Performance Shares may be awarded and no Option or SAR may be granted under this Plan after April 9, 2005. Restricted Stock and Performance Share awards and Options and SARs granted before that date shall remain valid in accordance with their terms. ARTICLE XVI EFFECTIVE DATE OF PLAN ---------------------- Shares of Restricted Stock and Performance Shares may be awarded and Options and SARs may be granted under this Plan upon its adoption by the Board, provided that no Restricted Stock or Performance Share award, Option or SAR will be effective unless this Plan is approved by shareholders holding a majority of SNC's outstanding voting stock, voting either in person or by proxy at a duly held shareholders' meeting within twelve months of such adoption. -23- EX-10.J 6 SOUTHERN NATIONAL DEFERRED COMPENSATION PLAN EXHIBIT 10(J) SOUTHERN NATIONAL DEFERRED COMPENSATION PLAN FOR KEY EXECUTIVES Effective January 1, 1989
TABLE OF CONTENTS PAGE ---- ARTICLE I STATEMENT OF PURPOSE..................................... 1 ARTICLE II DEFINITIONS.............................................. 2 ARTICLE III ELIGIBILITY, PARTICIPATION AND DEFERRALS................. 8 ARTICLE IV SEVERANCE BENEFITS....................................... 13 ARTICLE V SURVIVOR BENEFITS........................................ 15 ARTICLE VI NONCOMPETITION........................................... 17 ARTICLE VII ADMINISTRATIVE COMMITTEE................................. 20 ARTICLE VIII AMENDMENT AND TERMINATION................................ 21 ARTICLE IX MISCELLANEOUS............................................ 22 ARTICLE X CONSTRUCTION............................................. 28
i ARTICLE I --------- STATEMENT OF PURPOSE -------------------- This Plan provides retirement and survivor benefits to or on behalf of certain key executives of Southern National Corporation and its Participating Subsidiaries, and thereby helps Southern National attract and retain superior key management employees and gives such employees additional incentive to work to make Southern National more profitable. For executives who participate in the Southern National Employee Stock Ownership Plan (the "ESOP"), a qualified stock bonus plan with a qualified 410(k) cash or deferred arrangement feature, the Plan restores benefits lost or denied because of certain limitations imposed by the rules governing qualified retirement plans. ARTICLE II ---------- DEFINITIONS ----------- When used herein and capitalized, the following terms shall have the meanings denoted unless a different meaning is clearly required by the context. 1. Change in Control. A Change in Control shall be deemed to have ----------------- occurred upon the happening of any of the following: (a) the adoption of a plan of merger or consolidation of Southern National Corporation with any other corporation or association as a result of which the holders of the voting capital stock of Southern National Corporation would receive less than 50% of the voting capital stock of the surviving or resulting corporation; (b) the occurrence of any event (including, without limitation, any merger or consolidation) as a result of which Southern National Corporation is not the owner beneficially and of record of 50% or more of the voting power of the capital stock of Southern National Bank of North Carolina, N.A. (the "Bank"); (c) the sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of Southern National Corporation or the Bank (other than as security for the obligations of Southern National Corporation or the Bank); 2 (d) the approval by the shareholders of Southern National Corporation or the Bank of any plan or proposal for the liquidation or dissolution of Southern National Corporation or the Bank; (e) the acquisition by any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act")), other than any Trustee under any employee benefit plan of Southern National Corporation or the Bank, and persons (as such term is so used) who are then affiliates and associates (as defined on January 1, 1989 in Rule 12b-2 under the Exchange Act) of such person, or any one of them, after the date this plan is executed, directly or indirectly, of beneficial ownership (as defined on January 1, 1989 in Rules 13d-3 and 13d-5 under the Exchange Act) of securities of Southern National Corporation representing in the aggregate 20% or more of the voting power of all then outstanding securities of Southern National Corporation having the right under ordinary circumstances to vote in an election of the Board of Directors of Southern National Corporation (without limitation, any securities having such voting power that any such person has the right to acquire pursuant to any agreement, or upon exercise of conversation of rights, warrants or options, or otherwise, shall be deemed beneficially owned by such person); or (f) the failure, for any reason, during any period of two consecutive years, of the individuals who at the beginning of such period constitute the entire Board of Directors of 3 Southern National Corporation (the "Board") and any new directors whose election by the Board, or whose nomination for election by the shareholders, shall have been approved by a vote of at least two-thirds (2/3) of the directors of the Board then still in office who either were directors at the beginning of the period or whose election or nomination for election shall previously have been so approved, to constitute a majority of the members of the Board. 2. Code. The Internal Revenue Code of 1986, as amended, and as it may be ---- further amended from time to time. 3. Committee. The committee which administers the Plan and which is more --------- particularly described in Article VIII below. The Committee shall be made up of the individuals who hold the following offices of Southern National Bank of North Carolina, N.A.: Chairman of the Board of Directors, President, Director of Human Resources, and Chief Financial Officer. 4. Company. Southern National Corporation, Participating Subsidiaries, ------- and any successor by merger, acquisition or otherwise. All references to "Company" shall be applied to each such Company as if the Plan were solely the Plan of such Company. 5. Company Matching Contributions. The Company's matching contributions ------------------------------ to the ESOP based on a Participant's Pre-Tax Employee Contributions. 6. Compensation. Compensation shall have the same meaning the ESOP ------------ ascribes to such term in its definition of 4 "Compensation," as that definition is amended from time to time, such definition being expressly incorporated herein by reference. 7. Deferral Election. An irrevocable election by a Participation to ----------------- defer a portion of his Compensation for a calendar year, such election to be made in the manner prescribed by Article III, Section 3 of this Plan. Amounts so deferred are "elective deferrals." 8. Designated Beneficiary. One or more beneficiaries, as designated in a ---------------------- writing filed with the Committee, to who payments otherwise due to or for the benefit of the Participant hereunder shall be made in the event of his death prior to the complete payment of such benefit. In the event no such written designation is made by the Participant or if such beneficiary shall not be in existence at the Participant's death or if such beneficiary predeceases the Participant, the Participant shall be deemed to have designated his estate as such beneficiary. 9. Employee. A person who is employed the Company. -------- 10. ERISA. The Employee Retirement Income Security Act of 1974, as ----- amended, and as it may be further amended from time to time. 11. ESOP. The Southern National Employee Stock Ownership Plan, as amended ---- and restated effective July 1, 1987, as it may be further amended from time to time. 12. ESOP Excess Plan. The Southern National ESOP Excess Plan, effective ---------------- January 1, 1989, and as it may be amended from time to time. 5 13. Insurable. Insurable shall mean that at the time of the Participant's --------- election to defer Compensation pursuant to this Plan the life of the Participant is insurable by an insurance company approved by the Committee and at premium rates acceptable to the Committee in the exercise of its sole and absolute discretion. 14. Participant. An Employee who has been notified pursuant to Article ----------- III, Section 1 that he is eligible to participate in the Plan and who has made a Deferral Election. 15. Participating Subsidiaries. Each subsidiary of Southern National -------------------------- Corporation which, pursuant to action duly adopted by its board of directors, has adopted this Plan. "Subsidiary" means a corporation over 50% of the voting stock of which is owned by Southern National Corporation, by another subsidiary or other subsidiaries of Southern National Corporation. The foregoing notwithstanding, the Board of Directors of Southern National Corporation may designate any company affiliated with Southern National Corporation as a "subsidiary" for purposes of this Plan. 16. Plan. The Southern National Deferred Compensation Plan for Key ---- Executives as contained herein, and as it may be amended from time to time. 17. Pre-Tax Employee Contributions. Amounts contributed to the ESOP on ------------------------------ behalf of a Participant pursuant to the Participant's election to have his Compensation for a calender year reduced and contributed to the ESOP in accordance with Section 401(k) 6 (or any successor section) of the Code and corresponding provisions of the ESOP. 18. Severance Date. The date the Participant's employment with the Company -------------- terminates for any reason other than death; provided, however, that if the Participant's employment ceases because of Total Disability, his Severance Date shall be the earlier of (i) the first date he is no longer under a Total Disability and does not return to active employment with the Company or (ii) his sixty-fifth (65th) birthday. 19. Total Disability. Total Disability shall have the same meaning as is ---------------- ascribed to such term by the long-term disability benefits plan sponsored by the Company and in which the Participant participates. If the Participant does not participate in such plan or if the Company does not sponsor such a plan, then the Participant shall be under a Total Disability if by reason of sickness or injury he cannot perform each of the material duties of his regular occupation; provided, however, that after the first twenty-four (24) months he shall be under a Total Disability if he cannot perform each of the material duties of any gainful occupation for which he is reasonably fitted by training, education or experience. 7 ARTICLE III ----------- ELIGIBILITY, PARTICIPATION AND DEFERRALS ---------------------------------------- 1. Eligibility. The Committee shall have the sole discretion to determine ----------- the Employees who are eligible to become Participants; provided, however, that no Employee who is not a member of the "select group of management or highly compensated employees," as defined in Section 201(2), 301(a)(3) and 401(a) of ERISA shall be eligible to become a Participant in the Plan. An Employee shall become eligible upon being notified by the Committee that he is eligible. 2. Participation. An Employee who is eligible to participate shall become ------------- a Participant by making a Deferral Election. 3. Elective Deferrals. ------------------ (a) For each calendar year, each eligible Employee is entitled to make a Deferral Election in such manner and form as the Committee prescribes to defer Compensation for the calendar year which, by reason of the application of Sections 401(k), 402(g) and 415 of the Code and the corresponding provisions of the ESOP, the Employee is prohibited from deferring and having contributed to the ESOP as Pre-Tax Employee Contributions. (b) Deferral Elections shall be made as follows. (i) Within thirty (30) days following the adoption of this Plan to defer Compensation to be earned in the remainder of such calendar year; 8 (ii) Within thirty (30) days following the date on which an Employee first becomes eligible to participate in this Plan to defer Compensation to be earned in the remainder of such calendar year; or (iii) In all other cases on or before December 31 to defer Compensation to be earned in succeeding calendar years. 4. Limitations on Elective Deferrals. --------------------------------- (a) The maximum amount by which an eligible Employee or Participant may reduce his Compensation for a calendar year pursuant to a Deferral Election under Article III, Section 3 shall be the difference between (i) fifteen percent (15%) of his Compensation for the calendar year and (ii) his maximum permissible amount of Pre-Tax Employee Contributions for the calendar year. The eligible Employee's or Participant's "maximum permissible amount of Pre-Tax Employee Contributions for the calendar year" is (i) the annual $7,000 limitation set forth in Code Section 402(g) and any corresponding provisions of the ESOP, as amended and adjusted for inflation, on elective deferrals to certain qualified retirement plans or, if less, (ii) the maximum amount of Pre-Tax Employee Contributions permitted to be made by the eligible Employee or Participant for such calendar year by reason of the application of the actual deferral percentage nondiscrimination test and annual addition limitation set forth in Sections 401(k) and 415 of the Code and in any corresponding provisions of the ESOP. 9 (b) Anything to the contrary herein notwithstanding, a Participant's elective deferrals of Compensation for a calendar year shall not be permitted under this Plan unless the Participant has made the maximum permissible amount of Pre-Tax Employee Contributions for the calendar year. 5. Deemed Deferrals. In addition to any elective deferrals pursuant to a ---------------- Deferral Election in accordance with Sections 3 and 4 of this Article III, for each calendar year for which a Participant has made a Deferral Election, the Participant shall receive credit for "deemed deferrals" equal to the difference between (A) and (B) where (A) is the amount of Company Matching Contributions which would have been credited to the Participant's account in the ESOP (i) had the ESOP permitted the amount of the elective deferrals the Participant made pursuant to a Deferral Election under this Plan for the calendar year to have been contributed as Pre-Tax Employee Contributions, and (ii) had there not been given effect the compensation, elective deferral, nondiscrimination and annual addition limitations set forth in Sections 401(a)(17), 402(g), 401(k), 401(m), and 415 of the Code and in any corresponding provisions of the ESOP, and where (B) is the amount of Company Matching Contributions actually credited to the Participant's account in the ESOP. 6. No ESOP Excess Plan Deferrals. Anything to the contrary herein ----------------------------- notwithstanding, any eligible Employee or Participant who has elected to make deferrals of compensation under the ESOP Excess Plan for a calendar year (hereafter called 10 "ESOP Excess Deferrals") shall be ineligible to make a Deferral Election under this Plan for such calendar year. The foregoing notwithstanding, any eligible Employee who has elected to make ESOP Excess Deferrals for the 1989 calendar year shall be permitted to make a Deferral Election to defer Compensation under this Plan for the calendar year 1989; provided, however (i) such Deferral Election shall supersede his deferral election under the ESOP Excess Plan, (ii) no additional ESOP Excess Deferrals for the calendar year 1989 shall be made after the making of such Deferral Election, (iii) any ESOP Excess Deferrals for the calendar year 1989 which were made prior to such Deferral Election shall be transferred to this Plan and treated for all purposes as elective deferrals made under such Deferral Election and subject to Sections 3 and 4 of this Article III, and (iv) such Deferral Election shall not be honored unless the eligible Employee has properly executed a release of liability in a form acceptable to the Committee with respect to deferred compensation benefits which would have been payable under the ESOP Excess Plan with respect to ESOP Excess Deferrals for the 1989 calendar year. 7. Benefits. The total amount of deferred compensation or other benefits -------- payable under this Plan to a Participant or his Designated Beneficiary pursuant to Articles IV or V shall be the sum of the amounts payable with respect to each individual calendar year for which the Participant has a deferral amount (whether elective or deemed) for such calendar year. The amount of deferred compensation or other benefits payable with respect 11 to deferrals (elective or deemed) for any calendar year shall be determined in accordance with the appropriate column in the schedule of benefits attached as an exhibit to the Deferral Election for the calendar year. 12 ARTICLE IV ---------- SEVERANCE BENEFITS ------------------- 1. Benefits. After the Severance Date of a Participant, the Company shall -------- pay the Participant a level fifteen (15) year annuity payable in equal monthly installments. The amount of the monthly payments are determined in accordance with the appropriate column on the schedule of benefits provided for in Article III, Section 7. Payment of the benefit shall commence on the first January 1st following the Severance Date; provided, however, that if the Severance Date occurs after the Participant attains age sixty (60) but before he attains age sixty-five (65), payment shall commence on the first January 1st following the Participant's sixty-fifth (65th) birthday unless the Participant files a written election with the Committee no later than the later of the date of the making of his last Deferral Election or the date two (2) years prior to his Severance Date, to have his benefits commence on the first January 1st following his Severance Date. Payment shall continue on the first day of each month thereafter until one hundred eighty (180) monthly payments have been made. 2. Payments to Beneficiary. In the event a Participant dies prior to full ----------------------- payment of his benefits under this Article IV, all remaining payments due hereunder shall be made to such Participant's Designated Beneficiary, provided such Designated Beneficiary is living at the time of the Participant's death. In 13 the event the Designated Beneficiary is not living at the time of the Participant's death, all remaining payments due hereunder shall be paid to the Participant's estate. In the event the Designated Beneficiary survives the Participant but dies prior to full payment of all remaining payments due hereunder, all payments then remaining due hereunder shall be paid to the Designated Beneficiary's estate. 14 ARTICLE V --------- SURVIVOR BENEFITS ----------------- 1. Benefits. Upon the death of the Participant prior to his Severance -------- Date the Company shall pay to the Participant's Designated Beneficiary a level fifteen (15) year annuity payable in equal monthly installments. Payment of the benefit shall commence on the first January 1st following the Participant's death and shall continue on the first day of each month thereafter until one hundred eighty (180) monthly payments have been made. The amount of the monthly payments shall be the sum of (A) and (B) below: (A) With respect to elective and deemed deferrals made in calendar years in which the Participant was deemed Insurable, the amount determined with reference to the appropriate column in the schedule of benefits for calculating survivor benefits attached to the Participant's Deferral Elections for those calendar years. (B) With respect to elective and deemed deferrals made in calendar years in which the Participant was deemed not Insurable, the amount determined in accordance with the appropriate column on the schedule of benefits attached to the Participant's Deferral Elections for those calendar years on the basis of the assumption that the Participant terminated employment with the Company on the day immediately preceding his death. 15 2. Payments to Beneficiary. In the event that a Designated Beneficiary ----------------------- dies prior to full payment of his survivor benefits under this Article V, all remaining payments due hereunder shall be made to such Designated Beneficiary's estate. In the event the Designated Beneficiary is not living at the time of the Participant's death, the survivor benefits shall be paid to the Participant's estate. ARTICLE VI ---------- NONCOMPETITION -------------- Notwithstanding any provision of this Plan to the contrary but subject to the proviso below, if any Participant terminates employment with the Company for any reason and later accepts employment with, or assumes any other position with, any national bank, state bank, savings and loan association, or any other similar financial institution which has one or more offices in a state in which a subsidiary of Southern National Corporation has a banking office, the Company may at its discretion and in full and complete discharge of its obligations to the Participant under this Plan and his Deferral Elections, make a lump sum payment to the Participant equal to the present value (calculated using the "Present Value Monthly Discount Rate" stated on the schedule of benefits attached to the Participant's various Deferral Elections) of the remaining benefit payments due to or on behalf of the Participant; provided, however, that the Company shall have no right to make such lump sum payment if, within two (2) years following a Change in Control, either the Company terminates the Participant's employment other than for cause or the Participant quits or resigns for good reason. Termination by the Company of the Participant's employment for "cause" shall mean termination due to (i) an act or acts of dishonesty by the Participant constituting a felony and resulting or intended to result in substantial gain or 17 personal enrichment for the Participant at the expense of the Company or (ii) willful and continued failure by the Participant to substantially perform his duties with the Company, other than for incapacity due to mental or physical illness, after a written demand for substantial performance is delivered to the Participant by the Chairman of the Board of Directors of the Company which specifies how the Participant has failed to substantially perform his duties; provided, however, in no event shall the Participant's termination by the Company be considered to have been for cause if such termination shall have been the result of (i) the Participant's bad judgment or negligence, (ii) any act or omission without intent of gaining a profit to which the Participant was not legally entitled, or (iii) any act or omission believed by the Participant in good faith to have been in, or not opposed to, the interests of the Company. "Good reason" shall mean: (i) the assignment to the Participant of any duties inconsistent with his duties immediately prior to the Change in Control or any removal of the Participant from or any failure to reelect or reappoint the Participant to his positions, except in connection with promotions to higher office; (ii) a reduction by the Company in the Participant's base salary as in effect immediately prior to the Change in Control; (iii) the failure by the Company to maintain, and to continue the Participant's participation in, the Company's benefit or compensation plans as in effect immediately prior to the Change in Control (including but not limited to bonus and incentive 18 compensation plans, stock option, bonus, award and purchase plans, life insurance, medical, health and accident insurance, disability plans and deferred compensation plans); or the taking of any action by the Company which would adversely affect the Participant's participation in or reduce the Participant's benefits under any of such plans or deprive the Participant of any fringe benefit he enjoyed immediately prior to the Change in Control; or the failure to provide the Participant with the number of paid vacation days to which he was entitled under the Company's normal vacation policy in effect immediately prior to the Change in Control; (iv) the relocation of the Participant's office to anywhere other than a location within 25 miles of the Participant's office immediately prior to the Change in Control or the Company's requiring the Participant to be based anywhere other than within 25 miles of the Participant's office immediately prior to the Change in Control, except for required travel on the Company's business to an extent consistent with the Participant's business travel obligations immediately prior to the Change in Control; or (v) Total Disability. 19 ARTICLE VII ----------- ADMINISTRATIVE COMMITTEE ------------------------ 1. This Plan shall be administered by the Committee. The Committee shall have all powers necessary to enable it to carry out its duties in the administration of the Plan. Not in limitation, but in application of the foregoing, the Committee shall have the duty and power to determine all questions that may arise hereunder as to the status and rights of Participants. 2. The Committee shall act by a majority of the number then constituting the Committee, and such action may be taken either by a vote at a meeting or in writing without a meeting. 3. The Committee shall keep a complete record of all its proceedings and all data relating to the administration of the Plan. 4. The Committee shall select one of its members as a Chairman. The Committee shall appoint a Secretary to keep minutes of its meetings and the Secretary may or may not be a member of the Committee. The Committee shall make such rules and regulations for the conduct of its business as it shall deem advisable. 5. No member of the Committee shall be personally liable for any actions taken by the Committee unless the member's action involves willful misconduct. 20 ARTICLE VIII ------------ AMENDMENT AND TERMINATION ------------------------- Southern National Corporation reserves the right, at any time or from time to time, by action of its Board of Directors, to amend in whole or in part any or all provisions of the Plan. In addition, Southern National Corporation reserves the right by action of its Board of Directors to terminate the Plan in whole or in part, and each Participating Subsidiary reserves the right by action of its Board of Directors to terminate the Plan with respect to such Participants employed by it. Anything to the contrary herein notwithstanding, any such amendment or termination shall not adversely affect any benefits attributable to elective or deemed deferrals made in the calendar year in which the amendment or termination is adopted or in any prior calendar years. 21 ARTICLE IX ---------- MISCELLANEOUS ------------- 1. Early Death or Suicide. Notwithstanding any provision in this Plan to ---------------------- the contrary, in the event (i) the Participant dies prior to the first May 1 following the making of a Deferral Election pursuant to Section 3(b)(iii) of Article III, (ii) the Participant dies within one hundred twenty (120) days after making a Deferral Election pursuant to Section 3(b)(i) or (ii) of Article III, or (iii) the Participant dies as a result of suicide within twenty-eight (28) months after making a Deferral Election, then in lieu of all other benefits to which the Designated Beneficiary would otherwise be entitled pursuant to such Deferral Election(s), the Company shall pay to the Designated Beneficiary, within sixty (60) days of receipt of written proof of the Participant's death, a lump sum equal to the Participant's actual deferrals pursuant to such Deferral Election(s) plus interest thereon from the date of deferral at the rate of nine percent (9%) per annum compounded annually. The payment of such lump sum shall fully and completely discharge the Company's obligations under such Deferral Election(s) and shall fully and completely satisfy all the Participant's and his Designated Beneficiary's rights thereunder. 2. Nonalienation of Benefits. No right or benefit under the Plan shall ------------------------- be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to 22 anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under this Plan shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefits. If the Participant or any beneficiary hereunder shall become bankrupt, or attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right hereunder, then such right or benefit shall, in the discretion of the Committee, cease and terminate, and in such event, the Committee may hold or apply the same or any part thereof for the benefit of the Participant or his beneficiary, spouse, children, or other dependents, or any of them in such manner and in such amounts and proportions as the Committee may deem proper. 3. No Trust Created. The obligations of Southern National Corporation and ---------------- Participating Subsidiaries to make payments hereunder shall constitute a liability of Southern National Corporation and Participating Subsidiaries to a Participant. Such payments shall be made from the general funds of Southern National Corporation and its Participating Subsidiaries, and no such Company shall be required to establish or maintain any special or separate fund, or purchase or acquire life insurance on a Participant's life, or otherwise to segregate assets to assure that such payment shall be made, and neither a Participant, his estate nor Designated Beneficiary shall have any interest in any particular asset of either Southern National Corporation or its Participating Subsidiaries by reason of its 23 obligations hereunder. Nothing contained in the Plan shall create or be construed as creating a trust of any kind or any other fiduciary relationship between the Company and a Participant or any other person. 4. No Employment agreement. Neither the execution of this Plan nor any ----------------------- action taken by the Company pursuant to this Plan shall be held or construed to confer on a Participant any legal right to be continued as an Employee of the Company in an executive position or in any other capacity whatsoever. This Plan shall not be deemed to constitute a contract of employment between the Company and a Participant, nor shall any provision herein restrict the right of the Company to discharge any Participant or restrict the right of any Participant to terminate his employment with the Company. 5. Designation of Beneficiary. Participants shall file with the Company -------------------------- a notice in writing designating one or more Designated Beneficiaries to whom payments otherwise due to or for the benefit of the Participant hereunder shall be made in the event of his death prior to the complete payment of such benefit. Participants shall have the right to change the beneficiary or beneficiaries so designated from time to time; provided, however, that any change shall not become effective until received in writing by the Committee. 6. Payment to Incompetents. The Committee shall make payment provided ----------------------- herein directly to a Participant or such Designated Beneficiary entitled thereto, or if such Participant or 24 such Designated Beneficiary has been determined by a court of competent jurisdiction to be mentally or physically incompetent, then payment shall be made to the duly appointed guardian, committee or other authorized representative of such Participant or such Designated Beneficiary and his estate. The Company shall have the right to make payment directly to a Participant or such Designated Beneficiary or until it has received actual notice of the physical or mental incapacity of such Participant or such Designated Beneficiary, and notice of the appointment of a duly authorized representative of his estate. Any such payment for the benefit of the Participant or such Designated Beneficiary or to such representative for his benefit, shall be a complete discharge of all liability of the Company therefor. The Company is authorized to interpret and administer this Section in accordance with the laws of the State of North Carolina. 7. Claims for Benefits. Each Participant or beneficiary must claim any ------------------- benefit to which he is entitled under this Plan by a written notification to the Committee. If a claim is denied, it must be denied within a reasonable period of time, and be contained in a written notice stating the following: A. The specific reason for the denial. B. Specific reference to the Plan provision on which the denial is based. C. Description of additional information necessary for the claimant to present his claim, if any, and an explanation of why such material is necessary. 25 D. An explanation of the Plan's claims review procedure. The claimant will have 60 days to request a review of the denial by the Committee, which will provide a full and fair review. The request for review must be in writing delivered to the Committee. The claimant may review pertinent documents, and he may submit issues and comments in writing. The decision by the Committee with respect to the review must be given within 60 days after receipt of the request, unless special circumstances require an extension (such as for a hearing). In no event shall the decision be delayed beyond 120 days after receipt of the request for review. The decision shall be written in a manner calculated to be understood by the claimant, and it shall include specific reasons and refer to specific Plan provisions as to its effect. 8. Binding Effect. Southern National Corporation shall be jointly and -------------- severally liable with respect to obligations incurred by a Participating Subsidiary under this Plan. Obligations incurred by the Company pursuant to this Plan shall be binding upon and inure to the benefit of the Company, its successors and assigns, and the Participant and the beneficiary or beneficiaries designated pursuant to Article IX, Section 5 hereinabove. 9. Entire Plan. This document and any amendments contains all the terms ----------- and provisions of the Plan and shall constitute the entire Plan, any other alleged terms or provisions being of no effect. 26 10. Merger or Consolidation. In the event of a merger or a consolidation ----------------------- by the Company with another corporation, or the acquisition of substantially all of the assets or outstanding stock of the Company by another corporation, then and in such event the obligations and responsibilities of the Company under this Plan shall be assumed by any successor or acquiring corporation, and all of the rights, privileges and benefits of the Participants hereunder shall continue. 11. Participant Transfers. In the event a Participant is transferred --------------------- between Southern National Corporation and a Participating Subsidiary, or between Participating Subsidiaries, the Company to which the Participant is transferred (i) shall assume, to the extent it is executory at the time of the transfer, any obligation under a Deferral Election to defer Compensation of the Participant, and (ii) shall become jointly liable with the transferring Company to pay any benefits due the Participant under such Deferral Election. 27 ARTICLE X --------- CONSTRUCTION ------------ 1. Governing Law. This Plan shall be construed and governed in ------------- accordance with the laws of the State of North Carolina. 2. Gender. The masculine gender, where appearing in the Plan, shall be ------ deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary. 3. Headings, etc. The cover page of this Plan, the Table of Contents and ------------- all headings used in this Plan are for convenience of reference only and are not part of the substance of this Plan. THIS PLAN is adopted and becomes effective the 17 day of August, 1989. ---- ------ - SOUTHERN NATIONAL CORPORATION BY: /s/ Hector Maclean ------------------------------------- President ATTEST: /s/ Faye M. Hollowell - ------------------------ Acting Secretary 28 EX-10.K 7 SOUTHERN NATIONAL SUPPLEMENTAL EXEC. RETIREMENT EXHIBIT 10(K) SOUTHERN NATIONAL SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP) Effective January 1, 1989
TABLE OF CONTENTS PAGE ---- ARTICLE I STATEMENT OF PURPOSE..................................... 1 ARTICLE II DEFINITIONS.............................................. 2 ARTICLE III ELIGIBILITY AND PARTICIPATION............................ 14 ARTICLE IV RETIREMENT BENEFITS...................................... 15 ARTICLE V PRE-RETIREMENT SURVIVOR BENEFITS......................... 17 ARTICLE VI DISABILITY BENEFITS...................................... 18 ARTICLE VII SEVERANCE BENEFITS....................................... 20 ARTICLE VIII NONCOMPETITION........................................... 21 ARTICLE IX COMMITTEE................................................ 24 ARTICLE X AMENDMENT AND TERMINATION................................ 26 ARTICLE XI MISCELLANEOUS............................................ 28 ARTICLE XII CONSTRUCTION............................................. 33
i ARTICLE I --------- STATEMENT OF PURPOSE -------------------- This Plan is designed to enhance the earnings and growth of Southern National Corporation and its Participating Subsidiaries. The Plan provides benefits to or on behalf of selected key management employees which supplement retirement and survivor benefits payable from the Southern National Retirement Plan, a qualified defined benefit pension plan. Such supplemental benefits are intended to enable Southern National to attract and retain superior key management employees and to give such employees additional incentive to make Southern National more profitable. ARTICLE II ---------- DEFINITIONS ----------- When used herein and capitalized, the following terms shall have the meanings denoted, unless the context clearly requires otherwise. 2.01 Actuarial Equivalent and Actuarially Equivalent. A form of ----------------------------------------------- benefit differing in time, period or manner of payment from a specified benefit provided by this Plan or provided by the Pension Plan, but having the same value when computed using the same assumptions used for computing actuarial equivalence under the Pension Plan. 2.02 Change in Control. A Change in Control shall be deemed to have ----------------- occurred upon the happening of any of the following: (a) the adoption of a plan of merger or consolidation of Southern National Corporation with any other corporation or association as a result of which the holders of the voting capital stock of Southern National Corporation would receive less than 50% of the voting capital stock of the surviving or resulting corporation; (b) the occurrence of any event (including, without limitation, any merger or consolidation) as a result of which Southern National Corporation is not the owner beneficially and of record of 50% or more of the voting power of the capital stock of Southern National Bank of North Carolina, N.A. (the "Bank"); 2 (c) the sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of Southern National Corporation or the Bank (other than as security for the obligations of Southern National Corporation or the Bank); (d) the approval by the shareholders of Southern National Corporation or the Bank of any plan or proposal for the liquidation or dissolution of Southern National Corporation or the Bank; (e) the acquisition by any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act")), other than any Trustee under any employee benefit plan of Southern National Corporation or the Bank, and persons (as such term is so used) who are then affiliates and associates (as defined on January 1, 1989 in Rule 12b-2 under the Exchange Act) of such person, or any one of them, after the date this Plan is executed, directly or indirectly, of beneficial ownership (as defined on January 1, 1989 in Rules 13d-3 and 13d-5 under the Exchange Act) of securities of Southern National Corporation representing in the aggregate 20% or more of the voting power of all then outstanding securities of Southern National Corporation having the right under ordinary circumstances to vote in an election of the Board of Directors of Southern National Corporation (without limitation, any securities having such voting power that any such 3 person has the right to acquire pursuant to any agreement, or upon exercise of conversion of rights, warrants or options, or otherwise, shall be deemed beneficially owned by such person); or (f) the failure, for any reason, during any period of two consecutive years, of the individuals who at the beginning of such period constitute the entire Board of Directors of Southern National Corporation (the "Board") and any new directors whose election by the Board, or whose nomination for election by the shareholders, shall have been approved by a vote of at least two-thirds (2/3) of the directors of the Board then still in office who either were directors at the beginning of the period or whose election nomination for election shall previously have been so approved, to constitute a majority of the members of the Board. 2.03 Code. The Internal Revenue Code of 1986, as amended, and as it may be ---- amended from time to time. 2.04 Committee. The committee which administers the Plan and which is more --------- particularly described in Article VIII below. The Committee shall be made up of the individuals who hold the following offices of Southern National Bank of North Carolina, N.A.: Chairman of the Board of Directors, President, Director of Human Resources, and Chief Financial Officer. 2.05 Company. Southern National Corporation, Participating Subsidiaries, ------- and any successor by merger, acquisition or otherwise. All references to "Company" shall be 4 applied to each such Company as if the Plan were solely the Plan of such Company. 2.06 Credited Service. This term shall have the meaning the Pension ---------------- Plan ascribes to such term, except that for purposes of this Plan a Participant shall be credited with Credited Service for any period he is under a Total Disability. 2.07 Designated Beneficiary. One or more beneficiaries, as ---------------------- designated by a Participant in writing delivered to the Committee, to whom certain SERP Pre-Retirement Death Benefits shall be paid pursuant to the provisions of Article V below. In the event no such written designation is made by the Participant or such beneficiary shall not be living or in existence at the time payments are to commence, the Participant shall be deemed to have designated his estate as such beneficiary. 2.08 Early Payment Reduction Percentage. The sum of (A) and (B) ---------------------------------- where (A) is the product of one thousand six hundred and sixty-seven ten thousandths percent (.1667%) multiplied by the number of such whole calendar months by which the date of the first monthly payment of a Participant's SERP Retirement Benefit precedes the month of his sixty-fifth (65th) birthday, and where (B) is the product of one-half of one percent (.50%) multiplied by the number of whole calendar months, in excess of sixty (60), by which the date of the first monthly payment of the Participant's SERP Retirement Benefit precedes the month of his sixty-fifth (65th) birthday. 5 2.09 Early Retirement Date. The date on which a Participant under --------------------- this Plan who has attained at least age fifty-five (55) and has at least fifteen (15) years of Credited Service terminates employment with the Company prior to attaining age sixty-five (65). 2.10 Eligible Spouse. The person, if any, who is legally married to --------------- the Participant on the Participant's date of death; provided however that such term shall not include a spouse who on the date of death is legally separated from the Participant pursuant to a court order or written agreement between the Participant and spouse. 2.11 ERISA. The Employee Retirement Income Security Act of 1974, as ----- amended, and as it may be amended from time to time. 2.12 ERISA Excess Benefit. -------------------- (a) If the Participant is married, the difference between (i) the monthly amount he would receive as the primary annuitant of a joint and seventy-five percent (75%) survivor annuity which is Actuarially Equivalent to his Unlimited Pension Plan Benefit and which commences when his SERP Retirement Benefit commences, and (ii) his Pension Plan Benefit. (b) If the Participant is not married, the difference between (i) the monthly amount he would receive as the annuitant of a level life and ten-year certain annuity which is Actuarially Equivalent to his Unlimited Pension Plan Benefit and 6 which commences when his SERP Retirement Benefit commences, and (ii) his Pension Plan Benefit. For purposes of this Section and Section 2.19, (A) a "joint and seventy-five percent (75%) survivor annuity" means an annuity providing a monthly benefit for the life of the Participant with a monthly benefit payable to his surviving spouse, if any, for the remainder of her life in an amount equal to seventy-five percent (75%) of the monthly benefit payable to him during his lifetime; and (B) a "level life and ten-year certain annuity" means an annuity providing a monthly benefit payable for a minimum of one hundred and twenty (120) months and, if longer, for the life of the Participant. 2.13 Final Average Earnings. A Participant's average Monthly ---------------------- Earnings (as defined in Section 2.14) for the sixty (60) calendar months during which his Monthly Earnings were the highest (which sixty months may or may not be consecutive) within the one hundred and twenty (120) calendar months (or if less the total number of calendar months during which he was employed with the Company) immediately preceding the earliest to occur of his Severance Date, date of death, or date his employment with the Company terminates by reason of Total Disability. In the event the Participant does not have at least sixty (60) months of employment with the Company, Final Average Earnings shall mean the average Monthly Earnings for his total period of employment. 7 2.14 Monthly Earnings. Monthly Earnings, for any calendar month, ---------------- shall mean the quotient obtained by dividing by twelve (12) the total earnings paid to a Participant by the Company during the calendar year in which the calendar month falls. For purposes of the preceding sentence, "total earnings paid to a Participant by the Company during the calendar year" shall mean the total earnings paid by the Company to the Participant reported or reportable for that calendar year on U.S. Treasury Department Wage and Tax Statement Form W-2 or similar form required for such purpose, increased by (i) any deferrals under the Southern National Employee Stock Ownership Plan as amended from time to time, and (ii) any reductions in compensation resulting from participation in any deferred compensation plan or cafeteria plan to the extent that such deferrals and reductions are excluded from reporting on Form W-2 or other similar form required for such purpose. For purposes of the preceding sentence, noncash items, including company car income and income from stock options, and benefits paid under this Plan or any other employee benefit plan of the Company shall be excluded from "total earnings paid to a Participant by the Company during the calendar year." 2.15 Normal Retirement Date. The first day of the month next ---------------------- following the month of the Participant's sixty-fifth (65th) birthday. 2.16 Participant. An employee selected by the Committee pursuant to ----------- the provisions of Article III to 8 participate in this Plan. The Committee may designate new Participants as it, in its sole discretion, deems proper. 2.17 Participating Subsidiary. Each subsidiary of Southern National ------------------------ Corporation who, pursuant to action duly adopted by its board of directors, has adopted this Trust Agreement. "Subsidiary" means a corporation over 50% of the voting stock of which is owned by Southern National Corporation, by another subsidiary or other subsidiaries of Southern National Corporation. The foregoing notwithstanding, the Board of Directors of Southern National Corporation may designate any company affiliated with Southern National Corporation as a "subsidiary" for purposes of this Plan. 2.18 Pension Plan. The Southern National Retirement Plan as it may ------------ be amended from time to time. 2.19 Pension Plan Benefit. One-twelfth (1/12th) of the annual amount -------------------- of the benefit which would be payable to a Participant under the Pension Plan if the Participant's vested accrued benefit in the Pension Plan were paid as follows: (A) In the case of a married Participant, in the form of a joint and seventy-five percent (75%) survivor annuity which is Actuarially Equivalent to his vested accrued benefit in the Pension Plan and which commences when his SERP Retirement Benefit commences; (B) In the case of an unmarried Participant, in the form of a level life and ten-year 9 certain annuity which is Actuarially Equivalent to his vested accrued benefit in the Pension Plan and which commences when his SERP Retirement Benefit commences. The foregoing assumptions are made solely for purposes of this Plan, and such assumptions shall apply without regard for the form in which or the time at which a Participant's vested accrued benefit under the Pension Plan is actually paid or authorized to be paid. 2.20 Plan. This Southern National Supplemental Executive Retirement ---- Plan (SERP) as contained herein and as it may be amended from time to time. 2.21 Postponed Retirement Date. The first day of the month next ------------------------- following the month of the Participant's Severance Date if such Severance Date is later than his Normal Retirement Date. 2.22 SERP Retirement Benefit. Subject to Section 4.03 below, an ----------------------- amount equal to the greater of (A) or (B) below: (A) The product of (1) the Participant's Target Retirement Benefit reduced by the sum of (i) his Pension Plan Benefit and (ii) fifty percent (50%) of his Social Security Benefit, multiplied by (2) the difference between one hundred percent (100%) and the Early Payment Reduction Percentage. (B) The Participant's ERISA Excess Benefit. 10 2.23 Severance Date. The date on which a Participant terminates his --------------- employment with the Company other than by reason of death; provided, however, that if his employment with the Company terminates prior to Early or Normal Retirement by reason of the onset of Total Disability, then his Severance Date shall be the earlier of (a) the date such Total Disability ceases and he does not return to the employ of the Company or (b) the date he first becomes eligible to retire on his Early Retirement Date or Normal Retirement Date. 2.24 Social Security Benefit. An amount equal to the annual Primary ----------------------- Old Age Insurance benefit to which the Participant would be entitled to receive commencing on his Normal Retirement Date (assuming that he will have no earnings after such date that would cause a reduction in such benefit) under the Federal Social Security Act, as such Act is in effect on the Participant's Severance Date, divided by twelve (12). The Social Security Benefit shall be calculated on the basis of the Participant's estimated earnings history, constructed as follows: (a) If the Participant has not reached age sixty-five (65) on his Severance Date, it shall be assumed that he will receive no additional compensation during the period between his Severance Date and his attainment of age sixty-five (65); (b) The Participant's Monthly Earnings shall be used for the one hundred and twenty (120) calendar month period 11 (or for the Participant's total months of employment if shorter) that is considered in the determination of Final Average Earnings; and (c) For years beginning the later of 1951, or the calendar year in which the Participant attained age twenty-two (22), and ending with the year immediately preceding the period described in (b) above, the Participant's wages for purposes of the Federal Social Security Act shall be calculated by projecting backwards, using a salary scale of six percent (6%) per annum, his Monthly Earnings for the earliest calendar year in the period described in (b) above. Notwithstanding the foregoing, a Participant shall have the right to have his Social Security Benefit recomputed on the basis of his actual Social Security earnings history by providing appropriate documentation to the Committee. For a Participant whose Social Security full-benefit retirement age is later than age sixty-five (65), the Social Security Benefit shall be determined at age sixty-five (65) subject to applicable Social Security reduction for months before his full-benefit retirement age. 2.25 Target Retirement Benefit. An amount equal to fifty-five percent ------------------------- (55%) of the Participant's Final Average Earnings. 2.26 Total Disability. Total disability shall have the same meaning as ---------------- is ascribed to such term by the long-term 12 disability benefits plan sponsored by the Company and in which the Participant participates. If the Participant does not participate in such plan or if the Company does not sponsor such a plan, then the Participant shall be under a Total Disability if by reason of sickness or injury he cannot perform each of the material duties of his regular occupation; provided, however, that after the first twenty-four (24) months he shall be under a Total Disability if he cannot perform each of the material duties of any gainful occupation for which he is reasonably fitted by training, education or experience. 2.27 Unlimited Pension Plan Benefit. The vested accrued benefit to ------------------------------ which the Participant would have been entitled under the Pension Plan if such benefit were computed without giving effect to the compensation and annual benefit limitations as set forth in Sections 401(a)(17) and 415 of the Code and corresponding provisions of the Pension Plan. 13 ARTICLE III ----------- ELIGIBILITY AND PARTICIPATION ----------------------------- 3.01 Eligibility. The Committee shall have the sole discretion to ----------- determine the employees of the Company who are eligible to become Participants; provided, however, that no employee who is not a member of the "select group of management or highly compensated employees," as defined in Sections 201(2), 301(a)(3) and 401(a) of ERISA shall be eligible to become a Participant in the Plan. 3.02 Participation. The Committee shall cause those employees selected by ------------- it to become Participants to be notified of their participation and of the benefits available to them under the Plan. Once selected to participate in the Plan, a Participant shall remain a Participant as long as he is employed by the Company. 14 ARTICLE IV ---------- RETIREMENT BENEFITS ------------------- 4.01 Retirement. ---------- (a) Benefit Payable to Participant. Upon a Participant's ------------------------------ retirement on his Early Retirement Date, Normal Retirement Date or Postponed Retirement Date, the Company shall make monthly payments to the Participant of his SERP Retirement Benefit commencing with the month immediately following the month of the Participant's Severance Date and continuing for each month thereafter until and including the month of his death. (b) Spousal Survivor Benefit. Upon the death of a retired ------------------------ Participant who is either receiving or entitled to receive a SERP Retirement Benefit, the Company shall make monthly payments to the Participant's Eligible Spouse, if any, commencing with the month next following the month of the retired Participant's death and continuing for each month thereafter until and including the month of the Eligible Spouse's death. Each monthly payment shall equal seventy-five percent (75%) of the monthly amount of the deceased participant's SERP Retirement Benefit. 4.02 Reemployment of Retired Participant. A retired Participant ----------------------------------- receiving or eligible to receive supplemental retirement benefits under this Plan and who is reemployed by the Company shall not be entitled to any increased benefits under 15 this Plan by reason of accumulating additional years of Credited Service or Monthly Earnings after his reemployment. 4.03 Actuarial Reduction. Notwithstanding the foregoing provisions ------------------- of Sections 2.22 and 4.01, in the event the Eligible Spouse is more than ten (10) years younger than the Participant, the monthly amount of the Particpant's SERP Retirement Benefit (as otherwise calculated under Sections 2.22 and 4.01(a) above) and, consequently, the derivative spousal survivor benefit under Section 4.01(b), shall be reduced in order that the Participant's SERP Retirement Benefit and the spousal survivor benefit, when considered together, is the Actuarial Equivalent of the benefits that would be payable to the Participant and his Eligible Spouse if the Eligible Spouse were ten (10) years younger than the Participant. 16 ARTICLE V ---------- PRE-RETIREMENT SURVIVOR BENEFITS -------------------------------- 5.01 Death Benefit. ------------- (a) If a Participant who has not attained age sixty-five (65) dies prior to his Severance Date, the Company shall pay to the Participant's Eligible Spouse or, if none, his Designated Beneficiary a monthly benefit for one hundred and eighty (180) consecutive months. The amount of the monthly benefit shall equal twenty percent (20%) of the Participant's Final Average Earnings. The benefits shall commence in the first month following the month of the Participant's death. (b) If a Participant who has attained age sixty-five (65) dies prior to his Severance Date, he shall be considered to have retired on the day before his death and, accordingly, the Company shall pay to his Eligible Spouse, if any, the spousal survivor benefit set forth in Section 4.01(b). (c) Except as set forth in this Article V, no survivor benefit is payable under this Plan if a Participant dies prior to his Severance Date. 17 ARTICLE VI ---------- DISABILITY BENEFITS ------------------- 6.01 Disability Prior to Retirement Date. ----------------------------------- (a) Except as provided in Article IV in the case of retirement by Participants, this Plan provides no disability benefits. (b) If the Participant's employment with the Company terminates by reason of the onset of Total Disability, and the termination of employment occurs prior to the Participant's Early Retirement Date and Normal Retirement Date, then for purposes of qualifying for the Early Retirement Date the Participant will receive credit for Credited Service during his period of Total Disability. If the Participant's Total Disability continues until a Severance Date which qualifies him for a benefit under Article IV, his Final Average Earnings is calculated based on his Monthly Earnings during the one hundred and twenty (120) calendar month period immediately preceding the date on which his Total Disability commenced. (c) If the Participant's Total Disability ceases, and he does not return to regular active employment with the Company, then for the purpose of determining his years of Credited Service his employment shall be deemed terminated on the date that the Total Disability ceased. (d) The Committee may from time to time request that a Participant who is under a Total Disability submit to a 18 medical examination or related series of examinations by a physician or physicians acceptable to the Committee to determine whether the Total Disability continues. A Participant's refusal to submit to such an examination or related series of examinations shall be deemed an admission by him that he is no longer under a Total Disability. All examinations requested by the Committee pursuant to this provision shall be at the expense of the Company. 19 ARTICLE VII ----------- SEVERANCE BENEFITS ------------------ 7.01 No Severance Benefits. Except as provided in Article IV in the --------------------- case of retirement by Participants, this Plan provides no severance benefits. 20 ARTICLE VIII ------------ NONCOMPETITION -------------- Notwithstanding any provision of this Plan to the contrary but subject to the proviso below, if any Participant terminates employment with the Company for any reason and accepts employment with, or assumes any other position with, any national bank, state bank, savings and loan association, or any other similar financial institution with one or more offices in a state in which a subsidiary of Southern National Corporation has a banking office, the Participant shall forfeit all rights to all retirement and survivor benefits to which he, his Eligible Spouse, or his Designated Beneficiary is or may become entitled to under this Plan; provided, however, that no such forfeiture shall occur if, within two (2) years following a Change in Control, either the Company terminates the Participant's employment other than for cause or the Participant quits or resigns for good reason. Termination by the Company of the Participant's employment for "cause" shall mean termination due to (i) an act or acts of dishonesty by the Participant constituting a felony and resulting or intended to result in substantial gain or personal enrichment for the Participant at the expense of the Company or (ii) willful and continued failure by the Participant to substantially perform his duties with the Company, other than for incapacity due to mental or physical illness, after a written demand for substantial performance is 21 delivered to the Participant by the Chairman of the Board of Directors of the Company which specifies how the Participant has failed to substantially perform his duties; provided, however, in no event shall the Participant's termination by the Company be considered to have been for cause if such termination shall have been the result of (i) the Participant's bad judgment or negligence, (ii) any act or omission without intent of gaining a profit to which the Participant was not legally entitled, or (iii) any act or omission believed by the Participant in good faith to have been in, or not opposed to, the interests of the Company. "Good reason" shall mean: (i) the assignment to the Participant of any duties inconsistent with his duties immediately prior to the Change in Control or any removal of the Participant from or any failure to reelect or reappoint the Participant to his positions, except in connection with promotions to higher office; (ii) a reduction by the Company in the Participant's base salary as in effect immediately prior to the Change in Control; (iii) the failure by the Company to maintain, and to continue the Participant's participation in, the Company's benefit or compensation plans as in effect immediately prior to the Change in Control (including but not limited to bonus and incentive compensation plans, stock option, bonus, award and purchase plans, life insurance, medical, health and accident insurance, disability plans and deferred compensation plans); or the taking of any action by the Company which would adversely affect the Participant's participation in or reduce the 22 Participant's benefits under any of such plans or deprive the Participant of any fringe benefit he enjoyed immediately prior to the Change in Control; or the failure to provide the Participant which the number of paid vacation days to which he was entitled under the Company's normal vacation policy in effect immediately prior to the Change in Control; (iv) the relocation of the Participant's office to anywhere other than a location within 25 miles of the Participant's office immediately prior to the Change in Control or the Company's requiring the Participant to be based anywhere other than within 25 miles of the Participant's office immediately prior to the Change in Control, except for required travel on the Company's business to an extent consistent with the Participant's business travel obligations immediately prior to the Change in Control; or (v) Total Disability. 23 ARTICLE IX ---------- COMMITTEE --------- 9.01 Authority. The Committee shall be responsible for the --------- administration and interpretation of the Plan, and shall have all powers necessary to enable it to carry out its duties in the administration and interpretation of the Plan, and shall have the duty and power to determine all questions that may arise hereunder as to the status and rights of Participants in the Plan. 9.02 Voting. The Committee shall act by a majority of the number ------ then constituting the Committee, and such action may be taken either by vote at a meeting or in writing without a meeting. 9.03 Records. The Committee shall keep a complete record of all its ------- proceedings and all data relating to the administration of the Plan. The Committee shall make such rules and regulations for the conduct of its business as it shall deem advisable. 9.04 Liability. No member of the Committee shall be personally --------- liable for any actions taken or omitted by the Committee unless the member's action or inaction involves willful misconduct. To the extent permitted by applicable law, the Company shall indemnify and hold harmless each member of the Committee and each employee of the Company acting pursuant to the direction of the Committee from and against any and all 24 liability, claims, demands, costs and expenses (including reasonable attorneys' fees) arising out of or incident to any act or failure to act in connection with the administration of the Plan, except for any such act or failure to act that involves willful misconduct. 25 ARTICLE X --------- AMENDMENT AND TERMINATION ------------------------- Southern National Corporation reserves the right, at any time and from time to time, by action of its Board of Directors, to amend or terminate the Plan, and each Participating Subsidiary reserves the right by action of its Board of Directors to terminate the Plan with respect to it and the Participants employed by it; provided, however, no such amendment or termination shall reduce or eliminate the benefits (including survivor benefits) of a Participant (or Eligible Spouse or Designated Beneficiary) to whom payments under this Plan have commenced or who is then eligible under Article IV to retire and begin receiving benefits under this Plan. In addition, each other Participant in the Plan on the date of such amendment or termination shall be entitled to benefits (including survivor benefits) under this Plan, at such times as such benefits would have been paid absent such amendment or termination, in an amount not less than the amount that would have been paid absent such amendment or termination multiplied by an "accrual fraction" (which may not exceed 1.0) the numerator of which is equal to the number of his years of Credited Service at the time of such amendment or termination and the denominator of which is equal to the lesser of fifteen (15) or the number of years of Credited Service he would have had if the Plan had not been amended or terminated and if he had continued in the employ of the Company until the date he attained age sixty (60); 26 provided, however, that upon and after a Change in Control, each Participant's accrual fraction shall be 1.0. 27 ARTICLE XI ---------- MISCELLANEOUS ------------- 11.01 Nonalienation of Benefits. No right or benefit under the Plan ------------------------- shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefits. If a Participant or Eligible Spouse hereunder shall become bankrupt, or attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right hereunder, then such right or benefit shall, in the discretion of the Committee, cease and terminate, and in such event, the Committee may hold or apply the same, or any part thereof, for the benefit of the Participant or Eligible Spouse in such manner and in such amounts and proportions as the Committee may deem proper. 11.02 No Trust Created. The obligations of the Company to make ---------------- payments hereunder shall constitute a liability of the Company to the Participants. Such payments shall be made from the general funds of the Company and the Company shall not be required to establish or maintain any special or separate fund, or to purchase or acquire life insurance on a Participant's life, or otherwise to segregate assets to assure that such 28 payments shall be made. Neither a Participant, Eligible Spouse, or Designated Beneficiary shall have any interest in any particular asset of the Company by reason of the obligations hereunder, and the right of any of them to receive payments under this Plan shall be no greater than the right of any other unsecured general creditor of the Company. Nothing contained in the Plan shall create or be construed as creating a trust of any kind or any other fiduciary relationship between the Company and a Participant, Eligible Spouse, or Designated Beneficiary. 11.03 No Employment Agreement. Neither the execution of this Plan ----------------------- nor any action taken by the Company pursuant to this Plan shall be held or construed to confer on a Participant any legal right to be continued as an employee of the Company. This Plan shall not be deemed to constitute a contract of employment between the Company and a Participant, nor shall any provision herein restrict the right of any Participant to terminate his employment with the Company. 11.04 Binding Effect. Southern National Corporation and -------------- Participating Subsidiaries shall be jointly and severally liable with respect to the obligations incurred pursuant to this Plan and such obligations shall be binding upon and inure to the benefit of their successors and assigns, and the Participant and his Eligible Spouse and Designated Beneficiary. 11.05 Claims for Benefits. Any Participant, Eligible Spouse or ------------------- Designated Beneficiary claiming a benefit under this Plan must given written notification thereof to the Committee. If 29 a claim is denied, it must be denied within a reasonable period of time and the denial must be accompanied by a written notice stating the following: (a) Specific reason for the denial; (b) Specific reference to the Plan provision on which the denial is based; (c) Description of additional information necessary for the claimant to present his claim, if any, and an explanation of why such material is necessary; and (d) Explanation of the Plan's claims review procedure. The claimant will have 60 days to request a review of the denial by the Committee. The request for review must be in writing delivered to the Committee, which will then provide a full and fair review. The claimant may review pertinent documents, and he may submit issues and comments in writing. The decision by the Committee with respect to the review must be given within 60 days after receipt of the request, unless special circumstances require an extension (such as for a hearing). In no event shall the decision be delayed beyond 120 days after receipt of the request for review. The decision shall be written in a manner calculated to be understood by the claimant, and it shall include the specific reasons and refer to the specific Plan provisions on which it is based. 30 11.06 Entire Plan. This document and any amendments hereto contain ----------- all the terms and provisions of the Plan and shall constitute the entire Plan, any other alleged terms or provisions being of no effect. 11.07 Merger or Consolidation. In the event of a merger or a ----------------------- consolidation of the Company or a Participating Subsidiary with another corporation or entity, or the acquisition of substantially all of the assets or outstanding stock of the Company or a Participating Subsidiary by another corporation or entity, then and in such event the obligations and responsibilities of such merged or acquired corporation under this Plan shall be assumed by any such successor or acquiring corporation or entity, and all of the rights, privileges and benefits of the Participants hereunder shall continue. 11.08 Payment to Incompetent. The Committee shall make the payments ---------------------- provided herein directly to a Participant or beneficiary entitled thereto, or if such Participant or beneficiary has been determined by a court of competent jurisdiction to be mentally or physically incompetent, then payment shall be made to the duly appointed guardian, conservator or other authorized representative of such Participant or beneficiary. The Company shall have the right to make payment directly to a Participant or beneficiary until it has received actual notice of the physical or mental incapacity of such Participant or beneficiary and notice of the appointment of a duly authorized representative of his estate. Any such payment to an authorized representative for 31 the benefit of a Participant or beneficiary shall be a complete discharge of all liability of the Company herefor. 32 ARTICLE XII ----------- CONSTRUCTION ------------ 12.01 Governing Law. This Plan shall be construed and governed in ------------- accordance with the laws of the State of North Carolina. 12.02 Gender. The masculine gender, where appearing in the Plan, ------ shall be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary. 12.03 Headings, Etc. The cover page of the Plan, the Table of ------------- Contents and all headings used in this Plan are for convenience of reference only and are not part of the substance of this Plan. 12.04 Date. The effective date of this Plan is January 1, 1989. ---- IN WITNESS WHEREOF, this Plan is duly executed by Southern National Corporation's duly authorized officers as of the 15th day of June, 1989. SOUTHERN NATIONAL CORPORATION BY: /s/ Hector McLean ---------------------------- ATTEST: /s/ Faye M. Hallowell - ------------------------------ Secretary (Acting) [Corporate Seal] 33 EX-10.L 8 BRANCH BANKING AND TRUST SUPPLEMENTAL Exhibit 10(l) BRANCH BANKING AND TRUST COMPANY -------------------------------- SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN -------------------------------------- (Restated as of August 8, 1991) BRANCH BANKING AND TRUST COMPANY -------------------------------- SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN --------------------------------------- (Restated as of August 8, 1991) TABLE OF CONTENTS -----------------
Article Section Page - ------- ------- ---- I Establishment and Purpose............................. 1 ------------------------- 1.1 Establishment of plan................................. 1 1.2 Purpose of Plan....................................... 1 1.3 Application of Plan................................... 2 II Definitions and Construction.......................... 3 ---------------------------- 2.1 Definitions........................................... 3 2.2 Applicable Law........................................ 6 2.3 Number and Gender..................................... 6 2.4 Employment Rights..................................... 6 2.5 Severability.......................................... 7 III Eligibility to Participate............................ 8 -------------------------- 3.1 Eligibility........................................... 8 3.2 Duration.............................................. 9 IV Benefits..............................................10 -------- 4.1 Retirement plan Supplement............................10 4.2 Thrift Plan Supplement................................11 4.3 Executive Incentive Compensation Plan Deferrals......................................15 4.4 Hardship Withdrawals..................................17 4.5 Nonassignability......................................18 V Accounts, Earnings, and Records of Plan...............19 --------------------------------------- 5.1 Accounts and Records..................................19 5.2 Account Value.........................................19 5.3 Interest Accrual......................................19 VI No Trust or Funding Vehicle...........................21 --------------------------- 6.1 No Trust or Funding Vehicle...........................21 VII Administration........................................22 -------------- 7.1 Plan Administrator....................................22 7.2 Administration........................................22 7.3 Uniform Rules.........................................23 7.4 No Individual Liability...............................23 7.5 Notice of Address.....................................23 7.6 Data..................................................24 7.7 Missing Persons.......................................24 7.8 Incompetency..........................................25
-i- BRANCH BANKING AND TRUST COMPANY -------------------------------- SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN -------------------------------------- (Restated as of August 8, 1991) VIII Amendment and Termination .......................... 27 ------------------------- 8.1 Amendment and Termination .......................... 27 8.2 Corporate Reorganization ........................... 27 8.3 Protected Benefits ................................. 28 8.4 Adoption by Affiliates ............................. 28
- ii - BRANCH BANKING AND TRUST COMPANY -------------------------------- SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN -------------------------------------- (Restated as of August 8, 1991) Article I. Establishment and Purpose ------------------------------------- 1.1 Establishment of Plan. Branch Banking and Trust Company (the --------------------- "Company") previously established and currently maintains a supplemental retirement plan for Eligible Executives of the Company and participating Affiliates. Said Plan was established effective January 1, 1988. This plan is hereby restated as set forth herein effective as of August 8, 1991 and shall continue to be known as the BRANCH BANKING AND TRUST COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (the "Supplemental Plan"). All benefits from this Supplemental Plan shall be payable solely from the general assets of the Company and participating Affiliates. The Supplemental Plan is comprised of both an "excess benefit plan" within the meaning of section 3(36) of the Employee Retirement Income Security Act of 1974 ("ERISA") and an unfunded plan maintained for the purposes of providing deferred compensation to a "select group of management or highly compensated employees" within the meaning of ERISA section 201(2). The Supplemental Plan, therefore, is intended to be exempt from the participation, vesting, funding, and fiduciary requirements of Title I of ERISA. 1.2 Purpose of Plan. The primary purpose of this Supplemental plan is to --------------- supplement the benefits payable to Participants under the qualified Retirement Plan for the Employees of Branch Banking & Trust Company (the "Retirement Plan") and the qualified Savings and Thrift Plan for the Employees of Branch Banking & Trust Company (the "Thrift Plan") to the extent that such benefits are curtailed by the application of certain limits imposed by the Internal Revenue Code of 1986 (the "Code"). The Supplemental Plan is also intended to provide certain participants in the Company's executive incentive compensation plan with an effective means of deferring a portion of the payments they are entitled to receive under that plan. 1.3 Application of Plan. The terms of this Supplemental Plan are ------------------- applicable only to Eligible Executives who are in the employ of the Company or a participating Affiliate on or after August 8, 1991. The benefits with respect to the employees who terminated, retired, or died before this date shall be determined under prior plan documents, except as explicitly provided elsewhere in this document. -2- Article II. Definitions and Construction ----------------------------------------- 2.1 Definitions A capitalized term used but not defined in this ----------- Supplemental Plan shall have the same meaning given in either Article II of the Retirement Plan or section 2.1 of the Thrift Plan, depending on the context in which the term is used. Whenever used in this Supplemental Plan, the following capitalized terms shall have the meaning set forth below (unless otherwise expressly provided) rather than any definition provided under the Retirement Plan or the Thrift Plan: (a) "Affiliate" means a corporation which, with the Company, is a member ----------- of a controlled group of employers or an affiliate as defined in Code sections 414(b), (c), or (m). (b) "Beneficiary" means the person or persons designated by the Eligible ------------- Executives or former Eligible Executives to receive the balance of his benefits under this Supplemental Plan, if any, after his death, as described in sections 4.1(b), 4.2(d), and 4.3(d). (c) "Code" means the Internal Revenue Code of 1986, as amended, or as it ------ may be amended from time to time. (d) "Committee" means the Executive Committee of the Company's Board of ----------- Directors. (e) "Company" means Branch Banking and Trust Company. --------- -3- (f) "Company Matching Allocation" means the allocations credited to the ----------------------------- Executive's Account pursuant to section 4.2(b) of this Supplemental Plan. (g) "Covered Compensation" means base pay, determined prior to any ---------------------- election to reduce pay under section 4.1 of the Thrift Plan or section 4.2(a) of this Supplemental Plan, and including amounts in excess of the limit described in Code section 401(a)(17). (h) "Effective Date" means August 8, 1991. ---------------- (i) "Eligible Executive" means an individual who has met and continues to -------------------- meet the eligibility criteria selected by the Committee for participation in this Supplemental Plan under section 3.1. Where the context requires, "Eligible Executive" shall also include a former Eligible Executive. (j) "Employer" means the Company and participating Affiliates. ---------- (k) "Entry Date" means January 1. ------------ (l) "Executive's Account" means the unfunded, recordkeeping account --------------------- maintained for each Eligible Executive on the books of the Company, which as of any Adjustment Date, consists of the sum of his Deferred Allocation Account, his Matching Allocation Account, and his Executive Incentive Compensation Account. (1) "Deferred Allocation Account" means that portion of the ----------------------------- Executive's Account to which his Salary -4- Reduction Allocations have been credited pursuant to section 4.2(a) of this Supplemental Plan, plus any interest accruals credited thereto pursuant to section 5.3 of this Supplemental Plan. (2) "Matching Allocation Account" means that portion of the ----------------------------- Executive's Account to which his Company Matching Allocations have been credited pursuant to section 4.2(b) of this Supplemental Plan, plus any interest accruals credited thereto pursuant to section 5.3 of this Supplemental Plan. (3) "Executive Incentive Compensation Account" means that portion of ------------------------------------------ the Executive's Account to which his deferrals of payments under any designated executive incentive compensation plan have been credited pursuant to section 4.3 of this Supplemental Plan, plus any interest accruals credited thereto pursuant to section 5.3 of this Supplemental Plan. (4) "Prior Plan Account" means that portion of the Executive's -------------------- Account (if any) attributable to an account maintained by an Employer on behalf of an Eligible Executive pursuant to any other unfunded nonqualified plan or contract of deferred compensation which was transferred to this Plan at the direction of the Committee. -5- (m) "Retirement Plan" means the Retirement Plan for the Employees of ----------------- Branch Banking and Trust Company (effective as of January 1, 1989), as it may be amended from time to time. (n) "Salary Reduction Allocation" means the allocations credited to the ----------------------------- Executive's Account pursuant to section 4.2(a) of this Supplemental Plan. (o) "Thrift Plan" means the Savings and Thrift Plan for the Employees of ------------- Branch Banking & Trust Company (restated as of August 9, 1991), as it may be amended from time to time. 2.2 Applicable Law. Except to the extent preempted by federal law, this -------------- Supplemental Plan shall be interpreted and administered in accordance with the laws of the State of North Carolina. 2.3 Number and Gender. Wherever appropriate, words herein used in the ----------------- singular may include the plural, or the plural may be read as the singular, and the masculine may include the feminine. 2.4 Employment Rights. Establishment of this Supplemental Plan shall not ----------------- be construed to give any Eligible Executive the right to be retained by the Employer or an Affiliate or to interfere with the right of the Employer or an Affiliate to discharge or retire any Eligible Executive at any time. Nothing -6- contained in this Supplemental Plan shall give an Eligible Executive the right to any benefits other than those specified herein. 2.5 Severability. In the event any provision of this Supplemental Plan ------------ shall be held invalid or illegal for any reason, any illegality or invalidity shall not affect the remaining parts of this Supplemental Plan, but the Supplemental Plan shall be construed and enforced as if the illegal or invalid provision had never been inserted, and the Company shall have the privilege and opportunity to correct and remedy such questions of illegality or invalidity by amendment. -7- Article III. Eligibility to Participate --------------------------------------- 3.1 Eligibility. An individual shall be eligible to participate in this ----------- Supplemental Plan as of the Entry Date next following the date on which he satisfies both subsections (a) and (b) below except that an individual who satisfies subsection (a) on the Effective Date shall be eligible to participate in this Supplemental Plan as of the Closing Date: (a) Such individual is among the employees designated as eligible to participate in this Supplemental Plan in accordance with eligibility criteria specified by the Committee before each Plan year (or the Effective Date, as applicable); and (b) either-- (1) the benefit payable to him under the Retirement Plan is less than the benefit that would otherwise be payable under the Retirement Plan if such Plan did not observe the limitations described in Code section 401(a)(17) or 415, or if such Plan included deferrals under section 3.1 of the Thrift Plan or section 4.2(a) of this Supplemental Plan in its definition of Compensations; or (2) the contributions or allocations to his Thrift Plan accounts (other than his Albemarle ESOP Account and his Gate City ESOP Account) are less -8- than such contributions and allocations would otherwise be under the Thrift Plan if such Plan did not observe the limitations described in Code sections 401(a)(17), 401(k), 401(m), 402(g) and 415, or if such Plan included deferrals under section 4.2(a) of this Supplemental Plan in its definition of Compensation; or (3) he is eligible to participate in any designated executive incentive compensation plan. An individual who has satisfied the eligibility requirements of this section 3.1 shall be known as an "Eligible Executive." 3.2 Duration. A person who becomes an Eligible Executive shall remain an -------- Eligible Executive until: (a) he ceases to be a Participant in the Retirement Plan, Thrift Plan, or any designated executive incentive compensation plan; or (b) he ceases to meet the eligibility criteria established for the Plan Year by the Committee under section 3.1. -9- Article IV. Benefits -------------------- 4.1 Retirement Plan Supplement. -------------------------- (a) Amount. An Eligible Executive who is entitled to a benefit under the ------ Retirement Plan shall receive a benefit under this section 4.1 equal to the Actuarial Equivalent of the difference between (1) and (2) where -- (1) is the benefit he would be entitled to under the Retirement Plan if -- (A) such benefit is calculated by modifying the Retirement Plan's definition of Compensation to include amounts in excess of the limit specified in Code section 401(a)(17) and amounts deferred under section 3.1 of the Thrift Plan and section 4.2(a) of this Supplemental Plan; and (B) such benefit is calculated without regard to the limit described in Code section 415; and (2) is the benefit which he is entitled to under the Retirement Plan. (b) Distribution. Benefits payable to the Eligible Executive under section ------------ 4.1(a) shall be paid at the same time and in the same manner as the benefit payable to such Eligible Executive under the Retirement Plan. If the Eligible Executive (or former -10- Eligible Executive) should die before his Retirement Plan supplement has been completely distributed, any remaining benefit shall be payable to the Beneficiary designated by him under section 2.1(b) of this Supplemental Plan at a time and in a manner determined by the Committee. 4.2 Thrift Plan Supplement. ---------------------- (a) Salary Reduction Allocations. ---------------------------- (1) Amount. Each Eligible Executive who is a Participant in the ------ Thrift Plan may elect to contribute to his Deferred Allocation Account on a pretax basis for any Plan Year an amount equal to the difference between (A) and (B) where -- (A) is a whole percentage of Covered Compensation equal to the same contribution percentage elected by the Eligible Executive under section 3.1 of the Thrift Plan; and (B) is an amount equal to the maximum Tax-Deferred Contributions that has been, or will be, made to the Eligible Executive's Account under the Thrift Plan (determined with regard to all Thrift Plan provisions, and the limitations described in Code sections 401(a)(17), 401(k), 401(m), 402(g), and 415) for such Plan Year. -11- (2) Salary Reduction Election. An election by an Eligible Executive ------------------------- to reduce his Covered Compensation under section 4.2(a)(1) shall be made in writing prior to the beginning of each Plan Year (or the date he is eligible to participate in the Thrift Plan, if he becomes so eligible during the Plan year) and shall be irrevocable for such Plan Year (or remainder of the Plan Year, if applicable). The election made by an Eligible Executive under section 3.1 of the Thrift Plan shall also be irrevocable for the Plan Year (or remainder of the Plan Year, if applicable). (3) Time for Crediting Salary Reduction Allocation. The amount ---------------------------------------------- allocated to the Deferred Allocation Account pursuant to an Eligible Executive's election under section 4.2(a)(1) shall be credited to the Executive's Account at the same time and in the manner as Tax-Deferred Contributions are credited to the Eligible Executive's Tax-Deferred Contributions Account under the Thrift Plan. (b) Company Matching Allocations. ---------------------------- (1) Amount. Each Eligible Executive who elects to reduce his Covered ------ Compensation under section 4.2(a)(1) shall receive a Company Matching -12- Allocation for each month in an amount equal to the difference between (A) and (B) where -- (A) is an amount equal to the sum of (i) the first two percent (2%) of Covered Compensation elected for salary reduction under section 4.1 of the Thrift Plan (but not more than the amount described in section 4.2(a)(1)(B) of this Supplemental Plan) and for salary reduction under section 4.2(a)(1) of this supplemental Plan; and (ii) 50 percent of the next four percent (4%) of Covered compensation elected for salary reduction under section 4.1 of the Thrift Plan (but not more than the amount described in section 4.2(a)(1)(B) of this Supplemental Plan) and for salary reduction under section 4.2(a)(1) of this Supplemental Plan; and (B) is an amount equal to the maximum Employer Contributions that has been, or will be, made to the Eligible Executive Account under the Thrift Plan (determined with regard to all Thrift Plan provisions and the limitations described in Code sections 401(a)(17), 401(k), 401(m), 402(g), and 415) for such Plan Year. -13- (2) Time for Crediting Company Matching Allocations. The amount ----------------------------------------------- allocated to the Matching Allocation Account under this section 4.2(b) shall be credited to the Executive's Account at the same time and in the same manner as Employer Contributions are credited to the Eligible Executive's Employer Contribution Account under the Thrift Plan. (c) Vesting. The interest of an Eligible Executive in his Deferred ------- Allocation Account shall be fully vested in him at all times. The interest of an Eligible Executive in his Matching Allocation Account shall be contingent, except that such interest shall become vested at the same time and in the same manner as his interest in his Employer Contributions Account becomes vested under the Thrift Plan. (d) Distribution. The interest of an Eligible Executive in his Deferred ------------ Allocation Account and Matching Allocation Account, including earnings thereon, shall be distributed to the Eligible Executive upon his separation from service with the Company and the Affiliates for any reason. The form of distribution will be either a lump sum, a series of installments payable over a period not to exceed 15 years, or a combination thereof, as elected by the Eligible Executive at the time described in section 4.2(a)(2). -14- If the Eligible Executive (or former Eligible Executive) should die before his Deferred Allocation Account and Matching Allocation Account have been completely distributed, the remaining balances shall be paid to the Beneficiary designated by him under section 2.1(b) of this Supplemental Plan at a time and in a manner determined by the Committee. Notwithstanding any provision of the Thrift Plan to the contrary, an Eligible Executive may not receive a distribution from his Deferred Allocation Account or Matching Allocation Account by withdrawal, loan, or otherwise until he incurs a separation from service with the Company and the Affiliate. 4.3 Executive Incentive Compensation Plan Deferrals. ------------------------------------------------ (a) Amount. Each Eligible Executive who is a participant in any designated ------ executive incentive compensation plan maintained by the Employer may elect to defer to his Executive Incentive Compensation Account, on a pretax basis, an amount equal to either 10 percent, 20 percent, 30 percent, 40 percent, or 50 percent of the benefit payable to him under such plan. (b) Deferral Election. An election by an Eligible Executive to defer incentive ----------------- compensation under section 4.3(a) shall be made in writing at a time -15- determined by the Committee and shall be irrevocable. In establishing the time of election, the Committee shall select a date that will not result in the constructive receipt of income to an Eligible Executive who elects to defer incentive compensation under this section 4.3. (c) Vesting. The interest of an Eligible Executive in his Executive ------- Incentive Compensation Account shall be fully vested in him at all times. (d) Distribution. ------------ (1) Time of Distribution. The interest of an Eligible Executive in -------------------- his Executive Incentive Compensation Account, including earnings thereon, shall be paid, at the election of the Eligible Executive, upon either: (A) the Eligible Executive's separation from service with the Company and the Affiliates; (B) a date specified by the Eligible Executive at the time of deferral (which shall be at least two years after the date of deferral); or (C) the earlier of the occurrence of an event specified by the Eligible Executive at the time of deferral (which even shall be at least two years after the date of deferral) or a date specified by the Eligible -16- Executive at the time of deferral (which date shall be at least two years after the date of deferral). Any election under this subparagraph (C) is subject to the approval of the Committee. (2) Form of Distribution. The form of distribution will be either a -------------------- lump sum, a series of installments payable over a period not to exceed 15 years, or a combination thereof, as elected by the Eligible Executive at the time described in section 4.3(b). If the Eligible Executive (or former Eligible Executive) should die before his Executive Incentive Compensation Account has been completely distributed, the remaining balance shall be paid to the Beneficiary designate by him under section 2.1(b) of this Supplemental Plan at a time and in a manner determined by the Committee. 4.4 Hardship Withdrawals. -------------------- (a) In the event of an Eligible Executive's financial hardship, the Committee may, in its sole and absolute discretion, permit the Eligible Executive to withdraw without penalty all or part of his Executive's Account (determined as of the Adjustment Date immediately preceding the date of withdrawal). For purposes of -17- this section, "financial hardship" shall mean an unforeseeable situation that is caused by events beyond the control of the Eligible Executive and that would result in a severe financial hardship to the Eligible Executive if the withdrawal is not permitted. The determination of whether a situation constitutes a financial hardship shall be made by the Committee. (b) The amount withdrawn under this section shall not exceed the amounts needed to meet the financial hardship less all amounts reasonably available from other sources (including all amounts that may be withdrawn from the Thrift Plan). A withdrawal under this section shall be drawn from the various subaccounts in the Executive's Account in the following order: (1) the Executive Incentive Compensation Account; (2) the Eligible Executive's Deferred Allocation Account; (3) the Eligible Executive's Prior Plan Account; and (4) the Eligible Executive's Matching Allocation Account. 4.5 Nonassignability. Benefits under this Supplemental Plan are not in ---------------- any way subject to the debts or other obligations of the persons entitled thereto and may not voluntarily or involuntary be sold, transferred, or assigned. Any voluntary -18- attempt to sell, anticipate, assign, or encumber benefits under this Supplemental Plan shall operate to cancel the balance of an Executive's Account as of the date of such attempt and to relieve the Employer from any future liability to pay or distribute any benefit with respect to such cancelled amount. -19- Article V. Accounts, Earnings, and Records of Plan -------------------------------------------------- 5.1 Accounts and Records. The Company shall maintain records relative to -------------------- an Executive's Account so that the current value may be determined as of any Adjustment Date. 5.2 Account Value. As of any given date for which a determination of the ------------- value of the Executive's Account is required, such value shall equal the sum of the value of his Deferred Allocation Account, his Matching Allocation Account, his Executive Incentive Compensation Account, and his Prior Plan Account determined as of the Adjustment Date coinciding with or immediately preceding the date as of which the value of the Executive's Account is sought. 5.3 Interest Accrual. The account balance of the Executive's Account ---------------- shall accrue interest at a rate fixed from time to time by the Committee in its sole and absolute discretion. Interest shall accrue from each Adjustment Date on the account balance as of that date and shall be credited to the Executive's Account as of the next Adjustment Date or, if earlier, the first day of the month which includes the distribution date. Interest credited to an Executive's Account pursuant to this section 5.3 shall be allocated among the Deferred Allocation Account, Matching Allocation Account, Executive Incentive Compensation Account, and -20- Prior Plan Account in the same proportion that each such subaccount bears to the total Executive's Account. -21- Article VI. No Trust or Funding Vehicle --------------------------------------- 6.1 No Trust or Funding Vehicle. Nothing contained in this Supplemental --------------------------- Plan, and no action taken pursuant to provisions of this Supplemental Plan, shall create or be construed to create a trust or other funding vehicle of any kind or to create a fiduciary relationship between the Company and any Eligible Executive. Any amount payable or other interest in this Supplemental Plan shall remain an unfunded and unsecured general obligation of the Company and no amounts shall be set aside as the Executive's Account. -22- Article VII. Administration --------------------------- 7.1 Plan Administrator. The Supplemental Plan shall be administered by the ------------------ Committee, which shall be the Plan Administrator, and such employees or other agents as the Committee may designate from time to time. 7.2 Administration. The Committee shall have all powers as may be -------------- necessary to carry out its duties hereunder and may, from time to time, establish rules for the administration of the Supplemental Plan and the transaction of its business. Without limiting the generality of the foregoing, the Committee shall have the exclusive authority to interpret the Supplemental Plan, to prescribe, amend, and rescind rules and regulations related to it, and to make all other determinations necessary for the administration of the Supplemental Plan. The Committee shall have the exclusive right to remedy or resolve possible ambiguities, inconsistencies, or omissions by general rule or particular decision. The Committee shall have the power to remedy any defects in the administration of the Supplemental Plan and may take whatever correction action it deems appropriate. The interpretation and construction by the Committee of any Supplemental Plan provision shall be conclusive and binding on all parties. -23- The Committee shall have the authority to delegate responsibility for performance of any or all functions necessary for administration of the Supplemental Plan to such employees of the Company, including Eligible Executives, as the Committee shall in its sole discretion deem appropriate. 7.3 Uniform Rules. In administering the Supplemental Plan, the Committee ------------- shall endeavor to apply uniform rules to all similarly situated individuals. 7.4 No Individual Liability. It is declared to be an expressed purpose ----------------------- and intention of the Supplemental Plan that no liability whatsoever shall attach to or be incurred by employees, shareholders, officers, or directors of the Company or any Affiliate, or any agent or representative appointed hereunder, under or by reason of any of the terms or conditions of the Supplemental Plan. The Company, through insurance or otherwise, may indemnify and defend any such person against any personal liability for actions taken or omitted in good faith in the performance of duties under this Supplemental Plan. 7.5 Notice of Address. Each person entitled to benefits from the ----------------- Supplemental Plan must file with the Committee in writing, his post office address and each change of post office address. Any such notice provided to the Company under the Retirement Plan or the Thrift Plan shall be deemed to satisfy the -24- requirement of this section. Any Communication, statement, or notice address will be binding upon him for all purposes of this Supplemental Plan, and neither the Company nor the Committee shall be obligated to search for or ascertain his whereabouts. 7.6 Data. All persons entitled to benefits from the Supplemental Plan ---- must furnish to the Committee such documents, evidence, or information as the Committee considers necessary or desirable for the purpose of administering the Supplemental Plan, and it shall be an express condition of the Supplemental Plan that each such person must furnish such information and sign such documents as the Committee may require before any benefits become payable from the supplemental Plan. 7.7 Missing Persons. If the Committee shall be unable, within two (2) --------------- years after any amount becomes due and payable from the Supplemental Plan to a former Eligible Executive or Beneficiary, to make payment because the identity or whereabouts of such person cannot be ascertained, the committee may mail a notice by registered mail to the last known address of such person stating that unless such person makes written reply within sixty (60) days from the mailing of such notice, the Committee will direct that all liability for the payment of such amount shall terminate; provided, however, that in the event of the subsequent reappearance of the former Eligible Executive of Beneficiary prior to termination of the supplemental Plan, the benefits which are -25- payable and which such person missed shall be paid in a single sum without any interest or other income being credited thereto subsequent to the original due date. 7.8 Incompetency. Every person receiving or claiming benefits under the ------------ Supplemental Plan shall be conclusively presumed to be mentally competent and of legal age until the date on which the Committee receives a written notice, in a form and manner acceptable to the Committee, that such person is incompetent or a minor, from whom a guardian or other person legally vested with the care of his person or estate has been appointed; provided, however, that if the Committee shall find that any person to whom a benefit is payable under the Supplemental Plan is unable to care for his affairs because of incompetency, or is a minor, any payment due (unless a prior claim therefor shall have been made by a legal representative) may be paid to the spouse, a child, a parent, or a brother or sister, or to any person or institution deemed by the Committee to have incurred expense for such person otherwise entitled to payment. To the extent permitted by law, any such payment so made shall be a complete discharge of liability therefor. In the event a guardian of the estate of any person receiving or claiming benefits under the Supplemental Plan shall be appointed by a court of competent jurisdiction, benefit payments may be made to such guardian, provided that proper proof of appointment and -26- continuing qualification is furnished in a form and manner acceptable to the Committee. To the extent permitted by law, any such payment so made shall be a complete discharge of any liability therefor. -27- Article VIII. Amendment and Termination ---------------------------------------- 8.1 Amendment and Termination. The Company expects the Supplemental Plan ------------------------- to be permanent, but since future conditions affecting the Company cannot be anticipated or foreseen, the Company must necessarily and does hereby reserve to its board of directors the right to amend, modify, or terminate the Supplemental Plan at any time. In addition, the Committee may make any amendment which does not significantly increase benefit levels or costs and does not accelerate the time that any amount under this Supplement Plan is paid or made available. However, no amendment or termination shall retroactively reduce the accrued benefit of any Eligible Executive. 8.2 Corporate Reorganization. In the event of a merger or consolidation ------------------------ of an Employer, or the transfer of more than 25 percent of the ownership of an Employer or substantially all of the assets of an Employer to an nonaffiliated corporation, it is intended that this Supplemental Plan shall be continued and that any such continuing, resulting, or transferee corporation shall assume all liabilities of the Employer hereunder. If the Supplemental Plan is not continued or such successor does not agree to assume the liabilities of the Employer hereunder, then all benefits that have accrued hereunder shall vest in full and become due and payable in a lump sum by the Employer at the time of such merger, consolidation, or transfer. -28- 8.3 Protected Benefits. If the Supplemental Plan is terminated, then the ------------------ dollar amount of benefits of each retired Eligible Executive and Beneficiary and the dollar amount of vested benefits of each active Eligible Executive shall not thereafter be reduced without the Eligible Executive's or Beneficiary's consent. 8.4 Adoption by Affiliates. Any Affiliate that has adopted the Retirement ---------------------- Plan or Thrift Plan shall be deemed to have adopted this Supplemental Plan for the benefit of its employees who have been selected by the Company as Eligible Executives (with such adoption being effective upon the Company's notification of the Affiliate of such selection); provided, however, that an Affiliate may decline to adopt this Supplemental Plan or may rescind its prior adoption by delivering to the Company a written instrument to that effect which has been authorized by a resolution of its board of directors. The adoption of this Supplemental Plan by an Affiliate constitutes authorization for the Committee to serve as the agent of the Affiliate in administering the Supplemental Plan and also constitutes acceptance of the Affiliate's obligation to make payment of any benefits to Eligible Executives in its employ (or their Beneficiaries) that may become due hereunder. * * * * * * -29- IN WITNESS WHEREOF, Branch Banking & Trust Company has caused this instrument to be executed by its duly authorized officer effective as of August 8, 1991. BRANCH BANKING & TRUST COMPANY By /s/ Henry Williamson Jr --------------------------- Its Chief Operating Officer -------------------------- ATTEST: By /s/ Jerone C. Herring --------------------- Secretary -30- EX-11 9 STATEMENT OF RE-COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 --------------- --------------- --------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) PRIMARY EARNINGS PER SHARE: Weighted average number of common shares outstanding during the period.......... 108,545,334 108,558,570 106,961,466 Add-- Dilutive effect of outstanding options (as determined by application of treasury stock method).................. 1,789,118 1,218,140 1,181,522 Issuance of additional shares under share repurchase agreement, contingent upon market price.................... 151,675 -- -- --------------- --------------- --------------- Weighted average number of common shares, as adjusted................... 110,486,127 109,776,710 108,142,988 =============== =============== =============== Net income.................. $ 283,664 $ 186,341 $ 243,842 Less--Preferred dividend requirement................ 610 5,079 5,198 --------------- --------------- --------------- Income available for common shares..................... $ 283,054 $ 181,262 $ 238,644 =============== =============== =============== Primary earnings per share.. $ 2.56 $ 1.65 $ 2.21 =============== =============== =============== FULLY DILUTED EARNINGS PER SHARE: Weighted average number of common shares outstanding during the period.......... 108,545,334 108,558,570 106,961,466 Add-- Shares issuable assuming conversion of convertible preferred stock.......... 938,652 4,458,426 4,548,236 Dilutive effect of outstanding options (as determined by application of treasury stock method).................. 2,200,539 1,458,096 1,186,516 Issuance of additional shares under share repurchase agreement, contingent upon market price.................... 151,675 -- -- Shares assuming conversion of convertible debentures............... -- 326,751 497,463 --------------- --------------- --------------- Weighted average number of common shares, as adjusted................... 111,836,200 114,801,843 113,193,681 =============== =============== =============== Net income.................. $ 283,664 $ 186,341 $ 243,842 Add--After tax interest expense and amortization of issue costs applicable to convertible debentures....... -- 211 325 --------------- --------------- --------------- Net income, as adjusted..... $ 283,664 $ 186,552 $ 244,167 =============== =============== =============== Fully diluted earnings per share...................... $ 2.54 $ 1.62 $ 2.16 =============== =============== ===============
EX-21 10 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Southern National Corporation, a North Carolina corporation, is a multi-bank holding company. The table below sets forth all of Southern National's subsidiaries as to State or Jurisdiction of Organization and Percentage of Voting Securities Owned as well as their relationship to Southern National. All of the subsidiaries listed below are included in the consolidated financial statements, and no separate financial statements are submitted for any subsidiary.
PERCENTAGE STATE OR JURISDICTION OF VOTING SUBSIDIARY OF ORGANIZATION SHARES OWNED - ---------- --------------------- ------------ Branch Banking and Trust Company...................................................... North Carolina 100% BB&T Financial Corporation of South Carolina.......................................... South Carolina 100% Branch Banking and Trust Company of South Carolina.................................... South Carolina 100% BB&T Financial Corporation of Virginia................................................ Virginia 100% Regional Acceptance Corporation....................................................... North Carolina 100% Money 24, Inc......................................................................... North Carolina 100% BB&T Leasing Corp..................................................................... North Carolina 100%(1) Branch Banking and Trust Company of Virginia.......................................... Virginia 100%(3) Southern International Corp........................................................... North Carolina 100%(4) Workmen's Service Corp................................................................ North Carolina 100%(1,4) First Savings Service Corp............................................................ North Carolina 100%(1,4) Citizens Financial Services, Inc...................................................... North Carolina 100%(1,4) Fay-Charl Corp........................................................................ North Carolina 100%(1,4) Peoples Service Corp. of Thomasville.................................................. North Carolina 100%(1) City Finance Company, Inc............................................................. North Carolina 100%(1,4) Southern National Mortgage Company.................................................... North Carolina 100%(1) BB&T Savings Corporation.............................................................. North Carolina 100%(4) BB&T Investment Services, Inc......................................................... North Carolina 100%(1) BB&T Insurance Services, Inc.......................................................... North Carolina 100%(1) Grey Eagle, Inc....................................................................... Delaware 100%(1) BB&T Realty Investments, Inc.......................................................... Virginia 100%(1) BB&T Real Estate Investment Trust, Inc................................................ North Carolina 100%(6) First Capital Corporation............................................................. South Carolina 100%(2,4) The First Real Estate Group, Inc...................................................... South Carolina 100%(2,4) FICORP of South Carolina.............................................................. South Carolina 100%(2,4) BB&T Realty Corporation............................................................... North Carolina 100%(2,4) BB&T Investment Services of South Carolina, Inc....................................... South Carolina 100%(2) Unified Investors Life Insurance Company.............................................. Arizona 100% Prime Rate Premium Finance Corporation, Inc........................................... South Carolina 100%(1) Agency Technologies, Inc.............................................................. South Carolina 100%(1) IFCO, Incorporated.................................................................... Virginia 100%(1) College Investments of South Carolina, Inc............................................ South Carolina 100%(2,4) College Investments of North Carolina, Inc............................................ North Carolina 100%(2,4) College Properties, Inc............................................................... South Carolina 100%(2,4) Firstmark Development Corporation..................................................... South Carolina 100%(2,4) 150 Corporation....................................................................... North Carolina 100%(1) Carolina Lenders, Inc................................................................. North Carolina 100%(1,4) Building Service Corporation.......................................................... North Carolina 100%(1,4) Guaranty Financial Services........................................................... North Carolina 100%(1,4) CSB Financial......................................................................... North Carolina 100%(1,4)
PERCENTAGE STATE OR JURISDICTION OF VOTING SUBSIDIARY OF ORGANIZATION SHARES OWNED - ---------- ---------------------- ------------ North Carolina Trustee Company............................................ North Carolina 100%(1,4) Goddard Technology Corporation............................................ South Carolina 100%(1) FARR Associates, Inc...................................................... North Carolina 100%(1) Davidson Financial, Inc................................................... North Carolina 100%(1,4) Carolina Securities Corp.................................................. South Carolina 100%(2,4) Nexus..................................................................... North Carolina 51%(5) AutoBase Information Systems, Inc......................................... North Carolina 51%(1) Regional Acceptance Investment Corporation of Nevada...................... Nevada 100%(4,7) REGA Insurance Services, Inc.............................................. North Carolina 100%(7) Greenville Car Mart, Inc.................................................. North Carolina 100%(7) Regional Fidelity Limited................................................. British Virgin Islands 99%(7) Roanoke Fidelity Limited.................................................. British Virgin Islands 99%(4,7) Universal Fidelity Limited................................................ British Virgin Islands 99%(4,7)
- -------- (1) Owned by Branch Banking and Trust Company (North Carolina) (2) Owned by Branch Banking and Trust Company of South Carolina (3) Owned by BB&T Financial Corporation of Virginia (4) Inactive (5) Owned by 150 Corporation (6) Owned by BB&T Realty Investments, Inc. (7) Owned by Regional Acceptance Corporation EX-23.A 11 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23(A) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into Southern National Corporation's previously filed Registration Statement File Nos. 33-52367, 33-57865 and 33- 57867 filed on Form S-8 and Registration Statement File Nos. 33-57859, 33- 57861 and 33-57871 filed on Form S-3. Arthur Andersen LLP Charlotte, North Carolina, March 17, 1997. EX-23.B 12 OPINION OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23(B) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Southern National Corporation: We have audited in accordance with generally accepted auditing standards the consolidated financial statements of Southern National Corporation and subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which financial statements are included in this Form 10-K, and have issued our report thereon dated January 14, 1997. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Exhibit 11 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. Exhibit 11 has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Charlotte, North Carolina, January 14, 1997. EX-27 13 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 638,748 1,046 19,940 0 5,136,789 124,718 128,410 14,584,064 183,932 21,246,562 14,953,914 2,263,303 248,409 2,051,767 0 0 546,487 1,182,682 21,246,562 1,282,521 323,360 732 1,606,613 564,747 778,120 828,493 53,661 3,206 654,053 418,168 418,168 0 0 283,664 2.56 2.54 4.45 64,430 32,052 0 0 175,588 59,484 14,167 183,932 183,932 0 29,429
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