-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, S3m8ThkZElRmyd6ZkWNq5CkNEntp8u0y71YKJhkfK/SzVWoVLFFChIfT8+sRrzDe bFTmPdf5lynHhYyTDCG23g== 0000950168-94-000105.txt : 19940404 0000950168-94-000105.hdr.sgml : 19940404 ACCESSION NUMBER: 0000950168-94-000105 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN NATIONAL CORP /NC/ CENTRAL INDEX KEY: 0000092230 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 560939887 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-10853 FILM NUMBER: 94519832 BUSINESS ADDRESS: STREET 1: 500 N CHESTNUT ST CITY: LUMBERTON STATE: NC ZIP: 28358 BUSINESS PHONE: 9196712000 MAIL ADDRESS: STREET 1: 500 NORTH CHESTNUT STREET CITY: LUMBERTON STATE: NC ZIP: 28358 10-K 1 SOUTHERN NATIONAL 10-K 3/30/94 #89509.1 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 1934 for the fiscal year ended: December 31, 1993 commission file number: 0-4641 SOUTHERN NATIONAL CORPORATION (Exact name of registrant as specified its charter) North Carolina 56-0939887 (State of incorporation) (I.R.S. Employer Identification No.) 500 North Chestnut Street 28358 Lumberton, North Carolina (Zip Code) Address of principal executive offices) (919) 671-2000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $5 par value New York Stock Exchange Depositary Shares, New York Stock Exchange stated value $25 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K __________. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act Of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X NO ________ The aggregate market value of Southern National Corporation voting common stock held by non-affiliates as of February 17, 1994 was $780.9 million and the number of shares outstanding at February 17, 1994 was 42, 353,374. Portions of the Proxy Statement for the 1994 Annual Meeting of Shareholders are incorporated by reference into Par III of this Form 10-K. Part I. Item 4. Submission of Matters to a Vote of Security Holders A special meeting of the shareholders of Southern National Corporation was held on December 27, 1993 to consider the following resolution: RESOLVED, that up to 8,305,000 shares of Southern National Corporation's common stock including shares to be issued pursuant to options to purchase shares of Southern National Corporation common stock based upon the exchange ratio) (subject to adjustment in retain circumstances) to be issued pursuant to the terms of the Agreement and Plan of Merger dated August 5, 1993, providing for the acquisition by Southern National Corporation of The First Savings Bank, FSB. Of shares represented by proxy there were: Votes for 18,803,894 (07.62%); Votes Against 227,902 (1.18%); Abstain 229,576 (1.19%); as a percentage of the shares represented by proxy at the meeting. There were 31,751,733 shares eligible to vote. SIGNATURES Pursuant to the requirements 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, in the City of Lumberton, State of North Carolina, On March 24, 1994. SOUTHERN NATIONAL CORPORATION (Registrant) By:_____________________________________ L. Glenn Orr, Jr., Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on March 24, 1994. Signature Title _______________________ Chairman, President, Chief L. Glenn Orr, Jr. Executive Officer and Director (Principal Executive Officer) ________________________ Executive Vice President and Chief John R. Spruill Financial Officer (Principal Financial Officer) ________________________ Executive Vice President and Gary E. Carlton Director _______________________ Vice President and Controller Sherry A. Kellett (Principal Accounting Officer) _______________________ Director William F. Black _______________________ Director Ronald E. Deal ________________________ Director William N. Geiger, Jr. ________________________ Director Lloyd V. Hackley, Ph.D. ________________________ Director James A. Hardison, Jr. ________________________ Director Donald C. Hiscott ________________________ Director Richard Janeway, M.D. ________________________ Director Joseph A. McAleer, Jr. ________________________ Director Albert O. McCauley ________________________ Director Dickson McLean, Jr. ________________________ Director Charles E. Nichols ________________________ Director C. Edward Pleasants, Jr. ________________________ Director Nido R. Qubein ________________________ Director Ted R. Reynolds ________________________ Director A. Bruce Williams ________________________ Director A. Tab Williams, Jr. ________________________ Director Edward M. Williams ________________________ Director T.H. Yancey EXHIBIT INDEX EXHIBIT INDEX Exhibit No. Description Location 3.1 Articles of Incorporation of Incorporated herein Southern National Corporation, by reference to as amended. Registration No. 33- 64176. 3.2 Bylaws of Southern National Incorporated herein Corporation, as amended. by reference to Registration No. 33- 29586. 4.1 Form of Articles of Amendment Incorporated herein to Articles of Incorporation of by reference to Southern National Corporation Registration No. 33- relating to Cumulative 44557. Convertible Preferred Stock, Series A. 4.2 Agreement to furnish copies of Filed herewith. documents defining the rights of the holders of the Capital Notes of Southern National Corporation. 10.1* Deferred compensation Incorporated herein Agreement, dated as of January by reference to 8, 1974, as amended, by and Registration No. 2- between Southern National Bank 86631. of North Carolina and Hector MacLean. 10.2* Deferred Compensation Incorporated herein Agreement, dated as of April 1, by reference to 1977, as amended, by and Registration No. 2- between Southern National Bank 73848. of North Carolina and A. Bruce Williams. EXHIBIT INDEX (continued) Exhibit No. Description Location 10.3* Employment Contract dated Incorporated herein by July 16, 1981, by and reference to Registration between Southern National No. 33-29586. Bank of North Carolina, Souther National Corporation and L. Glenn Orr, Jr. 10.4* Employment Contract dated Incorporated herein by July 21, 1983, by and reference to Registration between Southern National No. 33-29586. Bank of North Carolina, Southern National Corporation and William F. Black. 10.5* Employment Contract dated Incorporated herein by July 21, 1983, by and reference to Registration between Southern National No. 33-29586. Bank of North Carolina and J.A. Hardison, Jr. 10.6* Agreement dated December Incorporated herein by 12, 1984, by and between reference to Registration Southern National Bank of No. 33-29586. North Carolina and James A. Hardison, Jr. 10.7* Salary continuation Incorporated herein by agreement dated May 18, reference to Registration 1983, by and between First No. 33-29586. National Bank of Anson County and James A. Hardison, Jr. 10.8* Employment Contract dated Incorporated herein by September 19, 1985, by and reference to Registration between Southern National No. 33-00962. Corporation, Southern National Bank of North Carolina and A. Bruce Williams. EXHIBIT INDEX (continued) Exhibit No. Description Location 10.9* Employment Contract dated Incorporated herein by September 19, 1985, by and reference to Registration between Southern National No. 33-00962. Corporation, Southern National Bank of North Carolina and A. Bruce Williams. 10.10* Employment contact dated Incorporated herein by July 17, 1986, by and reference to Registration between Southern National No. 33-8137. Corporation, Southern National Bank of North Carolina and Gary E. Carlton. 10.11* Amendment to Employment Incorporated herein by contract dated june 15, reference to Registration 1987, by and between No. 33-29586. Southern National Corporation, Southern National Bank of North Carolina and Gary E. Carlton. 10.12* Employee Stock Ownership Incorporated herein by Plan, as amended, of reference to Southern Southern National National Corporation's Corporation. Annual Report on form 10- K for the year ended December 31, 1988. 10.13* Employment contract dated Incorporated herein by April 24, 1989, by and reference to Registration between Southern National No. 33-29586. Corporation, Southern National Bank of North Carolina, Southern National Bank of South Carolina and John R. Spruill. EXHIBIT INDEX (continued) Exhibit No. Description Location 10.14* Employment Contract dated Incorporated herein by June 15, 1989, by and reference to Registration between Southern National No. 33-29586. Corporation, Southern National Bank of North Carolina and L. Glenn Orr, Jr. 10.15* Employment contact dated Incorporated herein by June 15, 1989, by and reference to Registration between Southern National No. 33-29586 Corporation, Southern National Bank of North Carolina and A. Bruce Williams. 10.16* Amendment to Employment Incorporated herein by contract dated January 1, reference to Registration 1989, by and between No. 33-38894. Southern National Corporation, Southern National Bank of North Carolina and A. Bruce Williams. 10.17* Amendment to Employment Incorporated herein by contract, dated July 2, reference to Registration 1990, by and between No. 33-38894. Southern National corporation, Southern National Bank of North Carolina and Hector MacLean. 10.18* Death Benefit Only plan, Incorporated herein by dated April 23, 1990, by reference to Registration and between Southern No. 33-38894. National Bank of North Carolina and L. Glenn Orr, Jr. EXHIBIT INDEX (continued) Exhibit No. Description Location 10.19* Non-Employee Director's Incorporated herein by Stock Option Plan of reference to Southern Southern National National corporation's Corporation. definitive Proxy Statement for the 1992 Annual Meeting of shareholders, dated March 25, 1992. 10.20* Amendment to Employment Filed herewith. contract, dated january 1, 1994, by and between Southern National corporation, Southern National Bank of North Carolina and Gary E. Carlton. 10.21* Employment Contract dated Filed herewith. January 24, 1994, by and between Souther National Corporation, Southern National Bank of South Carolina and Luther C. Boliek. 10.22* Executive change in Control Filed herewith. Agreement dated January 1, 1994, by and between Southern National corporation and G. Lee Cory. 10.23* executive change in Control Filed herewith. Agreement dated january 1, 1994, by and between Southern National corporation and Charles Royce Hough. EXHIBIT (continued) Exhibit Description Location No. 10.24* Executive change in Filed herewith. Control Agreement dated january 1, 1994, by and between Southern National Corporation and Robert E. Greene. 10.25* Executive change in Filed herewith. Control Agreement dated January 1, 1994, by and between Southern National Corporation and Morris D. Marley. 10.26* Executive change in Filed herewith. Control Agreement dated january 1, 1994, by and between Southern National corporation and Sherry a. Kellett. 10.27* Form of consulting Filed herewith. Agreement between Southern National Corporation and Outside Directors. 11.1 Computations of Filed herewith. Earnings Per Share 13.1 Annual report to Filed herewith. security holders. 21.1 Subsidiaries of the Filed herewith. Registrant. 23.1 Consent of Arthur Filed herewith. Andersen & Co. 99.1 Proxy Statement of the Filed herewith. 1994 Annual Meeting of Shareholders dated March 16, 1994.
* Management contract or compensatory plan or arrangement. EX-4 2 EXHIBIT 4.2 EXHIBIT 4.2 Agreement to Furnish Copies of Document Defining the Rights of the Holders of the Capital Notes of Southern National Corporation Exhibit 4.2 Agreement to Furnish Copies of Documents Defining the Rights of the Holders of the Capital Notes of Southern National Corporation Copies of the documents defining the rights of the holders of the Capital Notes which have been issued by SNC are not included as exhibits because these securities were exempt from registration under the Securities Act of 1933, as amended, and the total amount authorized does not exceed 10% of the consolidated total assets of SNC. However, SNC hereby agrees to furnish copies of the aforementioned documents upon the written request of the Commission. EX-10 3 EXHIBIT 10.20 EXHIBIT 10.20 Amendment to Employment Contract, dated January 1, 1994, by and between Southern National Corporation, Southern National Bank of North Carolina and Gary E. Carlton STATE OF NORTH CAROLINA, EMPLOYMENT CONTRACT FORSYTH COUNTY THIS EMPLOYMENT CONTRACT, made and entered into effective January 1, 1994, by and between SOUTHERN NATIONAL CORPORATION (herein "Corporation"), a North Carolina Corporation with its principal office in Lumberton, North Carolina, and SOUTHERN NATIONAL BANK OF NORTH CAROLINA (herein "Bank"), a National Banking Association with its principal office in Lumberton, North Carolina, parties of the first part, and GARY E. CARLTON (herein "Carlton"), party of the second part; W I T N E S S E T H: WHEREAS, Carlton is an officer of the Corporation and Bank; and WHEREAS, Corporation is the sole shareholder and holding company of the Bank; WHEREAS, Corporation and Bank, recognizing the value of the services which Carlton has provided and can continue to provide to Corporation and Bank and recognizing his banking and financial experience and managerial abilities, entered into an Employment Contract with Carlton dated July 17, 1986; and WHEREAS, Corporation and Bank and Carlton agreed to an amendment to the July 17, 1986, Employment Contract, by agreement dated June 15, 1987, extending the term of Carlton's employment as an officer and employee of the Corporation and Bank until he reaches age sixty-five (65) (as amended, the "Employment Contract"; and WHEREAS, the parties have determined that the Employment Contract should be further amended to clarify Carlton's compensation and future increases therein (which the parties have determined to be reasonable compensation) to include a mitigation provision consistent with the provisions of Prop. Treas. Reg. (bullet)1.280 G-1 (A-42) and to add several other non-material provisions. NOW, THEREFORE, for and in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration,receipt of which is hereby acknowledged by each of the parties, and in consideration of the mutual covenants of the parties, the parties agree that the Employment Contract shall be and is hereby further amended and restated as follows: Section 1. Employment. Corporation and Bank employ Carlton and Carlton agrees that he shall be employed by Corporation and Bank, as Executive Vice President and President,respectively, with such duties and responsibilities as may be assigned to him in such capacities from time to time by the Boards of Directors of Corporation and Bank. Section 2. Duties and Offices. Carlton shall continue to be employed as Executive Vice President of the Corporation and President of the Bank and have equivalent or higher duties and responsibilities during his employment by Corporation and Bank. While this Employment Contract is in effect, senior management of Corporation and Bank shall each year nominate Carlton for election by the Boards of Directors of Corporation and Bank to the offices herein set out (or such higher officer level as the respective Boards of Directors may decide). Section 3. Election to Boards of Directors. Carlton shall be elected to the Boards of Directors of both Corporation and Bank during the term of his employment. Management of Corporation and Bank will nominate Carlton at each of their respective annual shareholders' meetings for election to the Boards of Directors of Corporation and Bank for successive terms during his employment under this Employment Contract. Section 4. Term. The term of this Employment Contract and the employment by the Corporation and Bank of Carlton under this Employment Contract shall be for the period of time beginning January 1, 1994, and continuing and existing until Carlton reaches age sixty-five (65). Section 5. Compensation. Effective from and after January 1, 1994, the Bank and the Corporation jointly and severally agree to pay Carlton for his services to be rendered hereunder a minimum base salary of two hundred twenty thousand dollars ($220,000) per year payable in equal monthly installments. Subsequent to 1994, Carlton's base salary may be increased each year, effective January 1st, by an amount determined by the Corporation's Compensation Committee. In the event the Corporation or Bank merges in a transaction where it is not the surviving entity, Carlton shall be entitled to annual increases in base salary which shall be, at a minimum, the average percentage increase granted to the officers of equal rank of senior management of the surviving banking entity which carries on the business of Bank or the surviving corporation which is the parent of the Bank. If the Corporation ceases to exist and is dissolved,and is no longer the parent holding company for the Bank, then reference herein to the "Corporation shall not longer be applicable to this Section 5. Section 6. Employee Benefits. Bank maintains employee benefits for officers and employees of Corporation and Bank including a retirement plan and life insurance benefits. Corporation and Bank will continue to provide for Carlton benefits under its retirement plans and to provide Carlton with fringe or employee benefits available to officers of similar officer level of Bank including, but not limited to, medical insurance, life insurance, holidays, vacations, sick pay, leave, and participation in the Southern National Employee Stock Ownership Plan as in effect from time to time. Section 7. Life Insurance. At the present time, Bank carries, at the cost of Bank and Carlton, life insurance on Carlton, pursuant to the Southern National Corporation Senior Officers Insurance Program Agreement dated July 1, 1992 and pursuant to an additional Southern National Corporation Senior Officers Insurance Program Agreement effective October 1,1992. Corporation and Bank agree to continue to carry and maintain in force and pay its share of the premiums on life insurance on the life of Carlton as required, under the Southern National Corporation Senior Officers Insurance Program Agreements in favor of Carlton referenced in this Section 7. Carlton may designate or change the beneficiary of that portion of the policy proceeds to which Carlton is entitled under such agreements, subject to the collateral assignment of proceeds provided for under such agreements. Section 8. Services. Carlton agrees to devote his full time and efforts to the business and affairs of the Corporation and Bank and to use his best efforts to promote and increase the business of the Corporation and Bank, to serve in the Offices of Corporation and Bank herein set out, and to perform any other duties which the Boards of Directors of Corporation and Bank may from time to time assign or delegate to him. Section 9. Termination. In the event (1) Carlton voluntarily severs his employment before the end of the term of this Employment Contract, (2) becomes no longer bondable by the surety company writing fidelity and similar type bonds for the Bank and Corporation, or (3) becomes no longer acceptable to the applicable banking regulatory authorities to be an officer of the Corporation and Bank, then this contract and the employment of Carlton by Corporation and Bank shall terminate, and Carlton shall receive no further salary payments or other fringe benefits provided under this contract, except Carlton shall not forfeit any benefits to which he had become vested prior to the time of the happening of such event. Section 10. Covenant Not to Compete. If Carlton voluntarily terminates his employment with Corporation before the end of the term of this contract, that is before Carlton reaches age sixty-five (65), then Carlton covenants, contracts and agrees that he shall not for his own account or behalf or for the account of others, or as the employee, officer, agent or representative of any other bank holding company, bank, savings and loan association or lending or financial institution of any type,engage in the business of banking or lending or financial services, nor enter into the employment of any other bank holding company, bank savings and loan association, or any financial institution of any type, within the geographical area of the State of North Carolina or the State of South Carolina (in which latter state a banking subsidiary of Southern National Corporation operates) for a period of time beginning with the date of such termination and ending five (5) years thereafter. Section 11. Severability. If any provision or clause of this Employment Contract or any application thereof to any party or circumstance is held invalid, such invalidity shall not affect other provisions or applications to any party or of the Employment Contract that can be given effect without the invalid provisions or application, and to this end the provisions of the Employment Contract are declared to be severable. Section 12. Mitigation. Carlton shall be required to mitigate the amount of any payment provided for in this Employment Contract by seeking other employment and the amount of any such payment shall be reduced by any compensation earned by Carlton as the result of employment by another employer after Carlton's termination by Corporation and Bank. Section 13. Continuance of Agreement. Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business of the Corporation or Bank to expressly assume and perform all of the obligations of this Employment Contract, in a written agreement form satisfactory to Carlton. Section 14. Assumption of Agreement. Unless the parties to this Employment Contract otherwise mutually agree in writing, the Corporation or Bank shall not merge or consolidate with any other corporation, bank or association until such successor entity expressly agrees to and assumes the obligations of Corporation and Bank under this Employment Contract. Section 15. Payment. Should a potential successor not agree to assume the obligations of Corporation and Bank under this Employment Contract during a merger or consolidation, Carlton shall be entitled to compensation from Corporation and Bank (in the aggregate) pursuant to the terms of Section 5 for the term of this Employment Contract provided in Section 2. Section 16. Indemnification. Corporation and Bank must pay any reasonable legal fees and expenses incurred by Carlton in seeking to obtain or enforce any right or benefit provided under this Employment Contract, whether Carlton is successful or not. Payments made under this Section 16 shall be paid by Corporation and Bank (in the aggregate) to Carlton at the time Carlton incurs such legal fees or expenses. Section 17. Governing Law. This contract shall be governed and construed by the Laws of the State of North Carolina. Section 18. Binding Effect. This contract shall be binding upon any of the successors, assigns or personal representatives of the parties hereto. IN WITNESS WHEREOF, the parties have executed this amended and restates Employment Contract, this 1st day of January, 1994, effective as of January 1, 1994. SOUTHERN NATIONAL CORPORATION By: Chairman and Chief Executive Officer ATTEST: Secretary SOUTHERN NATIONAL BANK OF NORTH CAROLINA By: Chairman and Chief Executive Officer ATTEST: Secretary GARY E. CARLTON (SEAL) EX-10 4 EXHIBIT 10.21 EXHIBIT 10.21 Employment Contract, dated January 24, 1994, by and between Southern National Corporation, Southern National Bank of South Carolina and Luther C. Boliek NOTICE: THIS AGREEMENT IS SUBJECT TO ARBITRATION PURSUANT TO SECTION 15-48-10 ET. SEQ. OF THE SOUTH CAROLINA UNIFORM ARBITRATION ACT EMPLOYMENT AGREEMENT THIS AGREEMENT made and entered into this 24th day of January, 1994, by and between SOUTHERN NATIONAL CORPORATION, SOUTHERN NATIONAL BANK OF SOUTH CAROLINA, as successor to the First Savings Bank, FSB, hereinafter referred to as "Bank", and LUTHER C. BOLIEK of GREENVILLE, SOUTHER CAROLINA, hereinafter referred to as "Employee", provides as follows: W I T N E S S E T H : WHEREAS, The First Savings Bank, FSB ("FSB") previously entered into an employment agreement with Employee (the "FSB Agreement"); and WHEREAS, Southern National Corporation, Bank, and Employee desire to amend and restate the FSB Agreement and substitute this employment agreement in lieu thereof as of the Effective Data, as defined in paragraph 15.1. NOW, THEREFORE, for and in consideration of the mutual promises and agreements hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Employee, Southern National Corporation, and Bank covenant and agree as follows: ARTICLE I. EMPLOYEE'S RESPONSIBILITIES 1.1. Southern National Corporation does hereby employ and engage Employee as Vice Chairman. Employee shall have all responsibilities associated with such position and such other or additional duties as may be assigned to him from time to time by the Chairman of Southern National Corporation or its Board of Directors consistent with the duties and responsibilities of the position held by Employee. Employee shall report to the Chairman of Southern National Corporation. 1.2 Employee shall provide full-time services to Bank, Southern National Corporation, and its other affiliates (collectively referred to herein as "SNC"). For purposes of this Agreement, the term "SNC" shall refer to Southern National Corporation and its other affiliates unless the context clearly implies that it refers only to Southern National Corporation. Employee will assist in business development efforts as required by Bank and SNC. Employee will be required to work on behalf of Bank and SNC according to a mutually agreed schedule which must meet reasonable requirements of Bank and SNC. 1.3 The place of performance of Employee's duties shall be in Greenville, South Carolina, except for required business travel and other short-term business-related obligations. 1.4 During the following Employee's employment with Bank and SNC, Employee will not discuss or use any confidential information or proprietary data of Bank or SNC, in any form, except in the course of Employee's employment with Bank and SNC. ARTICLE II. PERFORMANCE OF DUTIES 2.1 Employee agrees that Employee will, at all times, faithfully,industriously and to the best of Employee's ability, experience and talents perform any duties that may be required by and from Employee pursuant to the terms hereof, to the reasonable satisfaction of Bank and SNC. 2.2 During the term of this Agreement, Employee agrees not to working any other paying capacity without the prior written consent of Bank's and SNC's management. ARTICLE III. DURATION, SEVERANCE PAY AND SUPPLEMENTAL RETIREMENT BENEFIT 3.1 The initial term of employment under this Agreement shall begin as of the Effective Date, as defined in paragraph 15.1, and shall end three (3) years later unless the initial term (or an extended term, as the case may be) is continued for an extended term as provided hereinbelow, subject to prior termination. Each extended term shall be for a period of one (1) year and shall begin at the end of the expiring initial term (or an expiring extended term, as the case may be). The parties hereto must mutually agree in writing to an extended term at least sixty (60) days prior to the end of the expiring initial term, or an expiring extended term, whichever shall be applicable. 3.2 The death of the Employee during the term of this Agreement shall terminate this agreement. 3.3 Employee shall receive up to six (6) months full compensation for any period of illness or incapacity during the term of this Agreement. Thereafter, and unless Employee shall have resumed his full responsibilities hereunder prior to the end of such six (6) month period, this Agreement and the employment contemplated hereunder shall terminate. Thereafter, Employee shall be entitled to such benefits as to which Employee may be entitled under any short- or long- term disability plans maintained by SNC. Management further reserves the right to appoint another person to Employee's position on a temporary basis during the six (6) month period of illness or incapacity. Periods of absence de to illness or incapacity shall be treated as months worked for purposes of paragraph 3.6; provided, however, that no more than six (6) months of such absence shall be in addition to, and shall not reduce, any benefits payable under paragraphs 3.6 and 3.7. 3.4 Bank and SNC reserve the right to terminate this Agreement at any time for Just Cause. For purposes of this Agreement, termination for "Just Cause" shall mean termination for personal dishonesty, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule,regulation (other than a law, rule or regulation relating to a traffic violation or similar offense, the violation of which does not involve moral turpitude and the commission of which is not a felony), final cease-and-desist order, or material breach of any provision of this Agreement. Should Bank or SNC and Employee be unable to agree on whether or not Employee's conduct, acts or omissions constitute "Just Cause" for termination of employment within thirty (30) days after Bank or SNC gives Employee Notice of Termination, the controversy shall be settled by arbitration in accordance with the rules of the South Carolina Uniform Arbitration Act in effect, which decision shall be binding on both parties. The date of termination for this purpose shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by binding or final arbitration award, or final judgement, order or decree of a court of competent jurisdiction (the time for appeal having expired and no appeal having been perfected). Employee shall not be deemed to have been terminated for "Just Cause" without: (a) delivery to Employee of a written Notice of Termination from the Chairman of Southern National Corporation explaining SNC's or Bank's intention to terminate Employee for "Just Cause" and specifying in detail the facts and circumstances that are the basis for the terminating Employee's employment; and (b) providing an opportunity for Employee to cure any default specified in the Notice of Termination for a period of thirty (30) days after receipt of such notice. 3.5 This Agreement may be terminated at any time by either Bank, SNC or Employee for any reason, with or without "Just Cause", by giving the other parties to this Agreement sixty (60) days prior written notice of said termination. 3.6 Notwithstanding anything in this Agreement to the contrary other than the provisions of Article V, upon termination of this Agreement for any reason whatsoever (including, but not limited to, death, disability, termination by any party hereto with or without "Just Cause") and in all events, Bank or SNC shall pay to Employee (or his beneficiary or his estate in the event of his death) as severance pay an amount equal to three (3) times his Base Salary, as defined in paragraph 4.1. The amount of any severance pay in the preceding sentence shall be reduced by one thirty-sixth (1/36th) for each calendar month Employee works (or is deemed to work (such deemed work not to exceed six (6) months) in accordance with paragraph 3.3) for Bank of SNC, beginning on the Effective Date of this Agreement, as defined in paragraph 15.1. In addition to the severance pay previously described in this paragraph 3.6 and the Supplemental Retirement Benefit described in paragraph 3.7, if this Agreement is terminated by Bank or SNC without "Just Cause", then Employee shall also receive any vested amounts to which he is entitled under the terms of any incentive or deferred compensation plan. Bank and SNC shall pay the severance benefits under this paragraph 3.6 in a lump sum payment within thirty (30) days after termination of this Agreement. In the event that the amount payable to Employee under this paragraph should cause a "parachute payment", as defined in section 280G(b)(2) of the Internal Revenue Code of 1986, as amended ("Code"), then such amount shall be reduced One Dollar ($1.00) at a time until the payment will not constitute a parachute payment. In the event the amount Employee receives under this paragraph should be incorrectly calculated so that such amount constitutes a parachute payment, then Employee will promptly refund the excess amount. Excess amount shall mean the amount in excess of Employee's base amount, as defined in Code section 280G(b)(3), multiplied by 2.999. The severance benefits in this paragraph 3.6 are in addition to any other benefits Employee (or his beneficiary or his estate, as the case may be) may be entitled to upon termination of this Agreement, including, but not limited to, the Supplemental Retirement Benefit in paragraph 3.7. It is the intention of the parties to this Agreement that the severance benefits in this paragraph 3.6 shall be paid to Employee (or his beneficiary or his estate in the event of his death) without regard to the reason for the termination of this Agreement and without regard as to who terminated this Agreement. The severance pay in this paragraph 3.6 is a vested benefit. 3.7 Notwithstanding anything in this Agreement to the contrary other than the provisions of Article V, upon termination of this Agreement for any reason whatsoever (including, but not limited to, death, disability, termination by any party hereto with or without "Just Cause" or expiation of the later of the initial term or an extended term as provided for in paragraph 3.1) and in all events, SNC shall pay to Employee (or his beneficiary or his estate in the event of his death) a Supplemental Retirement Benefit. The Supplemental Retirement Benefit shall be payable in the actuarially equivalent form of a lump sum amount calculated as follows: (A) SNC shall multiply the Employee's "Final Average Monthly Compensation", as defined below, by sixty- five (65%) percent. (B) From the amount determined in (A) SNC shall subtract the "Offset Amount", as defined below. (C) From the result in (B) SNC using the Actuarial Assumptions, as defined below, shall actuarially determine the lump sum present value as of the Date of Termination based upon the Employee receiving the monthly payments for his life with one hundred twenty (120) guaranteed monthly payments so that the payments would cease upon the later of Employee's death or upon one hundred twenty (120) monthly payments having been made. The fact that the Employee is then deceased shall have no effect upon the calculation in the preceding sentence. For purposes of determining the Supplemental Retirement Benefit, the following definitions shall apply: (I) "Final Average Monthly Compensation" means the average of the Employee's base annual salary with Bank and SNC for the five (5) consecutive full calendar year period preceding his Date of Termination which produces the highest average and further divided by twelve (12). (II) "Offset Amount" shall be calculated as follows: (1.1) Employee's "Final Average Monthly Compensation", as defined above, shall be multiplied by 0.0135; (1.2) Employee's Final Average Monthly Compensation", as defined above, in excess of the "Monthly Covered Compensation Amount", as defined below shall be multiplied by 0.0006; (1.3) The amounts determined in (1.1) and (1.2) shall be added together; (1.4) The total amount determined in (1.3) shall be multiplied by thirty-five (35); (1.5) The amount determined in (1.4) shall be multiplied by a fraction which shall not exceed one (1). The numerator of the fraction shall be Employee's number of Years of Service with FSB and SNC reduced by three (3) and the denominator of the fraction shall be forty (40). The amount determined in this (1.5) shall not exceed the maximum monthly benefit payable under a defined benefit pension plan as determined in Section 415 of the Internal Revenue Code of 1986, as amended; and (1.6) The amount determined in (1.5) shall be further reduced by a one-fifteenth (1/15th) fraction for each of the first five (5) years by which the date payment of the Supplemental Retirement Benefit commences prior to the first day of the calendar month immediately preceding Employee's sixty-fifth (65th) birthday and a one-thirtieth (1/30th) fraction for each additional year by which the date payment of the Supplemental Retirement Benefit commences prior to the first day of the calendar month immediately preceding Employee's sixty- fifth (65th) birthday. The reduction in this (1.6) shall be calculated to the nearest month. (III) "Monthly Covered Compensation Amount" means the average of the Social Security taxable wage bases for the thirty-five (35) calendar years ending with the calendar year the Employee attains his sixty-fifth (65th) birthday. If the Employee's Date of Termination occurs prior to his sixty-fifth (65th) birthday, the taxable wage base as of the Date of Termination shall be used in computing such average for any future year which is not otherwise known. (IV) "Years of Service" means the twelve (12) consecutive month period from January 1 to December 31 during which the Employee performs at least one thousand hours of service for FSM or SNC as an Employee. As of February 1, 1994, Employee has 34 Years of Service. (V) "Actuarial Assumptions" shall mean that the actuary shall use age to nearest month, an interest rate of 8.50% and the 1971 Group Annuity Mortality Table - Male in making the calculation herein. (VI) "Date of Termination" means the date this Agreement terminates. As of February 1, 1994, based upon the above formula the Supplemental Retirement Benefit would be $798,659.40 and the calculation thereof is shown on Exhibit A which is attached to this Agreement and is made a part hereof by reference. SNC shall pay the Supplemental Retirement Benefit in a lump sum payment within thirty (30) days after the termination of this Agreement. The Supplemental Retirement Benefit provided in this paragraph 3.7 is in addition to any other benefits Employee (or his beneficiary or his estate, as the case may be) may be entitled to upon termination of this Agreement. It is the intention of the parties to this Agreement that the Supplemental Retirement Benefit in this paragraph 3.7 shall be paid to Employee (or his estate in the event of his death) without regard to the reason for the termination of this Agreement and without regard as to who terminated this Agreement. The Supplemental Retirement Benefit, calculated in the manner provided in this paragraph 3.7 (but not necessarily the February 1, 1994 amount shown above, is a vested benefit. 3.8 Should this Agreement terminate pursuant to paragraph 3.2 or 3.3, Employee,Employee's legal guardian, estate or beneficiary, as designated by Employee (or his legal guardian, as the case may be) in writing, shall be entitled to the balance of any payments to which Employee is entitled under this Agreement. 3.9 The FSB Agreement, effective September 30, 1992, as amended, and all prior employment agreements between FSB and Employee are canceled and terminated on the Effective Date, as defined in paragraph 15.1. ARTICLE IV. COMPENSATION AND BENEFITS 4.1 Bank or SNC shall pay Employee and Employee agrees to accept from Bank or SNC, in payment for Employee's faithful performance of his duties hereunder a "Base Salary" of Two Hundred Sixty Thousand and no/100 Dollars ($260,000.00) per year, as increased from time to time as provided below, payable in equal installments not less frequently than monthly. Employee's Base Salary shall be reviewed at least once per year by Employee's supervisor and may be increased from time to time in accordance with normal business practices of Bank and SNC. 4.2 In addition to Employee's Base Salary, Employee shall also be entitled to participate in any employee benefit or incentive compensation plan maintained by Bank or SNC which is generally available to similarly situated full- time employees of Bank or SNC. ARTICLE V. BANKING REGULATION 5.1 Notwithstanding any term of this Agreement to the contrary,this Agreement is subject to the following terms and conditions: (1) Bank or SNC may terminate Employee's employment in accordance with paragraph 3.4 or 3.5, but any termination by Bank or SNC shall not prejudice Employee's right to compensation earned or other vested benefits or vested rights under this Agreement. (2) Bank's or SNC's obligations to provide compensation or other benefits to Employee under this Agreement may be suspended if Bank or SNC has been served with a notice of charges by the appropriate federal banking agency under provisions of Section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818) directing Bank or SNC to cease making payments required hereunder; provided, however, that (a) Bank or SNC, respectively, agree to use its best efforts to oppose any such notice of charges as to which there are reasonable defenses; (b) In the event the notice of charges is dismissed or otherwise resolved in a manner that will permit Bank or SNC to resume its obligations to provide compensation or other benefits hereunder, Bank and SNC shall resume such payments and shall also pay Employee the compensation withheld while the contract obligations were suspended; and (c) During the period of suspension, the vested rights of the contracting parties shall not be affected including, but not limited to, the rights provided in paragraphs 3.6 and 3.7 of this Agreement, except to the extent precluded by such notice. (3) Bank's or SNC's obligations to provide compensation or other benefits to Employee under this Agreement shall be terminated to the extent a valid, non- appealable order has been entered by the appropriate federal banking agency under provisions of Section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818) directing Bank or SNC not to make the payments required hereunder; provided, however, that the vested rights of the contracting parties shall not be affected by such order including, but not limited to, the rights provided in paragraphs 3.6 and 3.7 of this Agreement except to the extent precluded or prohibited by such order. (4) Bank's or SNC's obligations to provide compensation or other benefits to Employee under this Agreement shall be terminated or limited to the extent required by the provisions of any final regulation or order of the Federal Deposit Insurance Corporation promulgated under Section 18(k) of the Federal Deposit Insurance Act (12 U.S.C. 1828(k) limiting or prohibiting any "golden parachute payments", as defined therein, but only to the extent that the compensation or payments to be provided under this Agreement are so prohibited or limited. (5) Notwithstanding the foregoing, no statute, rule, regulation,order, notice of charges or other item that might prevent or impair Bank from performing its obligations under this Agreement shall excuse SNC from performing its obligations hereunder except to the extent SNC is specifically subject to such statute, rule, regulation, order, notice of charges or other item; similarly, not statute, rule, regulation, order, notice of charges or other item that might prevent or impair SNC from performing its obligations under this Agreement shall excuse Bank from performing its obligations hereunder except to the extent Bank is specifically subject to such statute, rule, regulation, order, notice of charges or other item. (6) Nothing contained herein shall obligate Bank or SNC to make any payment prohibited by law. ARTICLE VI. WAIVERS AND MODIFICATIONS 6.1 The parties to this Agreement agree that no waiver, amendment or modification of this Agreement or any covenant, condition or limitation shall be valid unless in writing and duly executed by the parties to this Agreement and that no evidence of any waiver, amendment, or modification shall be offered or received in evidence in any proceeding or litigation arising out of or affecting this Agreement, unless such waiver, amendment, or modification is in writing, and duly executed. The parties to this Agreement further agree that the provisions of this Article VI may not be waived except as mutually agreed in writing and that the provisions of this Agreement constitute a waiver of the FSB Agreement, as amended, between Employee and FSB as of the Effective Date, as defined in paragraph 15.1. ARTICLE VII. CONSTRUCTION 7.1 The parties to this Agreement do hereby agree that it is their intention and covenant that this Agreement and performance hereunder and all suits and special proceedings hereunder be construed in accordance with and under and pursuant to the Laws of the State of South Carolina and that in any action, special proceeding or other proceeding that may be brought arising out of, in connection with or by reason of this Agreement, the Laws of the State of South Carolina shall be applicable and shall govern to the exclusion of the law of any other forum, without regard to the jurisdiction in which any action or special proceeding may be instituted. 7.2 Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the requirements of the South Carolina Uniform Arbitration Act then in effect. All arbitration shall be held in Greenville, South Carolina. The arbitrators' expenses and fees, together with other expenses of arbitration, not including counsel fees, incurred in the conduct of the arbitration, shall be paid as provided in the arbitration award. Each party shall beat its own respective counsel fees. ARTICLE VIII. VALIDITY, ENFORCEABILITY 8.1 If any term or provision of this Agreement or the application thereof to any person or circumstance shall, to any extent be invalid or unenforceable, the remainder of the Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law. 8.2 This Agreement shall be binding upon and inure to the benefit of the respective parties to this Agreement and their executors, administrators, heirs, personal representatives, legal representatives, successors, assigns and affiliates. This Agreement is personal to Employee, and Employee may not assign this Agreement. ARTICLE IX. MERGERS AND CONSOLIDATIONS 9.1 Bank and SNC will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business of SNC to expressly assume and perform all of the obligations of this Agreement. 9.2 Unless the parties to this Agreement otherwise mutually agree in writing, SNC shall not merge or consolidate with any other corporation, bank or association until such successor entity expressly agrees to and assumes the obligation of Bank or SNC set forth in this Agreement. 9.3 Should a potential successor not agree to assume the obligations of Bank or SNC under this Agreement during a merger or consolidation, Employee shall be entitled to compensation from Bank or SNC under the terms of paragraphs 3.6 and 3.7 payable no later that the earlier of (i) sixty (60) days from the date of notice of the failure of the successor to agree to assume the obligations of Bank and SNC or (ii) the date of merger or consolidation. ARTICLE X. AMENDMENTS 10.1 This Agreement may not be amended or modified except by written instrument signed by all of the parties to this Agreement. The parties agree that this Agreement constitutes an amendment to the FSB Agreement, as amended, effective as of the Effective Date, as defined in paragraph 15.1. ARTICLE XI. AMENDMENT OR TERMINATION OF BENEFITS PLANS 11.1 Notwithstanding anything in this Agreement to the contrary and except for the severance pay under paragraph 3.6 and the Supplemental Retirement Benefit under paragraph 3.7 Bank and SNC retain the absolute and sole right to modify, amend or terminate any employee benefit plan maintained by Bank or SNC. In such event, any benefit described in this Agreement for Employee shall be determined based upon such modified, amended or terminated plan as then in existence, in accordance with applicable laws and regulations. ARTICLE XII. NON-COMPETITION 12.1 In the event of termination for any reason (including, but not limited to Just Cause), Employee will not for a period of twenty-four (24) consecutive months (or such shorter or longer period for which Employee has been paid the severance pay under paragraph 3.6 of this Agreement) without the prior written approval of management, become an officer, executive, agent, partner, employee, or director of any business enterprise in substantial direct competition with Bank or SNC, such as any federal or state savings and loan association, bank, mortgage banking company or similar financial institution. The area comprising the non-competition covenant shall be a fifty (50) mile radius of any office, branch, or facility of Bank or SNC, for which Employee physically performed duties during the term of this Agreement. 12.2 In regard to this non-competition covenant Bank, SNC and Employee mutually and irrevocably agree as follows: (a) The non-competitive covenant is ancillary to and an integral part of this Agreement. (b) The geographic limitation and duration period are regarded by Employee, Bank and SNC as reasonable, and that the non-competition covenant is necessary for the protection of the business of Bank and SNC. Employee also expressly acknowledges that for the non-competition covenant, Employee has received full and adequate consideration and such consideration was accepted by Employee with full knowledge and awareness of the restrictions in this Agreement. Further, Employee agrees that this non-competition covenant does not deprive Employee of a reasonable opportunity to earn a livelihood. (c) If any one of the restrictions contained in this Article XII shall for any reason be held to be excessively broad, it shall be deemed amended by limiting and reducing it so as to be valid and enforceable to the extent compatible with applicable South Carolina law. It is the express intent of Employee, Bank, and SNC that the non- competition covenant contained herein be divisible, and that in all events the bargained-for agreement of the parties to this Agreement be enforced, and the parties to this Agreement expressly agree to be bound by the restraints deemed to be reasonable in the event of such finding of excessiveness. ARTICLE XIII. NOTICE 13.1 For purpose of this Agreement, notices and all other communications relevant to this Agreement shall be in writing and deemed to have been duly given when personally delivered or mailed by United States Certified or Registered Mail, return receipt requested, postage prepaid, address as follows: Employee or to Bank Mr. Luther C. Boliek Southern National Corporation 310 Pimlico Road Attn: Corporate Secretary Greenville, SC 29607 Southern National Financial Center P.O. Box 1290 Winston-Salem, NC 27102-1290 or to such other address as either party to this Agreement may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. ARTICLE XIV. ENTIRE AGREEMENT 14.1 This Agreement sets forth all the promises, convenants, agreements, conditions and understandings between the parties to this Agreement with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducement or conditions, express or implied, oral or written, with respect thereto, except as contained herein. Moreover, no waiver by any party to this Agreement of any condition or breach or any term, covenant, representation or warranty contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed or construed as a further or continuing waiver of any such condition or breach, nor shall it be deemed or construed as a waiver of any other condition or as a waiver of the breach of any other term, covenant, representation or warranty set forth in this Agreement. ARTICLE XV. MISCELLANEOUS 15.1 The "Effective Date" of this Agreement is February 1, 1994. IN WITNESS WHEREOF, Southern National Corporation and Bank, by their duly authorized officers, and Employee have hereunto set their hands and seals this the day and year first written above. IN THE PRESENCE OF: SOUTHERN NATIONAL CORPORATION By: Its: IN THE PRESENCE OF: SOUTHERN NATIONAL BANK OF SOUTH CAROLINA By: Its: LUTHER C. BOLIEK EMPLOYMENT AGREEMENT APPENDIX NAME: Luther C. Boliek Effective: February 1, 1994 1. Physical Examination Employee shall be entitled to an annual physical examination to be conducted by a qualified, licensed medical doctor of his choice in Greenville, South Carolina. The examination shall be a thorough one, as defined by the policy of the Bank, or as prescribed by the medical doctor with the Bank's approval, within the reasonable constraints of coverages and costs befitting the circumstances. The cost of said examinatin will be paid by the Bank upon presentation of a statement for services. A report as to the condition of Employee will be made available to the Bank's and SNC's Compensation and Benefits Administrators for review, and Employee agrees to release said report to the Bank's and SNC's Compensation and Benefits Administrators upon completion of his annual physical examination. 2. SNC will continue to provide Employee the club memberships provided to Employee by The First Savings Bank, FSB, as of the Effective Date of the Employment Agreement, as provided in paragraph 15.1 thereof. EXHIBIT A TO EMPLOYMENT AGREEMENT Example of computation of Supplemental Retirement Benefit. ASSUMPTIONS AND COMPUTATIONS: 1. Birthdate of Employee - September 24, 1937 Birthdate of Employee's Spouse - March 15, 1937 2. Date of Employment with Bank - December 16, 1959 3. Employee's Final Average Monthly Compensation is $17,985 4. Monthly Covered Compensation Amount is $3,080 5. Employee's Date of Termination is February 1, 1994 Employee's number of Years of Service with Bank and SNC at Date of Termination is thirty-four (34). 6. The maximum monthly benefit payable under a defined benefit pension plan under section 415 of the Internal Revenue Code of 1986, as amended (in effect at Date of Termination) is $8,910. 7. The Offset Amount is calculated pursuant to paragraph 3.7 (II) in the Agreement as follows: (1.1) $17,985 x 0.0135 = $ 242.80 (1.2) $17,985 - 3080 = $14,905.00 x 0.006 $ 89.43 (1.3) $242.80 + 89.43 = $ 332.23 (1.4) $332.23 x 35 = $11,628.05 (1.5) 34 - 3 x 11,628.05 = $ 9,011.74 40 (1.6) $8,910.00 is used since $9,011.74 exceeds the Section 415 limit. The Offset Amount is $4,875.75 The Supplemental Retirement Benefit payable as a lump sum amount of $798,659.40 is determined as follows: (i) $17,985 x 65% = $11,690.25 (ii) Offset Amount - 4,875.75 (iii) Supplemental Retirement $ 6,814.50 Date: January 24, 1994 Initial: Initial: EX-10 5 EXHIBIT 10.22 EXHIBIT 10.22 Executive Change in Control Agreement dated January 1, 1994, by and between Southern National Corporation and G. Lee Cory SOUTHERN NATIONAL CORPORATION EXECUTIVE CHANGE IN CONTROL AGREEMENT THIS AGREEMENT made and entered into this 1st day of January, 199 4 , by and between SOUTHERN NATIONAL CORPORATION ("SNC"), together with its affiliates hereinafter referred to as "the Company" and G. Lee Cory, hereinafter referred to as "Executive" provides as follows: W I T N E S S E T H : WHEREAS, SNC's Board of Directors (the "Board") believes that, in the event of a threat or occurrence of a bid to acquire or change control on SNC or to effect a business combination, it is in the best interest of SNC and its present and future shareholders that the business of the Company be continued with a minimum of disruption, and that such objective will be achieved only if its key management employees are given assurances of employment security so they will not be distracted by personal uncertainties and risks created during any such period; and WHEREAS, SNC believes that the giving of such assurances will (a) secure the continued services of its key operational management executives in the performance of both their regular duties and such extra duties as may be required of them during any such period of uncertainty; (b) enable it to rely on such executives to manage the affairs of the Company during any such period with less concern for their personal risks; and (c) give it the ability to attract new key executives as needed; and WHEREAS, the Compensation Committee (the "Committee") of the Board has recommended, the Board has approved, entering into change in control agreements with key management executives of the Company recommended by management and approved by the Committee in order to achieve the foregoing objectives; and WHEREAS, Executive is a key management executive of the Company; NOW, THEREFORE, for and in consideration of the mutual promises and agreements hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Executive covenant and agree as follows: ARTICLE I DEFINITIONS 1.01. Agreement means the Southern National Corporation Executive Change in Control Agreement. 1.02. Board means SNC's Board of Directors. 1.03. Change in Control means the ownership, holding or power to vote more than twenty-five percent (25%) of SNC's voting stock, the control of the election of a majority of SNC's directors, or the exercise of a controlling influence over the management or policies of SNC by any person or persons acting as a group within the meaning of section 13(d) of the Securities Exchange Act of 1934. For purposes of this section 1.03, the term "persons" means an individual or a corporation, partnership, trust, association, joint venture, pool syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. 1.04. Change in Control Date means the date on which a Change in Control occurs. 1.05. Code means the Internal Revenue Code of 1986, as amended. 1.06. Company means Southern National Corporation and its subsidiaries and affiliates, as applicable, or their successors. 1.07. Compensation means the base salary paid or payable to Executive during or with respect to the twelve (12) month period preceding the date of Executive's termination of employment. Compensation also shall include the average of any annual incentive bonuses or other incentive amounts paid or payable to Executive during or with respect to the thirty-six (36) month period preceding the date of Executive's termination of employment. If Executive has not been employed for twelve (12) or thirty-six (36) months, as applicable, at the time of Executive's termination of employment, Executive's "Compensation" shall be Executive's annualized base salary at the rate then in effect and the average of any annual incentive bonuses or other incentive amounts paid to Executive prior to the date of Executive's termination of employment or payable to Executive with respect to Executive's period of employment. 1.08. Employment Period means the period commencing on the Change in Control Date or such earlier date as Executive's employment is terminated as a result of or in conjunction with a Board-approved contemplated Change in Control and ending on the earlier to occur of (a) the third anniversary of such date, or (b) the Executive's normal retirement date (or what would have been his normal retirement date), as determined under the Southern National Retirement Plan, as amended from time to time. 1.09. ERISA means the Employee Retirement Income Security Act of 1974, as amended. 1.10. Just Cause means termination of employment for personal dishonesty, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than a law, rule or regulation relating to a traffic violation or similar offence, the violation of which does not involve moral turpitude and the commission of which is not a felony), or final cease-and- desist order. ARTICLE II APPLICABILITY OF AGREEMENT 2.01. Termination. This Agreement is not an employment contract; SNC may terminate Executive's employment with the Company at any time for any reason pursuant to the Company's normal employment policies and practices. However, if such termination occurs for any reason after a Change in Control of SNC or as a result of or in conjunction with a Board- approved contemplated Change in Control of SNC and before the end of the Employment Period, Executive will be entitled to receive severance benefits in accordance with this Agreement. 2.02. Effect of Change in Control. Upon a Change in Control of SNC while Executive is in the employ of the Company or upon a termination resulting from or in conjunction with a Board-approved contemplated Change in Control of SNC, this Agreement and all of its provisions shall become operative immediately and shall not thereafter be amended or rescinded. Until such time, no benefits shall be payable hereunder. ARTICLE III BENEFITS 3.01. Employment. If Executive is in the employ of the Company on a Change in Control Date, the Company will continue to employ Executive and Executive will remain in the employ of the Company for Employment Period. After a Change in Control Date, Executive shall exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties performed by Executive immediately prior to the Change in Control Date, which services shall be performed at the location where the Executive was employed immediately prior to the Change in Control Date. 3.02. Compensation. During the Employment Period, the Company will (a) continue to pay Executive a base salary in an amount not less than the amount Executive was receiving immediately prior to Change in Control Date, including pay increases which shall be, at a minimum, the average percentage increase granted to other senior management of the Company with essentially similar positions or responsibilities and (b) pay Executive annual bonuses which shall be the greater of: (i) a bonus equal to the average of any annual incentive bonuses or other incentive amounts paid or payable to Executive during or with respect to the thirty-six (36) month period preceding the Change in Control date; (ii) an average of the bonus amounts or percentage awards paid other senior management employees with essentially similar positions or responsibilities for such period; or (iii) an amount equal to twenty-five percent (25%) of Executive's annual base salary. 3.03. Termination of Employment. (a) If Executive's employment is terminated prior to but as a result of or in conjunction with a Board-approved contemplated Change in Control or if during the Employment Period (i) Executive's employment is terminated by the Company without Just Cause or (ii) there is a material reduction in Executive's Compensation or employment related benefits, or a material change in Executive's status, title(s), offices, place of employment, working conditions or management responsibilities (other than changes in reporting or management responsibilities to reflect sound business practices commonly followed by other comparable institutions or required by applicable federal or state law), and Executive voluntarily terminates employment within ninety (90) days of such event, or the last in a series of events, then Executive shall be entitled to receive a lump sum payment in an amount equal to three (3) times Executive's Compensation. In the event a payment is triggered under this paragraph 3(a) within three (3) years of what would have been Executive's normal retirement date, as determined under the Southern National Retirement Plan, such payment shall be limited to an amount equal to the product of three (3) times the Executive's Compensation multiplied by a fraction, the numerator of which equals the number of full or partial months between the date or event triggering the payment and Executive's normal retirement date, as determined under the Southern National Retirement Plan, and the denominator of which equals thirty-six (36). Further, to the extent any payment under this agreement 3(a) (and any other payments required to be taken into account) cause a "parachute payment", as defined in Code section 280G(b)(2), such aggregate amounts shall be reduced by one dollar ($1.00) at a time until the aggregate of all such payments do not constitute a parachute payment. Such amount shall be paid to Executive within fifteen (15) business days after Executive's termination of employment is terminated prior to a Change in Control Date or during the Employment Period, and the events described in (i) or (ii) do not occur and such termination is not a result of or in conjunction with a Board-approved contemplated Change in Control, Executive's rights under this Agreement shall terminate. (b) In addition to the payment provided for in section 3.03(a), or any other arrangement between the Company and Executive, and subject to the adjustment provided in section 3.03(a), Executive is entitled to (i) any benefits that become vested under any accelerated vesting provisions of any Company-sponsored non-qualified deferred compensation plan and any benefits due Executive as a result of the exercise of a stock option, restricted stock or other award to which Executive is entitled under any stock option or stock-based compensation plan, and (ii) any other payments or benefits due him that do not constitute "parachute payments" (as defined in Code section 280G), including amounts that Executive is entitled to receive under SNC's qualified employee pension benefit plans and employee welfare benefit plans. 3.04. Mitigation. Executive shall not be required to mitigate the amounts of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any such payment be reduced by any compensation earned by Executive as the result of employment by another employer after Executive's termination by the Company. 3.05. Death Benefits. (a) If Executive dies before receiving the amounts described in the preceding sections of this Article III, the balance remaining to be paid shall be paid to Executive's Beneficiary at the times and in the manner provided in those sections. ARTICLE IV AMENDMENT OR TERMINATION 4.01 Amendment and Termination. SNC may, with the consent of Executive, modify, alter, amend or terminate this Agreement, in whole or in part at any time. An amendment may be made retroactively if it is necessary to make this Agreement conform to applicable law or agreeable to the parties. No amendment or modification of this Agreement or any covenant, condition or limitation shall be valid unless in writing and duly executed by the parties to this Agreement. ARTICLE V MERGERS AND CONSOLIDATIONS 5.01 Continuance of Agreement. SNC will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business to expressly assume and perform all of the obligations of this Agreement, in a written agreement form satisfactory to the Executive. 5.02. Assumption of Agreement. Unless the parties to this Agreement otherwise mutually agree in writing, SNC shall not merge or consolidate with any other corporation, bank or association until such successor entity expressly agrees to and assumes the obligation of the Company set forth in this Agreement. 5.03. Payment. Should a potential successor not agree to assume the obligations of the Company under this Agreement during a merger or consolidation, Executive shall be entitled to compensation from Company under the terms of section 3.03. ARTICLE VI GENERAL PROVISIONS 6.01. Construction. Headings and subheadings used in this Agreement have been inserted for convenience of reference only and must be ignored in any construction of the provisions. If a provision of this Agreement is illegal or invalid, that illegality or invalidity does not affect other provisions in this Agreement. Any term with an initial capital not expected by capitalization rules is a defined term according to Article I of this Agreement. This Agreement must be construed according to the applicable provisions of the Code in a manner that assures that the Agreement provides the benefits and tax consequences intended for Executives. 6.02. Governing Law. This Agreement shall be construed, enforced and administered in accordance with the Laws of the State of North Carolina (other than its choice of law rules), except to the extent that those laws are superseded by the laws of the United States of America. 6.03. Indemnification. The Company must pay any reasonable legal fees and expenses incurred by Executive in seeking to obtain or enforce any right or benefit provided under this Agreement, whether Executive is successful or not. Payments made under this section 6.03 shall be paid by Company to Executive at the time Executive incurs such legal fees or expenses. 6.04. Agreement Creates No Separate Rights. The creation, continuance, or change in this Agreement or any payment made pursuant to this Agreement, does not give any person a non-statutory legal or equitable right against the Company or any of the Company's officers, agents, or other persons employed by the Company. This Agreement does not modify the terms of Executive's employment. 6.05. Notice. For purposes of this Agreement, notices and all other communications relevant to this Agreement shall be in writing and deemed to have been duly given when personally delivered or mailed by United States Certified or Registered Mail, return receipt requested, postage prepaid, addressed as follows: Executive or to Company Mr. G. Lee Cory Southern National Corporation Southern National Bank of S.C. Attn: Corporate Secretary P.O. Box 408 Southern National Financial Center Greenville, SC 29602 P.O. Box 1290 Winston-Salem, NC 27102-1290 or to such other address as any party to this Agreement may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 6.06. Entire Agreement. This Agreement sets forth all the promises, covenants, agreements, conditions and understandings between the parties to this Agreement with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducement or conditions, express or implied, oral or written, with respect thereto, except as contained herein. 6.07. Effective Date and Automatic Termination. This Agreement is effective January 1, 1994. It automatically terminates on Executive's normal retirement date, as defined under the Southern National Retirement Plan, unless a Change of Control has occurred or Executive is terminated before such date as a result of or in conjunction with a Board-approved contemplated Change in Control of SNC. IN WITNESS WHEREOF, SNC, by their duly authorized officers (for itself and the Company), and Executive have hereunto set their hands as of the day and year first written above. SOUTHERN NATIONAL CORPORATION By: Its: Executive EX-10 6 EXHIBIT 10.23 EXHIBIT 10.23 Executive Change in Control Agreement dated January 1, 1994, by and between Southern National Corporation and Charles Royce Hough SOUTHERN NATIONAL CORPORATION EXECUTIVE CHANGE IN CONTROL AGREEMENT THIS AGREEMENT made and entered into this 1st day of January, 199 4 , by and between SOUTHERN NATIONAL CORPORATION ("SNC"), together with its affiliates hereinafter referred to as "the Company" and Charles Royce Hough, hereinafter referred to as "Executive" provides as follows: W I T N E S S E T H : WHEREAS, SNC's Board of Directors (the "Board") believes that, in the event of a threat or occurrence of a bid to acquire or change control on SNC or to effect a business combination, it is in the best interest of SNC and its present and future shareholders that the business of the Company be continued with a minimum of disruption, and that such objective will be achieved only if its key management employees are given assurances of employment security so they will not be distracted by personal uncertainties and risks created during any such period; and WHEREAS, SNC believes that the giving of such assurances will (a) secure the continued services of its key operational management executives in the performance of both their regular duties and such extra duties as may be required of them during any such period of uncertainty; (b) enable it to rely on such executives to manage the affairs of the Company during any such period with less concern for their personal risks; and (c) give it the ability to attract new key executives as needed; and WHEREAS, the Compensation Committee (the "Committee") of the Board has recommended, the Board has approved, entering into change in control agreements with key management executives of the Company recommended by management and approved by the Committee in order to achieve the foregoing objectives; and WHEREAS, Executive is a key management executive of the Company; NOW, THEREFORE, for and in consideration of the mutual promises and agreements hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Executive covenant and agree as follows: ARTICLE I DEFINITIONS 1.01. Agreement means the Southern National Corporation Executive Change in Control Agreement. 1.02. Board means SNC's Board of Directors. 1.03. Change in Control means the ownership, holding or power to vote more than twenty-five percent (25%) of SNC's voting stock, the control of the election of a majority of SNC's directors, or the exercise of a controlling influence over the management or policies of SNC by any person or persons acting as a group within the meaning of section 13(d) of the Securities Exchange Act of 1934. For purposes of this section 1.03, the term "persons" means an individual or a corporation, partnership, trust, association, joint venture, pool syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. 1.04. Change in Control Date means the date on which a Change in Control occurs. 1.05. Code means the Internal Revenue Code of 1986, as amended. 1.06. Company means Southern National Corporation and its subsidiaries and affiliates, as applicable, or their successors. 1.07. Compensation means the base salary paid or payable to Executive during or with respect to the twelve (12) month period preceding the date of Executive's termination of employment. Compensation also shall include the average of any annual incentive bonuses or other incentive amounts paid or payable to Executive during or with respect to the thirty-six (36) month period preceding the date of Executive's termination of employment. If Executive has not been employed for twelve (12) or thirty-six (36) months, as applicable, at the time of Executive's termination of employment, Executive's "Compensation" shall be Executive's annualized base salary at the rate then in effect and the average of any annual incentive bonuses or other incentive amounts paid to Executive prior to the date of Executive's termination of employment or payable to Executive with respect to Executive's period of employment. 1.08. Employment Period means the period commencing on the Change in Control Date or such earlier date as Executive's employment is terminated as a result of or in conjunction with a Board-approved contemplated Change in Control and ending on the earlier to occur of (a) the third anniversary of such date, or (b) the Executive's normal retirement date (or what would have been his normal retirement date), as determined under the Southern National Retirement Plan, as amended from time to time. 1.09. ERISA means the Employee Retirement Income Security Act of 1974, as amended. 1.10. Just Cause means termination of employment for personal dishonesty, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than a law, rule or regulation relating to a traffic violation or similar offence, the violation of which does not involve moral turpitude and the commission of which is not a felony), or final cease-and- desist order. ARTICLE II APPLICABILITY OF AGREEMENT 2.01. Termination. This Agreement is not an employment contract; SNC may terminate Executive's employment with the Company at any time for any reason pursuant to the Company's normal employment policies and practices. However, if such termination occurs for any reason after a Change in Control of SNC or as a result of or in conjunction with a Board- approved contemplated Change in Control of SNC and before the end of the Employment Period, Executive will be entitled to receive severance benefits in accordance with this Agreement. 2.02. Effect of Change in Control. Upon a Change in Control of SNC while Executive is in the employ of the Company or upon a termination resulting from or in conjunction with a Board-approved contemplated Change in Control of SNC, this Agreement and all of its provisions shall become operative immediately and shall not thereafter be amended or rescinded. Until such time, no benefits shall be payable hereunder. ARTICLE III BENEFITS 3.01. Employment. If Executive is in the employ of the Company on a Change in Control Date, the Company will continue to employ Executive and Executive will remain in the employ of the Company for Employment Period. After a Change in Control Date, Executive shall exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties performed by Executive immediately prior to the Change in Control Date, which services shall be performed at the location where the Executive was employed immediately prior to the Change in Control Date. 3.02. Compensation. During the Employment Period, the Company will (a) continue to pay Executive a base salary in an amount not less than the amount Executive was receiving immediately prior to Change in Control Date, including pay increases which shall be, at a minimum, the average percentage increase granted to other senior management of the Company with essentially similar positions or responsibilities and (b) pay Executive annual bonuses which shall be the greater of: (i) a bonus equal to the average of any annual incentive bonuses or other incentive amounts paid or payable to Executive during or with respect to the thirty-six (36) month period preceding the Change in Control date; (ii) an average of the bonus amounts or percentage awards paid other senior management employees with essentially similar positions or responsibilities for such period; or (iii) an amount equal to twenty-five percent (25%) of Executive's annual base salary. 3.03. Termination of Employment. (a) If Executive's employment is terminated prior to but as a result of or in conjunction with a Board-approved contemplated Change in Control or if during the Employment Period (i) Executive's employment is terminated by the Company without Just Cause or (ii) there is a material reduction in Executive's Compensation or employment related benefits, or a material change in Executive's status, title(s), offices, place of employment, working conditions or management responsibilities (other than changes in reporting or management responsibilities to reflect sound business practices commonly followed by other comparable institutions or required by applicable federal or state law), and Executive voluntarily terminates employment within ninety (90) days of such event, or the last in a series of events, then Executive shall be entitled to receive a lump sum payment in an amount equal to three (3) times Executive's Compensation. In the event a payment is triggered under this paragraph 3(a) within three (3) years of what would have been Executive's normal retirement date, as determined under the Southern National Retirement Plan, such payment shall be limited to an amount equal to the product of three (3) times the Executive's Compensation multiplied by a fraction, the numerator of which equals the number of full or partial months between the date or event triggering the payment and Executive's normal retirement date, as determined under the Southern National Retirement Plan, and the denominator of which equals thirty-six (36). Further, to the extent any payment under this agreement 3(a) (and any other payments required to be taken into account) cause a "parachute payment", as defined in Code section 280G(b)(2), such aggregate amounts shall be reduced by one dollar ($1.00) at a time until the aggregate of all such payments do not constitute a parachute payment. Such amount shall be paid to Executive within fifteen (15) business days after Executive's termination of employment is terminated prior to a Change in Control Date or during the Employment Period, and the events described in (i) or (ii) do not occur and such termination is not a result of or in conjunction with a Board-approved contemplated Change in Control, Executive's rights under this Agreement shall terminate. (b) In addition to the payment provided for in section 3.03(a), or any other arrangement between the Company and Executive, and subject to the adjustment provided in section 3.03(a), Executive is entitled to (i) any benefits that become vested under any accelerated vesting provisions of any Company-sponsored non-qualified deferred compensation plan and any benefits due Executive as a result of the exercise of a stock option, restricted stock or other award to which Executive is entitled under any stock option or stock-based compensation plan, and (ii) any other payments or benefits due him that do not constitute "parachute payments" (as defined in Code section 280G), including amounts that Executive is entitled to receive under SNC's qualified employee pension benefit plans and employee welfare benefit plans. 3.04. Mitigation. Executive shall not be required to mitigate the amounts of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any such payment be reduced by any compensation earned by Executive as the result of employment by another employer after Executive's termination by the Company. 3.05. Death Benefits. (a) If Executive dies before receiving the amounts described in the preceding sections of this Article III, the balance remaining to be paid shall be paid to Executive's Beneficiary at the times and in the manner provided in those sections. ARTICLE IV AMENDMENT OR TERMINATION 4.01 Amendment and Termination. SNC may, with the consent of Executive, modify, alter, amend or terminate this Agreement, in whole or in part at any time. An amendment may be made retroactively if it is necessary to make this Agreement conform to applicable law or agreeable to the parties. No amendment or modification of this Agreement or any covenant, condition or limitation shall be valid unless in writing and duly executed by the parties to this Agreement. ARTICLE V MERGERS AND CONSOLIDATIONS 5.01 Continuance of Agreement. SNC will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business to expressly assume and perform all of the obligations of this Agreement, in a written agreement form satisfactory to the Executive. 5.02. Assumption of Agreement. Unless the parties to this Agreement otherwise mutually agree in writing, SNC shall not merge or consolidate with any other corporation, bank or association until such successor entity expressly agrees to and assumes the obligation of the Company set forth in this Agreement. 5.03. Payment. Should a potential successor not agree to assume the obligations of the Company under this Agreement during a merger or consolidation, Executive shall be entitled to compensation from Company under the terms of section 3.03. ARTICLE VI GENERAL PROVISIONS 6.01. Construction. Headings and subheadings used in this Agreement have been inserted for convenience of reference only and must be ignored in any construction of the provisions. If a provision of this Agreement is illegal or invalid, that illegality or invalidity does not affect other provisions in this Agreement. Any term with an initial capital not expected by capitalization rules is a defined term according to Article I of this Agreement. This Agreement must be construed according to the applicable provisions of the Code in a manner that assures that the Agreement provides the benefits and tax consequences intended for Executives. 6.02. Governing Law. This Agreement shall be construed, enforced and administered in accordance with the Laws of the State of North Carolina (other than its choice of law rules), except to the extent that those laws are superseded by the laws of the United States of America. 6.03. Indemnification. The Company must pay any reasonable legal fees and expenses incurred by Executive in seeking to obtain or enforce any right or benefit provided under this Agreement, whether Executive is successful or not. Payments made under this section 6.03 shall be paid by Company to Executive at the time Executive incurs such legal fees or expenses. 6.04. Agreement Creates No Separate Rights. The creation, continuance, or change in this Agreement or any payment made pursuant to this Agreement, does not give any person a non-statutory legal or equitable right against the Company or any of the Company's officers, agents, or other persons employed by the Company. This Agreement does not modify the terms of Executive's employment. 6.05. Notice. For purposes of this Agreement, notices and all other communications relevant to this Agreement shall be in writing and deemed to have been duly given when personally delivered or mailed by United States Certified or Registered Mail, return receipt requested, postage prepaid, addressed as follows: Executive or to Company Southern National Corporation Attn: Corporate Secretary Southern National Financial Center P.O. Box 1290 Winston-Salem, NC 27102-1290 or to such other address as any party to this Agreement may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 6.06. Entire Agreement. This Agreement sets forth all the promises, covenants, agreements, conditions and understandings between the parties to this Agreement with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducement or conditions, express or implied, oral or written, with respect thereto, except as contained herein. 6.07. Effective Date and Automatic Termination. This Agreement is effective January 1, 1994. It automatically terminates on Executive's normal retirement date, as defined under the Southern National Retirement Plan, unless a Change of Control has occurred or Executive is terminated before such date as a result of or in conjunction with a Board-approved contemplated Change in Control of SNC. IN WITNESS WHEREOF, SNC, by their duly authorized officers (for itself and the Company), and Executive have hereunto set their hands as of the day and year first written above. SOUTHERN NATIONAL CORPORATION By: Its: Executive EX-10 7 EXHIBIT 10.24 EXHIBIT 10.24 Executive Change in Control Agreement dated January 1, 1994, by and between Southern National Corporation and Robert E. Greene SOUTHERN NATIONAL CORPORATION EXECUTIVE CHANGE IN CONTROL AGREEMENT THIS AGREEMENT made and entered into this 1st day of January, 199 4 , by and between SOUTHERN NATIONAL CORPORATION ("SNC"), together with its affiliates hereinafter referred to as "the Company" and Robert E. Greene, hereinafter referred to as "Executive" provides as follows: W I T N E S S E T H : WHEREAS, SNC's Board of Directors (the "Board") believes that, in the event of a threat or occurrence of a bid to acquire or change control on SNC or to effect a business combination, it is in the best interest of SNC and its present and future shareholders that the business of the Company be continued with a minimum of disruption, and that such objective will be achieved only if its key management employees are given assurances of employment security so they will not be distracted by personal uncertainties and risks created during any such period; and WHEREAS, SNC believes that the giving of such assurances will (a) secure the continued services of its key operational management executives in the performance of both their regular duties and such extra duties as may be required of them during any such period of uncertainty; (b) enable it to rely on such executives to manage the affairs of the Company during any such period with less concern for their personal risks; and (c) give it the ability to attract new key executives as needed; and WHEREAS, the Compensation Committee (the "Committee") of the Board has recommended, the Board has approved, entering into change in control agreements with key management executives of the Company recommended by management and approved by the Committee in order to achieve the foregoing objectives; and WHEREAS, Executive is a key management executive of the Company; NOW, THEREFORE, for and in consideration of the mutual promises and agreements hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Executive covenant and agree as follows: ARTICLE I DEFINITIONS 1.01. Agreement means the Southern National Corporation Executive Change in Control Agreement. 1.02. Board means SNC's Board of Directors. 1.03. Change in Control means the ownership, holding or power to vote more than twenty-five percent (25%) of SNC's voting stock, the control of the election of a majority of SNC's directors, or the exercise of a controlling influence over the management or policies of SNC by any person or persons acting as a group within the meaning of section 13(d) of the Securities Exchange Act of 1934. For purposes of this section 1.03, the term "persons" means an individual or a corporation, partnership, trust, association, joint venture, pool syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. 1.04. Change in Control Date means the date on which a Change in Control occurs. 1.05. Code means the Internal Revenue Code of 1986, as amended. 1.06. Company means Southern National Corporation and its subsidiaries and affiliates, as applicable, or their successors. 1.07. Compensation means the base salary paid or payable to Executive during or with respect to the twelve (12) month period preceding the date of Executive's termination of employment. Compensation also shall include the average of any annual incentive bonuses or other incentive amounts paid or payable to Executive during or with respect to the thirty-six (36) month period preceding the date of Executive's termination of employment. If Executive has not been employed for twelve (12) or thirty-six (36) months, as applicable, at the time of Executive's termination of employment, Executive's "Compensation" shall be Executive's annualized base salary at the rate then in effect and the average of any annual incentive bonuses or other incentive amounts paid to Executive prior to the date of Executive's termination of employment or payable to Executive with respect to Executive's period of employment. 1.08. Employment Period means the period commencing on the Change in Control Date or such earlier date as Executive's employment is terminated as a result of or in conjunction with a Board-approved contemplated Change in Control and ending on the earlier to occur of (a) the third anniversary of such date, or (b) the Executive's normal retirement date (or what would have been his normal retirement date), as determined under the Southern National Retirement Plan, as amended from time to time. 1.09. ERISA means the Employee Retirement Income Security Act of 1974, as amended. 1.10. Just Cause means termination of employment for personal dishonesty, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than a law, rule or regulation relating to a traffic violation or similar offence, the violation of which does not involve moral turpitude and the commission of which is not a felony), or final cease-and- desist order. ARTICLE II APPLICABILITY OF AGREEMENT 2.01. Termination. This Agreement is not an employment contract; SNC may terminate Executive's employment with the Company at any time for any reason pursuant to the Company's normal employment policies and practices. However, if such termination occurs for any reason after a Change in Control of SNC or as a result of or in conjunction with a Board- approved contemplated Change in Control of SNC and before the end of the Employment Period, Executive will be entitled to receive severance benefits in accordance with this Agreement. 2.02. Effect of Change in Control. Upon a Change in Control of SNC while Executive is in the employ of the Company or upon a termination resulting from or in conjunction with a Board-approved contemplated Change in Control of SNC, this Agreement and all of its provisions shall become operative immediately and shall not thereafter be amended or rescinded. Until such time, no benefits shall be payable hereunder. ARTICLE III BENEFITS 3.01. Employment. If Executive is in the employ of the Company on a Change in Control Date, the Company will continue to employ Executive and Executive will remain in the employ of the Company for Employment Period. After a Change in Control Date, Executive shall exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties performed by Executive immediately prior to the Change in Control Date, which services shall be performed at the location where the Executive was employed immediately prior to the Change in Control Date. 3.02. Compensation. During the Employment Period, the Company will (a) continue to pay Executive a base salary in an amount not less than the amount Executive was receiving immediately prior to Change in Control Date, including pay increases which shall be, at a minimum, the average percentage increase granted to other senior management of the Company with essentially similar positions or responsibilities and (b) pay Executive annual bonuses which shall be the greater of: (i) a bonus equal to the average of any annual incentive bonuses or other incentive amounts paid or payable to Executive during or with respect to the thirty-six (36) month period preceding the Change in Control date; (ii) an average of the bonus amounts or percentage awards paid other senior management employees with essentially similar positions or responsibilities for such period; or (iii) an amount equal to twenty-five percent (25%) of Executive's annual base salary. 3.03. Termination of Employment. (a) If Executive's employment is terminated prior to but as a result of or in conjunction with a Board-approved contemplated Change in Control or if during the Employment Period (i) Executive's employment is terminated by the Company without Just Cause or (ii) there is a material reduction in Executive's Compensation or employment related benefits, or a material change in Executive's status, title(s), offices, place of employment, working conditions or management responsibilities (other than changes in reporting or management responsibilities to reflect sound business practices commonly followed by other comparable institutions or required by applicable federal or state law), and Executive voluntarily terminates employment within ninety (90) days of such event, or the last in a series of events, then Executive shall be entitled to receive a lump sum payment in an amount equal to three (3) times Executive's Compensation. In the event a payment is triggered under this paragraph 3(a) within three (3) years of what would have been Executive's normal retirement date, as determined under the Southern National Retirement Plan, such payment shall be limited to an amount equal to the product of three (3) times the Executive's Compensation multiplied by a fraction, the numerator of which equals the number of full or partial months between the date or event triggering the payment and Executive's normal retirement date, as determined under the Southern National Retirement Plan, and the denominator of which equals thirty-six (36). Further, to the extent any payment under this agreement 3(a) (and any other payments required to be taken into account) cause a "parachute payment", as defined in Code section 280G(b)(2), such aggregate amounts shall be reduced by one dollar ($1.00) at a time until the aggregate of all such payments do not constitute a parachute payment. Such amount shall be paid to Executive within fifteen (15) business days after Executive's termination of employment is terminated prior to a Change in Control Date or during the Employment Period, and the events described in (i) or (ii) do not occur and such termination is not a result of or in conjunction with a Board-approved contemplated Change in Control, Executive's rights under this Agreement shall terminate. (b) In addition to the payment provided for in section 3.03(a), or any other arrangement between the Company and Executive, and subject to the adjustment provided in section 3.03(a), Executive is entitled to (i) any benefits that become vested under any accelerated vesting provisions of any Company-sponsored non-qualified deferred compensation plan and any benefits due Executive as a result of the exercise of a stock option, restricted stock or other award to which Executive is entitled under any stock option or stock-based compensation plan, and (ii) any other payments or benefits due him that do not constitute "parachute payments" (as defined in Code section 280G), including amounts that Executive is entitled to receive under SNC's qualified employee pension benefit plans and employee welfare benefit plans. 3.04. Mitigation. Executive shall not be required to mitigate the amounts of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any such payment be reduced by any compensation earned by Executive as the result of employment by another employer after Executive's termination by the Company. 3.05. Death Benefits. (a) If Executive dies before receiving the amounts described in the preceding sections of this Article III, the balance remaining to be paid shall be paid to Executive's Beneficiary at the times and in the manner provided in those sections. ARTICLE IV AMENDMENT OR TERMINATION 4.01 Amendment and Termination. SNC may, with the consent of Executive, modify, alter, amend or terminate this Agreement, in whole or in part at any time. An amendment may be made retroactively if it is necessary to make this Agreement conform to applicable law or agreeable to the parties. No amendment or modification of this Agreement or any covenant, condition or limitation shall be valid unless in writing and duly executed by the parties to this Agreement. ARTICLE V MERGERS AND CONSOLIDATIONS 5.01 Continuance of Agreement. SNC will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business to expressly assume and perform all of the obligations of this Agreement, in a written agreement form satisfactory to the Executive. 5.02. Assumption of Agreement. Unless the parties to this Agreement otherwise mutually agree in writing, SNC shall not merge or consolidate with any other corporation, bank or association until such successor entity expressly agrees to and assumes the obligation of the Company set forth in this Agreement. 5.03. Payment. Should a potential successor not agree to assume the obligations of the Company under this Agreement during a merger or consolidation, Executive shall be entitled to compensation from Company under the terms of section 3.03. ARTICLE VI GENERAL PROVISIONS 6.01. Construction. Headings and subheadings used in this Agreement have been inserted for convenience of reference only and must be ignored in any construction of the provisions. If a provision of this Agreement is illegal or invalid, that illegality or invalidity does not affect other provisions in this Agreement. Any term with an initial capital not expected by capitalization rules is a defined term according to Article I of this Agreement. This Agreement must be construed according to the applicable provisions of the Code in a manner that assures that the Agreement provides the benefits and tax consequences intended for Executives. 6.02. Governing Law. This Agreement shall be construed, enforced and administered in accordance with the Laws of the State of North Carolina (other than its choice of law rules), except to the extent that those laws are superseded by the laws of the United States of America. 6.03. Indemnification. The Company must pay any reasonable legal fees and expenses incurred by Executive in seeking to obtain or enforce any right or benefit provided under this Agreement, whether Executive is successful or not. Payments made under this section 6.03 shall be paid by Company to Executive at the time Executive incurs such legal fees or expenses. 6.04. Agreement Creates No Separate Rights. The creation, continuance, or change in this Agreement or any payment made pursuant to this Agreement, does not give any person a non-statutory legal or equitable right against the Company or any of the Company's officers, agents, or other persons employed by the Company. This Agreement does not modify the terms of Executive's employment. 6.05. Notice. For purposes of this Agreement, notices and all other communications relevant to this Agreement shall be in writing and deemed to have been duly given when personally delivered or mailed by United States Certified or Registered Mail, return receipt requested, postage prepaid, addressed as follows: Executive or to Company Mr. Robert E. Greene Southern National Corporation 317 Beechcliff Court Attn: Corporate Secretary Winston-Salem, NC 27104 Southern National Financial Center P.O. Box 1290 Winston-Salem, NC 27102-1290 or to such other address as any party to this Agreement may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 6.06. Entire Agreement. This Agreement sets forth all the promises, covenants, agreements, conditions and understandings between the parties to this Agreement with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducement or conditions, express or implied, oral or written, with respect thereto, except as contained herein. 6.07. Effective Date and Automatic Termination. This Agreement is effective January 1, 1994. It automatically terminates on Executive's normal retirement date, as defined under the Southern National Retirement Plan, unless a Change of Control has occurred or Executive is terminated before such date as a result of or in conjunction with a Board-approved contemplated Change in Control of SNC. IN WITNESS WHEREOF, SNC, by their duly authorized officers (for itself and the Company), and Executive have hereunto set their hands as of the day and year first written above. SOUTHERN NATIONAL CORPORATION By: Its: Executive EX-10 8 EXHIBIT 10.25 EXHIBIT 10.25 Executive Change in Control Agreement dated January 1, 1994, by and between Southern National Corporation and Morris D. Marley SOUTHERN NATIONAL CORPORATION EXECUTIVE CHANGE IN CONTROL AGREEMENT THIS AGREEMENT made and entered into this 1st day of January, 199 4 , by and between SOUTHERN NATIONAL CORPORATION ("SNC"), together with its affiliates hereinafter referred to as "the Company" and Morris D. Marley, hereinafter referred to as "Executive" provides as follows: W I T N E S S E T H : WHEREAS, SNC's Board of Directors (the "Board") believes that, in the event of a threat or occurrence of a bid to acquire or change control on SNC or to effect a business combination, it is in the best interest of SNC and its present and future shareholders that the business of the Company be continued with a minimum of disruption, and that such objective will be achieved only if its key management employees are given assurances of employment security so they will not be distracted by personal uncertainties and risks created during any such period; and WHEREAS, SNC believes that the giving of such assurances will (a) secure the continued services of its key operational management executives in the performance of both their regular duties and such extra duties as may be required of them during any such period of uncertainty; (b) enable it to rely on such executives to manage the affairs of the Company during any such period with less concern for their personal risks; and (c) give it the ability to attract new key executives as needed; and WHEREAS, the Compensation Committee (the "Committee") of the Board has recommended, the Board has approved, entering into change in control agreements with key management executives of the Company recommended by management and approved by the Committee in order to achieve the foregoing objectives; and WHEREAS, Executive is a key management executive of the Company; NOW, THEREFORE, for and in consideration of the mutual promises and agreements hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Executive covenant and agree as follows: ARTICLE I DEFINITIONS 1.01. Agreement means the Southern National Corporation Executive Change in Control Agreement. 1.02. Board means SNC's Board of Directors. 1.03. Change in Control means the ownership, holding or power to vote more than twenty-five percent (25%) of SNC's voting stock, the control of the election of a majority of SNC's directors, or the exercise of a controlling influence over the management or policies of SNC by any person or persons acting as a group within the meaning of section 13(d) of the Securities Exchange Act of 1934. For purposes of this section 1.03, the term "persons" means an individual or a corporation, partnership, trust, association, joint venture, pool syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. 1.04. Change in Control Date means the date on which a Change in Control occurs. 1.05. Code means the Internal Revenue Code of 1986, as amended. 1.06. Company means Southern National Corporation and its subsidiaries and affiliates, as applicable, or their successors. 1.07. Compensation means the base salary paid or payable to Executive during or with respect to the twelve (12) month period preceding the date of Executive's termination of employment. Compensation also shall include the average of any annual incentive bonuses or other incentive amounts paid or payable to Executive during or with respect to the thirty-six (36) month period preceding the date of Executive's termination of employment. If Executive has not been employed for twelve (12) or thirty-six (36) months, as applicable, at the time of Executive's termination of employment, Executive's "Compensation" shall be Executive's annualized base salary at the rate then in effect and the average of any annual incentive bonuses or other incentive amounts paid to Executive prior to the date of Executive's termination of employment or payable to Executive with respect to Executive's period of employment. 1.08. Employment Period means the period commencing on the Change in Control Date or such earlier date as Executive's employment is terminated as a result of or in conjunction with a Board-approved contemplated Change in Control and ending on the earlier to occur of (a) the third anniversary of such date, or (b) the Executive's normal retirement date (or what would have been his normal retirement date), as determined under the Southern National Retirement Plan, as amended from time to time. 1.09. ERISA means the Employee Retirement Income Security Act of 1974, as amended. 1.10. Just Cause means termination of employment for personal dishonesty, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than a law, rule or regulation relating to a traffic violation or similar offence, the violation of which does not involve moral turpitude and the commission of which is not a felony), or final cease-and- desist order. ARTICLE II APPLICABILITY OF AGREEMENT 2.01. Termination. This Agreement is not an employment contract; SNC may terminate Executive's employment with the Company at any time for any reason pursuant to the Company's normal employment policies and practices. However, if such termination occurs for any reason after a Change in Control of SNC or as a result of or in conjunction with a Board- approved contemplated Change in Control of SNC and before the end of the Employment Period, Executive will be entitled to receive severance benefits in accordance with this Agreement. 2.02. Effect of Change in Control. Upon a Change in Control of SNC while Executive is in the employ of the Company or upon a termination resulting from or in conjunction with a Board-approved contemplated Change in Control of SNC, this Agreement and all of its provisions shall become operative immediately and shall not thereafter be amended or rescinded. Until such time, no benefits shall be payable hereunder. ARTICLE III BENEFITS 3.01. Employment. If Executive is in the employ of the Company on a Change in Control Date, the Company will continue to employ Executive and Executive will remain in the employ of the Company for Employment Period. After a Change in Control Date, Executive shall exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties performed by Executive immediately prior to the Change in Control Date, which services shall be performed at the location where the Executive was employed immediately prior to the Change in Control Date. 3.02. Compensation. During the Employment Period, the Company will (a) continue to pay Executive a base salary in an amount not less than the amount Executive was receiving immediately prior to Change in Control Date, including pay increases which shall be, at a minimum, the average percentage increase granted to other senior management of the Company with essentially similar positions or responsibilities and (b) pay Executive annual bonuses which shall be the greater of: (i) a bonus equal to the average of any annual incentive bonuses or other incentive amounts paid or payable to Executive during or with respect to the thirty-six (36) month period preceding the Change in Control date; (ii) an average of the bonus amounts or percentage awards paid other senior management employees with essentially similar positions or responsibilities for such period; or (iii) an amount equal to twenty-five percent (25%) of Executive's annual base salary. 3.03. Termination of Employment. (a) If Executive's employment is terminated prior to but as a result of or in conjunction with a Board-approved contemplated Change in Control or if during the Employment Period (i) Executive's employment is terminated by the Company without Just Cause or (ii) there is a material reduction in Executive's Compensation or employment related benefits, or a material change in Executive's status, title(s), offices, place of employment, working conditions or management responsibilities (other than changes in reporting or management responsibilities to reflect sound business practices commonly followed by other comparable institutions or required by applicable federal or state law), and Executive voluntarily terminates employment within ninety (90) days of such event, or the last in a series of events, then Executive shall be entitled to receive a lump sum payment in an amount equal to three (3) times Executive's Compensation. In the event a payment is triggered under this paragraph 3(a) within three (3) years of what would have been Executive's normal retirement date, as determined under the Southern National Retirement Plan, such payment shall be limited to an amount equal to the product of three (3) times the Executive's Compensation multiplied by a fraction, the numerator of which equals the number of full or partial months between the date or event triggering the payment and Executive's normal retirement date, as determined under the Southern National Retirement Plan, and the denominator of which equals thirty-six (36). Further, to the extent any payment under this agreement 3(a) (and any other payments required to be taken into account) cause a "parachute payment", as defined in Code section 280G(b)(2), such aggregate amounts shall be reduced by one dollar ($1.00) at a time until the aggregate of all such payments do not constitute a parachute payment. Such amount shall be paid to Executive within fifteen (15) business days after Executive's termination of employment is terminated prior to a Change in Control Date or during the Employment Period, and the events described in (i) or (ii) do not occur and such termination is not a result of or in conjunction with a Board-approved contemplated Change in Control, Executive's rights under this Agreement shall terminate. (b) In addition to the payment provided for in section 3.03(a), or any other arrangement between the Company and Executive, and subject to the adjustment provided in section 3.03(a), Executive is entitled to (i) any benefits that become vested under any accelerated vesting provisions of any Company-sponsored non-qualified deferred compensation plan and any benefits due Executive as a result of the exercise of a stock option, restricted stock or other award to which Executive is entitled under any stock option or stock-based compensation plan, and (ii) any other payments or benefits due him that do not constitute "parachute payments" (as defined in Code section 280G), including amounts that Executive is entitled to receive under SNC's qualified employee pension benefit plans and employee welfare benefit plans. 3.04. Mitigation. Executive shall not be required to mitigate the amounts of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any such payment be reduced by any compensation earned by Executive as the result of employment by another employer after Executive's termination by the Company. 3.05. Death Benefits. (a) If Executive dies before receiving the amounts described in the preceding sections of this Article III, the balance remaining to be paid shall be paid to Executive's Beneficiary at the times and in the manner provided in those sections. ARTICLE IV AMENDMENT OR TERMINATION 4.01 Amendment and Termination. SNC may, with the consent of Executive, modify, alter, amend or terminate this Agreement, in whole or in part at any time. An amendment may be made retroactively if it is necessary to make this Agreement conform to applicable law or agreeable to the parties. No amendment or modification of this Agreement or any covenant, condition or limitation shall be valid unless in writing and duly executed by the parties to this Agreement. ARTICLE V MERGERS AND CONSOLIDATIONS 5.01 Continuance of Agreement. SNC will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business to expressly assume and perform all of the obligations of this Agreement, in a written agreement form satisfactory to the Executive. 5.02. Assumption of Agreement. Unless the parties to this Agreement otherwise mutually agree in writing, SNC shall not merge or consolidate with any other corporation, bank or association until such successor entity expressly agrees to and assumes the obligation of the Company set forth in this Agreement. 5.03. Payment. Should a potential successor not agree to assume the obligations of the Company under this Agreement during a merger or consolidation, Executive shall be entitled to compensation from Company under the terms of section 3.03. ARTICLE VI GENERAL PROVISIONS 6.01. Construction. Headings and subheadings used in this Agreement have been inserted for convenience of reference only and must be ignored in any construction of the provisions. If a provision of this Agreement is illegal or invalid, that illegality or invalidity does not affect other provisions in this Agreement. Any term with an initial capital not expected by capitalization rules is a defined term according to Article I of this Agreement. This Agreement must be construed according to the applicable provisions of the Code in a manner that assures that the Agreement provides the benefits and tax consequences intended for Executives. 6.02. Governing Law. This Agreement shall be construed, enforced and administered in accordance with the Laws of the State of North Carolina (other than its choice of law rules), except to the extent that those laws are superseded by the laws of the United States of America. 6.03. Indemnification. The Company must pay any reasonable legal fees and expenses incurred by Executive in seeking to obtain or enforce any right or benefit provided under this Agreement, whether Executive is successful or not. Payments made under this section 6.03 shall be paid by Company to Executive at the time Executive incurs such legal fees or expenses. 6.04. Agreement Creates No Separate Rights. The creation, continuance, or change in this Agreement or any payment made pursuant to this Agreement, does not give any person a non-statutory legal or equitable right against the Company or any of the Company's officers, agents, or other persons employed by the Company. This Agreement does not modify the terms of Executive's employment. 6.05. Notice. For purposes of this Agreement, notices and all other communications relevant to this Agreement shall be in writing and deemed to have been duly given when personally delivered or mailed by United States Certified or Registered Mail, return receipt requested, postage prepaid, addressed as follows: Executive or to Company Mr. Morris D. Marley Southern National Corporation 642 Carolina Circle Attn: Corporate Secretary Winston-Salem, NC 27104 Southern National Financial Center P.O. Box 1290 Winston-Salem, NC 27102-1290 or to such other address as any party to this Agreement may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 6.06. Entire Agreement. This Agreement sets forth all the promises, covenants, agreements, conditions and understandings between the parties to this Agreement with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducement or conditions, express or implied, oral or written, with respect thereto, except as contained herein. 6.07. Effective Date and Automatic Termination. This Agreement is effective January 1, 1994. It automatically terminates on Executive's normal retirement date, as defined under the Southern National Retirement Plan, unless a Change of Control has occurred or Executive is terminated before such date as a result of or in conjunction with a Board-approved contemplated Change in Control of SNC. IN WITNESS WHEREOF, SNC, by their duly authorized officers (for itself and the Company), and Executive have hereunto set their hands as of the day and year first written above. SOUTHERN NATIONAL CORPORATION By: Its: Executive EX-10 9 EXHIBIT 10.26 EXHIBIT 10.26 Executive Change in Control Agreement dated January 1, 1994, by and between Southern National Corporation and Sherry A. Kellett SOUTHERN NATIONAL CORPORATION EXECUTIVE CHANGE IN CONTROL AGREEMENT THIS AGREEMENT made and entered into this 1st day of January, 199 4 , by and between SOUTHERN NATIONAL CORPORATION ("SNC"), together with its affiliates hereinafter referred to as "the Company" and Sherry A. Kellett, hereinafter referred to as "Executive" provides as follows: W I T N E S S E T H : WHEREAS, SNC's Board of Directors (the "Board") believes that, in the event of a threat or occurrence of a bid to acquire or change control on SNC or to effect a business combination, it is in the best interest of SNC and its present and future shareholders that the business of the Company be continued with a minimum of disruption, and that such objective will be achieved only if its key management employees are given assurances of employment security so they will not be distracted by personal uncertainties and risks created during any such period; and WHEREAS, SNC believes that the giving of such assurances will (a) secure the continued services of its key operational management executives in the performance of both their regular duties and such extra duties as may be required of them during any such period of uncertainty; (b) enable it to rely on such executives to manage the affairs of the Company during any such period with less concern for their personal risks; and (c) give it the ability to attract new key executives as needed; and WHEREAS, the Compensation Committee (the "Committee") of the Board has recommended, the Board has approved, entering into change in control agreements with key management executives of the Company recommended by management and approved by the Committee in order to achieve the foregoing objectives; and WHEREAS, Executive is a key management executive of the Company; NOW, THEREFORE, for and in consideration of the mutual promises and agreements hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Executive covenant and agree as follows: ARTICLE I DEFINITIONS 1.01. Agreement means the Southern National Corporation Executive Change in Control Agreement. 1.02. Board means SNC's Board of Directors. 1.03. Change in Control means the ownership, holding or power to vote more than twenty-five percent (25%) of SNC's voting stock, the control of the election of a majority of SNC's directors, or the exercise of a controlling influence over the management or policies of SNC by any person or persons acting as a group within the meaning of section 13(d) of the Securities Exchange Act of 1934. For purposes of this section 1.03, the term "persons" means an individual or a corporation, partnership, trust, association, joint venture, pool syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. 1.04. Change in Control Date means the date on which a Change in Control occurs. 1.05. Code means the Internal Revenue Code of 1986, as amended. 1.06. Company means Southern National Corporation and its subsidiaries and affiliates, as applicable, or their successors. 1.07. Compensation means the base salary paid or payable to Executive during or with respect to the twelve (12) month period preceding the date of Executive's termination of employment. Compensation also shall include the average of any annual incentive bonuses or other incentive amounts paid or payable to Executive during or with respect to the thirty-six (36) month period preceding the date of Executive's termination of employment. If Executive has not been employed for twelve (12) or thirty-six (36) months, as applicable, at the time of Executive's termination of employment, Executive's "Compensation" shall be Executive's annualized base salary at the rate then in effect and the average of any annual incentive bonuses or other incentive amounts paid to Executive prior to the date of Executive's termination of employment or payable to Executive with respect to Executive's period of employment. 1.08. Employment Period means the period commencing on the Change in Control Date or such earlier date as Executive's employment is terminated as a result of or in conjunction with a Board-approved contemplated Change in Control and ending on the earlier to occur of (a) the third anniversary of such date, or (b) the Executive's normal retirement date (or what would have been his normal retirement date), as determined under the Southern National Retirement Plan, as amended from time to time. 1.09. ERISA means the Employee Retirement Income Security Act of 1974, as amended. 1.10. Just Cause means termination of employment for personal dishonesty, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than a law, rule or regulation relating to a traffic violation or similar offence, the violation of which does not involve moral turpitude and the commission of which is not a felony), or final cease-and- desist order. ARTICLE II APPLICABILITY OF AGREEMENT 2.01. Termination. This Agreement is not an employment contract; SNC may terminate Executive's employment with the Company at any time for any reason pursuant to the Company's normal employment policies and practices. However, if such termination occurs for any reason after a Change in Control of SNC or as a result of or in conjunction with a Board- approved contemplated Change in Control of SNC and before the end of the Employment Period, Executive will be entitled to receive severance benefits in accordance with this Agreement. 2.02. Effect of Change in Control. Upon a Change in Control of SNC while Executive is in the employ of the Company or upon a termination resulting from or in conjunction with a Board-approved contemplated Change in Control of SNC, this Agreement and all of its provisions shall become operative immediately and shall not thereafter be amended or rescinded. Until such time, no benefits shall be payable hereunder. ARTICLE III BENEFITS 3.01. Employment. If Executive is in the employ of the Company on a Change in Control Date, the Company will continue to employ Executive and Executive will remain in the employ of the Company for Employment Period. After a Change in Control Date, Executive shall exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties performed by Executive immediately prior to the Change in Control Date, which services shall be performed at the location where the Executive was employed immediately prior to the Change in Control Date. 3.02. Compensation. During the Employment Period, the Company will (a) continue to pay Executive a base salary in an amount not less than the amount Executive was receiving immediately prior to Change in Control Date, including pay increases which shall be, at a minimum, the average percentage increase granted to other senior management of the Company with essentially similar positions or responsibilities and (b) pay Executive annual bonuses which shall be the greater of: (i) a bonus equal to the average of any annual incentive bonuses or other incentive amounts paid or payable to Executive during or with respect to the thirty-six (36) month period preceding the Change in Control date; (ii) an average of the bonus amounts or percentage awards paid other senior management employees with essentially similar positions or responsibilities for such period; or (iii) an amount equal to twenty-five percent (25%) of Executive's annual base salary. 3.03. Termination of Employment. (a) If Executive's employment is terminated prior to but as a result of or in conjunction with a Board-approved contemplated Change in Control or if during the Employment Period (i) Executive's employment is terminated by the Company without Just Cause or (ii) there is a material reduction in Executive's Compensation or employment related benefits, or a material change in Executive's status, title(s), offices, place of employment, working conditions or management responsibilities (other than changes in reporting or management responsibilities to reflect sound business practices commonly followed by other comparable institutions or required by applicable federal or state law), and Executive voluntarily terminates employment within ninety (90) days of such event, or the last in a series of events, then Executive shall be entitled to receive a lump sum payment in an amount equal to three (3) times Executive's Compensation. In the event a payment is triggered under this paragraph 3(a) within three (3) years of what would have been Executive's normal retirement date, as determined under the Southern National Retirement Plan, such payment shall be limited to an amount equal to the product of three (3) times the Executive's Compensation multiplied by a fraction, the numerator of which equals the number of full or partial months between the date or event triggering the payment and Executive's normal retirement date, as determined under the Southern National Retirement Plan, and the denominator of which equals thirty-six (36). Further, to the extent any payment under this agreement 3(a) (and any other payments required to be taken into account) cause a "parachute payment", as defined in Code section 280G(b)(2), such aggregate amounts shall be reduced by one dollar ($1.00) at a time until the aggregate of all such payments do not constitute a parachute payment. Such amount shall be paid to Executive within fifteen (15) business days after Executive's termination of employment is terminated prior to a Change in Control Date or during the Employment Period, and the events described in (i) or (ii) do not occur and such termination is not a result of or in conjunction with a Board-approved contemplated Change in Control, Executive's rights under this Agreement shall terminate. (b) In addition to the payment provided for in section 3.03(a), or any other arrangement between the Company and Executive, and subject to the adjustment provided in section 3.03(a), Executive is entitled to (i) any benefits that become vested under any accelerated vesting provisions of any Company-sponsored non-qualified deferred compensation plan and any benefits due Executive as a result of the exercise of a stock option, restricted stock or other award to which Executive is entitled under any stock option or stock-based compensation plan, and (ii) any other payments or benefits due him that do not constitute "parachute payments" (as defined in Code section 280G), including amounts that Executive is entitled to receive under SNC's qualified employee pension benefit plans and employee welfare benefit plans. 3.04. Mitigation. Executive shall not be required to mitigate the amounts of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any such payment be reduced by any compensation earned by Executive as the result of employment by another employer after Executive's termination by the Company. 3.05. Death Benefits. (a) If Executive dies before receiving the amounts described in the preceding sections of this Article III, the balance remaining to be paid shall be paid to Executive's Beneficiary at the times and in the manner provided in those sections. ARTICLE IV AMENDMENT OR TERMINATION 4.01 Amendment and Termination. SNC may, with the consent of Executive, modify, alter, amend or terminate this Agreement, in whole or in part at any time. An amendment may be made retroactively if it is necessary to make this Agreement conform to applicable law or agreeable to the parties. No amendment or modification of this Agreement or any covenant, condition or limitation shall be valid unless in writing and duly executed by the parties to this Agreement. ARTICLE V MERGERS AND CONSOLIDATIONS 5.01 Continuance of Agreement. SNC will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business to expressly assume and perform all of the obligations of this Agreement, in a written agreement form satisfactory to the Executive. 5.02. Assumption of Agreement. Unless the parties to this Agreement otherwise mutually agree in writing, SNC shall not merge or consolidate with any other corporation, bank or association until such successor entity expressly agrees to and assumes the obligation of the Company set forth in this Agreement. 5.03. Payment. Should a potential successor not agree to assume the obligations of the Company under this Agreement during a merger or consolidation, Executive shall be entitled to compensation from Company under the terms of section 3.03. ARTICLE VI GENERAL PROVISIONS 6.01. Construction. Headings and subheadings used in this Agreement have been inserted for convenience of reference only and must be ignored in any construction of the provisions. If a provision of this Agreement is illegal or invalid, that illegality or invalidity does not affect other provisions in this Agreement. Any term with an initial capital not expected by capitalization rules is a defined term according to Article I of this Agreement. This Agreement must be construed according to the applicable provisions of the Code in a manner that assures that the Agreement provides the benefits and tax consequences intended for Executives. 6.02. Governing Law. This Agreement shall be construed, enforced and administered in accordance with the Laws of the State of North Carolina (other than its choice of law rules), except to the extent that those laws are superseded by the laws of the United States of America. 6.03. Indemnification. The Company must pay any reasonable legal fees and expenses incurred by Executive in seeking to obtain or enforce any right or benefit provided under this Agreement, whether Executive is successful or not. Payments made under this section 6.03 shall be paid by Company to Executive at the time Executive incurs such legal fees or expenses. 6.04. Agreement Creates No Separate Rights. The creation, continuance, or change in this Agreement or any payment made pursuant to this Agreement, does not give any person a non-statutory legal or equitable right against the Company or any of the Company's officers, agents, or other persons employed by the Company. This Agreement does not modify the terms of Executive's employment. 6.05. Notice. For purposes of this Agreement, notices and all other communications relevant to this Agreement shall be in writing and deemed to have been duly given when personally delivered or mailed by United States Certified or Registered Mail, return receipt requested, postage prepaid, addressed as follows: Executive or to Company Ms. Sherry A. Kellett Southern National Corporation 5198 Clearview Drive Attn: Corporate Secretary Winston-Salem, NC 27104 Southern National Financial Center P.O. Box 1290 Winston-Salem, NC 27102-1290 or to such other address as any party to this Agreement may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 6.06. Entire Agreement. This Agreement sets forth all the promises, covenants, agreements, conditions and understandings between the parties to this Agreement with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducement or conditions, express or implied, oral or written, with respect thereto, except as contained herein. 6.07. Effective Date and Automatic Termination. This Agreement is effective January 1, 1994. It automatically terminates on Executive's normal retirement date, as defined under the Southern National Retirement Plan, unless a Change of Control has occurred or Executive is terminated before such date as a result of or in conjunction with a Board-approved contemplated Change in Control of SNC. IN WITNESS WHEREOF, SNC, by their duly authorized officers (for itself and the Company), and Executive have hereunto set their hands as of the day and year first written above. SOUTHERN NATIONAL CORPORATION By: Its: Executive EX-10 10 EXHIBIT 10.27 EXHIBIT 10.27 Form of Consulting Agreement between Southern National Corporation and Outside Directors STATE OF NORTH CAROLINAS CONSULTING AGREEMENT COUNTY OF FORSYTH This Agreement is dated and effective January 1, 1994 between Southern National Corporation (the "Corporation") and _____________________, ("Consultant"). RECITALS The purpose of this Agreement is to retain the services of Consultant who has served as a Director of Southern National Corporation ("Corporation") and who is neither an officer or an employee of the Corporation, or any of its affiliates (herein "Bank") as of the date of this Agreement and who has provided expertise in enabling the Corporation to experience successful growth and development, so as to ensure that the Corporation will have the benefit of his or her continued service as a Director and to assist the Bank in the conduct of its affairs as a consultant following his or her termination of service as a Director. Consultant is willing to enter into this Agreement upon the terms and conditions hereinafter set forth. Accordingly, Consultant and Corporation hereby agree as follows: 1. Definitions. (a) "Corporation" means Southern National Corporation. (b) "Outside Director" means a person who is not an officer or employee of the Corporation or Bank and who is elected or appointed as a Director of the Corporation. (c) "Board" means Board of Directors of Corporation. (d) "Consulting Services" means advice and consultation provided to the Bank as requested from time to time by the Board of Directors or any officer designated by the Board, not to exceed seven (7) days a year; provided, however, Consultant shall at all times positively promote the business interests of the Corporation and its affiliates in all of Consultant's other business dealings during his service as a Consultant hereunder. (e) "Initial Date" means the date of a Consultant's initial appointment or election as an Outside Director of the Corporation which is (f) "Termination Date" means the date of a Consultant's termination as an active Outside Director of the Corporation or as a Director of a successor in interest to the Corporation by (1) resignation, (2) voluntary early retirement elected by Consultant, (3) retirement on the first day of January of the year following Consultant obtaining the age of seventy (70), (4) failure of a successor in interest to the Corporation to appoint Consultant to the corporate board of such successor, (5) failure of a successor in interest to the Corporation to nominate a Consultant for election to the corporate board of directors of such successor or to the Board if Corporation is the surviving entity, (6) failure of the shareholders of a successor in interest to the Corporation to reelect Consultant to the corporate board of directors of such successor as a director, (7) failure of the shareholders of the Corporation to nominate or reelect Consultant as a Director of the Board, or (8) otherwise. (g) "Credited Service" means the number of full months the Consultant served as an Outside Director between the Initial Date and the Termination Date. (h) "Consulting Payment" means an amount equal to one twelfth (1/12th) of the annual Directors' retainer fee, paid by the Corporation to its Outside Directors as of the Consultant's Termination Date for Consultants whose Termination Date occurs after 1997. The Consulting Payment shall be $1,100.00 per month for Consultant whose Termination Date occurs in 1994, 1995, 1996 and 1997 (this amount is subject to adjustment pursuant to the provisions of Section 13 in the case of retirement prior to age seventy (70). Such amount may not be reduced by a successor in interest to the Corporation without the written consent of Consultant. 2. Eligibility. If an Outside Director is removed as a Director for cause regardless of length of service, if a cease and desist order has been entered by the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve Board or other appropriate regulatory agency requiring Consultant to cease participating in the conduct of the affairs of the Bank, if Consultant violates the provisions of Section 5, 8, or 12 herein and Consultant shall no further rights hereunder. 3. Term/Payments. Beginning the first month following Consultants' Termination Date, Consultant shall provide Consulting Services for a term and shall be paid monthly for his or her Consulting Payment for the number of months equal to the last of (1) the number of months Consultant agrees to provide Consulting Service hereunder, (2) the number of months of Consultant's Credited Services, or (3) 120 months. At the expiration of the period for which Consultant is entitled to payments under this paragraph, his or her status as Consultant shall cease. Notwithstanding the above, no payments shall be paid hereunder following entry of a cease and desist order by the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve Board or other appropriate regulatory agency requiring Consultant to cease participating in the conduct of the affairs of the Bank, or the date Consultant violates the provisions of Section 5, 8 or 12 herein. 4. Death of a Consultant. If Consultant dies, then all payments payable hereunder shall cease and Consultant's beneficiaries, heirs or assigns shall have no right to any payment hereunder. 5. Trade Secrets and Confidentiality. Consultant agrees not to disclose to any other employer, person or entity any trade secrets or other proprietary or confidential information pertaining to the Bank and agrees to comply with the Corporation's and/or the Bank's Code of Ethics. 6. Responsibility for Taxes. Consultant acknowledges sole responsibility for income taxes due on amounts paid to Consultant hereunder. 7. Relationship of the Parties. Consultant is engaged by the Corporation only for the purposes and to the extent set forth in this Agreement, and Consultant's relation to the Bank shall be that of an independent contractor. Consultant shall not be considered an employee or entitled to participate in any plans, arrangements, or distributions by the Bank pertaining to or in connection with any pension, stock bonus, profit-sharing, or other benefit plan insuring employees of the Bank. 8. Exclusive Services. During the term of this Agreement, Consultant shall provide business development consulting services only to the Bank and to no other financial institution. Consultant specifically agrees not to serve on the board of directors or advisory board of any other financial institution during the term of this Agreement. 9. Attorneys Fees. Each party agrees to bear its expenses incurred by such party in preparation or review of this Agreement by their respective counsel. 10. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 11. Non-Solicitation of Employees. Consultant agrees that he or she shall not solicit officers or employees of the Bank for employment at any other entity during the term of his Agreement. 12. Noncompetition. Notwithstanding any other provision of this Agreement, payment hereunder to Consultant shall cease if the Board determines that Consultant has become an officer, employee, director or advisor to, or is otherwise engaging in, any business or activity which shall be competitive with the business of the Bank. This provision shall be limited to the term of payments hereunder. If payments hereunder cease due to a breach of this section by Consultant, Consultant shall have no further rights hereunder and Payments shall not recommence if he shall discontinue such competition. 13. Early Retirement. If Consultant voluntarily ceases service as an Outside Director prior to reaching age seventy (70) but remains willing to provide the Consulting Services provided for hereunder, he or she shall be entitled to Consulting Payment reduced by five percent (5%) for each year remaining before the Outside Director would have reached age seventy (70), but in no event shall the reduction in such Consulting Payment exceed fifty percent (50). 14. Assignment. This Agreement and the right of Consultant to payments hereunder shall not be assigned, transferred, pledged or encumbered at any time. 15. Severability. Should any provision o this Agreement be declared to be invalid for any reason or to have ceased to be binding on the parties hereto, such provision shall be severed, and all other provisions herein effective and binding. 16. Binding Effect. This Agreement shall be binding upon any successor in interest to the Corporation, which successor in interest shall have all the rights, duties and obligations of the Corporation hereunder. 17. Gender. References herein to the masculine gender shall include the feminine where appropriate. 18. Amendment. The Corporation may, with the consent of the Consultant, modify, alter, amend or terminate this Agreement, in whole or in part, at any time. An amendment may be made retroactively if it is necessary to make this Agreement conform to applicable law or agreeable to the parties. No amendment or modification of this Agreement or any covenant, condition or limitation shall be valid unless in writing and duly executed by the parties to this Agreement. This Agreement may not be amended, modified, suspended or terminated, nor may the benefits provided for herein be reduced by a successor in interest to the Corporation without the written consent of Consultant. Notwithstanding the foregoing, this Agreement may be terminated at any time and payments may be discontinued in whole or in part if the Agreement is deemed by the Comptroller of the Currency, the Federal Deposit Insurance Corporation or a successor regulator to constitute an unsafe or unsound practice. 19. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the United States and the laws of the State of North Carolina 20. Termination. This Agreement may be terminated by the Corporation due to breach by the Consultant of Consultant's obligations hereunder or upon a breach by Consultant in any of Consultant's obligations to the Bank which is not cured within the lesser of any time period providing for such cure previously established by Agreement between Corporation and Consultant or thirty days. IN WITNESS WHEREOF, the Agreement is executed on behalf of the Corporation pursuant to authority granted by the Board of Directors of the Corporation on the day and year set forth above. SOUTHERN NATIONAL CORPORATION (CORPORATE SEAL) By: Chairman of the Board, President and Attest Chief Executive Officer Secretary CONSULTANT (SEAL) Typed Name EX-11 11 EXHIBIT 11.1 EXHIBIT 11.1 Computation of Earnings Per Share Exhibit 11.1 SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES Computation of Earnings Per Share For the Periods Indicated (Dollars in thousands, except per share data) For the Years Ended Dec. 31, 1993 1992 Primary Earnings Per Share: Weighted average number of common shares 30,665,726 29,410,555 outstanding during the period Add - Dilutive effect of outstanding options (as determined by application of treasury stock method) 291,783 477,072 Weighted average number of common shares, as adjusted 30,957,509 29,887,627 Net income $ 71,993 $ 47,239 Less- Preferred dividend requirements 5,196 4,605 Net income available for common shares 66,797 42,634 Primary Earnings per share $ 2.16 $ 1.43 Fully-Diluted Earnings Per Share: Weighted average number of common shares outstanding during the period 30,665,726 29,410,555 Add Shares issuable assuming conversion of convertible preferred stock 4,548,236 4,125,722 Dilutive effect of outstanding options (as determined by application of treasury stock method) 298,134 555,107 Weighted average number of common shares, as adjusted 35,512,096 34,091,384 Net income $ 71,993 $ 47,293 Fully-diluted earnings per share $ 2.03 $ 1.39
EX-13 12 EXHIBIT 13.1 Enhancing Value Southern National serves individuals and small- to medium-sized businesses in North and South Carolina. Our goal is to excel in this market by providing customers with convenient access to a full range of personalized financial products and services. We strive to consistently deliver superior service to our customers, superior returns to our shareholders and superior job opportunities and benefits to our employees. These commitments are the driving forces of Southern National Corporation. Begun in 1897 as a rural farmers' bank, Southern National has built strong bonds with this region and its people and has evolved into a highly successful financial services company. Our ability to provide consistent value for our customers through an efficient, innovative and cost-effective banking system has enabled Southern National to generate steady profit growth through the years. Acquisitions of other successful financial service companies play a key role in our ongoing success. By integrating the best of these companies, we are able to raise our level of service and convenience while achieving the economies of scale that help us operate more efficiently. This report examines Southern National's approach to building a financially secure future -- an approach based on discipline and a relentless commitment to excellence. Financial Highlights 1 To Our Shareholders and Friends 2 Southern National Today 4 Progress Through Strategic Acquisitions 6 Southern National Network 8 Profile of an Acquisition: The First 10 1993 Southern National Highlights 12 1993 Financial Review 13 Financial Highlights (Dollars in thousands except per share data) For The Years Ended December 31, Percent 1993 1992 Change At Year-End Total assets $5,898,394 $5,003,961 18 % Securities* 1,978,874 1,577,704 25 Net loans and leases* 3,475,113 2,966,197 17 Total deposits 4,536,998 4,132,125 10 Shareholders' equity 503,149 431,889 16 For the Year Net interest income $ 224,655 $ 207,969 8 % Provision for loan and lease losses 5,574 14,775 (62 ) Noninterest income 66,284 43,580 52 Noninterest expense 171,863 156,812 10 Income taxes 37,938 32,723 16 Net income 71,993 47,239 52 Per Common Share Net income Primary $ 2.16 $ 1.43 51 % Fully-diluted 2.03 1.39 46 Cash dividends paid .64 .50 28 Shareholders' equity 13.47 11.95 13 Key Performance Ratios Return on average assets 1.35 % 1.00 % Return on average common shareholders' equity 17.32 12.61 Net yield on average earning assets (fully taxable equivalent) 4.71 4.89
* Includes assets held for sale Net Income (In millions) (net income bar graph appears here -- see appendix) Average Total Assets (In billions) (average total assets bar graph appears here -- see appendix) 1 To Our Shareholders and Friends: Enhanced value. When all is said and done, these two words define Southern National's point of focus for 1993 -- and for years to come. To enhance our value to the individuals and small- to medium-sized businesses we serve in the Carolinas, Southern National must provide personalized service, convenience and product innovation that generate customer satisfaction. And we must do this in a cost-effective corporate environment that promotes in-market efficiencies and takes advantage of advanced banking technologies. Success in this endeavor translates to increased profitability over the long term, which in turn brings us full circle to enhanced value - -- for our customers and our shareholders. During 1993, our continuing focus on enhanced value resulted in strong financial and physical growth. We undertook the largest acquisitions by far in this bank's nearly 100-year history, but we did so within strict guidelines established to ensure that physical growth enhances our ability to provide consistently superior products, services, profitability and financial strength. Southern National management in 1992 instituted minimum annual financial goals: earnings per share growth of 12% annually, return on equity of 15%, and return on assets of 1%. We surpassed these minimum objectives in both 1992 and 1993, and these goals remain in place for 1994. In 1993, fully-diluted earnings per share climbed 46% to $2.03, return on average common equity was 17.32% and return on average assets stood at 1.35%. This compares with $1.39, 12.61% and 1.00%, respectively, for 1992. Net income for the year rose 52% to $72.0 million, total assets increased 18% to $5.9 billion and total deposits climbed 10% to $4.5 billion. Our net yield on earning assets for 1993 was 4.71%, compared with 4.89% in the prior year. Asset quality showed continued improvement during the year. Nonperforming assets, which have declined every quarter since the first quarter of 1991, totaled $21.8 million at year-end, or .63% of loan-related assets and 27% below year-end 1992. Net charge-offs for 1993 fell 50% from the prior year to $6.4 million, or .20% of average loans. The allowance for losses at year-end was 1.15% of loans and leases, and equaled 203% of our nonaccrual loans. Our ongoing efforts to enhance the company's overall financial position resulted in Southern National's being ranked among the top 25 banks in the country by banking industry magazines during 1993 in terms of safety and soundness. At the same time, we began realizing the benefits of initiatives to increase fee income as a percent of total revenue. Our new fully registered broker-dealer, Southern National Investment Services, Inc., more than doubled its contribution to revenues. Our Trust and Capital Management Group and Southern National Leasing Corp. both had record years in terms of asset and revenue growth. We expect further fee income contributions from these areas in 1994. In addition, we are in the process of forming an insurance group, which will market a full line of insurance products and services. Offerings will include property and casualty, life, auto, mortgage and homeowners insurance. In August 1993, we announced our largest merger ever, the acquisition of The First Savings Bank, FSB of Greenville, S.C. The First represents a significant event in Southern National's corporate life. It not only boosted our total assets by $2.0 billion, it immediately lifted us to 3rd from 9th in deposit market share in South Carolina and gave us the largest share of deposits in the economically thriving Greenville area. We are now the largest mortgage lender in South Carolina and are strategically positioned in every major city in the state. In place is a banking network that offers our customers more convenience than they have ever had before. Further, we expect significant fee income contributions from our new acquisition. Most importantly, however, The First represents the biggest step to date in Southern National's approach to building a financially secure future for our employees, customers and our shareholders. Our acquisition strategy dictates that each business combination we choose must fortify our existing foundation of profitability, financial strength, economies of scale and service to our customers. In addition to announcing The First merger, in 1993 we completed the acquisitions of East Coast Savings Bank, SSB, of Goldsboro, N.C., and FedFirst Bancshares, Inc., headquartered in Winston-Salem. The acquisition of FedFirst, completed in January 1993, added $396 million in assets and $328 million in deposits. The merger has proven to be as powerful as we had expected. FedFirst was a well-run savings bank and provided us with exceptional market share in the vibrant Winston-Salem market. The addition of East Coast Savings added $271 million in assets and $201 million in deposits, giving us added share in markets where we already do business, such as Fayetteville and Goldsboro. In early 1994, we also completed the acquisitions of Regency Bancshares Inc., headquartered in Hickory, N.C., and Home Federal Savings Bank of 2 (photo appears here -- see appendix) Executive Management Team: (Seated from left) L. Glenn Orr, Jr., John R. Spruill, Michael W. Sperry, James F. Byrne; (Standing from left) Sherry A. Kellett, Gary E. Carlton, Morris D. Marley, C. Royce Hough, G. Lee Cory, Robert E. Greene, Jerry H. Blue Statesville, N.C., mergers that will provide Southern National with resources to increase customer services, expand market share and operate more efficiently in the markets where we choose to do business. One of the qualities we seek in merger partners is a management that exhibits both quality and compatibility. We found such managements in the organizations mentioned above. Just as importantly, we also benefitted from a fresh infusion of motivated employees who know their customers and their markets. We welcome them to the Southern National family. Finally, 1993 witnessed the relocation of our North Carolina banking headquarters to Winston-Salem from Lumberton. It was a major achievement in that we moved many of our employees to new facilities. The year 1994 will be full of challenges. We have much yet to do to consolidate our newly merged banking partners. At the same time, we must remain alert and nimble to act quickly on acquisition opportunities as they develop and to anticipate and react to changes in our marketplace. Our vision for Southern National is that you, our shareholders, will see in this organization a consistent and predictable company that delivers on its own expectations and those of the marketplace. In that way, we will be able to provide both our customers and our shareholders the enhanced value Southern National represents. Thank you for your continued support. (signature appears here -- see appendix) L. Glenn Orr, Jr. Chairman, President and Chief Executive Officer 3 Southern National Today Prospering With The Carolinas In a region of the country known for its strong and competitive banking environment, Southern National stands out. The Carolinas are our home. We have been banking here since 1897 and have focused our business efforts within this fertile region, while much of our larger competition has turned its attention elsewhere. The Carolinas are the heart of a region offering a diverse, vibrant economy that is experiencing steady population growth, consistently low unemployment and an influx of national and international manufacturing plants. It has been and will continue to be rich in banking growth opportunities. Concentrating on this region, Southern National has developed into a competitive middle-market bank, dedicated to serving retail banking customers and small- to medium-sized commercial businesses. In focusing on a defined geographical area, we maintain strict financial controls, maximize operating efficiencies, respond quickly to opportunities in the marketplace, and provide personalized service to clients in these cities and towns that we call home. An Industry Leader As a result of this strategy, Southern National today is recognized as one of the region's leaders in profitability, asset quality, operating efficiency and customer service. In 1992, United States Banker magazine ranked Southern National 17th among the nation's 100 largest banking companies in terms of soundness, profitability and willingness to provide loans to communities where we do business. Bank Management magazine ranked us 21st among its top 100 performing banks in 1993. With total assets in excess of $8 billion, including acquisitions completed by the end of February 1994, Southern National is the 5th largest bank holding company in North Carolina and the 3rd largest in South Carolina. We operate 232 offices in 118 cities and towns in the Carolinas. We are committed to providing superior service to customers, superior returns to shareholders and superior job opportunities and benefits to Southern National employees. Failure to concentrate on any one of these three elements detracts from our ability to achieve success over the long term. Our growing size is not a goal so much as it is a by-product of our dedication to profitability and financial strength, our desire to operate more efficiently and our commitment to provide both commercial and consumer customers with the best personal, innovative and convenient financial services available. We pursue an aggressive acquisition strategy because it represents the most effective way to maximize operating efficiencies and build profitability through economies of scale obtainable through increased market share. We have successfully completed 10 acquisitions since 1990, taking each expansion step within clearly defined financial parameters. Southern National is continually strengthening the management teams required to achieve these goals by providing them with the training, tools and incentives to succeed. Measures of Success In 1993, Southern National returned 1.35% on average assets and 17.32% on average common equity, compared with 1.00% and 12.61%, respectively, in 1992. Fully- diluted earnings per share climbed 46% over 1992. These are important indicators because we have committed ourselves to meeting minimum financial goals of 12% annual earnings-per-share growth, 15% return on equity and 1% return on assets. We are guided by these goals in every decision we make. One of the best indicators of our steady financial growth is our dividend record. In 1993, Southern National not only increased the dividend on its common stock for the 21st consecutive year, but also raised the dividend twice during the year, allowing shareholders to participate more fully in the company's prosperity. All of Southern National's asset quality indicators returned to pre- recession levels in 1993, further strengthening our already solid credit quality indicators and providing further evidence that our credit risk management process is effective. Nonper-forming assets as a percent of loans and real estate owned fell to .63%, from .99% at the end of 1992. This ratio has declined favorably every quarter since the first quarter of 1991. Our allowance for losses at Dec. 31, 1993, was 1.15% of loans and leases and 203% of nonperforming loans. Maintaining steady increases in interest income continues to be key to our financial success. We focus our attention toward this goal on a daily basis by careful attention to our growth in earning assets and to our net interest margin. Net interest income increased 8% in 1993 compared to 1992. We remain committed to initiatives that will boost fee income as a percent of total revenue. In 1993, we strengthened our mortgage origination business and established a new fully registered broker- dealer subsidiary that sells annuities, mutual funds and traditional fixed-income securities as well as discount brokerage services. In 1994, we will realize additional revenues from this area. We also expect a significant contribution to fee income from our 4 acquisition of The First Savings Bank, which is the largest mortgage lender in South Carolina. Drivers of Success Southern National has taken several steps since 1990 to reenergize the performance level of our banking company. We built a management team within a simple, unencumbered structure that provides flexibility to respond quickly to opportunities in the marketplace. We can act quickly on these opportunities, whether they be new products, merger or acquisition initiatives, or customer demands. Incentive pay, for both our executive management team and the rest of the Southern National employee base, has played a key role in this program. In 1993, members of Southern National's executive team received 45% of their compensation from the company's incentive pay program. At the end of 1993, 8% of Southern National common stock outstanding was in the hands of employees, so our work force is motivated to make Southern National the best it can be. In 1993, we introduced a program for employees called "Southern National 2001," designed to provide our bankers with the training and motivation they need to successfully move into the 21st century. Southern National's vision is that our employees are leaders not only in the industry, but also in the communities in which we live. We must operate with increased efficiency in everything we do. Our constant drive to operate more efficiently has played a significant role in the bank's successes over the past few years. The most widely used indicator for measuring operating efficiency is the ratio of noninterest expenses to core revenues. In 1993, our efficiency ratio was 59.6%, which is better than the 60% ratio aspired to by many banks. Our quest for in-market efficiencies will continue during 1994. We have made great strides in growing deposits per branch, boosting employee productivity and increasing market penetration. Further improvements can and will be made. Our two-state focus gives us the ability to centralize support systems in singular locations that can effectively serve the total corporation. We will continue to take major steps that not only provide more consistent and efficient support services, but also free our sales people to do what they do best: serve our customers. Return On Assets (return on assets bar graph appears here -- see appendix) Return On Equity (return on equity bar graph appears here -- see appendix) Nonperforming Assets as % of Loan-Related Assets (nonperforming assets bar graph appears here -- see appendix) 5 Progress Through Strategic Acquisitions A Disciplined Approach Consistently superior products and services. Consistently superior profitability and financial strength. Consistently predictable performance. Southern National's future is built on these foundations. Commitments to these objectives guide us in every strategic decision we make. One of the most effective ways of ensuring a strong foundation in future years is to continually bolster our ability to operate more efficiently in the markets we serve. To do this, Southern National adheres to a disciplined acquisition policy. Following this structured approach, we have built profits over the past few years by expanding market share and achieving economies of scale. Properly executed, these acquisitions help us operate more efficiently, improve our returns and enhance our franchise value. Southern National has a strong track record for completing acquisitions that strengthen our financials and our ability to serve the community. We have merged more than 35 banks and thrifts in our history and have developed a reputation for our conservative approach to projecting the benefits of any such transaction for Southern National. Our merger program is a line of business with us today. Our capital ratios are well above the minimum required by banking regulators, giving us great latitude in our ability to pursue and structure mergers. We have the flexibility of doing transactions without having to return immediately to the capital markets. We are convinced the consolidation prevalent in today's banking and thrift industries will continue for the foreseeable future. Only institutions whose size provides sufficient economies of scale will be able to afford the technology, products and regulatory compliance specialists necessary to compete effectively. Many healthy smaller banks and S&Ls in our region today face this dilemma. We expect this environment to provide Southern National with continued opportunities in this geographical region. Criteria In evaluating potential merger and acquisition transactions, Southern National considers the following criteria: (bullet) Existing Markets -- We prefer to do business with partners in our trade area. This gives us the chance to leverage existing business and operate more efficiently. Acquisitions of this kind allow us to build market share and consolidate operations into a more efficient operating structure. We also know the market and the customers, since we have been banking in this region for nearly a century. (bullet) EPS Contribution -- Every merger partner must quickly become a contributor to earnings per share. If a particularly advantageous acquisition is moderately dilutive, however, we might be willing to accept it provided we can still meet our earnings per share goals. (bullet) Quality Management -- We seek management that shares our corporate philosophies and has exhibited an ability to successfully manage its company. A strong management team helps us maintain effective communications and quality customer service at a critical time. Franchise Enhancement Southern National is building market leadership through its merger and acquisition program. In 1993, we held the No. 1 market share ranking in 15 of the cities where we operated, representing 22% of our total deposits. We were 2nd in 29 cities, representing 40% of our deposits. With 62% of our deposits in cities where we are No. 1 or 2, opportunities remain to increase market share and realize additional operating efficiencies throughout our franchise. Our recent M&A activity shows our commitment to this strategy. Southern National is building a financially strong, competitive banking franchise with an improved ability to provide personal, innovative service to our customers. In 1993 and early 1994, we completed five acquisitions, which increased Southern National's assets to $8.3 billion. The 1994 acquisition of The First, with $2.0 billion in assets, is by far our largest merger. The acquisition of FedFirst Bancshares, Inc. of Winston-Salem, N.C., with $396 million in assets, made Southern National the No. 2 bank in North Carolina's 4th largest market. Our deposit market share in this area climbed to 19% from 9%. In October, we completed the acquisition of East Coast Savings Bank, SSB, of Goldsboro, N.C., through a conversion/merger. Eighty percent of East Coast's $201 million in deposits were in Southern National's existing market cities. The acquisition solidified our No. 1 market share ranking in Fayetteville, the state's 5th largest financial market, moved our rank in Goldsboro to 3rd from 6th and in Clinton to 1st from 5th. In addition, we expect to save about 20% in costs at the merged bank. 6 Mergers and Acquisitions Since 1990 Date Company Location Type Size (In Millions) 2/94 Home Federal Savings Bank Statesville, NC Merger $ 98 assets 1/94 Regency Bancshares Hickory, NC Merger 263 assets 1/94 The First Savings Bank Greenville, SC Merger 2,013 assets 10/93 East Coast Savings Bank Goldsboro, NC Merger/Conversion 271 assets 3/93 First Financial Savings Bank Kinston, NC Branch Purchase 12 deposits/ 3 consumer loans 1/93 First Federal Savings Bank Winston-Salem, NC Merger 396 assets 5/92 First Security Federal Savings Bank Pinehurst, NC RTC 55 assets 3/92 Workmen's Federal Savings Bank Mount Airy, NC Merger 260 assets 9/91 Preferred Savings Bank High Point, NC RTC 120 deposits 9/91 Southeastern Federal Savings Bank Charlotte, NC RTC 110 deposit 5/91 Southeastern Federal Savings Bank Charlotte, NC RTC 55 equity loans 8/90 Western Carolina Savings and Loan Valdese, NC Merger 90 assets 8/90 Mutual Federal Savings and Loan Elkin, NC Merger 130 assets
Our 1994 acquisition of Home Federal Savings Bank of Statesville, N.C., which had $98 million in assets, moved our market ranking in this city to 3rd from 11th, giving us a 17% share of the market. Seventy-five percent of Home Federal's deposits were in existing Southern National cities. The transaction is expected to provide cost savings of about 20%. Our acquisition of Regency Bancshares Inc. of Hickory, N.C., strengthened our market share in Hickory to 2nd from 5th and provided entry into four new markets: Lenoir, Welcome, Denton and Lexington. Regency had $263 million in assets and $210 million in deposits, 60% of which were in existing Southern National markets. We expect the transaction to generate cost savings in the 30% range. In future years, we will continue to act quickly on merger opportunities that enhance franchise value and provide increased profitability through revenue growth and operating efficiencies. 7 "We will continue to act quickly on acquisition and merger opportunities that enhance franchise value and provide increased profitability through revenue growth and operating efficiencies." Southern National Network of Cities and Communities (map appears here -- see appendix) 8 Profile* 232 Banking Offices 118 Cities $8.3 Billion in Assets (bullet) Southern National Cities (star) Southern National Corporation, Lumberton (diamond) Southern National Bank of North Carolina, Winston-Salem (triangle) Southern National Bank of South Carolina, Greenville *As of February 28, 1994 9 Profile of an Acquisition: The First The First On August 5, 1993, Southern National announced its most significant acquisition to date with a definitive agreement to acquire South Carolina's largest thrift, The First Savings Bank of Greenville. The transaction, which closed in January 1994, was five times larger than any merger we had ever completed. With more than $2 billion in assets, The First provided Southern National with the critical mass needed in South Carolina to compete more efficiently and effectively. Because of its size, merging The First into the Southern National franchise presents great challenges, but Southern National's healthy balance sheet allows us to absorb The First and its many benefits, while maintaining strong asset quality measures and sound capital adequacy. Acquisition Rationale Our logic for acquiring The First clearly illustrates the financial and operational benefits that can be achieved by Southern National through a merger and acquisition strategy based on distinct goals and judged against explicitly defined criteria. (bullet) Our acquisition of The First will solidify Southern National's South Carolina franchise. With $689 million in assets, our South Carolina banking operation was small, but growing and profitable. The First increased our market presence substantially, moving Southern National to 3rd from 9th in statewide deposit market share. We are now a major factor in South Carolina banking. (bullet) The merger makes us first in deposit share in the Greenville market and fourth in the Spartanburg and Charleston markets. With a population of one million, the Greenville/Spartanburg market is the largest and fastest growing area in the state. The area enjoys a low unemployment rate and is home to diversified industries including textiles, automotive and health services. With a substantial number of foreign companies from numerous countries doing business in the area, Greenville/Spartanburg boasts the heaviest per capita concentration of foreign investment of any U.S. metropolitan region. (bullet) The acquisition also makes Southern National the largest residential mortgage originator in South Carolina and provides an important source of additional noninterest income. The combined mortgage servicing portfolio for outside investors totaled approximately $2 billion after merger. (bullet) The acquisition affords Southern National the opportunity to achieve material expense savings and accelerate earnings momentum. Management expects to reduce The First's operating expenses by over 20%. Through a bulk sale of loans and real estate shortly after merger, we improved the credit quality statistics of the portfolio acquired from The First. These two steps alone are expected to substantially increase The First's contribution to earnings in the first full year after the merger. (bullet) Our balance sheet and overall financial posture remain strong. Our goal is to continue to maintain high-quality statistics and ratios. As a result of our merger with The First, Southern National is better positioned as a banking leader in the Carolinas, one of the most fertile regions of the country for our industry. By acquiring The First, we have diversified our revenue mix and greatly increased the potential contribution from fee income, traditionally one of Enhanced Market Share Position in South Carolina as a Result of The First Merger Premerger Postmerger Share/Rank Share/Rank Key Markets Greenville -- -- 18% 1 Greer -- -- 21 2 Spartanburg -- -- 8 4 Charleston 2% 11 6 4 Columbia 3 8 8 5 South Carolina 2 9 7 3 Note: Based on 1993 deposit share data 10 our weakest sources of revenue. More importantly, we have fortified our ability to efficiently serve our customers. The Future During 1994, we will seek to maximize consolidation opportunities presented by our acquisitions of The First, East Coast Savings, Home Federal Savings and Regency Bancshares. We have a proven track record of successfully integrating our merger partners into the Southern National franchise and realizing the benefits we have projected from these transactions. We have placed the best of our best leaders in critical positions of our combined organization. Many opportunities lie ahead. We must leverage The First's retail franchise by turning its customers into full-relationship customers of Southern National. A second objective of this cross-selling program is to minimize the attrition from The First's customer base through proactive, face-to-face discussions with these customers. While The First has excellent retail market share in some very vibrant commercial markets, e.g. Greenville/ Spartanburg, its commercial market share is generally very low. Our opportunity is to leverage our small- to medium-sized business expertise and momentum into these markets. Each step this organization takes will be judged in light of its contribution to our long-term profitability, enduring financial strength, and ability to deliver innovative products and services to the Southern National customer. We will not stray from this course. "Each step this organization takes will be judged in light of its contribution to our long-term profitability, enduring financial strength, and ability to deliver innovative products and services to the Southern National customer." 11 1993 Southern National Highlights January 29 SNC acquires FedFirst Bancshares, Inc. and assumes the No. 2 marketposition in Winston- Salem, North Carolina's fourth largest financial market. February 22 G. Lee Cory is named president of Southern National Bank of South Carolina. Former President Rob Greene is named executive vice president of SNC. March 9 SNC announces merger with East Coast Savings Bank, SSB of Goldsboro, a $271 million thrift that solidifies the bank's market share as 1st in Fayetteville, North Carolina's fifth largest financial market. March 26 SNC agrees to purchase a branch office in Kinston, a new North Carolina market. March 30 A new subsidiary is created, Southern National Investment Services,Inc., a registered broker-dealer. April 29 SNC announces merger with Regency Bancshares Inc. of Hickory, N.C. May 1 SNC is rated 21st in performance among top 100 banks in the U.S. by Bank Management magazine. June 22 SNC announces merger with Home Federal Savings Bank of Statesville, N.C. August 5 SNC announces merger with The First Savings Bank, FSB, of Greenville,S.C., a $2.0 billion thrift that boosts market share in South Carolina to 3rd from 9th. August 15 SNC completes relocation of North Carolina banking headquarters to Winston-Salem. September 13 SNC introduces HONOR ATM debit card. September 15 SNC makes available $2 million in loans to small minority businesses in South Carolina. October 7 SNC completes merger with East Coast Savings Bank of Goldsboro. October 14 Banking executive C. Royce Hough joins SNC and is named head of corporate banking. 12 1993 FINANCIAL REVIEW MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................................................................................. 14 OVERVIEW............................................................................................................... 14 ANALYSIS OF FINANCIAL CONDITION........................................................................................ 14 EARNINGS ANALYSIS...................................................................................................... 19 ASSET/LIABILITY MANAGEMENT............................................................................................. 24 INFLATION AND CHANGING INTEREST RATES.................................................................................. 25 CAPITAL ADEQUACY AND RESOURCES......................................................................................... 26 STOCK AND DIVIDENDS.................................................................................................... 26 FOURTH QUARTER RESULTS................................................................................................. 27 SIX-YEAR FINANCIAL SUMMARY AND SELECTED RATIOS........................................................................... 29 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING...................................................................... 30 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................................................................. 30 CONSOLIDATED FINANCIAL STATEMENTS........................................................................................ 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................................................... 35 FORM 10-K................................................................................................................ 50 SUPPLEMENTAL FINANCIAL INFORMATION....................................................................................... 54
13 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 and Subsidiaries (Southern National or SNC) for each of the three years in the period ended December 31, 1993 and related financial data are presented to assist in the evaluation of the accompanying consolidated financial statements and supplemental financial information. Much of the discussion that follows highlights Southern National's acquisition activity during 1993, as well as acquisitions occurring subsequent to year-end. All of the acquisitions were in the Carolinas allowing Southern National to leverage upon its existing market presence as well as expand into adjacent and complementary markets. On January 29, 1993, Southern National completed its acquisition of FedFirst Bancshares, Inc. (FedFirst), located in Winston-Salem, North Carolina, and its wholly-owned subsidiary, First Federal Savings Bank (FFSB) in a transaction accounted for as a pooling-of-interests. FFSB was merged into Southern National Bank of North Carolina (SNBNC), thereby increasing SNBNC's assets by $396 million and deposit base by $328 million. See Note B -- Acquisitions. On October 7, 1993, Southern National acquired East Coast Savings Bank, SSB (East Coast), headquartered in Goldsboro, North Carolina. Southern National issued 1,172,475 shares of its common stock in the conversion/merger of this North Carolina-chartered mutual savings bank in a transaction accounted for as a purchase, and therefore, the financial information contained herein does not include data relevant to the acquired institution prior to the date of acquisition. At merger date, East Coast had $271 million in total assets and $201 million in deposits. See Note B -- Acquisitions. On January 28, 1994, Southern National completed its acquisition of The First Savings Bank, FSB (The First) of Greenville, South Carolina in a transaction accounted for as a pooling-of-interests. The First was merged into Southern National Bank of South Carolina (SNBSC), thereby improving SNBSC's ranking by deposits to third in South Carolina. At year-end 1993, The First had $2.0 billion in assets and $1.5 billion in deposits. See Note B -- Acquisitions. On January 31, 1994, Southern National acquired Regency Bancshares Inc. (Regency) of Hickory, North Carolina in a transaction accounted for as a pooling-of-interests. At year-end 1993, Regency, a bank holding company whose principal subsidiaries are First Savings Bank, SSB of Hickory, North Carolina and Davidson Savings Bank, SSB of Lexington, North Carolina, had total consolidated assets of $263 million and total consolidated deposits of $210 million. See Note B -- Acquisitions. On February 24, 1993, Southern National acquired Home Federal Savings Bank (Home) of Statesville, North Carolina in a transaction accounted for as a pooling-of-interests. At year-end 1993, Home had total assets of $98 million and total deposits of $90 million. See Note B -- Acquisitions. SNBNC, Southern National's lead bank was formed in 1897 while SNBSC was organized in 1986 as Southern National's entry into the South Carolina banking market. SNB Savings Bank, Inc., SSB (SSB), a state-chartered savings bank, is the resulting entity which evolved from the 1993 merger of former savings and loan institutions acquired by Southern National in 1990, Western Carolina Savings and Loan Association, Inc. (Western) and Mutual Federal Savings and Loan Association, A Stock Corporation (Mutual). ANALYSIS OF FINANCIAL CONDITION Total assets at December 31, 1993 were $5.9 billion, an 18% increase from $5.0 billion at the end of 1992. Net loans and leases increased $461.2 million, or 16%, over the previous year's balance of $3.0 billion. See Table 4 -- Loan and Lease Portfolio Mix for the growth by category and the discussion which accompanies it. Shareholders' equity increased 16% to $503.1 million at December 31, 1993, from $431.9 million at the end of 1992. Significant components of this increase were the acquisition of East Coast and the retention of earnings. Average total assets in 1993 were $5.3 billion, a 13% increase over the 1992 average of $4.7 billion. The rise in total resources resulted principally from the growth in average earning assets, which were $5.0 billion in 1993, a 13% increase over the 1992 level of $4.4 billion. For 1991, average total assets were $3.9 billion. 14
TABLE 1 % Change COMPOSITION OF AVERAGE TOTAL ASSETS 1993 V. 1992 v. (DOLLARS IN THOUSANDS) 1993 1992 1991 1992 1991 Securities*......................................................... $1,747,184 $1,480,868 $ 975,570 18% 52% Federal funds sold and other earning assets......................... 40,259 78,834 87,084 (49) (9) Loans and leases, net of unearned income*........................... 3,204,116 2,862,198 2,542,097 12 13 Average earning assets.............................................. 4,991,559 4,421,900 3,604,751 13 23 Non-earning assets.................................................. 321,596 291,380 268,262 10 9 Average total assets................................................ $5,313,155 $4,713,280 $3,873,013 13% 22% Average earning assets as percent of average total assets........... 93.9% 93.8% 93.1%
* Includes assets held for sale. SECURITIES During the past three years, management has shifted the mix of the securities portfolio as regulations have changed and as asset/liability strategies required. The securities portfolio was managed to provide a stability between liquidity and yield. Investment activity was centered in obligations of U.S. Treasury and U.S. Government agencies. The average maturity of Southern National's portfolio at December 31, 1993, based upon final stated maturity dates, was 3 years 5 months, compared to 5 years 8 months at December 31, 1992. Emphasis continues to be placed on positioning shorter maturity treasuries and shorter average life mortgage-backed securities. U.S. Treasury securities continued to comprise a major portion of the securities portfolio, providing good yields at maturities structured to address liquidity requirements for current and future periods. Table 3 -- Securities shows the maturity distribution by category of Southern National's securities portfolio at December 31, 1993. During this past year the net unrealized gains in the portfolio decreased slightly. At December 31, 1992, the market value was $49.6 million greater than book value. At December 31, 1993, the market value was $32.1 million greater than book value. The fully taxable equivalent (FTE) yield on the portfolio was 7.58% at December 31, 1992 compared to 6.24% at December 31, 1993. Through mergers and acquisitions and the use of excess liquidity, the portfolio grew from $1.6 billion at the end of 1992 to $2.0 at the end of 1993. During the past three years, securities have become a greater component of earning assets, increasing from 27% in 1991 to 35% in 1993. Average deposit growth exceeded loan demand during that time period. From an asset/liability management standpoint, the markets were conducive to utilizing excess deposits as well as inexpensive repurchase agreements to fund securities. At the end of 1992, Southern National's Asset/Liability Com- mittee (ALCO) made a determination that $269 million in mortgage-backed securities should be classified as held for sale. This was done to help Southern National manage its interest rate risk position and in response to prepayment risks and declining interest rates in general. These securities were sold in the first quarter of 1993 at a gain of $13.5 million. During 1993, the Financial Accounting Standards Board (FASB), issued Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. This statement requires an entity to classify securities into held to maturity, available for sale and trading. Securities that are identified as held to maturity are placed there with the full intent to hold to maturity. Securities that are classified as available for sale may be sold for various reasons as determined by the ALCO. These securities are carried at fair value and unrealized gains and losses, net of tax, are reported in a separate component of equity. The ALCO determined that as of January 1, 1994 they would classify approximately $794 million in securities as available for sale. These securities were placed there to aid the ALCO in managing the liquidity needs and interest rate risk requirements of Southern National. Going forward, the size of the available for sale category may fluctuate as various needs are determined by the ALCO. At December 31, 1993, these securities were classified as held for sale. Early in 1994, Southern National completed its acquisition of The First, its largest merger to date. This acquisition added approximately $500 million in securities to the portfolio. Approximately $100 million of these securities have been classified as available for sale while the balance has been classified as held to maturity.
% TABLE 2 Change AVERAGE SECURITIES* 1993 V. (DOLLARS IN THOUSANDS) 1993 1992 1991 1992 U.S. Treasury.................................. $1,107,707 63% $ 788,721 53% $511,202 52% 40% U.S. Government agencies and corporations...... 558,638 32 620,640 42 395,487 41 (10) States and political subdivisions.............. 51,454 3 53,522 4 55,558 6 (4) Other securities............................... 29,385 2 17,985 1 13,323 1 63 Average total securities....................... $1,747,184 100% $1,480,868 100% $975,570 100% 18% TABLE 2 AVERAGE SECURITIES* 1992 v. (DOLLARS IN THOUSANDS) 1991 U.S. Treasury.................................. 54% U.S. Government agencies and corporations...... 57 States and political subdivisions.............. (4) Other securities............................... 35 Average total securities....................... 52%
* Includes securities held for sale. 15 TABLE 3 SECURITIES (DOLLARS IN THOUSANDS)
December 31, 1993 Book Value Average Yield (3) Average Maturity (4) U.S. Treasury Within one year........................................................ $ 385,583 5.68% One to five years...................................................... 901,290 6.13 Five to ten years...................................................... 96,506 5.86 After ten years........................................................ -- -- Total................................................................ 1,383,379 5.99 2.50 U.S. Government agencies and corporations (1) Within one year........................................................ 24,010 4.55 One to five years...................................................... 108,235 6.86 Five to ten years...................................................... 363,610 6.65 After ten years........................................................ 18,917 7.33 Total................................................................ 514,772 6.62 5.83 States and political subdivisions Within one year........................................................ 9,867 8.88 One to five years...................................................... 32,176 8.16 Five to ten years...................................................... 12,004 7.34 After ten years........................................................ -- -- Total................................................................ 54,047 8.11 3.00 Other securities Within one year........................................................ -- -- One to five years...................................................... 10 6.13 Five to ten years...................................................... 598 7.56 After ten years........................................................ -- -- Total................................................................ 608 7.54 6.04 Total securities (2)(5).............................................. $1,952,806 6.24% 3.42
(1) Included in U.S. Government agencies and corporations are mortgage-backed securities, totaling $455,665,000. 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. (2) Includes investment securities of $1,184,401,000 and securities held for sale of $794,473,000. (3) Taxable equivalent basis. (4) Weighted average in years. (5) Excludes Federal Reserve Bank stock, Federal Home Loan Bank stock and other equity securities totaling $26 million. LOANS AND LEASES Loans and leases, net of unearned income and loans held for sale, totaled $3.5 billion at year end, an increase of $463.1 million, or 15%, over the balance at the end of 1992. Commercial and industrial loans grew $220.8 million, or 17%. Commercial real estate loans grew $62.0 million, or 24%. Consumer loans were up $180.4 million, a 13% increase. The acquisition of East Coast in October contributed $200 million of this growth, primarily in the form of single family mortgage loans. Excluding loans acquired from East Coast, loan growth was approximately 7% for the year. Commercial loan growth was spurred by a relatively low interest rate environment, which created opportunities to refinance higher rate loans at other institutions and gain new customers. Also, 1993 was a good year for key industries in the Carolinas, which created opportunities to finance plant and equipment expansion. Commercial leasing, primarily tax-free leases with counties and municipalities, was strong. Lease receivables grew $56.6 million, or 38%, in 1993, after growing $41.5 million, or 39%, in 1992. Growth in commercial real estate loans is partially explained by the East Coast merger; however, a more significant factor was an improved market. Real estate markets rebounded throughout the Carolinas, creating expanded opportunities for new loans. 16 Consumer loan growth was primarily in single-family mortgage loans, which grew $143.1 million, or 17%, because of the East Coast merger. Excluding this acquisition, mortgage loans would have declined slightly. The interest rate environment prompted prepayment of older mortgage loans. In addition, refinanced and new mortgage loans were sold in the secondary market rather than held for investment. This strategy had the effect of reducing portfolio interest rate risk and increasing fee income. Balances outstanding under revolving credit lines were up $13.8 million, or 16%, the result of aggressive marketing efforts to expand this portfolio category. Home equity lines grew $20.1 million, or 8%. Loan and lease portfolio mix shifted slightly in 1993 toward a higher concentration in commercial loans, reversing a trend in the opposite direction that began in 1990. Commercial loans grew from 52.1% to 53.3% of the portfolio, while consumer loans declined from 47.9% to 46.7%. This change was the consequence of strong commercial loan demand, coupled with the accelerated pace of mortgage loan sales mentioned earlier. As a result of mergers with The First, Regency and Home, loan balances are expected to reach approximately $5 billion in the first quarter of 1994. Since most of the loans being acquired are single-family mortgage loans and other consumer loans, portfolio mix will shift back to a higher concentration in consumer loans. Loans held for sale at December 31, 1993 included $3.9 million in loans to be sold as part of a bulk asset sale immediately after merger with The First. Foreclosed properties amounting to $2.5 million were also part of the asset sale. The sales price for the loans was 53 1/3% of the aggregate face amount. Loans with specific reserves were charged down, and the remaining reduction to net realizable value was recorded in the noninterest expense category as loss on bulk sale of assets. Loans and real estate of The First with a realizable value, before costs to sell, of approximately $53 million were included in this asset sale. TABLE 4 LOAN AND LEASE PORTFOLIO MIX* (DOLLARS IN THOUSANDS)
December 31, 1993 1992 COMMERCIAL AND INDUSTRIAL Commercial and industrial secured by real estate................... $ 740,187 $ 596,014 Other commercial and industrial.... 576,633 556,636 Leases............................. 204,653 148,051 Total commercial and industrial..................... 1,521,473 1,300,701 COMMERCIAL REAL ESTATE Land acquisition, construction and development...................... 96,382 59,405 Term............................... 229,271 204,261 Total commercial real estate..... 325,653 263,666 CONSUMER Mortgages (1-4 family residential)..................... 974,050 830,972 Other installment.................. 266,755 263,296 Home equity........................ 278,536 258,477 Revolving credit................... 98,754 84,989 Total consumer................... 1,618,095 1,437,734 Total loan and lease portfolio... $3,465,221 $3,002,101
* Net of unearned income and loans held for sale. ASSET QUALITY Loan portfolio quality continued to improve in 1993, maintaining the trend that began in the second quarter of 1991. As reflected in Table 5 -- Asset Quality, nonperforming assets (NPA's) were $21.8 million at year end, down $7.9 million or 27% for the year. As a percent of total assets, NPA's declined from .59% at the end of 1992 to .37% at the end of 1993. As a percent of loans plus foreclosed properties, they decreased from .99% to .63%. Risk assets, which include NPA's and loans over 90 days past due but still accruing interest, were $22.4 million at year end, down from $31.5 million a year earlier, a 29% decrease. As a percent of loans and foreclosed properties, risk assets fell from 1.04% to .65% year end to year end. Net charge-offs fell 50% from $12.8 million in 1992 to $6.4 million in 1993, or from .45% to .20% of average loans. This ratio was .63% in 1991. The allowance for loan and lease losses totaled $39.8 million at year end, or 1.15% of loans and leases, compared to $37.9 million, or 1.26%, at the end of 1992. Reflecting the dramatic decline in net charge-offs, the year-end allowance was 6.22 times 1993 net charge-offs. Southern National assigns risk ratings to all commercial loans in the portfolio. This assignment of loans to one of seven categories is based upon the relative strength of the repayment source. All significant loans in the four lowest risk ratings are reviewed monthly by Southern National credit management for appropriateness of risk rating, accrual status and loss reserves. Loans are categorized as nonaccrual as soon as full collectibility of principal and interest is deemed doubtful. This policy contributes to a constant inflow of loans into the group of risk assets. As presented in the table entitled Changes in Nonperforming Assets, appearing elsewhere herein, there is also an outflow of loans being written off, upgraded or otherwise resolved. Southern National management believes that potential problem loans will not have a material effect on the total of risk assets. The mergers, which occurred during the first quarter of 1994, will have a minor, but adverse, effect on Southern National's asset quality ratios. Nonperforming assets will be much higher in dollar amount but are expected to remain below 1.00% of loan-related assets. The allowance for loan and lease losses will be higher, in dollar amount and as a percent of loans, reflecting management's plan to aggressively pursue resolution of acquired problem assets. Accordingly, higher loan losses are anticipated in 1994; however, management anticipates that reserves will be sufficient to minimize the impact on 1994 earnings. 17 TABLE 5 ASSET QUALITY (DOLLARS IN THOUSANDS)
December 31, 1993 1992 1991 RISK ASSETS Nonaccrual loans and leases.................................................................... $19,571 $17,054 $31,001 Foreclosed property............................................................................ 2,219 12,643 11,715 Total nonperforming assets................................................................... 21,790 29,697 42,716 Loans 90 days or more past due and still accruing.............................................. 578 1,774 2,931 Total risk assets.......................................................................... $22,368 $31,471 $45,647 ASSET QUALITY RATIOS Nonaccrual loans and leases as percent of loans and leases..................................... .56% .57% 1.19% Nonperforming assets as percent of: Total assets................................................................................. .37 .59 1.04 Loans and leases plus foreclosed property.................................................... .63 .99 1.64 Net charge-offs as percent of average loans and leases......................................... .20 .45 .63 Allowance for losses as percent of loans and leases............................................ 1.15 1.26 1.26 Ratio of allowance for losses to: Net charge-offs.............................................................................. 6.22X 2.96x 2.05x Nonaccrual loans and leases.................................................................. 2.03 2.22 1.06
NOTE: All line items referring to loans and leases reflect loans and leases, net of unearned income and loans held for sale. DEPOSITS AND OTHER BORROWINGS Average total deposits and other borrowings increased from $4.3 billion at the end of 1992 to $4.8 billion at December 31, 1993. Average deposits grew by 11% in 1993, compared to 1992. Average core deposits, Southern National's largest and most important funding source, increased $466.1 million, or 14%, over the balance at December 31, 1992. On average, core deposits were $3.8 billion in 1993 and $3.3 billion in 1992. At December 31, 1993, the level of core deposits exceeded the level of loans. Southern National will continue to emphasize core deposit growth, especially during the current operating environment in which liquidity has increased importance. In addition to increasing the core deposit level, management also increased the use of short-term borrowings, primarily repurchase agreements, to take advantage of significantly lower funding costs as rates declined. Because these instruments typically reprice rapidly, they were utilized to increase liability rate sensitivity. In anticipation of a potential rate rise, management utilized long-term debt, in the form of structured borrowings from the Federal Home Loan Bank (FHLB), to take advantage of lower funding costs over a longer time frame. See ASSET/LIABILITY MANAGEMENT for related discussion. TABLE 6 COMPOSITION OF AVERAGE DEPOSITS AND OTHER BORROWINGS (DOLLARS IN THOUSANDS)
1993 1992 1991 Savings deposits....................................... $ 828,207 17% $ 676,405 16% $ 500,993 14% Money market deposits.................................. 793,817 17 714,175 17 634,242 18 Certificates of deposit................................ 2,134,308 44 2,046,941 48 1,781,043 50 Total interest-bearing deposits........................ 3,756,332 78 3,437,521 81 2,916,278 82 Demand deposits........................................ 514,357 11 414,686 10 357,824 10 Total deposits......................................... 4,270,689 89 3,852,207 91 3,274,102 92 Short-term borrowings.................................. 462,297 10 389,678 8 265,805 7 Long-term debt......................................... 62,381 1 26,408 1 27,940 1 Total deposits and other borrowings.................... $4,795,367 100% $4,268,293 100% $3,567,847 100% % Change Savings deposits....................................... 22% 35% Money market deposits.................................. 11 13 Certificates of deposit................................ 4 15 Total interest-bearing deposits........................ 9 18 Demand deposits........................................ 24 16 Total deposits......................................... 11 18 Short-term borrowings.................................. 19 47 Long-term debt......................................... 136 (5) Total deposits and other borrowings.................... 12% 20%
18 The addition of the deposit and borrowing base provided by The First will enhance Southern National's ability to fund its ongoing loan activity and growth. The deposit base provided by The First exhibits a good mix of various consumer products which will be improved with the addition of Southern National products. Rates previously paid by The First were in line with the markets they operated in, and were comparable to Southern National's rate structure. It is anticipated that core deposits will continue to provide SNBSC with the majority of its funding needs. Any additional funding requirements will be provided by structured borrowings from correspondents and the FHLB in consideration of balance sheet composition and interest rate sensitivity. Management faces an ongoing challenge in attracting new deposits as competition from both financial and non-financial institutions continues to increase. Southern National continually evaluates its product offerings against those of competitors as a means of determining the need to enhance current products or to develop new ones. Southern National has developed a broader base of federal funds lines from correspondents and has established alternative funding sources, including commercial paper and FHLB advances. Management will also continue its strategy of aggressively seeking deposits as a source for its primary funding. The ultimate goal is to attain funding flexibility, which will allow Southern National to react rapidly to opportunities brought about by growth and market volatility. EARNINGS ANALYSIS Southern National's consolidated earnings are presented and analyzed in the following narrative and tables. All financial data reflect Southern National's merger with FedFirst that was accounted for on a pooling-of-interests basis. In addition, results attributable to East Coast are included since the date of acquisition in accordance with the purchase accounting method. Net income in 1993 was $72.0 million, a 52% increase over 1992 earnings of $47.2 million. On a per share basis, primary earnings were $2.16 in 1993, compared to $1.43 in 1992, while fully-diluted earnings were $2.03 in 1993 and $1.39 in 1992. Net income for 1991 was $33.8 million, or $1.21 per share. Net interest income FTE for 1993 was $235.3 million, a 9% increase over the prior year's level of $216.2 million. The net yield FTE on earning assets decreased from 4.89% in 1992 to 4.71% in 1993. The net yield FTE was 4.57% in 1991. The provision for loan and lease losses declined from $19.6 million in 1991, to $14.8 million in 1992 and $5.6 million in 1993. This decline was primarily attributable to a reduction in the level of nonperforming assets. See ANALYSIS OF FINANCIAL CONDITION -- Asset Quality elsewhere in this report. Southern National continues to emphasize goals to increase fee-based areas of income. Early in 1993, Southern National began operation of an investment subsidiary, which provides various investment related services to customers. Another program involves a mortgage lending division aimed at capturing and maintaining a share of the residential mortgage market. Finally, an accounts receivable-based lending group provides services to Southern National's business customers. This group will not necessarily generate additional fee income, but will increase loan activity. As discussed in ANALYSIS OF FINANCIAL CONDITION -- Securities, Southern National sold securities with a book value of $269 million during the first quarter, resulting in a net gain of $13.5 million. The primary factors leading to the sale of these securities, which were classified in the held for sale portfolio at December 31, 1992, were the consideration of new accounting regulations the banking industry is facing and anticipated balance sheet changes arising from merger and acquisition activity. The sale of these longer-term securities, substantially all of which were mortgage-backed securities, served to reduce the level of interest rate risk. The effect of the gains was mitigated by the implementation of the provisions of SFAS 106, which was recorded via a cumulative catch-up adjustment amounting to $6.5 million before taxes. NET INTEREST INCOME Net interest income, the difference between total interest income and total interest expense, is Southern National's principal source of revenue. The amount of net interest income is determined by the volume of interest-earning assets, the level of rates earned on those interest-earning assets and the cost of supporting funds. The difference between rates earned on interest-earning assets (with an adjustment made to tax-exempt income to provide comparability with taxable income) and the cost of supporting funds is measured by the net yield on earning assets. The accompanying table presents the dollar amount of changes in interest income and interest expense. The table distinguishes between the changes related to average outstanding balances of interest-earning assets and interest-bearing liabilities and the changes related to average interest rates on such assets and liabilities. Changes attributable to both volume and rate have been allocated proportionately. During 1993, the net interest income FTE improved while the net yield FTE on earning assets declined, compared with 1992. The improvement in net interest income FTE was attributable to volume, mitigated to some extent by a decline in rates. The average yield FTE on earning assets decreased 92 basis points while the average rate on interest-bearing liabilities was 80 basis points lower. 19 TABLE 7 NET INTEREST INCOME AND RATE/VOLUME ANALYSIS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1993, 1992 AND 1991 FULLY TAXABLE EQUIVALENT -- (DOLLARS IN THOUSANDS)
Average Balance Yield/Rate Income/Expense 1993 1992 1991 1993 1992 1991 1993 1992 1991 $1,695,730 $1,427,346 $ 920,012 6.50% 7.55% 8.29% $110,263 $107,714 $ 76,287 51,454 53,522 55,558 8.21 8.59 8.99 4,226 4,596 4,995 1,747,184 1,480,868 975,570 6.55 7.58 8.33 114,489 112,310 81,282 40,259 78,834 87,084 3.04 3.15 9.43 1,223 2,482 8,209 3,204,116 2,862,198 2,542,097 8.32 9.24 10.66 266,510 264,459 271,079 4,991,559 4,421,900 3,604,751 7.66 8.58 10.00 382,222 379,251 360,570 321,596 291,380 268,262 $5,313,155 $4,713,280 $3,873,013 $ 828,207 $ 676,405 $ 500,993 2.29% 2.85% 4.27% $ 18,944 $ 19,306 $ 21,405 793,817 714,175 634,242 2.51 3.28 5.19 19,958 23,394 32,939 2,134,308 2,046,941 1,781,043 4.22 5.08 6.93 90,111 103,996 123,432 3,756,332 3,437,521 2,916,278 3.43 4.27 6.10 129,013 146,696 177,776 462,297 389,678 265,805 2.95 3.58 5.88 13,616 13,932 15,618 62,381 26,408 27,940 6.96 9.11 8.78 4,343 2,405 2,453 4,281,010 3,853,607 3,210,023 3.43 4.23 6.10 146,972 163,033 195,847 514,357 414,686 357,824 58,061 41,114 36,778 459,727 403,873 268,388 $5,313,155 $4,713,280 $3,873,013 4.23% 4.35% 3.90% 4.71 4.89 4.57 $235,250 $216,218 $164,723 $ 10,595 $ 8,249 $ 6,840
(1) Yields related to investment 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. As a result of good commercial loan demand, the loan portfolio mix shifted to a higher concentration in commercial loans, reversing a trend from 1990. As mentioned previously, most of the loans being acquired from the three 1994 mergers are consumer-related and will cause a shift in the mix back to a higher concentration in consumer loans. 20
1993 V. 1992 1992 v. 1991 INCREASE CHANGE DUE TO Increase Change due to (DECREASE) RATE VOLUME (Decrease) Rate Volume ASSETS Securities (1): U.S. Treasury, Government and other (5)................. $ 2,549 $(16,185) $18,734 $ 31,427 $ (7,331) $38,758 States and political subdivisions....................... (370) (199) (171) (399) (218) (181) Total securities (5).................................. 2,179 (16,384) 18,563 31,028 (7,549) 38,577 Other earning assets (2).................................. (1,259) (83) (1,176) (5,727) (5,016) (711) Loans and leases, net of unearned income (1)(3)(4)(5)..... 2,051 (27,762) 29,813 (6,620) (38,434) 31,814 Total earning assets.................................... 2,971 (44,229) 47,200 18,681 (50,999) 69,680 Non-earning assets Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits: Savings deposits........................................ $ (362) $ (4,185) $ 3,823 $ (2,099) $ (8,327) $ 6,228 Money market deposits................................... (3,436) (5,915) 2,479 (9,545) (13,251) 3,706 Time deposits........................................... (13,885) (18,204) 4,319 (19,436) (32,949) 13,513 Total interest-bearing deposits....................... (17,683) (28,304) 10,621 (31,080) (54,527) 23,447 Short-term borrowings..................................... (316) (2,677) 2,361 (1,686) (7,414) 5,728 Long-term debt............................................ 1,938 (682) 2,620 (48) 90 (138) Total interest-bearing liabilities.................... (16,061) (31,663) 15,602 (32,814) (61,851) 29,037 Demand deposits........................................... Other liabilities......................................... Shareholders' equity...................................... Total liabilities and shareholders' equity............ Average interest rate spread.............................. Net yield on earning assets............................... $ 19,032 $(12,566) $31,598 $ 51,495 $ 10,852 $40,643 Taxable equivalent adjustment
The net yield FTE on earning assets declined from 4.89% in 1992 to 4.71% in 1993. Several factors, including the impact of the overall interest rate environment, contributed to this decline: (i) prepayments on higher yielding mortgage loans increased as consumers refinanced at lower rates; (ii) the acquisition of thrift assets and liabilities with historically narrower spreads depressed the net yield; (iii) management utilized aggressive pricing to stimulate loan growth and (iv) bonds purchased to replace those sold in the first quarter of 1993 earned a lower rate. The acquisitions of FedFirst and East Coast during 1993 and the 1994 mergers with Regency, Home and The First total more than $3.1 billion in thrift assets which have a negative impact on Southern National's net yield. Repricing of deposits, on-and-off balance sheet hedging and other active asset/liability management techniques will continue to be utilized in 1994, as they were in 1993, to effectively manage the net yield. For a number of years, financial institutions have been hampered by fluctuating interest rate spreads and margins as a result of deregulation and increased competition. Southern National will continue to address this issue in the future through careful and timely monitoring of these percentages and taking a proactive stance in pricing both loan and deposit products to protect and enhance these margins while remaining competitive. The acquisition of The First will improve Southern National's ranking, based on deposits, in South Carolina to third. Additionally, SNBSC will gain the strength and depth of being a statewide bank with offices in all major markets while becoming a major mortgage lender. These factors will enable Southern National to strengthen its branch network in the Carolinas, attract new core deposits and enhance banking relationships with customers. Hedging strategies have been used in the past and will be utilized in the future to reduce sensitivity to interest rate movements. Southern National continues to evaluate new avenues of interest-based and fee-based income through its Strategic Planning Committee and other special task force groups. 21 NONINTEREST INCOME The highly competitive environment in which financial institutions operate continues to raise the importance of recognizing and pursuing opportunities to expand noninterest income. The primary components of noninterest income are service charges on deposit accounts and fees from bank and bank-related services. Noninterest income was $66.3 million in 1993 a 52% increase over the prior year's level. Noninterest income totaled $44.1 million in 1991. Service charges on deposit accounts increased 5% in 1993 over 1992. An 18% increase in average deposits upon which service charges are incurred contributed to this increase. Another factor improving service charge income was the lower market interest rates used to calculate the credit given depositors for collected funds. On the other hand, several factors offset these increases to service charges. First, Southern National has been very successful in promoting the Select Banking program, primarily to new customers acquired through mergers and RTC transactions. Many service fees are waived for Select Banking customers. Second, because of competitive considerations, Southern National decreased the percentage of deposit insurance expense passed through to customers during the first quarter of 1993. Excluding securities gains and losses, net, service charges on deposits made up 49% of noninterest income in 1993 and 56% in 1992. Nondeposit fees and commissions increased $4.6 million, or 31%, in 1993. Key areas combined to culminate in this net increase over 1992. Aggressive marketing by the trust division, combined with continuing product enhancements, was primarily responsible for the $312 thousand, or 12%, increase in trust fees over the 1992 level of $2.7 million. Bankcard related fees increased $942 thousand, or 17%, in 1993. Among other fees, Southern National's investment subsidiary, generated $3.7 million. Management's continuous efforts to develop additional fee-generating activities and methods of improving profitability influenced the balance of 1993's net changes. Table 8 -- Noninterest Income shows total other noninterest income increased $3.1 million over 1992. Trading account income increased $307 thousand, or 64% in 1993. Income from operating leases increased $1.2 million, or 142% in 1993. A gain of $902 thousand was recognized on the sale of Atlantic States Bankcard Association stock. Since this stock was held as a condition of membership, rather than for investment purposes, the gain was included in other noninterest income. With the exception of securities gains and losses and other noninterest income, the change from 1991 to 1992 was the result of similar factors discussed for 1993. In 1992, a net loss of $99 thousand was recorded, compared with a $4.4 million net gain in 1991. The discontinuance of option fee activity was somewhat offset by an increase in net gains on the sale of mortgage loans held for sale and contributed to a decline in other noninterest income from 1991 to 1992. The employment of strategies discussed in ASSET/LIABILITY MANAGEMENT was the principal factor resulting in the net gain on securities of $13.6 million, compared with a net loss of $99 thousand in 1992. TABLE 8 NONINTEREST INCOME (DOLLARS IN THOUSANDS)
% Change 1993 V. 1992 v. 1993 1992 1991 1992 1991 Service charges on deposit accounts......................................... $25,844 $24,595 $22,287 5 % 10% Insurance fees and commissions.............................................. 2,992 2,930 2,686 2 9 Trust fees.................................................................. 3,000 2,688 2,542 12 6 Bankcard related fees....................................................... 6,468 5,526 5,228 17 6 Other fees and commissions.................................................. 7,022 3,757 2,500 87 50 Total nondeposit fees and commissions..................................... 19,482 14,901 12,956 31 15 Securities gains (losses), net.............................................. 13,631 (99) 4,368 NM NM Other noninterest income.................................................... 7,327 4,183 4,525 75 (8) Total noninterest income................................................ $66,284 $43,580 $44,136 52 % (1)% NM-not meaningful
NONINTEREST EXPENSE Noninterest expense was $171.9 million in 1993, $156.8 million in 1992 and $132.5 million in 1991. As a result, the overhead costs of conducting business increased 10% over the prior year, while 1992 was 18% higher than 1991. The largest category of noninterest expense, personnel expense, increased 8% over 1992. Approximately 85%, or $5.2 million, of the increase occurred in the area of salaries. The acquisition of East Coast, combined with internal growth, resulted in a 15% increase in full-time equivalent employees during 1993 with approximately 2,549 employees at December 31, 1993. New endeavors undertaken during the year, namely, the internalization of investment services via the formation of Southern National Investment Services, Inc. and the formation of the residential mortgage division, as well as relocation bonuses attributable to the 22 relocation of personnel to Winston-Salem, contributed to the 1993 increase. The $13.0 million, or 20%, increase in personnel expense from 1991 to 1992 resulted primarily from (i) the purchase acquisition of Workmen's in March 1992, (ii) $3.3 million in nonrecurring charges related to the FedFirst acquisition, (iii) $1.1 million associated with a nonrecurring early retirement program and (iv) strengthening of key management and technical areas. Employee benefits increased $874 thousand in 1993, compared to 1992, while 1992 was $3.4 million higher than 1991. These increases are directly associated with the increase in salary expense. The discount rate, the rate of increase in future compensation and the long-term rate of return on assets used in determining the net periodic pension cost for 1994 will be reviewed by management for appropriateness. Reduction of the discount rate to 7% and the rate of increase in future compensation to 5% is not expected to have a material impact on net income. Occupancy and equipment expense was $3.2 million, or 15%, higher in 1993 than in the prior year, while 1992 was $2.3 million higher than 1991. The primary factor impacting the increase from 1992 to 1993 was a $1.4 million charge related to the retirement and/or useful life reduction of certain assets, primarily technology-related equipment, to facilitate future upgrading. General increases associated with growth and expansion, as well as the acquisition of Workmen's, accounted for the increase from 1991 to 1992. Federal deposit insurance expense increased $783 thousand, or 9%, in 1993, as compared to the prior year, and $1.9 million in 1992 over 1991. Internal growth of deposits was a principal factor contributing to the increases for both years. Additionally, the acquisition of Workmen's was a factor in the increase in 1992 , compared to 1991. Procedures are in place to pass portions of this expense to customers through service charges and interest rates paid on deposits. The FDIC has approved the implementation of a risk-related insurance system that will place each financial institution in one of nine risk categories based on their level of capital and supervisory rating. There is an eight basis point spread between the highest and lowest premium rates where well-capitalized institutions with the highest supervisory rating will pay 0.23% of deposits and under-capitalized institutions with the lowest supervisory rating will pay 0.31%. Southern National's weighted average rate during 1993 and 1992 was 0.23%. Management expects to maintain its well-capitalized position and high supervisory rating in 1994 following the consummation of the mergers with Regency, Home and The First. Expenses relating to foreclosed property were $5.6 million in 1993, compared to $7.7 million in 1992 and $6.3 million in 1991. The higher level of 1992 expense resulted from increased sales activity and aggressive efforts to accelerate disposal of foreclosed properties. As a result of the continuing improvement in asset quality, foreclosed property expense declined in 1993. The other noninterest expense category increased 17% over 1992, rising from $40.7 million in 1992 to $47.9 million in 1993. Contributing factors included: (i) the stocking of former FedFirst branches, acquired through merger, (ii) start-up costs associated with new divisions and (iii) costs related to relocation of SNBNC's administrative offices to Winston-Salem, North Carolina. TABLE 9 NONINTEREST EXPENSE (DOLLARS IN THOUSANDS)
% Change 1993 V. 1992 v. 1993 1992 1991 1992 1991 Salaries................................................................. $ 68,930 $ 63,735 $ 54,145 8% 18% Employee benefits........................................................ 16,346 15,472 12,048 6 28 Total personnel expense................................................ 85,276 79,207 66,193 8 20 Net occupancy expense.................................................... 10,846 9,966 9,021 9 10 Furniture and equipment expense.......................................... 13,052 10,761 9,391 21 15 Total occupancy and equipment expense.................................. 23,898 20,727 18,412 15 13 Federal deposit insurance expense........................................ 9,222 8,439 6,536 9 29 Foreclosed property expense.............................................. 5,617 7,694 6,344 (27) 21 Stationery and printing.................................................. 3,424 3,065 2,327 12 32 Advertising.............................................................. 4,190 3,963 3,370 6 18 Data processing expense.................................................. 2,883 3,108 3,011 (7) 3 Credit card expense...................................................... 5,200 4,453 4,326 17 3 Communications........................................................... 3,545 2,672 2,340 33 14 Postage and freight...................................................... 2,336 2,359 2,070 (1) 14 Charitable contributions................................................. 987 769 695 28 11 Loss on bulk sale of assets.............................................. 1,274 -- -- NM -- Other expense............................................................ 24,011 20,356 16,860 18 21 Total other noninterest expense........................................ 47,850 40,745 34,999 17 16 Total noninterest expense............................................ $171,863 $156,812 $132,484 10% 18%
23 PROVISION FOR INCOME TAXES The provision for income taxes was $37.9 million in 1993, compared with $32.7 million in 1992 and $16.1 million in 1991. Southern National's effective tax rates were 34.5%, 40.9% and 32.2% in 1993, 1992 and 1991 respectively. Total effective tax rates for 1993 and 1991 were less than statutory federal income tax rates primarily because of tax-exempt income derived from obligations of states and political subdivisions. The expense associated with the recapture of the tax bad debt reserves related to FedFirst was the principal factor resulting in the 1992 effective tax rates exceeding the statutory rates. In 1993, Southern National adopted SFAS No. 109, Accounting for Income Taxes, which supersedes Accounting Principles Board Opinion No. 11 and SFAS 96. SFAS 109 requires that the net deferred tax assets and liabilities on the statement of condition be recorded at current tax rates. The net change for the year in the deferred tax accounts on the statement of condition is recorded as deferred taxes in the provision for income taxes on the statement of income. See Note L -- Income Taxes for a detailed analysis of the components of income tax expense for the past three years. ASSET/LIABILITY MANAGEMENT Asset/liability management activities are designed to assure liquidity and, through the management of Southern National's interest sensitivity position, to achieve relatively stable net interest margins. It is the responsibility of the ALCO to set policy guidelines and to establish long-term strategies with respect to interest rate exposure and liquidity. The ALCO, which is composed primarily of executive management, 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 balance sheet management strategies that are intended to assure that any potential impact on earnings and liquidity is within conservative standards. Liquidity represents a bank's continuing ability to meet its funding needs, primarily deposit withdrawals, timely repayment of borrowings and other liabilities, and draw-downs on 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 investment securities, repayment of loans and growth in core deposits. Federal funds purchased, repurchase agreements and dollar rolls supplement the traditional sources. As can be seen from the CONSOLIDATED STATEMENTS OF CASH FLOWS, operating activities provided $24.4 million, $79.9 million and $55.2 million in cash in 1993, 1992 and 1991, respectively. Deposits were a key funding source in all three years. In addition, short-term borrowings, principally federal funds purchased, repurchase agreements and dollar rolls, were important in providing funding in 1993 and 1992. The preferred stock issue in early 1992 raised $74.1 million in cash. Net increases in both the securities portfolio and the loan and lease portfolio accounted for the majority of the uses of cash in all three years. No trends in the sources or uses of cash by Southern National are expected to have a material impact on Southern National's liquidity position. 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 Interest Sensitivity Simulation (Simulation) Analysis to measure the interest rate sensitivity of earnings. Discussion of this method is covered in INFLATION AND CHANGING INTEREST RATES. Balance sheet repositioning is the most efficient and cost effective means of managing rate risk and is accomplished by 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 rate risk on the balance sheet. These portfolios are analyzed for proper fixed rate and variable rate mixes given a specific interest rate outlook. In 1993, the total proportion of floating rate loans increased. At year-end, loans maturing or repricing in 30 days or less comprised 36% of all loans outstanding. During 1993, management utilized strategies to emphasize short-term liabilities to increase repricing speed on that side of the balance sheet. Southern National used dealer repurchase agreements (repos), in which securities comprising a portion of the securities portfolio are transferred to approved correspondent banks and brokers for short-term funding strategies. Management continued to utilize mortgage-backed securities dollar rolls. The use of dealer repos and dollar rolls complemented overall asset/liability strategy since most of these agreements had overnight to monthly repricing that helped to sensitize the liability side of the balance sheet in the falling interest rate environment prevailing during 1993. Interest rate volatility often increases to the point that balance sheet repositioning through the use of account repricing cannot occur rapidly enough to avoid adverse net income effects. At those times, and when customer demand and competition are such that account repricing is not sufficient, off-balance sheet or synthetic hedges are utilized. During 1993, management used interest rate swaps, caps and floors to supplement balance sheet repositioning. The counterparties to these transactions were large commercial banks and investment banks, all of which were approved by the ALCO. Semi-annually, the counterparties are reviewed for creditworthiness by Southern National's credit policy group. 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 even one floating rate to another floating rate. The underlying principal positions are not affected. Swap terms generally range from one year to seven years 24 depending on the need. At year-end 1993, interest rate swaps with a total notional value of $213 million, with terms ranging up to seven years, were outstanding. Management feels that interest rates may be at their low end and that earnings may be at risk if, in a rising rate environment, the prime rate does not increase at the same rate that funding costs rise. To protect from this possibility management entered into $300 million of two-year interest rate corridors. The transaction is based on the spread between the prime rate and the federal funds rate. A corridor is the simultaneous purchase of a cap on one rate, the federal funds rate, and the sale of a cap on a different interest rate, the prime rate. If the federal funds rate rises quicker than the prime rate, the proceeds from the off-balance sheet financial instruments will offset any reduction in income resulting from a higher relative funding cost. As a result of Southern National's on-balance sheet repositioning and off-balance sheet hedging, the negative impact of a 100 basis point decline over 12 months in interest rates is projected to be only .2% of net income. Stated in terms of earnings per share, a decline of 100 basis points in interest rates is projected to reduce earnings by only one-half of one cent per share by the end of 1994. Conversely, if interest rates were to rise 200 basis points, given Southern National's balance sheet position at year-end, the impact on net income would be a decrease of .1%, compared to a flat interest rate scenario. Management expects that a firming economic environment and restrictive monetary policy by the Federal Reserve Board (FRB) at the beginning of 1994 will justify the current positioning of Southern National's interest rate sensitivity. Events will be monitored during the course of the year to determine appropriate adjustments to balance sheet and off-balance sheet hedges. 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 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 earnings of Southern National. This method is subject to the assumptions that underlie the process, but it gives a better picture of the true earnings outlook as a whole. In reviewing Table 10 -- Interest Sensitivity Simulation Analysis, it is important to note that such analysis represents the sensitivity position as of a point in time and can be changed significantly by management within a short time period. Care should also be taken in noting that 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 income, given a change in interest rates, various interest TABLE 10 INTEREST SENSITIVITY SIMULATION ANALYSIS
Interest Rate Reference Rate Annualized Scenario Money Percent Instantaneous Market Change in Parallel Prime Account Net Income +4.00% 10.00% 6.08% -21.8% +3.00 9.00 5.08 -16.3 +2.00 8.00 4.08 -10.9 +1.00 7.00 3.08 -5.4 No change 6.00 2.08 0 -1.00 5.00 1.08 5.4 -2.00 4.00 0.08 10.4 -3.00 3.00 0.00 7.3 -4.00 2.00 0.00 -4.7 Gradual Historical +2.00% 8.00 2.74 -0.1 -1.00 5.00 1.75 -0.2
rate scenarios are applied to the projected balances, maturities and repricing opportunities. The resulting change in net income reflects the level of sensitivity that net income has in relation to changing interest rates. The Instantaneous Parallel rate shocks assume that all interest-bearing assets and liabilities move simultaneously and instantaneously in magnitude and direction. The Gradual Historical rate shocks assume that individual interest-bearing assets and liabilities move gradually over a twelve-month time period in correlation to its historical relationship with the assumed change in the Prime rate. For example, Southern National's Money Market Account rate has changed only one-third as much as Prime rate. 25 A comprehensive policy has been developed for setting parameters for the management of interest rate risk as defined by the results of the model's output. Management has set policy guidelines that interest sensitive assets should remain between 150% and 50% of interest sensitive liabilities for all periods. Management has also stated that earnings should not fluctuate more than 5% up or down given each 1% change in rates over a 12-month period. To control that variance, and to manage the balance sheet consistent with any projected interest rate environment, management uses a number of natural or on-balance sheet strategies as well as off-balance sheet strategies as discussed in ASSET/LIABILITY MANAGEMENT. CAPITAL ADEQUACY AND RESOURCES The maintenance of appropriate levels of capital is a management priority. Overall capital adequacy is monitored on an on-going 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 at December 31, 1993 was $503.1 million versus $431.9 million a year earlier, an increase of $71.3 million or 16%. As a percent of year-end assets, total shareholders' equity was 8.5 % at December 31, 1993 versus 8.6 % a year earlier. Changes in shareholders' equity for 1993 and each of the preceding two years are presented in Table 12. Growth in year-end equity per common share for the most recent three years is also shown in this table. Southern National's book value per common share at December 31, 1993 was $13.47, an increase of 12.7% from $11.95 a year earlier. TABLE 11 CAPITAL -- COMPONENTS AND RATIOS DECEMBER 31 (DOLLARS IN THOUSANDS)
1993 1992 Tier 1 capital........................ $492,752 $419,528 Tier 2 capital........................ 39,678 39,504 Total capital......................... $532,430 $459,032 Risk-based capital ratios: Tier 1 capital...................... 14.43% 14.77% Total capital....................... 15.56 16.16 Tier 1 leverage ratio................. 8.6 8.5
Southern National's internal capital formation rate (net income less dividends as a percent of average equity) was 10.4% for 1993 compared to 7.3% in 1992, when merger expenses and special charges reduced net income. Average shareholders' equity as a percent of average assets was 8.7%, 8.6% and 6.9% in 1993, 1992 and 1991, respectively. Southern National's long-term debt to long-term debt plus equity at December 31, 1993 was 15.5%, compared with 7.4% and 8.1% at December 31, 1992 and 1991, respectively. Average long-term debt increased 136% from $26.4 million in 1992 to $62.4 million in 1993. FHLB advances were utilized in 1993 to take advantage of low interest rates, which are expected to rise in 1994. Table 11 presents Southern National's Tier 1 and total risk-based capital and Tier 1 leverage ratios at year-end 1993 and 1992. The capital ratios measure the capital to risk-adjusted assets and off-balance sheet items as defined by FRB guidelines. An 8% minimum of total capital to risk-adjusted assets is required. One-half of the 8% minimum must consist of tangible common shareholders' equity. At December 31, 1993, Southern National's Tier 1 capital ratio was 14.43% and its total capital ratio was 15.56%, both of which well exceeded regulatory criteria. The leverage ratio, established by the FRB, measures Tier 1 capital to average total assets less goodwill and must be maintained in conjunction with the risk-based capital standards. At December 31, 1993, Southern National's leverage ratio was 8.6%, well above the 3% minimum required. TABLE 12 SELECTED EQUITY DATA AND RATIOS
1993 1992 1991 Book value per common share at year-end....................... $13.47 $11.95 $10.56 Book value per common share percent increase over prior year-end....................... 12.7 % 13.2 % 16.6 % Common dividends per share as a percent of net income available per common share............... 29.63 34.97 38.02 Equity at year-end to year-end: Total assets................... 8.5 8.6 7.1 Net loans and leases........... 14.7 14.6 11.4 Deposits....................... 11.1 10.5 8.3 Equity and long-term debt...... 84.5 93.0 91.9
STOCK AND DIVIDENDS A strong capital base is vital to any banking organization as capital provides a solid foundation for anticipated future asset growth and promotes investor and depositor confidence. Capital management is a continuous process at Southern National and ensures that capital is provided for current needs and anticipated growth. At the end of 1993, Southern National had 31.8 million shares of common stock issued and outstanding, compared to 29.9 million shares outstanding at the previous year-end. The principal reason for the increase in common shares was the issuance of 1.2 million shares in connection with the East Coast conversion/merger in October 1993. Southern National's common shares 26 were held by 19,938 owners of record at February 17, 1994. These common shareholders are located throughout the United States and in several foreign countries. At December 31, 1993, the total market capitalization of Southern National's common stock was approximately $629.0 million. Southern National's ability to pay dividends is primarily dependent on its earnings from operations, the adequacy of its capital and the availability of liquid assets for distribution. The Parent Company's ability to replenish its liquid assets available for distribution is primarily dependent on the ability of the banking subsidiaries (SNBNC, SNBSC and SSB) to pay dividends to the Parent Company. Historically, Southern National's cash dividends have been approximately one-third of earnings resulting from the need to retain sufficient capital to support future growth and to meet regulatory requirements while providing a competitive return on investment to its shareholders. Southern National's common dividend payout ratio, computed by dividing dividends per common share by earnings available per common share, was 29.6% in 1993, compared to 35.0% in 1992 and 38.0% in 1991. Southern National's quarterly cash dividend per common share was increased twice during 1993, rising from $.13 per common share to $.17. This marked the 21st consecutive year that cash dividends have been increased. A discussion of dividend restrictions is included in Note O -- Regulatory Requirements and Other Restrictions. Southern National's common stock is traded on the New York Stock Exchange (NYSE) under the symbol SNB. The accompanying table, Quarterly Common Stock Summary, sets forth the high, low and last sales prices for the common stock on the NYSE as reported on the NYSE Composite Tape and the cash dividends paid per share of common stock for each of the last eight quarters. At December 31, 1993, Southern National had 770,000 shares of 6.75% Cumulative Convertible Preferred Stock, Series A issued and outstanding in the form of 3,080,000 depositary shares, at a stated value of $25 per depositary share. Each depositary share represents a one-quarter interest in a preferred share. The depositary shares are convertible at the option of the holder into 1.4767 shares of common stock. Accordingly, 4,548,236 shares of common stock have been reserved for conversion of the preferred stock. The preferred stock will be redeemable at the option of Southern National, in whole or in part, or from time to time, on or after March 1, 1996, at $26.0125 per depositary share through February 28, 1997, with prices decreasing annually thereafter to $25 per depositary share on and after March 1, 2002, plus in each case dividends accrued and accumulated but unpaid to the redemption date. The depositary shares have a liquidation value of $25 per share, or $77,000,000 in the aggregate, plus accrued but unpaid dividends to, but excluding the date of final distribution. TABLE 13 QUARTERLY COMMON STOCK SUMMARY [CAPTION]
1993 1992 Quarter SALES PRICES DIVIDENDS Sales Prices Dividends Ended HIGH LOW LAST PAID High Low Last Paid March 31...................................... $22.50 $19.63 $21.88 $ .15 $14.63 $13.00 $14.25 $ .12 June 30....................................... 23.38 19.25 21.88 .15 18.13 14.00 16.25 .12 September 30.................................. 23.38 19.75 20.50 .17 18.25 15.25 17.00 .13 December 31................................... 21.88 18.88 19.75 .17 19.75 16.13 19.63 .13 Year.................................... 23.38 18.88 19.75 .64 19.75 13.00 19.63 .50
FOURTH QUARTER RESULTS Net income for the fourth quarter of 1993 was $18.6 million, an increase of 162% over the earnings of $7.1 million for the same period in 1992. On a per share basis, fully-diluted net income was $.51 for the three months ended December 31, 1993, compared to $.20 a year earlier. On January 29, 1993, Southern National acquired FedFirst in a transaction accounted for as a pooling-of-interests. During the three month period ended December 31, 1992, FedFirst recorded material, nonrecurring charges which totaled $7.8 million. Excluding the nonrecurring items, earnings per share dilution in 1992 was approximately $.12 per share. A 27% decline in the provision for income taxes to $8.8 million in the fourth quarter of 1993, compared with $12.1 in 1992, also contributed to the improvement in earnings in 1993 over 1992. The purchase acquisition of East Coast in October of 1993 was a factor contributing to increases in all fourth quarter 1993 categories compared to the same period in 1992. In the fourth quarter, net interest income FTE was 8.5% higher than for the same period in 1992. The 16% growth in average earning assets accounted for higher levels of net interest income FTE. Net yield FTE actually declined from 4.96% to 4.64%. Annualized return on average common equity was 16.62% for the fourth quarter of 1993, compared with 6.49% in 1992. Return on average assets was 1.30% in 1993 versus .58% in 1992. Noninterest income was $14.4 million and $11.2 million for the fourth quarters of 1993 and 1992, respectively. The following factors contributed to the net increase in 1993: (i) SNIS' income in 1993 was $1.1 million, compared to $184 thousand in 1992, (ii) trust revenues increased from $702 thousand in 1992 to $950 thousand in 1993, (iii) service charges on deposits rose from $6.4 million in 1992 to $6.7 million in 1993, (iv) net gains on the sale of securities were $71 thousand in 1993 versus a net loss of $167 27 thousand in 1992 and (v) trading account income rose from $78 thousand in 1992 to $164 thousand in 1993. Noninterest expense increased only $1.3 million, or 3%, compared to the same period last year. Approximately $3.7 million in nonrecurring adjustments recorded by FedFirst in connection with the merger elevated noninterest expense in the fourth quarter of 1992. The accompanying table, Quarterly Financial Summary -- Unaudited, presents condensed information relating to eight quarters in the period ended December 31, 1993. TABLE 14 QUARTERLY FINANCIAL SUMMARY -- UNAUDITED (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
1993 1992 FOURTH THIRD SECOND FIRST Fourth Third Second QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter CONSOLIDATED SUMMARY OF OPERATIONS Net interest income FTE......... $ 62,465 $ 58,506 $ 57,964 $ 56,315 $ 57,572 $ 56,280 $ 54,431 FTE adjustment................ 2,767 2,797 2,546 2,485 2,392 2,059 2,045 Provision for loan and lease losses.................. 1,299 865 1,826 1,584 3,125 3,741 3,716 Noninterest income.............. 14,408 13,422 13,371 25,083 11,170 11,177 10,628 Noninterest expense............. 45,341 41,425 40,554 44,543 44,004 38,010 38,860 Provision for income taxes...... 8,836 8,997 8,546 11,559 12,100 8,215 6,928 Income before cumulative effect........................ 18,630 17,844 17,863 21,227 7,121 15,432 13,510 Less: Cumulative effect*........ -- -- -- 3,571 -- -- -- Net income.................... $ 18,630 $ 17,844 $ 17,863 $ 17,656 $ 7,121 $ 15,432 $ 13,510 Fully-diluted income per share before cumulative effect...... $ .51 $ .51 $ .51 $ .60 $ .20 $ .44 $ .39 Less: Cumulative effect*........ -- -- -- .10 -- -- -- Net income per share.......... $ .51 $ .51 $ .51 $ .50 $ .20 $ .44 $ .39 SELECTED AVERAGE BALANCES Assets.......................... $$5,754,123 $5,306,977 $5,135,867 $5,047,854 $4,949,342 $4,837,249 $4,748,401 Securities...................... 1,905,195 1,768,091 1,683,824 1,624,411 1,582,743 1,551,848 1,536,247 Loans and leases, net........... 3,410,422 3,182,819 3,102,059 3,020,820 2,997,763 2,937,838 2,857,561 Total earning assets............ 5,390,597 4,992,032 4,830,229 4,742,348 4,640,759 4,545,356 4,467,727 Deposits........................ 4,502,706 4,231,546 4,199,158 4,145,857 4,047,890 3,963,810 3,841,159 Short-term borrowings........... 601,738 504,841 373,792 365,750 397,363 386,742 426,454 Long-term debt.................. 88,554 58,285 59,417 42,812 28,901 23,845 26,657 Total interest-bearing liabilities................... 4,600,377 4,270,617 4,144,744 4,102,948 4,017,226 3,954,493 3,892,605 Shareholders' equity............ $ 491,378 $ 461,323 $ 448,254 $ 437,246 $ 432,762 $ 421,417 $ 412,941 First Quarter CONSOLIDATED SUMMARY OF OPERATIONS Net interest income FTE......... $ 47,935 FTE adjustment................ 1,753 Provision for loan and lease losses.................. 4,193 Noninterest income.............. 10,605 Noninterest expense............. 35,938 Provision for income taxes...... 5,480 Income before cumulative effect........................ 11,176 Less: Cumulative effect*........ -- Net income.................... $ 11,176 Fully-diluted income per share before cumulative effect...... $ .36 Less: Cumulative effect*........ -- Net income per share.......... $ .36 SELECTED AVERAGE BALANCES Assets.......................... $4,328,589 Securities...................... 1,263,832 Loans and leases, net........... 2,647,180 Total earning assets............ 4,044,405 Deposits........................ 3,557,439 Short-term borrowings........... 362,324 Long-term debt.................. 26,229 Total interest-bearing liabilities................... 3,566,807 Shareholders' equity............ $ 342,766
* Cumulative effect of changes in accounting principle, net of income taxes. 28 SIX-YEAR FINANCIAL SUMMARY AND SELECTED RATIOS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Five-Year Compound 1993 1992 1991 1990 1989 1988 Growth Rate SUMMARY OF OPERATIONS Interest income...................... $ 371,627 $ 371,002 $ 353,730 $ 353,363 $ 329,011 $ 273,532 6.3% Interest expense..................... 146,972 163,033 195,847 215,870 206,026 159,575 (1.6) Net interest income.................. 224,655 207,969 157,883 137,493 122,985 113,957 14.5 Provision for loan and lease losses............................. 5,574 14,775 19,639 21,749 10,165 8,201 (7.4) Net interest income after provision for loan and lease losses.......... 219,081 193,194 138,244 115,744 112,820 105,756 15.7 Noninterest income................... 66,284 43,580 44,136 38,658 36,262 31,383 16.1 Noninterest expense.................. 171,863 156,812 132,484 118,123 106,644 97,135 12.1 Income before taxes.................. 113,502 79,962 49,896 36,279 42,438 40,004 23.2 Provision for income taxes........... 37,938 32,723 16,077 10,474 13,332 11,749 26.4 Income before cumulative effect...... 75,564 47,239 33,819 25,805 29,106 28,255 21.7 Less: cumulative effect............ 3,571 -- -- -- -- -- NM Net income........................... $ 71,993 $ 47,239 $ 33,819 $ 25,805 $ 29,106 $ 28,255 20.6 EARNINGS PER SHARE Average shares outstanding (000's) Primary............................ 30,958 29,888 27,952 27,831 27,759 27,706 Fully-diluted...................... 35,512 34,091 27,983 27,831 27,759 27,706 Primary earnings Income before cumulative effect.... $ 2.28 $ 1.43 $ 1.21 $ .93 $ 1.05 $ 1.02 17.5 Less: cumulative effect............ .12 -- -- -- -- -- NM Net income....................... $ 2.16 $ 1.43 $ 1.21 $ 0.93 $ 1.05 $ 1.02 16.2 Fully-diluted Income before cumulative effect.... $ 2.13 $ 1.39 $ 1.21 $ .93 $ 1.05 $ 1.02 15.9 Less: cumulative effect............ .10 -- -- -- -- -- NM Net income....................... $ 2.03 $ 1.39 $ 1.21 $ .93 $ 1.05 $ 1.02 14.8 Cash dividends....................... $ .64 $ .50 $ .46 $ .42 $ .39 $ .36 12.2 Shareholders' equity................. 13.47 11.95 10.56 9.06 8.48 7.76 11.7 AVERAGE BALANCE SHEETS Cash and due from depository institutions....................... $ 190,320 $ 173,048 $ 182,140 $ 187,624 $ 186,532 $ 175,685 1.6 Securities........................... 1,747,184 1,480,868 975,570 922,311 808,847 607,709 23.5 Loans and leases*.................... 3,165,102 2,825,924 2,511,393 2,351,980 2,221,249 2,074,893 8.8 Other assets......................... 210,549 233,440 203,910 154,133 137,543 124,538 11.1 Total assets..................... $5,313,155 $4,713,280 $3,873,013 $3,616,048 $3,354,171 $2,982,825 12.2 Deposits............................. $4,270,689 $3,852,207 $3,274,102 $2,946,397 $2,777,781 $2,553,407 10.8 Other liabilities.................... 569,747 441,344 312,508 402,020 321,571 195,708 23.8 Capital debt......................... 12,992 15,856 18,015 21,033 29,500 30,150 (15.5) Common shareholders' equity.......... 385,584 338,068 268,388 246,598 225,319 203,560 13.6 Preferred shareholders' equity....... 74,143 65,805 -- -- -- -- NM Total liabilities and shareholders' equity.......... $5,313,155 $4,713,280 $3,873,013 $3,616,048 $3,354,171 $2,982,825 12.2 SELECTED PERFORMANCE RATIOS Rate of return (annualized) on: Average total assets............... 1.35% 1.00% .87% .71% .87% .95% Average common shareholders' equity........................... 17.32 12.61 12.60 10.46 12.92 13.88 Dividend payout...................... 29.63 34.97 38.02 45.16 36.86 35.29 Average equity to average assets..... 8.65 8.57 6.93 6.82 6.72 6.82
* Loans and leases are net of unearned and allowance for losses. NM -- not meaningful 29 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of Southern National Corporation and Subsidiaries (Southern National) is responsible for the preparation of the financial statements, related financial data and other information in this Annual Report. 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 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 & Co., independent public accountants, who render an independent professional opinion on management's financial statements. Their appointment was recommended by the Audit Committee and approved by the Board of Directors. 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 which includes 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.
(Signature of L. Glenn Orr, Jr.) (Signature of John R. Spruill) (Signature of Sherry A. Kellett) L. Glenn Orr, Jr. John R. Spruill Sherry A. Kellett Chairman, President Chief Financial Officer Controller and Chief Executive Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS OF SOUTHERN NATIONAL CORPORATION: We have audited the accompanying consolidated statements of condition of SOUTHERN NATIONAL CORPORATION (a North Carolina corporation) and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southern National Corporation and Subsidiaries as of December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As explained in Notes L and M to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes and postretirement benefits other than pensions. (Signature of Arthur Andersen & Co.) ARTHUR ANDERSEN & CO. Charlotte, North Carolina, January 14, 1994. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS OF SOUTHERN NATIONAL CORPORATION: Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index of financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. (Signature of Arthur Andersen & Co.) Charlotte, North Carolina, January 14, 1994. 30 CONSOLIDATED STATEMENTS OF CONDITION SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES December 31, 1993 and 1992 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1993 1992 ASSETS Cash and due from depository institutions.......................................................... $ 232,360 $ 209,921 Interest-bearing bank balances..................................................................... 8,845 51,123 Federal funds sold and securities purchased under resale agreements or similar arrangements........ 9,955 30,525 Securities held for sale (market value: $803,162 in 1993 and $282,578 in 1992)..................... 794,473 269,347 Investment securities (market value: $1,207,841 in 1993 and $1,344,736 in 1992).................... 1,184,401 1,308,357 Loans held for sale................................................................................ 49,692 1,973 Loans and leases, net of unearned income of $33,949 in 1993 and $22,924 in 1992.................... 3,465,221 3,002,101 Less -- allowance for losses..................................................................... (39,800) (37,877) Net loans and leases........................................................................... 3,425,421 2,964,224 Premises and equipment, net........................................................................ 107,322 86,004 Other assets....................................................................................... 85,925 82,487 Total assets................................................................................... $5,898,394 $5,003,961 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing.............................................................................. $ 616,189 $ 492,186 Interest-bearing................................................................................. 3,920,809 3,639,939 Total deposits................................................................................. 4,536,998 4,132,125 Short-term borrowings.............................................................................. 703,614 364,093 Accounts payable and accrued liabilities........................................................... 62,532 41,355 Long-term debt..................................................................................... 92,101 34,499 Total liabilities.............................................................................. 5,395,245 4,572,072 Shareholders' equity: Preferred stock, $5 par, 5,000,000 shares authorized, 770,000 issued and outstanding in 1993 and 1992.................................................................................. 3,850 3,850 Common stock, $5 par, 120,000,000 shares authorized, 31,845,582 issued and outstanding in 1993 and 29,926,268 in 1992.......................................................................... 159,228 149,631 Paid-in capital.................................................................................. 137,804 120,973 Retained earnings................................................................................ 206,628 158,755 Unearned compensation............................................................................ (4,361) (1,320) Total shareholders' equity..................................................................... 503,149 431,889 Total liabilities and shareholders' equity..................................................... $5,898,394 $5,003,961
See notes to consolidated financial statements. 31 CONSOLIDATED STATEMENTS OF INCOME SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES For the Years Ended December 31, 1993, 1992 and 1991 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1993 1992 1991 INTEREST INCOME Interest and fees on loans and leases........................................... $263,466 $262,421 $269,425 Interest and dividends on securities............................................ 106,938 106,099 76,096 Interest on temporary investments............................................... 1,223 2,482 8,209 Total interest income....................................................... 371,627 371,002 353,730 INTEREST EXPENSE Interest on deposits............................................................ 129,013 146,696 177,776 Interest on short-term borrowings............................................... 13,616 13,932 15,618 Interest on long-term debt...................................................... 4,343 2,405 2,453 Total interest expense...................................................... 146,972 163,033 195,847 NET INTEREST INCOME............................................................... 224,655 207,969 157,883 Provision for loan and lease losses............................................. 5,574 14,775 19,639 NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES..................... 219,081 193,194 138,244 NONINTEREST INCOME Service charges on deposit accounts............................................. 25,844 24,595 22,287 Nondeposit fees and commissions................................................. 19,482 14,901 12,956 Securities gains, (losses) net.................................................. 13,631 (99) 4,368 Other income.................................................................... 7,327 4,183 4,525 Total noninterest income.................................................... 66,284 43,580 44,136 NONINTEREST EXPENSE Personnel expense............................................................... 85,276 79,207 66,193 Occupancy and equipment expense................................................. 23,898 20,727 18,412 Federal deposit insurance expense............................................... 9,222 8,439 6,536 Foreclosed property expense..................................................... 5,617 7,694 6,344 Other expense................................................................... 47,850 40,745 34,999 Total noninterest expense................................................... 171,863 156,812 132,484 EARNINGS Income before income taxes...................................................... 113,502 79,962 49,896 Provision for income taxes...................................................... 37,938 32,723 16,077 Income before cumulative effect of changes in accounting principles............. 75,564 47,239 33,819 Less: cumulative effect of changes in accounting principles, net of income taxes................................................................ 3,571 -- -- Net income...................................................................... 71,993 47,239 33,819 Preferred dividend requirements................................................. 5,196 4,605 -- Income applicable to common shares.............................................. $ 66,797 $ 42,634 $ 33,819 PER COMMON SHARE Net income: Primary Income before cumulative effect............................................. $ 2.28 $ 1.43 $ 1.21 Less: cumulative effect..................................................... .12 -- -- Net income............................................................... $ 2.16 $ 1.43 $ 1.21 Fully-diluted Income before cumulative effect............................................. $ 2.13 $ 1.39 $ 1.21 Less: cumulative effect..................................................... .10 -- -- Net income............................................................... $ 2.03 $ 1.39 $ 1.21 Cash dividends paid per common share............................................ $ .64 $ .50 $ .46
See notes to consolidated financial statements. 32 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES For the Years Ended December 31, 1993, 1992 and 1991 (DOLLARS IN THOUSANDS)
Retained Shares of Earnings Common Preferred Common Paid-In and Stock Stock Stock Capital Other* Total BALANCE, DECEMBER 31, 1990......................... 27,819,507 $ -- $139,097 $ 29,003 $ 83,900 $252,000 ADD (DEDUCT) Net income....................................... -- -- -- -- 33,819 33,819 Common stock issued pursuant to stock options.... 7,031 -- 35 (7) -- 28 Change in valuation allowance for net unrealized loss on securities............................. -- -- -- -- 140 140 Stock conversion of merged company............... -- -- -- -- 20,695 20,695 Unamortized ESOP compensation and unearned compensation................................... -- -- -- -- (2,533) (2,533) Cash dividends paid by Southern National......... -- -- -- -- (10,427) (10,427) BALANCE, DECEMBER 31, 1991......................... 27,826,538 -- 139,132 28,996 125,594 293,722 ADD (DEDUCT) Net income....................................... -- -- -- -- 47,239 47,239 Common stock issued pursuant to stock options.... 104,137 -- 520 169 (9) 680 Preferred stock issued........................... -- 3,850 -- 70,292 -- 74,142 Change in valuation allowance for net unrealized loss on securities............................. -- -- -- -- 37 37 Acquisition of Workmen's Bancorp, Inc. accounted for under the purchase method.................. 2,466,798 -- 12,335 21,516 -- 33,851 Amortization of ESOP compensation and unearned compensation................................... -- -- -- -- 1,000 1,000 Common stock acquired and retired................ (213,332) -- (1,067) -- (778) (1,845) Reconciliation of fiscal year of merged company to calendar year............................... (257,873) -- (1,289) -- 1,370 81 Tax benefit from vesting of certain benefit plans accelerated as a result of the change in control of FedFirst............................ -- -- -- -- 905 905 Cash dividends paid by merged company............ -- -- -- -- (1,012) (1,012) Cash dividends paid/accrued by Southern National: Common stock................................... -- -- -- -- (12,306) (12,306) Preferred stock................................ -- -- -- -- (4,605) (4,605) BALANCE, DECEMBER 31, 1992......................... 29,926,268 3,850 149,631 120,973 157,435 431,889 ADD (DEDUCT) Net income....................................... -- -- -- -- 71,993 71,993 Common stock issued pursuant to stock options.... 504,369 -- 2,523 (1,019) -- 1,504 Acquisition of East Coast Savings Bank, SSB accounted for under the purchase method........ 1,172,475 -- 5,862 13,970 -- 19,832 Common stock issued pursuant to restricted stock grants................................... 242,470 -- 1,212 3,880 (5,092) -- Amortization of unearned compensation............ -- -- -- -- 2,050 2,050 Cash dividends paid/accrued by Southern National: Common stock................................... -- -- -- -- (18,923) (18,923) Preferred stock................................ -- -- -- -- (5,196) (5,196) BALANCE, DECEMBER 31, 1993......................... 31,845,582 $ 3,850 $159,228 $137,804 $202,267 $503,149 * Other includes unrealized losses on equity securities, unamortized ESOP compensation and unearned compensation.
See notes to consolidated financial statements. 33 CONSOLIDATED STATEMENTS OF CASH FLOWS SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES For the Years Ended December 31, 1993, 1992 and 1991 (DOLLARS IN THOUSANDS)
1993 1992 1991 CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................................... $ 71,993 $ 47,239 $ 33,819 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses................................................ 5,574 14,775 19,639 Depreciation of premises and equipment............................................. 9,484 7,495 6,437 Amortization of intangibles........................................................ 1,680 1,612 929 Amortization of unearned stock compensation........................................ 730 -- -- Discount accretion and premium amortization on securities.......................... 4,295 1,368 727 Gain on sales of securities, net................................................... (14,422) (311) (4,608) Gain on sales of loans, net........................................................ (314) (1,738) (450) Net loss on disposals of premises and equipment.................................... 70 44 77 Net loss on foreclosed property.................................................... 4,684 6,541 4,724 Net proceeds from sales of trading account securities.............................. 791 500 239 Proceeds from sales of loans held for sale......................................... 201,840 200,264 46,970 Origination of loans held for sale, net of principal collected..................... (245,370) (192,189) (50,876) (Increase) decrease in: Accrued interest receivable...................................................... (3,746) (3,881) 2,919 Other assets..................................................................... (6,960) 3,784 (5,870) (Decrease) increase in: Accrued interest payable......................................................... (914) (5,725) (5,453) Accounts payable and other accrued liabilities................................... (5,041) 126 5,963 Net cash provided by operating activities..................................... 24,374 79,904 55,186 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of held for sale securities...................................... 280,460 10,456 468,755 Proceeds from sales of held to maturity securities................................... 870 25,187 12,618 Maturities of held to maturity securities............................................ 400,197 397,444 111,808 Purchase of held to maturity securities.............................................. (1,046,265) (811,007) (779,983) Leases made to customers............................................................. (43,034) (41,589) (28,089) Principal collected on leases........................................................ 34,750 33,849 28,614 Loan originations, net of principal collected........................................ (249,446) (183,336) (162,910) Purchase of loans.................................................................... -- -- (51,479) Net cash acquired in transactions accounted for under the purchase method of accounting......................................................................... 32,221 36,169 220,464 Purchases of premises and equipment.................................................. (31,878) (16,031) (9,610) Proceeds from disposals of premises and equipment.................................... 1,257 3,300 743 Proceeds from sales of foreclosed property........................................... 9,269 9,689 13,824 Net cash used in investing activities......................................... (611,599) (535,869) (175,245) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits............................................................. 198,172 301,653 232,161 Net increase (decrease) in short-term borrowings..................................... 339,521 149,875 (78,888) Proceeds from long-term debt......................................................... 62,300 13,302 -- Repayment of long-term debt.......................................................... (30,562) (4,319) (5,176) Net proceeds from common stock issued................................................ 1,504 680 19,843 Proceeds from sale of preferred stock................................................ -- 74,142 -- Common stock purchased and retired................................................... -- (1,845) -- Cash dividends paid on common and preferred stock.................................... (24,119) (17,273) (10,427) Net cash provided by financing activities..................................... 546,816 516,215 157,513 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................... (40,409) 60,250 37,454 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................................... 291,569 231,319 212,862 CASH AND CASH EQUIVALENTS AT END OF YEAR............................................... $ 251,160 $ 291,569 $ 250,316
See notes to consolidated financial statements. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES For the Years Ended December 31, 1993, 1992 and 1991 Southern National Corporation (Parent Company) is a multi-bank holding company organized under the laws of North Carolina and registered with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. Southern National Bank of North Carolina (SNBNC), Southern National Bank of South Carolina (SNBSC) (the Banks) and SNB Savings Bank, Inc., SSB (SSB) comprise the Parent Company's principal subsidiaries. The accounting and reporting policies of Southern National Corporation and Subsidiaries (Southern National or SNC) are in accordance with generally accepted accounting principles and conform to general practices within the banking industry. The following is a summary of the more significant policies. NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of Southern National include the accounts of the Parent Company and its subsidiaries, all of which are wholly-owned. In consolidation, all significant intercompany accounts and transactions have been eliminated. Prior period financial statements have been restated to include the accounts of companies acquired in transactions accounted for as poolings-of-interests. Results of operations of companies acquired in transactions accounted for as purchases are included from the dates of acquisition. Certain amounts for prior years have been reclassified to conform with statement presentations for 1993. The reclassifications have no effect on shareholders' equity or net income as previously reported. SECURITIES Securities classified as held for investment are those securities that management intends to hold to maturity, subject to continued creditworthiness of the issuer, and that Southern National has the ability to hold on a long-term basis. Accordingly, these securities are stated at cost, adjusted for amortization of premium and accretion of discount, computed using the level-yield method. Securities classified as held for sale are intended to be held for indefinite periods of time and include those securities that management may employ as part of its asset/liability strategy or that may be sold in response to changes in interest rates, prepayments, regulatory capital requirements or similar factors. These securities are carried at the lower of amortized cost or market value. Trading account securities, of which none were held on December 31, 1993 and 1992, are selected according to fundamental and technical analyses that identify potential market movements. Trading account securities are positioned to take advantage of such movements and are stated at market value. Market adjustments, fees, gains or losses and income earned on trading account securities are included in noninterest income. Gains or losses from the sale of securities are determined from specific cost-basis identification and are included in noninterest income. On January 1, 1994 Southern National adopted Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. These investments are to be classified in three categories: held to maturity, trading and available for sale. At January 1, 1994, $794.5 million of securities, with a market value of approximately $803.2 million, were classified as available for sale. Accordingly, shareholders' equity increased approximately $5.7 million after tax. In preparation for the adoption of SFAS 115, these same securities were classified as held for sale at December 31, 1993. This classification at year-end had no effect on income or shareholders' equity. LOANS AND LEASE RECEIVABLES Commercial loans and substantially all installment loans accrue interest on the unpaid balance of the loans. The net amount of nonrefundable loan origination fees and costs associated with the lending process, including commitment fees are deferred and amortized to interest income over the contractual lives of the loans using the level-yield method. If the commitment expires unexercised, the income is recognized upon expiration of the commitment. Lease receivables consist primarily of direct financing leases on rolling stock and equipment. Lease receivables are stated as the total amount of lease payments receivable plus guaranteed residual values, less unearned income. Recognition of income over the lives of the lease contracts approximates the level-yield method. LOANS HELD FOR SALE Gains or losses on sale of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold, adjusted for any yield differential, servicing fees and servicing costs applicable to future years. Any resulting deferred premium or discount is amortized, as an adjustment of yield, over the remaining life of the loans using the level-yield method. Loans held for sale are reported at the lower of cost or market value on an aggregate loan basis. 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 future 35 NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) losses related to loans and leases currently outstanding. The primary factors considered in determining the allowance are the distribution of loans by risk class, the amount of the allowance specifically allocated to nonperforming loans and other problem loans, prior years' loan loss experience, economic conditions in Southern National's market areas and the growth of the credit portfolio. Ultimate losses may vary from original estimates and adjustments, as necessary, are made in the period in which these factors and other relevant considerations indicate that future loss levels may vary from those previously estimated. NONPERFORMING ASSETS Nonperforming assets include loans and leases accounted for on a nonaccrual basis and other real estate acquired through foreclosure. Loans and leases are placed on nonaccrual status when concern exists that principal or interest is not fully collectible, or when any portion of principal or interest becomes 90 days past due, whichever occurs first. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction to the remaining principal balance when concern exists as to the ultimate collection of the principal; otherwise such payments are recognized as interest income. Loans and leases are removed from nonaccrual status when they become current as to both principal and interest and when concern no longer exists as to the collectibility of principal or interest. Assets acquired as a result of foreclosure are valued at the lower of cost or fair value. 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 time of foreclosure is charged to the allowance for losses. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using principally the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the lease terms. Capitalized leases are amortized by the same methods as premises and equipment over the estimated useful lives or the lease term, whichever is shorter. The related obligations under capital leases are amortized using the interest method to allocate payments between principal reduction and interest expense. Amortization of capital lease assets and rent expense of operating leases are included in occupancy and equipment expense, depending on the nature of the asset. Additions, major replacements or improvements are added to premises and equipment accounts at cost. Expenditures for maintenance, repairs and minor replacements are charged to expense as incurred. Gains or losses on the disposal of premises and equipment are included in results of current operations. INCOME TAXES The operating results of the Parent Company and its eligible subsidiaries are included in a consolidated federal income tax return. Each subsidiary pays its calculated portion of federal income taxes to the Parent Company, or receives payment from the Parent Company to the extent that tax benefits are realized. Deferred income taxes have been provided where different accounting methods have been used for reporting income for income tax and for financial reporting purposes. As explained in Note L, Southern National changed its method of accounting for income taxes as of January 1, 1993. OFF-BALANCE SHEET INSTRUMENTS Southern National utilizes financial forward and futures contracts, options written, interest rate caps and floors written and interest rate swaps to hedge interest rate risk associated with the asset/liability management, investment and trading account functions. These represent future commitments to purchase or sell financial instruments and are not reflected on the consolidated statements of condition. Income or expense on swaps and caps and floors qualifying as hedge instruments is recognized over the lives of the agreements as an adjustment of the yield of the particular underlying asset being hedged. 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 outstanding during the years, adjusted for the transaction accounted for as a pooling-of-interests in 1993. Common stock equivalents include the number of shares issuable on exercise of outstanding options less the number of shares that could be purchased with the proceeds from the exercise of the options based on the average price of common stock during the years. Fully-diluted net income per common share has been computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the years. Other potentially dilutive securities include the number of shares issuable upon conversion of the preferred stock. The number of shares issuable on exercise of options was calculated in the same manner as for primary net income per common share, except that purchases of common stock with the proceeds from the exercise of options have been assumed to have been made at the higher of the average price for the year or year-end price. Restricted stock grants are considered as issued for purposes of calculating net income per share. Weighted average number of shares were as follows:
DEC. 31, Dec. 31, Dec. 31, 1993 1992 1991 Primary................... 30,957,509 29,887,627 27,952,163 Fully-diluted............. 35,512,096 34,091,384 27,983,437
Cash dividends per share relate to Southern National only and do not include cash dividends paid by merged companies. PURCHASE ACCOUNTING The cost in excess of the fair value of net assets acquired in transactions accounted for as purchases, premiums paid on acquisitions of deposits and other identifiable intangible assets are included in other assets in the CONSOLIDATED STATEMENTS OF CONDITION. These assets, which totaled $10.4 million and $11.9 million at December 31, 1993 and 1992, are being amortized on straight-line or accelerated bases over periods ranging from 5 to 15 years. The excess of the fair value of the net 36 NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) assets related to the East Coast Savings Bank, SSB (East Coast) transaction, reflected as negative goodwill in other liabilities on the CONSOLIDATED STATEMENTS OF CONDITION, amounted to approximately $16.5 million at December 31, 1993 and is being amortized over 15 years. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION As referenced in the CONSOLIDATED STATEMENTS OF CASH FLOWS, Southern National acquired assets and assumed liabilities in transactions accounted for under the purchase method of accounting. The fair value of the assets acquired and liabilities assumed, at acquisition, are as follows:
(DOLLARS IN THOUSANDS) 1993 1992 1991 FAIR VALUE OF NET ASSETS ACQUIRED: Fair value of assets acquired..................... $282,076 $314,531 $232,624 Fair value of liabilities assumed...................... 244,277 279,370 230,506 Fair value of net assets acquired................... 37,799 35,161 2,118 PURCHASE PRICE: Fair value of common shares and options issued............... 20,839 33,947 -- Cash premium paid.............. -- 3,751 1,784 Capitalized acquisition costs........................ 220 217 334 Total purchase price......... 21,059 37,915 2,118 Excess of net assets acquired over purchase price (purchase price over net assets acquired)...................... $ 16,740 $ (2,754) $ -- CASH PAID DURING THE YEAR FOR: Interest....................... $147,399 $169,985 $200,378 Income taxes................... 42,450 26,850 13,437
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and due from depository institutions, interest-bearing bank balances, federal funds sold and securities purchased under resale agreements or similar arrangements. Generally, both cash and cash equivalents are considered to have maturities of three months or less. INCOME AND EXPENSE RECOGNITION Items of income and expense are recognized using the accrual basis of accounting, except for some immaterial amounts. TRUST ASSETS AND FEES Assets held in fiduciary or agency capacities are not included in the CONSOLIDATED STATEMENTS OF CONDITION since such items are not assets of Southern National. Income from trust activities is reported on an accrual basis or, in certain immaterial instances, a modified cash basis. FAIR VALUES OF FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires Southern National to disclose the estimated fair value of its on-and off-balance sheet financial instruments. A financial instrument is defined by SFAS 107 as cash, evidence of an ownership interest in an entity or a contract that creates a contractual obligation or right to deliver to or receive cash or another financial instrument from a second entity on potentially favorable or unfavorable terms. Fair value estimates are made at a point in time, based on relevant market data and information about the financial instrument. SFAS 107 specifies that fair values should be calculated based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various financial instruments. Because no readily available market exists for a significant portion of Southern National's financial instruments, fair value estimates for these instruments are based on judgments regarding current economic conditions, currency and interest rate risk characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates cannot always be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect the estimates. The following methods and assumptions were used by Southern National in estimating the fair value of its financial instruments at December 31, 1993 and 1992. CASH AND CASH EQUIVALENTS: The carrying amounts reported in the CONSOLIDATED STATEMENTS OF CONDITION approximate the fair value for those assets. SECURITIES: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. LOANS RECEIVABLE: The fair values for certain mortgage loans and credit card loans are based on quoted prices of similar loans, adjusted for differences in loan characteristics. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms and credit quality. The carrying amount of accrued interest approximates its fair values. OFF-BALANCE SHEET INSTRUMENTS: Fair values for Southern National's off-balance sheet instruments (futures, swaps, forwards, options, guarantees and lending commitments) are based on quoted prices, current settlement values or pricing models or other formulas. DEPOSIT LIABILITIES: The fair values disclosed for demand deposits, interest-checking accounts, savings accounts and certain money market accounts are, by definition, equal to the amount payable on demand at the reporting date, i.e. their carrying amounts. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to aggregate expected maturities. SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, master notes and other short-term borrowings approximate their fair values. LONG-TERM DEBT: The fair values of Southern National's long-term debt are based on quoted market prices for similar instruments or are estimated using discounted cash flow analyses, based on Southern National's current incremental borrowing rates for similar types of instruments. 37 NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING PRONOUNCEMENTS In June 1993, the FASB issued SFAS 114, Accounting by Creditors for Impairment of a Loan. SFAS 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Southern National has not yet adopted SFAS 114; however, the implementation of SFAS 114 is not expected to have a material impact on Southern National's financial position. SFAS 114 is effective for fiscal years beginning after December 15, 1994. NOTE B. ACQUISITIONS COMPLETED On January 29, 1993, Southern National completed its acquisition of FedFirst Bancshares, Inc. (FedFirst), located in Winston-Salem, North Carolina, in a transaction accounted for as a pooling-of-interests. Southern National issued 5,202,051 shares in exchange for all the outstanding shares and options to purchase shares of common stock of FedFirst. FedFirst operated ten branches in Winston-Salem, Clemmons, Mocksville and Yadkinville through its wholly-owned subsidiary, First Federal Savings Bank (FFSB). FFSB was merged into SNBNC. Southern National's financial statements have been restated to include the results of FedFirst. On October 7, 1993, Southern National acquired East Coast, headquartered in Goldsboro, North Carolina. Southern National issued 1,172,475 shares of its common stock in the conversion/merger of this North Carolina-chartered mutual savings bank and an additional 242,470 shares pursuant to restricted stock grants. The transaction was accounted for as a purchase, and therefore, the financial information contained herein includes data relevant to the acquiree since the date of acquisition. The following unaudited presentation reflects key line items on a proforma basis as if East Coast had been acquired as of the beginning of the years presented.
1993 1992 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net interest income................... $232,940 $218,037 Net income............................ $ 69,149 $51,090 Earnings per share Primary............................. $ 2.00 $ 1.49 Fully-diluted....................... $ 1.89 $ 1.44
PENDING Southern National has three acquisitions scheduled for completion during the first quarter of 1994 -- The First Savings Bank, FSB (The First) of Greenville, South Carolina, Regency Bancshares Inc. (Regency) of Hickory, North Carolina and Home Federal Savings Bank (Home) of Statesville, North Carolina. All of the transactions will be accounted for as poolings-of-interests. The following unaudited presentation reflects key line items on an historical basis for Regency, Home and The First as of, and for the twelve months ended, December 31, 1993.
(DOLLARS IN THOUSANDS) Regency Home The First Assets...................... $ 262,910 $ 98,123 $2,012,899 Deposits.................... 210,500 89,704 1,494,935 Shareholders' equity........ 19,014 6,813 35,888 Net interest income......... 9,525 4,098 71,756 Net loss*................... (4,766) (1,262) (84,989) Estimated shares to be issued.................... 2,437,000 825,000 8,053,000
* After cumulative effect The following unaudited presentation reflects key line items on an historical basis for Southern National only and on a proforma combined basis assuming the acquisitions of Regency, Home and The First were effective as of, and for the periods presented.
1993 1992 1991 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) As reported: Net interest income....... $ 224,655 $ 207,969 $ 157,883 Income before cumulative effect.................. 75,564 47,239 33,819 Net income................ 71,993 47,239 33,819 Earnings per share Primary Income before cumulative effect... 2.28 1.43 1.21 Net income............ 2.16 1.43 1.21 Fully-diluted Income before cumulative effect... 2.13 1.39 1.21 Net income............ 2.03 1.39 1.21 Assets.................... 5,898,394 5,003,961 4,120,994 Shareholders' equity...... 503,149 431,889 293,722 As restated: Net interest income....... 310,034 278,305 221,438 Income before cumulative effect.................. 8,193 59,163 44,609 Net income (loss)......... (19,024) 59,163 44,609 Earnings per share Primary Income before cumulative effect... .07 1.33 1.17 Net income............ (.57) 1.33 1.17 Fully-diluted Income before cumulative effect... NM 1.31 1.17 Net income............ NM 1.31 1.17 Assets.................... 8,272,326 7,374,032 6,567,309 Shareholders' equity...... 564,864 575,457 425,315
NM -- not meaningful 38 NOTE C. SECURITIES The amortized costs and approximate market value of securities were as follows:
DECEMBER 31, 1993 December 31, 1992 GROSS ESTIMATED Gross AMORTIZED UNREALIZED MARKET Amortized Unrealized COST GAINS LOSSES VALUE Cost Gains Losses (DOLLARS IN THOUSANDS) U.S. Treasury........................................ $ 695,034 $16,413 $ 557 $ 710,890 $ 878,236 $29,784 $1,084 U.S. Government agencies and corporations............ 36,364 270 6 36,628 67,226 1,046 79 States and political subdivisions.................... 54,047 1,517 131 55,433 57,680 1,300 33 Mortgage-backed securities GNMA................................................ 596 16 -- 612 1,205 15 -- FHLMC............................................... 195,343 2,688 96 197,935 112,798 2,146 151 FNMA................................................ 176,341 3,426 108 179,659 168,117 3,507 131 Other debt securities................................ 608 10 2 616 765 4 10 Total debt securities............................... 1,158,333 24,340 900 1,181,773 1,286,027 37,802 1,488 Equity securities.................................... 26,068 -- -- 26,068 22,330 65 -- Total investment securities......................... 1,184,401 24,340 900 1,207,841 1,308,357 37,867 1,488 Securities held for sale: Mortgage-backed securities.......................... 83,385 988 530 83,843 261,094 13,338 83 U.S. Treasury....................................... 688,345 10,313 2,458 696,200 3,273 24 24 U.S. Government agencies and corporations........... 22,743 376 -- 23,119 4,980 23 47 Total securities held for sale...................... 794,473 11,677 2,988 803,162 269,347 13,385 154 Total securities.................................... $1,978,874 $36,017 $3,888 $2,011,003 $1,577,704 $51,252 $1,642 Estimated Market Value U.S. Treasury........................................ $ 906,936 U.S. Government agencies and corporations............ 68,193 States and political subdivisions.................... 58,947 Mortgage-backed securities GNMA................................................ 1,220 FHLMC............................................... 114,793 FNMA................................................ 171,493 Other debt securities................................ 759 Total debt securities............................... 1,322,341 Equity securities.................................... 22,395 Total investment securities......................... 1,344,736 Securities held for sale: Mortgage-backed securities.......................... 274,349 U.S. Treasury....................................... 3,273 U.S. Government agencies and corporations........... 4,956 Total securities held for sale...................... 282,578 Total securities.................................... $1,627,314
Securities with a book value of approximately $839,692,000 and $873,739,000 at December 31, 1993 and 1992, respectively, were pledged to secure municipal deposits, securities sold under agreements to repurchase, Federal Reserve discount window borrowings and for other purposes as required by law. At December 31, 1993 and 1992, there was no concentration of investments in obligations of states and political subdivisions that were secured by or payable from the same taxing authority or revenue source and that exceeded ten percent of shareholders' equity. Proceeds from sales of debt securities during 1993, 1992 and 1991 were $281,330,000, $35,643,000 and $481,373,000, respectively. Gross gains of $14,059,000, $110,000 and $4,927,000 and gross losses of $497,000, $209,000 and $559,000 were realized on those sales in 1993, 1992 and 1991, respectively. The amortized cost and estimated market value of debt securities at December 31, 1993 and 1992, by contractual maturity, are shown in the accompanying table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 39 NOTE C. SECURITIES (CONTINUED)
December 31, 1993 1992 ESTIMATED AMORTIZED MARKET Amortized COST VALUE Cost (DOLLARS IN THOUSANDS) DEBT SECURITIES Due in one year or less............................................................ $ 304,855 $ 310,735 $ 217,383 Due after one year through five years.............................................. 467,556 478,930 773,428 Due after five years through ten years............................................. 13,642 13,902 13,086 Due after ten years................................................................ -- -- 10 786,053 803,567 1,003,907 Mortgage-backed securities......................................................... 372,280 378,206 282,120 Total investment debt securities................................................... 1,158,333 1,181,773 1,286,027 Securities held for sale........................................................... 794,473 803,162 269,347 Total debt securities............................................................. $1,952,806 $1,984,935 $1,555,374 Estimated Market Value DEBT SECURITIES Due in one year or less............................................................ $ 224,080 Due after one year through five years.............................................. 797,255 Due after five years through ten years............................................. 13,490 Due after ten years................................................................ 10 1,034,835 Mortgage-backed securities......................................................... 287,506 Total investment debt securities................................................... 1,322,341 Securities held for sale........................................................... 282,578 Total debt securities............................................................. $1,604,919
NOTE D. LOANS AND LEASES Loans and leases at December 31 were composed of the following:
1993 1992 (DOLLARS IN THOUSANDS) Loans -- Commercial, financial and agricultural.................. $ 553,118 $ 562,440 Real estate -- construction and land development.............. 151,009 124,349 Real estate -- mortgage......... 2,198,871 1,805,852 Consumer........................ 370,860 362,026 Loans held for investment..... 3,273,858 2,854,667 Loans held for sale........... 49,692 1,973 Total loans................. 3,323,550 2,856,640 Leases............................ 225,312 170,358 Total loans and leases...... $3,548,862 $3,026,998
The net investment in direct financing leases was $192,442,000 and $148,051,000 at December 31, 1993 and 1992. Southern National's only significant concentration of credit at December 31, 1993 occurred in real estate loans, which totaled $2.4 billion. However, this amount was not concentrated in any specific market or geographic area within Southern National's market area. The distribution of real estate loans in North and South Carolina is comparable to the distribution of total loans in the two-state area. While real estate loans accounted for 68% of loans and leases at December 31, 1993, only 4% of loans and leases were for construction, land acquisition and development. Another $1.3 billion consisted of mortgage loans for 1-4 family dwellings, including $278.6 million in home equity loans. The fair value for the loan portfolio, excluding leases, at December 31, 1993 and 1992 were estimated to be $3,312,175,000 and $2,846,481,000, respectively. NOTE E. ALLOWANCE FOR LOSSES An analysis of the allowance for losses is presented in the following table:
Year Ended December 31, 1993 1992 1991 (DOLLARS IN THOUSANDS) Balance, January 1........... $37,877 $ 33,052 $ 28,320 Provision for losses charged to expense................. 5,574 14,775 19,639 Charge-offs.................. (9,545) (15,005) (18,103) Recoveries................... 3,144 2,205 2,095 Allowance of acquired loans...................... 2,750 2,850 850 Balance, December 31......... $39,800 $ 37,877 $ 32,801
At December 31, 1993, 1992 and 1991, the amount of loans not currently accruing interest was $19,571,000, $17,054,000 and $31,001,000, respectively. The gross interest income that would have been earned during 1993 if the outstanding nonaccrual loans and leases had been current in accordance with the original terms and had been outstanding throughout the period (or since origination, if held for part of the period) was approximately $1.8 million. Interest earned and included in interest income during 1993 on such loans and leases amounted to approximately $300,000. Transfer of loans to other real estate owned, a non-cash investing activity, amounted to $6,156,000, $11,280,000, and $26,647,000 in 1993, 1992 and 1991, respectively. Foreclosed property was $2,219,000 , $12,643,000 and $11,715,000 at December 31, 1993, 1992 and 1991, respectively. Amounts previously considered in-substance foreclosures, and included in foreclosed property, have been reclassified as nonaccrual loans for all periods. 40 NOTE F. PREMISES AND EQUIPMENT Following is a summary of premises and equipment:
December 31, 1993 1992 (DOLLARS IN THOUSANDS) Land and land improvements............ $ 19,123 $ 12,135 Buildings and building improvements... 69,404 56,179 Furniture and equipment............... 73,137 69,370 Capitalized leases on premises and equipment....................... 5,054 4,963 166,718 142,647 Less -- accumulated depreciation and amortization........................ 59,396 56,643 Net premises and equipment.......... $107,322 $ 86,004
Depreciation expense, which is included in occupancy and equipment expense, was $9,484,000 ,$7,495,000 and $6,437,000 in 1993, 1992 and 1991, respectively. Southern National has noncancellable leases covering certain premises and equipment. Total rent expense applicable to operating leases was $6,004,000, $5,280,000 and $4,876,000 for 1993, 1992 and 1991, respectively. Future minimum lease payments for operating and capitalized leases for years subsequent to 1993 are as follows:
Leases Operating Capitalized (DOLLARS IN THOUSANDS) Year ended December 31: 1994............................... $ 4,133 $ 492 1995............................... 4,059 487 1996............................... 3,601 487 1997............................... 3,023 487 1998............................... 2,799 487 1999 and later years............... 38,133 11,293 Total minimum lease payments......... $55,748 13,733 Less -- amount representing interest........................... 9,160 Present value of net minimum payments on capitalized leases (Note I)........................... $ 4,573
NOTE G. DEPOSITS The composition of deposits at December 31 is presented in the following table:
1993 1992 ESTIMATED Estimated CARRYING FAIR Carrying Fair VALUE VALUE Value Value (DOLLARS IN THOUSANDS) Demand deposits... $ 616,189 $ 616,189 $ 492,186 $ 492,186 Savings deposits......... 942,244 942,244 799,498 799,498 Money market deposits......... 815,742 815,742 744,164 744,164 Certificates of deposit $100,000 and over......... 549,003 550,607 527,257 527,589 Other certificates of deposit....... 1,613,820 1,628,207 1,569,020 1,578,168 Total deposits........ $4,536,998 $4,552,989 $4,132,125 $4,141,605
NOTE H. SHORT-TERM BORROWINGS The composition of short-term borrowings at December 31 is presented in the following table:
1993 1992 (DOLLARS IN THOUSANDS) Securities sold under agreements to repurchase.......................... $512,562 $354,528 Master notes.......................... 25,539 -- Federal Reserve discount window borrowings.......................... 65,000 -- Federal funds purchased............... 58,890 8,810 U.S. Treasury tax and loan deposit notes payable....................... 41,623 755 Total short-term borrowings........... $703,614 $364,093
Federal funds purchased represent unsecured borrowings from other banks and generally mature daily. Securities sold under agreements to repurchase are borrowings collateralized by securities of the U.S. Government or its agencies and have maturities ranging from one to ninety days. U.S. Treasury tax and loan deposit notes payable are payable upon demand to the U.S. Treasury. Master notes are unsecured, non-negotiable obligations of Southern National (variable rate commercial paper). 41 NOTE I. LONG-TERM DEBT These liabilities consisted of the following:
December 31, 1993 1992 (DOLLARS IN THOUSANDS) PARENT COMPANY: 9.28%, $20 million senior capital notes, dated 1986, due in annual installments of amounts ranging from $3,000,000 to $4,000,000 through 1996................ $10,000 $13,000 $5 million Industrial Revenue Bond, dated 1984, secured by premises with a net book value of $6,330,000 at December 31, 1993, due in quarterly installments of $ 83,340 through second quarter, 1999, and one final installment of $82,940 in 1999. Interest rate is variable -- 4.619% at December 31, 1993................................... 1,916 2,250 SNBNC: Capitalized leases, varying maturities to 2028 with rates from 8.11% to 15.42%. This represents the unamortized balances due on leases of various facilities............................. 4,573 4,615 Advances from Federal Home Loan Bank, varying maturities to 1997 with rates from 4.41% to 6.3%..................... 75,300 13,300 Obligations of ESOP...................... -- 1,320 Other mortgage indebtedness.............. 312 14 $92,101 $34,499
Excluding the capitalized leases set forth in Note F, future debt maturities total $87,528,000 and are $3,335,000, $12,335,000, $57,335,000, $13,635,000 and $635,000 for the next five years. The maturities for 1999 and later years are $253,000. The estimated fair value of long-term debt, excluding capitalized leases, at December 31, 1993 was $89,264,000. NOTE J. SHAREHOLDERS' EQUITY The authorized capital stock of Southern National consists of 120,000,000 shares of common stock, $5 par value, and 5,000,000 shares of preferred stock, $5 par value. At December 31, 1993, 31,845,582 shares of common stock and 770,000 shares of preferred were issued and outstanding. The preferred stock is convertible at any time into 5.9068 shares of common stock. Although not subject to any mandatory redemption or sinking fund requirement, the preferred stock is redeemable at the option of Southern National after March 1, 1996. STOCK OPTION PLANS The Non-Employee Directors' Stock Option Plan (Directors' Plan) is intended to provide incentives to non-employee directors to remain on the Board of Directors and share in the profitability of Southern National and creates a deferred compensation system for participating non-employee directors. Each non-employee director may elect to defer 0%, 50% or 100% of the annual retainer fee and meeting fees for each calendar year and apply that percentage toward the grant of options to purchase Southern National's 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's 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's common stock. At December 31, 1993, options to purchase 101,427 shares of common stock at prices ranging from $12.7155 to $15.528 were outstanding pursuant to the Directors' Plan. The incentive stock option plan (ISOP) and the non-qualified stock option plan (NQSOP) were established to retain key officers and key management employees and to offer them the incentive to use their best efforts on behalf of Southern National. The plans, which expire on December 19, 2000, further provide for 1,101,000 shares of common stock to be reserved over a five year period for the granting of options, which have a four year vesting schedule and must be exercised within ten years from the date granted. Incentive stock options granted must have an exercise price equal to at least 100% of the fair market value of common stock on the date granted, and the non-qualified stock options must have an exercise price equal to at least 85% of the fair market value on the date granted. At December 31, 1993, options to purchase 527,789 shares of common stock at prices ranging from $9.50 to $16.75 were outstanding pursuant to the NQSOP. At December 31, 1993, options to purchase 256,570 shares of common stock at $19.77 were outstanding pursuant to the ISOP. At the time of acquisition by Southern National, FedFirst had an incentive stock option plan which provided for the granting of options to purchase shares of FedFirst common stock to officers and employees. In addition, FedFirst had a stock option plan for outside directors. The option period was limited to ten years. At merger date, each option was converted into an option to purchase 2.3443 shares of common stock of Southern National. In connection with the conversion/acquisition of East Coast, the directors of East Coast entered into consulting agreements with SNBNC and certain East Coast executive officers entered into employment agreements with SNBNC. As part of these agreements, options to purchase 157,382 shares of Southern National common stock, with an exercise price of $21.06 per share, were granted to these individuals. 42 NOTE J. SHAREHOLDERS' EQUITY (CONTINUED)
1993 1992 1991 AGGREGATE Aggregate Aggregate OPTION ACTIVITY SHARES PRICE Shares Price Shares Price (DOLLARS IN THOUSANDS) Outstanding, January 1................................ 1,259,555 $11,705 916,907 $ 6,703 298,201 $ 2,658 Granted ($4.27 to $21.06)............................. 464,073 9,152 450,301 5,697 629,235 4,100 Exercised ($3.91 to $13.02)........................... 568,721 2,766 104,137 680 7,031 28 Expired or forfeited.................................. -- -- 3,516 15 3,498 27 Outstanding December 31 ($4.27 to $21.06)............. 1,154,907 $18,091 1,259,555 $11,705 916,907 $ 6,703 Options exercisable at December 31, 1993 ($6.29 to $21.06 per share)......................... 428,196 $ 5,052
NOTE K. SUPPLEMENTAL INCOME STATEMENT INFORMATION
Year Ended December 31, 1993 1992 1991 (DOLLARS IN THOUSANDS) INTEREST ON DEPOSITS Savings deposits....... $ 18,944 $ 19,306 $ 21,405 Money market deposits............. 19,958 23,394 32,939 Certificates of deposit $100,000 and over.... 16,498 20,685 30,523 Other certificates of deposit.............. 73,613 83,311 92,909 $129,013 $146,696 $177,776 NONINTEREST INCOME Nondeposit fees and commissions: Insurance fees and commissions........ $ 2,992 $ 2,930 $ 2,686 Trust fees........... 3,000 2,688 2,542 Bankcard related fees............... 6,468 5,526 5,228 Other................ 7,022 3,757 2,500 $ 19,482 $ 14,901 $ 12,956 NONINTEREST EXPENSE Personnel expense: Salaries............. $ 68,930 $ 63,735 $ 54,145 Employee benefits.... 16,346 15,472 12,048 $ 85,276 $ 79,207 $ 66,193 Other expense: Credit card expense (processing, etc.).............. $ 5,200 $ 4,453 $ 4,326 Advertising.......... 4,190 3,963 3,370 Other................ 38,460 32,329 27,303 $ 47,850 $ 40,745 $ 34,999
NOTE L. INCOME TAXES The total provision for income taxes was allocated as follows:
1993 1992 1991 (DOLLARS IN THOUSANDS) Income from operations........ $37,938 $32,723 $16,077 Cumulative effect of changes in accounting principles.... (2,200) -- -- Total provision for income taxes....................... $35,738 $32,723 $16,077
The provision for income taxes attributable to operations was composed of the following:
1993 1992 1991 (DOLLARS IN THOUSANDS) Currently payable: Federal..................... $41,341 $27,709 $16,486 State....................... 1,573 1,258 467 42,914 28,967 16,953 Deferred (benefit) expense.... (4,976) 3,756 (876) Provision for income taxes.... $37,938 $32,723 $16,077
Deferred (benefit) expense results from timing differences in the accounting for certain income and expense items for financial reporting purposes and for income tax purposes. The book and tax accounting differences, and the deferred (benefit) expense arising from each, are summarized in the following table:
1993 1992 1991 (DOLLARS IN THOUSANDS) Provision for loan losses less (greater) than amount deductible for tax purposes................ $ 329 $ (640) $(918) Postretirement benefits other than pensions................... (2,698) -- -- Changes in tax accounting method for bad debts of savings institutions converting to a commercial bank................. (1,945) 3,823 -- Lease financing................... 1,207 (535) 813 Other, net........................ (1,869) 1,108 (771) Deferred (benefit) expense........ $(4,976) $3,756 $(876)
43 NOTE L. INCOME TAXES (CONTINUED) The reasons for the difference between the provision for income taxes attributable to operations and the amount computed by applying the statutory federal income tax rate to the income before income taxes were as follows:
1993 1992 1991 (DOLLARS IN THOUSANDS) Federal income taxes at statutory rates of 35% for 1993 and 34% for 1992 and 1991........................ $39,726 $27,187 $16,965 Tax-exempt income from securities, loans and leases less related non-deductible interest expense............ (2,399) (1,963) (1,843) Changes in tax accounting method for bad debts of savings institutions converting to a commercial bank........................ -- 5,190 -- Other, net.................... 611 2,309 955 Provision for income taxes.... $37,938 $32,723 $16,077 Effective income tax rate..... 34.5% 40.9% 32.2%
Income taxes related to securities gains (losses) for 1993, 1992 and 1991 were $5,083,000, $(39,000) and $1,486,000, respectively. As of January 1, 1993, Southern National adopted SFAS No. 109, Accounting for Income Taxes, which changes the method of accounting for income taxes under generally accepted accounting principles. As a result of adopting SFAS 109, Southern National recognized a cumulative benefit of the change in accounting principle of $700,000, or $.02 per fully-diluted share. The benefit is included under the caption Cumulative effect of changes in accounting principles, net of income taxes in the CONSOLIDATED STATEMENTS OF INCOME. The effect of this change, excluding the cumulative benefit, for the year ended December 31, 1993 was to increase net income $71,000, or less than $.01 per fully-diluted share. The tax effects of temporary differences that gave rise to significant portions of the net deferred tax assets (liabilities) in the CONSOLIDATED STATEMENTS OF CONDITION at December 31, 1993, as adjusted for the adoption of SFAS 109 were:
DECEMBER 31, 1993 (DOLLARS IN THOUSANDS) Deferred tax assets: Allowance for losses...................... $ 14,856 Postretirement benefits other than pensions................................ 2,998 Other..................................... 8,332 Total tax deferred assets................... 26,186 Deferred tax liabilities: Depreciation.............................. (3,919) Tax accounting method changes............. (7,851) Lease financing........................... (9,833) Other..................................... (6,592) Total tax deferred liabilities.............. (28,195) Net deferred tax liability.................. $ (2,009)
The deferred tax assets met the criteria of SFAS 109, and accordingly a valuation allowance was not required. At December 31, 1993, there were no operating losses, income tax credits or alternative minimum tax credit carryforwards. Retained earnings at December 31, 1993 included $7,411,000 of tax bad debt reserves accumulated prior to October 1, 1988 which were applicable to SSB for which no provision for income taxes has been made. If in the future this portion of retained earnings is used for any purpose other than to absorb tax bad debt losses of SSB, income taxes will be imposed at the then applicable rates. Since SSB does not intend to use the reserves for purposes other than to absorb its tax bad debt losses, deferred income taxes have not been provided on such reserves. As required by SFAS 109, deferred income taxes have been provided on SSB's tax bad debt reserves accumulated after September 30, 1988. NOTE M. BENEFIT PLANS RETIREMENT PLANS Southern National has a non-contributory defined benefit pension plan (Basic Plan) covering substantially all employees. The benefits are based on years of service and the employee's compensation during the five consecutive years of employment that will produce the highest average pay. Southern National's contributions to the plan are in amounts between the minimum required for funding standard account purposes and the maximum deductible for Internal Revenue Service purposes. Contributions to the plan of $3,089,000 and $4,299,000 were made in 1993 and 1992, respectively. Supplemental retirement benefits are provided to certain key officers under Southern National's Supplemental Executive Retirement Plan (SERP), effective January 1, 1989. This plan is 44 NOTE M. BENEFIT PLANS (CONTINUED) not qualified under the Internal Revenue Code. Although technically an unfunded plan, insurance policies on the lives of the covered employees are intended to be adequate to fund future benefits. Net periodic pension cost, which is included in personnel expense, consisted of the following components in 1993, 1992 and 1991.
Basic Plan SERP 1993 1992 1991 1993 1992 1991 (DOLLARS IN THOUSANDS) Service cost........ $ 2,708 $ 2,183 $ 2,042 $275 $112 $ 69 Interest cost....... 3,577 3,173 2,797 129 64 49 Actual return on assets............ (3,512) (2,634) (4,584) -- -- -- Net amortization and deferral.......... (525) (895) 1,653 62 27 27 Early retirement.... -- 557 -- -- -- -- Net periodic pension cost.... $ 2,248 $ 2,384 $ 1,908 $466 $203 $145
The following table sets forth the plans' funded status and amounts recognized in Southern National's CONSOLIDATED STATEMENTS OF CONDITION at December 31, 1993 and 1992.
Basic Plan SERP 1993 1992 1993 1992 (DOLLARS IN THOUSANDS) Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $37,119 in 1993 and $34,030 in 1992...... $(37,838) $(34,694) $ -- $-- Projected benefit obligation at December 31.......... $(49,472) $(45,127) $(2,009) $(981) Plan assets at fair value, primarily obligations of the U.S. Treasury and Federal agencies and corporations........... 50,438 46,582 -- -- Plan assets in excess of (less than) projected benefit obligation..... 966 1,455 (2,009) (981) Unrecognized transition amount................. (154) (307) 271 299 Unrecognized prior service cost........... 1,217 1,537 -- -- Unrecognized net loss.... 2,866 1,399 691 94 Prepaid (accrued) pension cost................... $ 4,895 $ 4,084 $(1,047) $(588)
The rate of increase in future compensation used in determining the actuarial present value of the projected benefit obligation was 6.0% for 1993 and 1992. The weighted average assumed discount rate was 8.0% in 1993 and 1992. The weighted average expected long-term rate of return on assets used was 9.0% in 1993 and 1992. POSTRETIREMENT BENEFITS Effective December 31, 1992, Southern National adopted a revised retiree medical program (Plan) in preparation for implementation of SFAS No. 106, Accounting for Postretirement Benefits Other Than Pensions. The Plan covers employees retiring after January 1, 1993 who are eligible for participation in the Southern National Retirement Plan and have at least ten years of service. The Plan requires retiree contributions, with a subsidy by Southern National based upon years of service of the employee at the time of retirement. The subsidy is adjusted each year for movement of the Consumer Price Index. There is no employer subsidy for dependent benefits. Employees who retired prior to January 1, 1993 are grandfathered and may choose from three comprehensive medical options with varying deductibles. Southern National adopted SFAS 106 as of January 1, 1993. As a result of adopting SFAS 106, Southern National recognized a cumulative charge for this change in accounting principle of $4,271,000 (net of $2,200,000 of deferred income tax benefits), or $.12 per fully-diluted share. The charge is included under the caption Cumulative effect of changes in accounting principles, net of income taxes in the CONSOLIDATED STATEMENTS OF INCOME. The effect of this change, net of income taxes and excluding the cumulative charge, for the year ended December 31, 1993 was to decrease net income by $318,000 or less than $.01 per fully-diluted share. The accumulated postretirement benefit obligation was $7,469,000 at December 31, 1993. Net postretirement health care cost for 1993 includes the following components:
1993 (DOLLARS IN THOUSANDS) Service cost -- benefits attributed to service during the period............ $300 Interest cost on accumulated postretirement benefit obligation.... 539 Net periodic postretirement benefit costs.............................. $839
For measurement purposes, a 15.7% annual rate of increase in the per capita cost of covered health care claims was assumed for 1993; the rate was assumed to remain stable for four years, then decrease to 6.5% for 1997 and years thereafter. Medical costs are assumed to increase from 13% of the gross national product in 1991 to 17.5% in 1997 and remain constant thereafter. A 1% increase in the assumed long-term health care trend rate would increase the net periodic benefit cost by 4.6% and the expected postretirement benefit obligation by 4.2%. Other actuarial assumptions are an 8.5% discount rate and a 5.5% assumed annual increase in all other items. Although technically an unfunded plan, corporate-owned life insurance policies are intended to partially fund future benefits. 45 NOTE M. BENEFIT PLANS (CONTINUED) EMPLOYEE STOCK OWNERSHIP PLAN Southern National's Employee Stock Ownership Plan allows all employees to acquire common stock in Southern National by contributing up to 15% of their salaries to the plan. Southern National matches 100% of each employee's contributions, up to a maximum of 6% of the employee's salary. The charges to noninterest expense for the contributions were approximately $2,800,000, $2,372,000 and $1,913,000 in 1993, 1992 and 1991, respectively. OTHER There are various deferred compensation arrangements, employment contracts and covenants not to compete with selected members of management and certain retirees. NOTE N. COMMITMENTS AND CONTINGENCIES FINANCIAL INSTRUMENTS Southern National is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, options written, standby letters of credit and financial guarantees, interest rate caps and floors written, interest rate swaps and forward and futures contracts. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract, or notional amounts, of those instruments reflect the extent of involvement Southern National has in particular classes of financial instruments. Southern National's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. Southern National uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For interest rate caps, floors, swap transactions, forward and futures contracts and options written, the contract or notional amounts do not represent exposure to credit loss. Southern National controls the credit risk of its interest rate swap agreements and forward and futures contracts through credit approvals, limits and monitoring procedures. Unless noted otherwise, Southern National does not require collateral or other security to support financial instruments with credit risk.
Contract or Estimated Notional Amount at Fair Value at December 31, December 31, 1993 1992 1993 1992 (DOLLARS IN THOUSANDS) Financial instruments whose contract amounts represent credit risk: Commitments to extend credit.............. $745,716 $ 726,328 $(1,750) $(1,367) Standby letters of credit and financial guarantees written............. 24,835 24,776 (97) (119) Financial instruments whose notional or contract amounts exceed the amount of credit risk: Interest rate swap agreements.......... 213,094 13,917 (1,010) 239 Interest rate caps and floors.............. 400,000 1,050,000 90 2,250
Commitments to extend credit are arrangements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Southern National evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by Southern National upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by Southern National to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Southern National holds first deeds of trust, certificates of deposit and/or marketable securities as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments at December 31, 1993 is approximately $11.5 million. Forward and futures contracts are contracts for delayed delivery of securities or money market instruments in which the seller agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities' values and interest rates. Southern National enters into a variety of interest rate contracts -- including interest rate caps and floors written, options written and interest rate swap agreements -- in its trading activities and in managing its interest rate exposure. Interest rate caps and floors written by Southern National enable customers to transfer, modify or reduce their interest rate risk. Options are 46 NOTE N. COMMITMENTS AND CONTINGENCIES (CONTINUED) contracts that allow the holder of the option to purchase or sell a financial instrument at a specified price and within a specified period of time from the seller or writer of the option. As a writer of options, Southern National receives a premium at the outset and then bears the risk of an unfavorable change in the price of the financial instrument underlying the option. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. These transactions are used as part of the asset/liability management function. Southern National minimizes its exposure to the interest rate risk inherent in swaps by entering into offsetting swap positions that essentially counterbalance each other. Entering into interest rate swap agreements involves not only the risk of dealing with counterparties and their ability to meet the terms of the contracts but also the interest rate risk associated with unmatched positions. Notional principal amounts often are used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. LITIGATION In June 1991, the trustee in bankruptcy for Kenyon Home Furnishings (Kenyon) filed an adversary proceeding against SNBNC in the United States Bankruptcy Court for the Middle District of North Carolina. The trustee alleges that American Bank and Trust Company (American), which was acquired by SNBNC in October 1989, aided and abetted Kenyon's officers in defrauding Kenyon's creditors and others. The trustee seeks to recover more than $40 million in damages. The trustee also filed separate proceedings against a number of other persons, corporations and financial institutions seeking identical damages. In these actions, the trustee is seeking to recover attorney's fees and treble damages. The claim addresses events and circumstances occurring on or before October 31, 1989, the date SNBNC acquired American. The case is in the discovery stage, and SNBNC is vigorously defending this action. Based on information presently available to Southern National, management believes that the ultimate outcome of this matter will not have a material impact on the consolidated financial condition or consolidated results of operations of Southern National. In July 1993, the trustee in bankruptcy for Florida Hotel Properties Limited Partnership (Florida) filed an adversary proceeding against SNBNC in the United States Bankruptcy Court for the Western District of North Carolina. The trustee alleges that SNBNC aided and abetted Florida's officers in defrauding Florida through SNBNC's handling of deposit accounts from which Florida allegedly made fraudulent transfers to third parties by check and/or wire transfer. The trustee seeks to recover compensatory damages in excess of $10,000, equitable subordination of any claim filed by SNBNC in the Florida bankruptcy, treble damages plus interest and attorney's fees. The trustee also filed separate proceedings against a number of other persons, corporations and financial institutions seeking damages. The case is in an early procedural stage, and SNBNC is vigorously defending this action. Based on information presently available to Southern National, management believes that the ultimate outcome of this matter will not have a material impact on the consolidated financial condition or consolidated results of operations of Southern National. In August 1993, the trustee for Southeast Hotel Properties Limited Partnership Claims Liquidating Trust (Southeast) filed an action against SNBNC in the United States District Court for the Western District of North Carolina. The trustee alleges that SNBNC aided and abetted Southeast's officers in defrauding Southeast through SNBNC's handling of deposit accounts from which Southeast allegedly made fraudulent transfers to third parties by check and/or wire transfer. The trustee seeks to recover compensatory damages as established at trial, punitive damages, exemplary damages, treble damages and attorney's fees. The total amount of damages sought by the trustee from SNBNC, including amounts sought by the trustee from immediate transferees of Southeast, exceeds $7,501,000. The damages stated by the trustee do not reflect any offsets which appear available or amounts which should be recovered by the trustee from third parties. The trustee also filed separate proceedings against a number of other persons, corporations and financial institutions seeking damages. The case is in an early procedural stage, and SNBNC is vigorously defending this action. This case will likely be consolidated with the Florida adversary proceeding for trial as the allegations refer to related entities. Based on information presently available to Southern National, management believes that the ultimate outcome of this matter will not have a material impact on the consolidated financial condition or results of operations of Southern National. The nature of the business of Southern National's banking subsidiaries ordinarily results in a certain amount of litigation. The subsidiaries of Southern National are involved in various other claims and lawsuits, all of which are considered incidental to the conduct of its business. NOTE O. REGULATORY REQUIREMENTS AND OTHER RESTRICTIONS Southern National, the Banks and SSB are required by the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency (OCC) and the North Carolina Savings Institution Division to maintain certain capital-to-assets ratios. At December 31, 1993, these ratios were above the minimums prescribed for bank holding companies, national banks and state savings banks. The Banks and SSB are required by the FRB to maintain reserve balances based on certain percentages of deposit types. At December 31, 1993, these reserves amounted to $101,835,000 and were satisfied by vault cash and noninterest bearing deposits with the Federal Reserve Bank. Under the regulations of the OCC, at December 31, 1993, SNBNC and SNBSC could have paid additional dividends to Southern National of $43.3 million and $12.9 million, respectively, without obtaining prior approval of the OCC. SSB, in accordance with Title IV of North Carolina general statutes, Chapter 16A.0105, can make capital distributions, including cash dividends, to Southern National with prior approval of the Administrator, in an amount less than the greater of one-half of net income for the most recent fiscal year or the average of net income for the most recent three years. 47 NOTE O. REGULATORY REQUIREMENTS AND OTHER RESTRICTIONS (CONTINUED) At the time a mutual thrift is converted to a capital stock form of organization, a liquidation account is established to be maintained for the benefit of eligible deposit account holders who continue to maintain their deposit accounts with the institution, or a successor institution, after conversion. Except for payment of dividends to Parent Company, the existence of these liquidation accounts will not restrict the use or application of shareholder's equity of SSB or SNBNC. The terms of the capital note agreement (Note I) provide for various restrictions on Southern National, including restrictions on the payment of dividends and incurrence of additional debt. Under these covenants, as of December 31, 1993, approximately $198.0 million was available for payment of cash dividends by Southern National out of its retained earnings of $202.3 million. The following table provides an analysis of loans made to directors, executive officers and their interests, which in the aggregate exceeded $60,000 at any time during 1993. All amounts shown represent loans made by the Banks, in the ordinary course of business at the Banks' normal credit terms, including interest rate and collateralization prevailing at the time for comparable transactions with other persons:
(DOLLARS IN THOUSANDS) Balance, December 31, 1992............ $ 27,220 Additions............................. 33,420 Repayments............................ 25,140 BALANCE, DECEMBER 31, 1993............ $ 35,500
48 NOTE P. PARENT COMPANY FINANCIAL STATEMENTS STATEMENTS OF CONDITION December 31, 1993 and 1992 (DOLLARS IN THOUSANDS)
1993 1992 ASSETS Cash.................................... $ 1,442 $ 2,819 Securities.............................. 108,041 48,013 Receivables from subsidiaries........... 8,232 848 Investment in bank subsidiaries, at equity................................ 411,537 387,114 Investment in other subsidiaries, at equity................................ 4,193 4,004 Premises................................ 6,330 6,501 Other assets............................ 1,849 785 Total assets........................ $541,624 $450,084 LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings................... $ 25,540 $ -- Accounts payable and accrued liabilities........................... 1,019 2,945 Capital notes and mortgages............. 11,916 15,250 Total liabilities................... 38,475 18,195 Shareholders' equity: Preferred stock....................... 3,850 3,850 Common stock.......................... 159,228 149,631 Paid-in capital....................... 137,804 120,973 Retained earnings..................... 202,267 157,435 Total shareholders' equity.......... 503,149 431,889 Total liabilities and shareholders' equity............................ $541,624 $450,084
STATEMENTS OF INCOME For the Years Ended December 31, 1993, 1992 and 1991 (DOLLARS IN THOUSANDS)
1993 1992 1991 INCOME Dividend income from bank subsidiaries................... $65,849 $16,849 $12,204 Interest income from subsidiaries................... 619 2,326 57 Interest on investment securities..................... 2,295 1,123 176 Rental income.................... 1,292 1,292 1,294 Other income..................... 254 102 66 Total income................... 70,309 21,692 13,797 EXPENSES Interest expense................. 1,630 1,512 1,670 Occupancy expense................ 173 182 172 Other expenses................... 409 865 386 Total expenses................. 2,212 2,559 2,228 Income before income tax provision (credit) and equity in undistributed earnings of subsidiaries..................... 68,097 19,133 11,569 Income tax provision (credit)..... 787 958 (201) Income before equity in undistributed earnings of subsidiaries..................... 67,310 18,175 11,770 Equity in undistributed earnings of subsidiaries.................. 4,683 29,064 22,049 NET INCOME........................ $71,993 $47,239 $33,819
STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1993, 1992 and 1991 (DOLLARS IN THOUSANDS)
1993 1992 1991 CASH FLOWS FROM OPERATING ACTIVITIES: Net income.......................... $ 71,993 $ 47,239 $ 33,819 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries................. (4,683) (29,064) (22,049) Depreciation of premises and equipment....................... 171 172 172 Discount accretion and premium amortization on securities...... 126 -- -- Decrease (increase) in receivables from subsidiaries............... (6,654) 2,225 (300) Decrease (increase) in other assets.......................... (1,064) (988) (432) Increase (decrease) in accounts payable and accrued liabilities..................... (603) 170 (246) Net cash provided by operating activities.................... 59,286 19,754 10,964 CASH FLOWS FROM INVESTING ACTIVITIES: Cash acquired in merger accounted for as purchase................... -- 311 -- Proceeds from maturities of investment securities............. 5,000 35,000 -- Proceeds from sales of investment securities........................ -- -- 336 Purchase of investment securities... (65,154) (77,739) (9,641) Additional investment in subsidiaries...................... (100) (32,500) (10,317) Return of investment in subsidiaries...................... -- -- 229 Net cash used in investing activities...................... (60,254) (74,928) (19,393) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt......... (3,334) (2,333) (1,334) Proceeds from common stock issued pursuant to stock options......... 1,504 630 28 Net proceeds from issuance of common stock...................... -- -- 20,695 Net proceeds from sale of preferred stock............................. -- 74,142 -- Net increase in short-term borrowings........................ 25,540 -- -- Cash dividends paid on stock........ (24,119) (17,273) (10,427) Net cash (used in) provided by financing activities............ (409) 55,166 8,962 NET INCREASE (DECREASE) IN CASH...... (1,377) (8) 533 CASH AT BEGINNING OF YEAR............ 2,819 2,827 51 CASH AT END OF YEAR.................. $ 1,442 $ 2,819 $ 584
During the years ended December 31, 1993, 1992 and 1991, Parent Company paid $1,306,000, $1,512,000 and $1,670,000, respectively, for interest on long-term debt. 49 FORM 10-K Securities and Exchange Commission WASHINGTON, D.C. 20549 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1993 Commission file number 0-4641 Southern National Corporation 500 North Chestnut Street Lumberton, North Carolina 28358 (919) 671-2000 Incorporated in the State of North Carolina IRS Employer Identification Number 56-0939887 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS Common Stock, $5 par value Depositary Shares, stated value $25 NAME OF EACH EXCHANGE ON WHICH REGISTERED New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE 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 [ ] 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. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 17, 1994 was $780.9 million. At February 17, 1994 the registrant had 42,353,374 shares of $5 par value common stock outstanding. Portions of the Registrant's Proxy Statement for the 1994 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. FORM 10-K CROSS REFERENCE INDEX
PART I. PAGE Item 1 Business 51-57 Item 2. Properties 41, 51, 53 Item 3. Legal Proceedings 47 Item 4. Submission of Matters to a Vote of Security Holders -- None PART II. Item 5. Market for Registrant's Common 26, 27, 29, 33, Equity and Related Stockholder 51, 52, 60 Matters Item 6. Selected Financial Data 29 Item 7. Management's Discussion and Analysis 14-28 of Financial Condition and Results of Operations Item 8. Financial Statements and 28, 31-49 Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure -- None PART III. Item 10. Directors and Executive Officers of 53 the Registrant* Item 11. Executive Compensation* Item 12. Security Ownership of Certain Beneficial Owners and Management* Item 13. Certain Relationships and Related Transactions* PART IV. Item 14. Exhibits, Financial Statement 50 Schedules and Reports on Form 8-K(Dagger) Signatures 53
* Incorporated by reference from Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 19, 1994 for which a Proxy Statement will be filed not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. (Dagger)A list of exhibits was filed separately. Copies of exhibits not contained herein may be obtained by writing to Sherry A. Kellett, Controller, 200 West Second Street, Winston-Salem, North Carolina 27101. Only those portions of this Annual Report referred to in the foregoing cross-reference index are deemed to be filed as a part of the Form 10-K. The SEC has not approved or disapproved of this report or passed upon its accuracy or adequacy. 50 BUSINESS Southern National is a multi-bank holding company headquartered in Lumberton, North Carolina. Southern National conducts its operations in North Carolina and South Carolina primarily through its commercial bank subsidiaries and, to a lesser extent, through its savings banks and other subsidiaries. At December 31, 1993, Southern National had total assets of $5.9 billion, deposits of $4.5 billion and shareholders' equity of $503 million. Based on total assets at December 31, 1993, Southern National was the sixth largest commercial banking entity based in the Carolinas. At December 31, 1993, 88% of Southern National's deposits were in North Carolina and 12% in South Carolina. SNBNC, Southern National's largest subsidiary, was founded in 1897 and currently operates through 144 banking offices in 69 cities and towns throughout North Carolina. Southern National Leasing Corp., a wholly-owned subsidiary of SNBNC, offers lease financing. Southern National Investment Services, Inc., provides investment services. Southern National entered the South Carolina banking market in 1986 with the formation of its second banking subsidiary, SNBSC. SNBSC serves South Carolina through 26 banking offices in 19 cities and towns. SNBNC and SNBSC focus on providing a wide range of banking services in their local markets for retail and commercial customers, including small and mid-size businesses, public agencies and local governments, trust customers and individuals. Southern National operates a savings bank subsidiary in North Carolina. SSB, a savings bank chartered by the state of North Carolina, engages primarily in the origination of mortgage loans on residential real estate and, to a lesser degree, other consumer and commercial loans. Substantially all of Southern National's loans are to businesses and individuals in the Carolinas. Southern National has no foreign loans and no loans that are characterized as highly leveraged transactions by bank regulators. In addition to its banking subsidiaries, Southern National has another active subsidiary, Unified Investors Life Insurance Company (Unified). Unified underwrites, as a reinsurer, certain credit life and accident and health insurance policies written by an unaffiliated insurance company in connection with certain loans made by the banks and thrifts. Southern National was incorporated in North Carolina as a bank holding company in 1968. Its executive offices are located at 500 North Chestnut Street, Lumberton, North Carolina 28358, and its telephone number is (910) 671-2000. COMPETITION The banking business is highly competitive. The banking subsidiaries of Southern National compete actively with national and state banks, savings and loan associations, securi- ties dealers, mortgage bankers, finance companies and insurance companies. SUPERVISION AND REGULATION The following generally describes the regulation to which Southern National and its subsidiary banks (the Subsidiaries) are subject. Bank holding companies and banks are extensively regulated under both federal and state law. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory provisions. Any change in applicable law or regulation may have a material effect on the business and prospects of Southern National and the Subsidiaries. Southern National is a legal entity separate and distinct from its subsidiary banks. Most of Southern National's revenues result from dividends paid to Southern National by the Subsidiaries. The right of Southern National, and consequently the right of creditors and shareholders of Southern National, to participate in any distribution of the assets or earnings of any Subsidiary through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the Subsidiary, except to the extent that claims of Southern National in its capacity as a creditor may be recognized. Under federal law, the Subsidiaries may not, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, Southern National or take securities of Southern National as collateral for loans to any borrower. The Subsidiaries are also subject to collateral security requirements for any loans or extensions of credit permitted by such exceptions. The Subsidiaries are subject to various statutory restrictions on their ability to pay dividends to Southern National. Under current supervisory practices of the Subsidiaries' regulatory agencies, prior approval from these agencies is required if cash dividends declared in any given year exceed net income for that year plus retained earnings of the two preceding years. Under these supervisory practices, at December 31, 1993, SNBNC and SNBSC could have paid additonal dividends to Southern National of $43.3 million and $12.9 million, respectively, without obtaining prior regulatory approval. SSB, in accordance with Title IV of North Carolina general statutes, Chapter 16A.0105, can make capital distributions, including cash dividends, to Southern National with prior approval of the Administrator, in an amount less than the greater of one-half of net income for the most recent fiscal year or the average of net income for the most recent three years. The payment of dividends by Southern National and the Subsidiaries may also be limited by other factors, such as requirements to maintain adequate capital above regulatory guidelines. The Comptroller, in the case of national bank subsidiaries, and the Administrator, in the case of the savings bank subsidiaries, have authority to prohibit any bank subsidiaries from engaging in an unsafe or unsound practice in conducting its business. The payment of dividends, depending upon the financial condition of the Subsidiary in question, could be deemed to constitute such an unsafe or unsound practice. The Comptroller and the Administrator have indicated their view that it generally would be an unsafe and unsound practice to pay dividends except out of current operating earnings. The ability of the Subsidiaries to pay dividends in the future is, and is expected to continue to be, influenced by regulatory policies and by capital guidelines. As a bank holding company, Southern National is subject to regulation by the FRB under the Bank Holding Company Act of 1956 (the BHCA). The FRB, the Comptroller and the Federal 51 Deposit Insurance Corporation (the FDIC) have issued substantially similar risk-based and leverage capital requirements applicable to United States banking organizations. In addition, those regulatory agencies may require that a bank organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The FRB's risk-based guidelines define a two-tier capital framework. Tier 1 capital consists of common and qualifying preferred shareholders' equity, less certain intangibles and other adjustments. Tier 2 capital consiusts of subordinated and other qualifying debt, and the allowance for credit losses up to 1.25% of risk-weighted assets. The sum of Tier 1 and Tier 2 capital represents qualifying total capital, at least 50% of which must consist of Tier 1 capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Risk-weighted assets are determined by assigning assets and off-balance exposures to one of four categories of risk-weights, based primarily on relative credit risk. The minimum Tier 1 capital ratio is 4% and the minimum total capital ratio is 8%. Southern National's Tier 1 and total capital to risk-weighted asset ratios as of December 31, 1993 were 14.43% and 15.56% respectively, exceeding the required minimums. In addition, the FRB has established minimum leverage ratio (Tier 1 capital to quarterly average tangible assets) guidelines for bank holding companies. These guidelines provide for a minimum ratio of 3% for bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating. All other bank holding companies will be required to maintain a leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. Southern National's leverage ratio as of December 31, 1993 was 8.6%. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels. As a result of the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. Default is defined generally as the existence of certain conditions indicating that default is likely to occur in the absence of regulatory assistance. Liability of any Subsidiary under this cross-guarantee provision could have a material adverse effect on the financial condition of any assessed Subsidiary and Southern National. The BHCA requires the prior approval of the FRB in any case where a bank holding company proposes to acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority owned by it or to merge or consolidate with any other bank holding company. The BHCA prohibits the FRB from approving an application from a bank holding company to acquire shares of a bank located outside the state in which the operations of the holding company's banking subsidiaries are principally conducted, unless such an acquisition is specifically authorized by statute of the state in which the bank whose shares are to be acquired is located. North Carolina has adopted legislation permitting such acquisitions by bank holding companies located in certain states that have reciprocal agreements with North Carolina. The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks. Under the BHCA, the FRB is authorized to approve the ownership of shares by a bank holding company in any company the activities of which the FRB has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. The FRB has by regulation determined that certain activities are closely related to banking within the meaning of the BHCA. These activities include: operating a mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing investment and financial advice; and acting as an insurance agent for certain types of credit-related insurance. The Subsidiaries are supervised and regularly examined by various federal and state regulatory agencies. The laws and regulations administered by the regulatory agencies affect corporate practices, such as payment of dividends, incurring debt and acquisition of financial institutions and other companies, and affect business practices, such as payment of interest on deposits, the charging of interest on loans, types of business conducted and location of offices. The Subsidiaries are subject to FDIC deposit insurance assessments. As mandated by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the FDIC adopted regulations effective January 1, 1993 for the transition from a flat-rate insurance assessment system to a risk-based system by January 1, 1994. Pursuant to these regulations, each of the Subsidiaries deposit insurance assessment will be individually set within a range of $.23 to $.31 per $100 of deposits and will depend on the institution's risk classification. Because of the increased number of bank and thrift failures in recent years and the related decreases in the reserves of the Bank Insurance Fund and the Savings Association Insurance Fund, it is possible that insurance assessments will increase. Additional assessments could have an adverse impact on Southern National's results of operations. Among other things, FDICIA identifies five capital categories for insured depository institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. FDICIA requires the federal banking regulators to take prompt corrective action with respect to insured depository institutions that do not meet minimum capital requirements. The FRB has adopted regulations establishing relevant capital requirements for banks. Under the regulations, a well capitalized institution must have a Tier 1 risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An adequately capitalized institution must have a Tier 1 risk-based capital ratio of at least 4%, a total risk-based capital ratio of at least 8% and a leverage ratio of at least 4% or, in some cases, 3%. Under these guidelines, at December 31, 1993, Southern National and each of the Subsidiaries were considered well capitalized. 52 In addition, undercapitalized depository institutions are required to submit capital restoration plans. In order to obtain acceptance of a capital restoration plan, a depository institution's holding company must guarantee the capital plan up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency at the time the institution fails to comply with the plan. The federal banking agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed. If an institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. In the event of bankruptcy of the parent holding company, such guarantee would have priority over the parent's general unsecured creditors. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if, after making the distribution or paying the fee, the depository institution would be undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of restrictions, including prohibition of capital distributions to its holding company without prior approval of the FRB, orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to the appointment of a conservator or receiver. The operations of Southern National and its subsidiaries are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the FRB regulates money and credit and interest rates in order to influence general economic conditions. These policies have significant influence on overall growth and distribution of loans, investments and deposits and affect interest rates charged on loans or paid on time and savings deposits. FRB monetary policies have had a significant effect on the operating results of commercial banks and thrifts in the past and are expected to continue to do so in the future. Various legislation, including proposals to overhaul the banking regulatory system and to limit the investments that a depository institution may make with insured funds are from time to time introduced in Congress. Southern National cannot determine the ultimate effect that FDICIA and the implementing regulations thereunder, or any potential legislation, if enacted, would have upon its financial condition or operations. EMPLOYEES At December 31, 1993, Southern National had approximately 2,549 full-time equivalent employees and considers its relationship with its employees to be good. PROPERTIES Southern National and its significant subsidiaries occupy their headquarters offices under long-term leases, and also own freestanding operations centers in Charlotte and Lumberton. Branch office locations are variously owned or leased. The premises occupied by Southern National and its subsidiaries are considered to be well-located and suitably equipped to serve as financial service facilities. EXECUTIVE OFFICERS The following table sets forth information with respect to the Executive Officers of Southern National. Indications are noted relevant to those individuals who have been affiliated with Southern National for less than five years.
NAME AGE POSITION L. Glenn Orr, Jr. 53 Chairman, President and Chief Executive Officer James F. Byrne 62 Executive Vice President and Chief Administrative Officer Gary E. Carlton 53 Executive Vice President and Chief Operating Officer Robert E. Greene 44 Executive Vice President Morris D. Marley 43 Executive Vice President, Chief Investment Officer and Treasurer Michael W. Sperry 48 Executive Vice President and Chief Credit Officer PREVIOUSLY SENIOR VICE PRESIDENT, NCNB NATIONAL BANK OF NORTH CAROLINA. John R. Spruill 51 Executive Vice President and Chief Financial Officer PREVIOUSLY A PRINCIPAL IN THE JOHN LITTLE GROUP. David L. Craven 41 Senior Vice President and Secretary PREVIOUSLY SENIOR VICE PRESIDENT AND GENERAL COUNSEL, CENTURA BANKS, INC. Sherry A. Kellett 49 Vice President and Controller
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. SOUTHERN NATIONAL CORPORATION Registrant L. GLENN ORR, JR. Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 24, 1994 by the following persons in the capacities indicated. L. GLENN ORR, JR. Chairman, President, Chief Executive Officer and Director (Principal Executive Officer) JOHN R. SPRUILL Executive Vice President and Chief Financial Officer (Principal Financial Officer) SHERRY A. KELLETT Vice President and Controller (Principal Accounting Officer) A MAJORITY OF THE DIRECTORS OF THE REGISTRANT whose names appear on page 59. 53 SUPPLEMENTAL FINANCIAL INFORMATION TABLE S-1 COMPOSITION OF LOAN AND LEASE PORTFOLIO* (DOLLARS IN THOUSANDS)
December 31, 1993 1992 1991 1990 1989 Loans -- Commercial, financial and agricultural....................... $ 553,118 $ 562,440 $ 519,681 $ 496,271 $ 430,836 Real estate -- construction.................................. 151,009 124,349 145,087 249,352 261,451 Real estate -- mortgage...................................... 2,198,871 1,805,852 1,443,784 1,215,124 1,152,458 Consumer..................................................... 370,860 362,026 384,515 362,664 348,309 Loans held for investment.................................. 3,273,858 2,854,667 2,493,067 2,323,411 2,193,054 Loans held for sale........................................ 49,692 1,973 8,912 -- -- Total loans.............................................. 3,323,550 2,856,640 2,501,979 2,323,411 2,193,054 Leases......................................................... 225,312 170,358 122,394 115,473 107,376 Total loans and leases................................... $3,548,862 $3,026,998 $2,624,373 $2,438,884 $2,300,430
* Balances are gross of unearned income. TABLE S-2 SELECTED LOAN MATURITIES AND INTEREST SENSITIVITY (DOLLARS IN THOUSANDS)
Commercial,December 31, 1993 Financial and Real Estate: Agricultural Construction Total Fixed rate: 1 year or less (2)................................................................... $ 55,093 $ 15,041 $ 70,134 1-5 years............................................................................ 103,618 28,289 131,907 After 5 years........................................................................ 23,653 6,458 30,111 Total.............................................................................. 182,364 49,788 232,152 Variable rate: 1 year or less (2)................................................................... 112,008 30,580 142,588 1-5 years............................................................................ 210,660 57,513 268,173 After 5 years........................................................................ 48,086 13,128 61,214 Total.............................................................................. 370,754 101,221 471,975 Total loans (1).................................................................... $ 553,118 $151,009 $704,127
(1) The table excludes: (i) consumer loans to individuals for household, family and other personal expenditures.......................................................................... $ 370,860,000 (ii) real estate mortgage loans....................................................... 2,198,871,000 (iii) loans held for sale............................................................. 49,692,000 (iv) leases........................................................................... 225,312,000 $2,844,735,000
(2) Includes demand loans. 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, or rollovers, 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. 54 TABLE S-3 LOANS AND LEASES 90 DAYS PAST DUE AND STILL ACCRUING (DOLLARS IN THOUSANDS)
December 31, 1993 1992 1991 1990 1989 Commercial, financial and agricultural...................... $ 130 $ 220 $ 311 $ 563 $ 3,144 Real estate -- all categories............................... -- 1,060 2,095 5,525 8,463 Consumer.................................................... 448 494 525 546 1,132 Leases...................................................... -- -- -- 545 103 Total..................................................... $ 578 $ 1,774 $ 2,931 $ 7,179 $ 12,842 Ratio of loans and leases 90 days or more past due and still accruing to outstanding loans and leases........ .02% .06% .11% .29% .56% Nonaccrual loans and leases................................. $ 19,571 $ 17,054 $ 31,001 $ 31,288 $ 13,184 Total outstanding loans and leases*......................... $3,548,862 $3,026,998 $2,624,373 $2,438,884 $2,300,430
* Balances are gross of unearned income and include loans held for sale. TABLE S-4 ALLOCATION OF RESERVE BY CATEGORY (DOLLARS IN THOUSANDS) [CAPTION]
December 31, 1993 1992 1991 1990 % LOANS % Loans % Loans % Loans IN EACH in each in each in each AMOUNT CATEGORY Amount category Amount category Amount category Balance at end of period applicable to: Commercial, financial and agricultural..................... $8,020 16% $8,403 19% $7,465 20% $4,827 20% Real estate: Construction and land development.................... 2,492 4 2,070 4 2,088 6 399 10 Mortgage......................... 13,193 62 12,782 60 8,512 55 10,399 50 Real estate -- total............. 15,685 66 14,852 64 10,600 61 10,798 60 Consumer.......................... 2,781 12 3,158 12 6,315 15 8,777 15 Leases............................ 1,218 6 1,313 5 1,610 4 1,021 5 Unallocated....................... 12,096 -- 10,151 -- 6,811 -- 2,897 -- Totals........................... $39,800 100% $37,877 100% $32,801 100% $28,320 100% 1989 % Loans in each Amount category Balance at end of period applicable to: Commercial, financial and agricultural..................... $2,957 19% Real estate: Construction and land development.................... N/A N/A Mortgage......................... N/A N/A Real estate -- total............. 7,926 15 Consumer.......................... 1,901 15 Leases............................ 1,074 5 Unallocated....................... 6,733 -- Totals........................... $20,591 54%
N/A -- Not available 55 TABLE S-5 COMPOSITION OF ALLOWANCE FOR LOAN AND LEASE LOSSES (DOLLARS IN THOUSANDS)
December 31, 1993 1992 1991 1990 1989 Balance, beginning of period.............................. $ 37,877 $ 33,052 $ 28,320 $ 20,591 $ 18,601 Charge-offs: Commercial, financial and agricultural................ (2,279) (3,653) (7,087) (3,846) (4,576) Real estate -- construction and land development...... (435) (705) (1,197) (283) N/A Real estate -- mortgage............................... (3,276) (5,497) (4,562) (5,965) N/A Real estate -- total................................ (3,711) (6,202) (5,759) (6,248) (1,856) Consumer.............................................. (2,784) (3,722) (3,949) (5,060) (2,727) Lease receivables..................................... (771) (1,428) (1,308) (419) (379) Total charge-offs................................... (9,545) (15,005) (18,103) (15,573) (9,538) Recoveries: Commercial, financial and agricultural................ 1,093 438 593 361 442 Real estate -- construction and land development...... 184 275 248 -- N/A Real estate -- mortgage............................... 973 595 503 225 N/A Real estate -- total................................ 1,157 870 751 225 199 Consumer.............................................. 745 709 635 841 679 Lease receivables..................................... 149 188 116 126 43 Total recoveries.................................... 3,144 2,205 2,095 1,553 1,363 Net charge-offs........................................... (6,401) (12,800) (16,008) (14,020) (8,175) Provision charged to expense............................ 5,574 14,775 19,639 21,749 10,165 Allowance of acquired loans............................. 2,750 2,850 850 -- -- Balance, end of period.................................... $ 39,800 $ 37,877 $ 32,801 $ 28,320 $ 20,591 Average loans and leases*................................. $3,204,116 $2,862,198 $2,542,097 $2,375,117 $2,240,064 Net charge-offs as percent of average loans and leases.... .20% .45% .63% .59% .36%
* -- Loans and leases are net of unearned income and loans held for sale. N/A -- Not available TABLE S-6 CHANGES IN NONPERFORMING ASSETS (DOLLARS IN THOUSANDS)
1993 1992 Balance at January 1,.................................................................................... $ 29,697 $ 42,670 Additions.............................................................................................. 28,097 33,675 Acquired by purchase................................................................................... 3,064 -- Payments/sales......................................................................................... (20,820) (28,672) Return to performing................................................................................... (3,698) (4,627) Charge-offs/writedowns................................................................................. (10,782) (13,349) Transfer to held for sale.............................................................................. (3,768) -- Balance at December 31,.................................................................................. $ 21,790 $ 29,697
56 TABLE S-7 COMPOSITION OF SECURITIES PORTFOLIO
1993 1992 1991 (DOLLARS IN THOUSANDS) U.S. Treasury........................................................................... $ 695,034 $ 878,236 $ 518,868 U.S. Government agencies and corporations............................................... 408,644 349,346 554,816 States and political subdivisions....................................................... 54,047 57,680 50,864 Other securities........................................................................ 26,676 23,095 10,721 Total investment securities........................................................... 1,184,401 1,308,357 1,135,269 Securities held for sale: U.S. Treasury......................................................................... 688,345 3,273 -- U.S. Government agencies and corporations............................................. 106,128 266,074 -- Total securities held for sale........................................................ 794,473 269,347 -- Total securities...................................................................... $1,978,874 $1,577,704 $1,135,269
TABLE S-8 TIME DEPOSITS $100,000 AND OVER (DOLLARS IN THOUSANDS) Maturity Less than three months......................... $350,931 Four through six months........................ 105,604 Seven through twelve months.................... 54,724 Over twelve months............................. 37,744 BALANCE AT DECEMBER 31, 1993..................... $549,003
TABLE S-9 SHORT-TERM BORROWINGS (DOLLARS IN THOUSANDS) The following information summarizes certain pertinent information for the past three years on securities sold under agreements to repurchase, master notes, federal funds purchased, Federal Reserve discount window borrowings and U.S. Treasury tax and loan deposit notes payable.
1993 1992 1991 Maximum outstanding at any month- end during the year.............. $703,614 $436,970 $384,954 Average outstanding during the year............................. 462,297 389,678 265,805 Average interest rate during the year............................. 2.95% 3.58% 5.88% Average interest rate at end of year............................. 2.91 3.84 3.94
TABLE S-10 SELECTED FINANCIAL DATA OF SUBSIDIARIES (DOLLARS IN THOUSANDS)
SNBNC SNBSC SSB 1993 1992 1991 1993 1992 1991 1993 Total assets............. $4,911,732 $4,164,913 $3,380,639 $ 689,302 $ 596,243 $ 527,397 $ 235,954 Securities............... 1,665,173 1,382,615 1,003,023 169,091 122,487 110,106 31,344 Loans and leases, net of unearned income.......... 2,841,550 2,392,660 2,058,249 483,625 420,011 364,750 189,739 Deposits................. 3,808,031 3,475,599 2,922,613 528,739 462,056 425,153 196,559 Shareholder's equity..... 328,171 309,440 234,735 56,440 49,886 36,176 26,925 Net interest income...... 183,031 168,403 128,688 29,213 26,992 21,542 10,746 Provision for loan and lease losses............. 3,765 11,430 15,793 1,504 3,211 3,716 305 Noninterest income....... 58,926 37,762 39,005 7,165 5,892 5,413 1,227 Noninterest expense...... 146,143 133,988 111,802 22,232 19,816 18,539 5,407 Net income............... 58,610 35,112 27,662 8,286 6,176 2,914 3,443 1992 1991 Total assets............. $ 238,349 $ 240,259 Securities............... 24,209 16,741 Loans and leases, net of unearned income.......... 180,625 184,598 Deposits................. 199,169 205,397 Shareholder's equity..... 33,686 29,582 Net interest income...... 10,707 8,843 Provision for loan and lease losses............. 134 131 Noninterest income....... 984 854 Noninterest expense...... 5,163 4,265 Net income............... 4,105 3,376
TABLE S-11 CAPITAL ADEQUACY
Regulatory Southern Minimums National SNBNC SNBSC SSB Risk-based capital ratios: Tier 1 capital (2)....................................................... 4.00% 14.43% 11.72% 11.08% 18.62% Total risk-based capital (3)............................................. 8.00 15.56 12.33 12.35 19.07 Tier 1 leverage ratio (4).................................................. 3.00 8.6 6.7 7.7 11.5
(1) Regulatory minimums are based upon fully phased-in requirements effective at December 31, 1992. (2) Shareholders' equity less certain intangible assets; computed as a ratio to risk-adjusted assets, as defined in the 1992 risk-based capital. (3) Tier 1 capital plus qualifying loan loss allowance and subordinated debt; computed as a ratio to risk-adjusted assets as defined in the risk-based capital guidelines. (4) Tier 1 capital; computed as a ratio to fourth quarter average assets less goodwill. 57 NOTES 58 B O A R D O F D I R E C T O R S L. Glenn Orr, Jr. (1) CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER Southern National Corporation Lumberton, North Carolina CHAIRMAN AND CHIEF EXECUTIVE OFFICER Southern National Bank of North Carolina (SNB North Carolina) CHAIRMAN Southern National Bank of South Carolina (SNB South Carolina) *Hector MacLean (1) CHAIRMAN EMERITUS Southern National Corporation Lumberton, North Carolina CHAIRMAN EMERITUS SNB South Carolina William F. Black (1, 5) RETIRED-FORMER EXECUTIVE VICE PRESIDENT SNB North Carolina Greensboro, North Carolina *Micou F. Browne (2) RETIRED-FORMER EXECUTIVE VICE PRESIDENT Durham Life Insurance Co. Durham, North Carolina Gary E. Carlton (1) EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER Southern National Corporation Winston-Salem, North Carolina PRESIDENT AND CHIEF OPERATING OFFICER SNB North Carolina VICE CHAIRMAN SNB South Carolina *A.M. Covington, M.D. (1) SURGEON Rockingham, North Carolina Ronald E. Deal (1, 3) CHAIRMAN Wesley Hall Hickory, North Carolina William H. Geiger, Jr. (4) CHAIRMAN Development Properties, Inc. Columbia, South Carolina *M. Carr Gibson (3) CHAIRMAN Canal Industries Canal Wood Corp. Lumberton, North Carolina *Voit Gilmore PRESIDENT Storey Corporation Pinehurst, North Carolina L. Vincent Hackley, Ph.D. (2, 5) CHANCELLOR AND TENURED PROFESSOR OF POLITICAL SCIENCE Fayetteville State University Fayetteville, North Carolina *James A. Hancock (1) RETIRED-CHAIRMAN Frank L. Blum Construction Co. Winston-Salem, North Carolina James A. Hardison, Jr. (1) EXECUTIVE VICE PRESIDENT SNB North Carolina Wadesboro, North Carolina *M.W. Harriss, Jr. (2) RETIRED-FORMER SECRETARY Southern National Corporation Sanford, North Carolina Donald C. Hiscott (2) PRESIDENT AND CHIEF EXECUTIVE OFFICER SGH Healthcare Corp. Lumberton, North Carolina Charles A. Hostetler (2) RETIRED-ATTORNEY Hostetler & McNeill Raeford, North Carolina Richard Janeway, M.D. (1, 3) EXECUTIVE VICE PRESIDENT FOR HEALTH AFFAIRS AND EXECUTIVE DEAN; PROFESSOR OF NEUROLOGY AND RESEARCH ASSOCIATE IN RADIOLOGY Bowman Gray School of Medicine of Wake Forest University Winston-Salem, North Carolina Joseph A. McAleer, Jr. (4) CHIEF EXECUTIVE OFFICER AND DIRECTOR Krispy Kreme Doughnut Corp. Winston-Salem, North Carolina Albert O. McCauley (2) PRESIDENT McCauley Moving & Storage of Fayetteville, Inc. Fayetteville, North Carolina Dickson McLean, Jr. (1, 3) ATTORNEY, PRESIDENT McLean, Stacy, Henry, McLean, Ramsaur & Slaughter, P.A. Lumberton, North Carolina Jonnie H. McLeod, M.D. (2, 5) PROFESSOR EMERITUS Department of Human Services University of North Carolina at Charlotte Charlotte, North Carolina Charles E. Nichols (1) OF COUNSEL Nichols, Caffrey, Hill, Evans and Murrelle Greensboro, North Carolina C. Edward Pleasants, Jr. (2) PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR Pleasants Hardware Company Winston-Salem, North Carolina Nido R. Qubein (1, 3) CHAIRMAN AND CHIEF EXECUTIVE OFFICER Creative Services, Inc. High Point, North Carolina Ted Reynolds (4) ATTORNEY, SENIOR PARTNER Reynolds & Pendergrass, P.A. Raleigh, North Carolina *W. Scott Shepherd (4) RETIRED-BUSINESS CONSULTANT Lumberton, North Carolina *V.F. Talley, Jr. (2) PRESIDENT V-Point Super Markets, Inc. Fayetteville, North Carolina A. Bruce Williams (1) RETIRED-FORMER PRESIDENT AND CHIEF OPERATING OFFICER SNB North Carolina Fairmont, North Carolina A. Tab Williams, Jr. (1) CHAIRMAN AND CHIEF EXECUTIVE OFFICER A.T. Williams Oil Co. Winston-Salem, North Carolina E.M. Williams (1, 3) PRESIDENT Sanford Notions, Inc. and W.S.W. Company Sanford, North Carolina T.H. Yancey (4) SECRETARY AND TREASURER Yancey Motors, Inc. Oxford, North Carolina *Director Emeritus Retired January 1, 1994 COMMITTEES 1 -- Loan 2 -- Audit 3 -- Compensation and Nominating 4 -- Trust 5 -- Community Reinvestment Act 59 C O R P O R A T E I N F O R M A T I O N Notice of Annual Meeting THE ANNUAL MEETING OF THE SHAREHOLDERS OF SOUTHERN NATIONAL CORPORATION WILL BE HELD TUESDAY, APRIL 19, 1994, AT 11 A.M. AT THE PINE CREST COUNTRY CLUB, LUMBERTON, NORTH CAROLINA. CORPORATE OFFICERS L. GLENN ORR, JR. Chairman, President and Chief Executive Officer HECTOR MACLEAN Chairman Emeritus JAMES F. BYRNE Executive Vice President and Chief Administrative Officer GARY E. CARLTON Executive Vice President and Chief Operating Officer ROBERT E. GREENE Executive Vice President MORRIS D. MARLEY Executive Vice President, Chief Investment Officer and Treasurer MICHAEL W. SPERRY Executive Vice President and Chief Credit Officer JOHN R. SPRUILL Executive Vice President and Chief Financial Officer DAVID L. CRAVEN Senior Vice President and Secretary SHERRY A. KELLETT Vice President and Controller COMMON STOCK AND PREFERRED STOCK Southern National's common stock and preferred stock are traded on the New York Stock Exchange under the trading symbols SNB and SNBPFA. ADDITIONAL INFORMATION: Analysts, investors and others seeking financial information -- contact Sherry A. Kellett, Vice President and Controller, (910) 773-7503. News media representatives and others seeking general information -- contact Robert A. Denham, Director of Public Relations, (910) 773-7363. Shareholders and others seeking information on Southern National's stock and on dividend reinvestment services -- contact Faye M. Hollowell, Director of Investor Relations, (910) 671-2273. C O R P O R A T E N E T W O R K SOUTHERN NATIONAL CORPORATION AND SUBSIDIARIES Affiliated Companies: SOUTHERN NATIONAL BANK OF NORTH CAROLINA Aberdeen (2)* Apex Boone Burlington Butner Cary Chadbourn Charlotte (11) Cherryville (2) Clayton Clemmons Clinton (3) Creedmoor Denton Eden (2) Fairmont Fayetteville (9) Fremont Fuquay-Varina Garner Gastonia (4) Goldsboro (4) Greensboro (6) Hamlet Henderson (2) Hickory (6) High Point Hope Mills Kernersville King Kinston Laurinburg (2) Lenoir Lexington (2) Lillington Lumberton (4) Madison Matthews Mocksville Morven Mt. Airy (2) Mt. Gilead Newton Newton Grove North Wilkesboro Oxford (2) Pilot Mountain Pinehurst Princeton Raeford Raleigh (6) Red Springs (2) Rockingham (2) Roseboro Rowland Sanford (3) Shallotte Southern Pines Sparta Spring Lake Stanleyville Statesville (2) Tabor City Taylorsville Troutman Wadesboro (2) Welcome Whiteville (3) Wilkesboro Wilmington (3) Wilson (2) Winston-Salem (11) Yadkinville SOUTHERN NATIONAL BANK OF SOUTH CAROLINA Anderson (2) Belton (2) Camden Charleston (6) Chester Clemson (2) Columbia (11) Easley Florence (2) Goose Creek Greenville (10) Greer Honea Path Irmo (2) James Island Johns Island Lancaster (2) Lexington (2) Little River Loris Lyman Mauldin Mt. Pleasant (2) Myrtle Beach Newberry (2) North Charleston North Myrtle Beach Orangeburg (2) Piedmont Rock Hill (2) Seneca Socastee Spartanburg (3) St. Matthews Summerville Sumter (3) Taylors Walterboro West Columbia Williamston SOUTHERN NATIONAL LEASING CORP. Charlotte Greensboro Raleigh Wilmington SNB SAVINGS BANK, INC., SSB Dobson Elkin (2) Hildebran Morganton Valdese Yadkinville UNIFIED INVESTORS LIFE INSURANCE COMPANY Lumberton SOUTHERN NATIONAL INVESTMENT SERVICES, INC. Charlotte * Numbers in parentheses indicate number of branches when more than one. NOTE: Network listing includes three mergers completed by Southern National in early 1994: The First Savings Bank of Greenville, S.C.; Regency Bancshares Inc. of Hickory, N.C.; and Home Federal Savings Bank of Statesville, N.C. 60 **************************************************************************** APPENDIX On Page 1 of Exhibit 13 two bar graphs appear where noted. The plot points for each are as listed below: Net Income (In millions) 1989 1990 1991 1992 1993 $29.1 $25.8 $33.8 $47.2 $72.0 Average Total Assets (In millions) 1989 1990 1991 1992 1993 $3.35 $3.62 $3.87 $4.71 $5.31 On Page 3 of Exhibit 13 a photo of the Executive Management Team appears at the top of the page. The caption is as listed in text on that page. On Page 5 of Exhibit 13 three bar graphs appear where indicated. The plot points are as listed below: Return On Assets 1989 1990 1991 1992 1993 .87% .71% .87% 1.00% 1.35% Return On Equity 1989 1990 1991 1992 1993 12.92% 10.46% 12.60% 12.61% 17.32% Nonperforming Assets as % of Loan-Related Assets 1990 1991 1992 1993 1.98% 1.62% .99% .63% On Pages 8 and 9 of Exhibit 13 there is a map spread across both pages depicting Southern National Cities and Offices as of February 28, 1994. On Page 30 of Exhibit 13 five signatures appear where indicated. One each for the following names: L. Glenn Orr, Jr., John R. Spruill, Sherry A. Kellett and two for Arthur Andersen & Co. EX-21 13 EXHIBIT 21.1 EXHIBIT 21.1 Subsidiaries of the Registrant Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT Southern National Corporation, a North Carolina corporation, is the parent 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 relation 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 of Voting Jurisdiction Securities Of Organization Owned Southern National Bank of North Carolina United States 100% Southern National Leasing Corporation North Carolina 100% (1) Southern Natonal Mortgage Company North Carolina 100% (1) Soutehrn National Investment Services, Inc. North Carolina 100% (1) Fay-Charl Corporation North Carolina 100% (1) Workmen's Service Corporation North Carolina 100% (1) First Savings Service Corporation North Carolina 100% (1) Citizens Service Corporation North Carolina 100% (1) Grey Eagle, Inc. Delaware 100% (1) Southern National Bank of South Carolina United States 100% Southern National Realty Corporation North Carolina 100% (2) SNB Savings Bank, Inc., SSB North Carolina 100% People's Service Corporation North Carolina 100% (3) ECF, Inc. North Carolina 100% (3) Unified Investors Life Insurance Company Arizona 100% Southern International Corporation North Carolina 100% (1) Owned by Southern National Bank of North Carolina. (2) Owned by Southern National Bank of South Carolina. (3) Owned by SNB Savings Bank, Inc., SSB EX-23 14 EXHIBIT 23.1 EXHIBIT 23.1 Consent of Arthur Andersen & Co. 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 No.33-52367. ARTHUR ANDERSEN & CO. Charlotte, North Carolina, March 28, 1994 EX-99 15 EXHIBIT 99.1 EXHIBIT 99.1 Proxy Statement of the 1994 Annual Meeting of Shareholders, dated March 16, 1994 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) (xx) Filed by the Registrant ( ) Filed by a Party other than the Registrant Check the appropriate box: ( ) Preliminary Proxy Statement (xx) Definitive Proxy Statement ( ) Definitive Additional Materials ( ) Soliciting Material Pursuant to (section mark)240.14a-11(c) or (section mark)240.14a-12 Southern National Corporation (Name of Registrant as Specified In Its Charter) (Name of Person(s) Filing Proxy Statement) PAYMENT OF FILING FEE (Check the appropriate box): (xx) $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2). ( ) $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). ( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1) Title of each class of securities to which transaction applies: 2) Aggregate number of securities to which transaction applies: 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11: * * Set forth the amount on which the filing fee is calculated and state how it was determined. ( ) Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: $0 2) Form, Schedule or Registration Statement No.: Def 14-A 3) Filing Party: Washburn Graphics, Inc. 4) Date Filed: 3-17-94 ( ) Filing Fee of $ was previously paid on , 199 , the date the Preliminary Proxy Statement was filed. SOUTHERN NATIONAL CORPORATION Post Office Box 1489 Lumberton, North Carolina 28359 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS April 19, 1994 TO THE SHAREHOLDERS OF SOUTHERN NATIONAL CORPORATION: Notice is hereby given that the Annual Meeting of Shareholders of Southern National Corporation (the Corporation) will be held on Tuesday, April 19, 1994 (at 11:00 A.M. local time), at PINE CREST COUNTRY CLUB, MAXTON HIGHWAY, LUMBERTON, NORTH CAROLINA, for the following purposes: (1) To elect eight Directors with terms expiring in 1997 and two Directors with terms expiring in 1996. (2) To approve the Corporation's Omnibus Stock Incentive Plan. (3) To approve the Corporation's Long-Term Incentive Plan. (4) To approve the Corporation's Short-Term Incentive Plan. (5) To approve an amendment to the Corporation's Incentive Stock Option Plan and Non-Qualified Stock Option Plan. (6) To transact such other business as may properly come before the meeting. Pursuant to the provisions of the North Carolina Business Corporation Act, February 17, 1994 has been fixed as the record date for the determination of holders of Common Stock entitled to notice of and to vote at the Annual Meeting of Shareholders or any adjournment thereof. Accordingly, only shareholders of record at the close of business on the record date will be entitled to notice of and to vote at said meeting or any adjournment thereof. It is important that your shares of the Corporation's Common Stock be represented at this meeting in order that the presence of a quorum may be assured. A copy of the Annual Report, containing the financial statements of the Corporation for the year ended December 31, 1993, is enclosed herewith. By Order of the Board of Directors (Sicnature of David L. Craven) DAVID L. CRAVEN, SECRETARY March 16, 1994 Even if you plan to attend the meeting in person, please date and execute the enclosed proxy and mail it promptly. If you attend the meeting, you may revoke your proxy and vote your shares in person. A postage-paid, return-addressed envelope is enclosed. SOUTHERN NATIONAL CORPORATION 500 North Chestnut Street Lumberton, North Carolina 28359 PROXY STATEMENT The enclosed proxy, for use only at the Annual Meeting of Shareholders to be held April 19, 1994, at 11:00 A.M. local time, and any adjournment thereof, is solicited on behalf of the Board of Directors of Southern National Corporation (the Corporation). The approximate date this proxy material is first being sent to shareholders is March 16, 1994. Such solicitation is being made by mail and may be made in person or by fax or telephone by officers or employees of the Corporation. All expenses incurred in such solicitation will be paid by the Corporation or its subsidiaries. Banks, brokerage houses and other institutions, nominees and fiduciaries will be requested to forward the soliciting material to beneficial owners and to obtain authorization for the execution of proxies. The Corporation will, upon request, reimburse such parties for their reasonable expenses in forwarding proxy material to beneficial owners. The accompanying proxy is for use at the meeting if a shareholder either will be unable to attend in person or will attend but wishes to vote by proxy. The proxy may be revoked by the shareholder at any time before it is exercised by filing with the Secretary of the Corporation an instrument revoking it, filing a duly executed proxy bearing a later date or by attending the meeting and electing to vote in person. All shares of the Corporation's Common Stock represented by valid proxies received pursuant to this solicitation, and not revoked before they are exercised, will be voted in the manner specified therein. If no specification is made, the proxies will be voted in favor of: (1) electing 10 nominees named in this Proxy Statement to the Board of Directors; (2) approving the Corporation's Omnibus Stock Incentive Plan; (3) approving the Corporation's Long-Term Incentive Plan; (4) approving the Corporation's Short-Term Incentive Plan and (5) approving an amendment to the Corporation's Incentive Stock Option Plan and Non-Qualified Stock Option Plan. VOTING SECURITIES OUTSTANDING Pursuant to the provisions of the North Carolina Business Corporation Act, February 17, 1994 has been fixed as the record date for the determination of holders of Common Stock entitled to notice of and to vote at the Annual Meeting of Shareholders. Each share of the Corporation's Common Stock issued and outstanding on February 17, 1994 is entitled to one vote on all proposals at the meeting, except that shares held by Southern National Bank of North Carolina (SNB North Carolina) or Southern National Bank of South Carolina (SNB South Carolina), in a fiduciary capacity, may only be voted in accordance with the instruments creating the fiduciary capacity. Holders of shares of Common Stock vote together as a voting group on all such proposals. As of the close of business on February 17, 1994, there were 42,353,374 shares of Common Stock of the Corporation outstanding and entitled to vote. SECURITY OWNERSHIP The following is the only shareholder known to the Corporation to be the beneficial owner as of February 17, 1994, of more than 5% of the Corporation's Common Stock:
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) CLASS Southern National Bank of 2,667,044 6.30% North Carolina P.O. Box 1489 500 North Chestnut Street Lumberton, North Carolina 28359
1 (1) The amount shown represents shares held in a fiduciary capacity for various accounts, including: (i) 2,537,212 shares (or 5.99% of the shares outstanding) held for the account of the Southern National Employee Stock Ownership Plan (the ESOP), as to which SNB North Carolina has sole investment power, votes shares which have been allocated to individual accounts in accordance with the instructions of the participants and does not vote shares as to which no instructions are received; (ii) 90,698 shares held for the account of the Southern National ESOP Excess Plan, as to which SNB North Carolina has sole voting power, but not investment power; and (iii) 39,134 shares held for customers of SNB North Carolina and SNB South Carolina as to which it has sole voting and sole investment power. Of that total, 36,801 shares are held by SNB North Carolina and 2,333 shares are held by SNB South Carolina. In connection with SNB North Carolina's beneficial ownership as disclosed above, all voting rights, investment discretion and other fiduciary duties of the bank are set forth in the plan documents in connection with the various accounts listed herein. The table below sets forth the beneficial ownership of Common Stock and Depositary Shares (each Depositary Share representing a one-quarter interest in a share of the Corporation's 6 3/4% Cumulative Convertible Preferred Stock, Series A (6 3/4% Preferred Stock )) by all Directors and nominees, the Chief Executive Officer and the four next most highly compensated executive officers and all Directors and executive officers of the Corporation as a group as of February 22, 1994. Unless otherwise indicated, all persons listed below have sole voting and investment power over all shares beneficially owned. No person or group owns more than 1% of the 6 3/4% Preferred Stock.
SHARES OF DEPOSITARY COMMON STOCK SHARES BENEFICIALLY PERCENT OF BENEFICIALLY NAME OF BENEFICIAL OWNER OR NUMBER OF PERSONS IN GROUP OWNED (1)(2) COMMON STOCK OWNED (3) L. Glenn Orr, Jr................................................. 132,665 * -- Gary E. Carlton.................................................. 32,503 * -- William F. Black................................................. 64,091 * -- Luther C. Boliek................................................. 121,028 * -- H. Ray Davis..................................................... 111,674 * -- Ronald E. Deal................................................... 22,104 * -- William N. Geiger................................................ 17,910 * -- Paul S. Goldsmith................................................ 46,305 * -- Lloyd Vincent Hackley............................................ 3,446 * -- James A. Hardison................................................ 2,553 * -- Donald C. Hiscott................................................ 11,999 * -- Richard Janeway, M.D............................................. 25,616 * 400 Joseph A. McAleer................................................ 200 * -- Albert O. McCauley............................................... 2,071 * -- Dickson McLean, Jr............................................... 20,157 * 400 Charles E. Nichols............................................... 69,641 * -- C. Edward Pleasants.............................................. 60,514 * -- Nido R. Qubein................................................... 51,017 * -- Ted R. Reynolds.................................................. 11,245 * -- T. H. Yancey..................................................... 110,000 * 600 Robert H. Yeargin................................................ 35,791 * -- A. Bruce Williams................................................ 26,725 * -- A. Tab Williams.................................................. 329,282 * 11,000 Edward M. Williams............................................... 18,326 * -- John R. Spruill.................................................. 26,689 * -- Michael W. Sperry................................................ 21,130 * -- James F. Byrne................................................... 30,840 * 1,062 Directors and executive officers as a group (33 persons)............................................. 1,464,955 3.46% 14,462
2 * Less than 1%. (1) As reported to the Corporation by the Directors and nominees (including shares held by spouses, minor children, family companies, partnerships and trusts). The table includes options which become exercisable within 60 days after February 22, 1994 and shares allocated to individual accounts by the ESOP, voting of which is directed by those named persons and group members who participate in the ESOP and as to which such persons have no investment power. (2) Unless otherwise indicated, the persons named in the table have sole voting and investment power over the shares included in the table. Does not include shares of Common Stock that could be acquired by conversion of the 6 3/4% Preferred Stock. (3) Each Depositary Share is convertible into 1.4767 shares of Common Stock. PROPOSAL 1: ELECTION OF DIRECTORS The Board of Directors currently consists of 22 persons. The Board of Directors has authorized increasing the size of the Board following the Annual Meeting of Shareholders to 24 persons. The Board is divided into three classes, each class to be as nearly equal in number as possible. There are 10 nominees for election as Directors, two of whom will serve for a term expiring in 1996 and eight of whom will serve for a term expiring in 1997. Edward M. Williams is retiring from the Board as of January 1, 1995, but will continue to serve as a Consultant thereafter. It is intended that the persons named in the accompanying form of proxy will vote to elect the 10 nominees listed below as Directors, unless authority so to vote is withheld. Each nominee is currently a member of the Board of Directors, except for Luther C. Boliek, H. Ray Davis, Paul S. Goldsmith and Robert H. Yeargin, who are former directors of The First Savings Bank, FSB which merged with and into Southern National Bank of South Carolina in January 1994. Although management expects that each of the nominees will be available for election, in the event a vacancy in the slate of nominees is occasioned by unexpected occurrence, it is intended that shares of the Corporation's Common Stock represented by proxies will be voted for the election of a substitute nominee selected by the persons named in the accompanying form of proxy. The election of each nominee requires the affirmative vote of a plurality of the shares of Common Stock cast in the election of Directors. Votes that are withheld and shares held in street name that are not voted in the election of Directors will not be included in determining the number of votes cast. The names of the nominees for election and the other continuing members of the Board of Directors, their principal occupations and certain other information with respect to such persons are as follows. 3 NOMINEES FOR ELECTION AS DIRECTORS FOR THREE-YEAR TERMS EXPIRING IN 1997
DIRECTOR PRINCIPAL OCCUPATION OF CORPORATION DURING THE PAST OR PREDECESSOR NAME AGE FIVE YEARS; OTHER DIRECTORSHIPS BANK SINCE (1) William N. Geiger, Jr. 59 Chairman of Development Properties, Incorporated; Chairman 1987 of GMK Associates (Real estate development) until 1988 James A. Hardison, Jr. 64 Executive Vice President of Southern National Bank of North 1984 Carolina; former President of Pee Dee Oil Co.; former President and Chairman of First National Bank of Anson County Charles E. Nichols (2) 66 Of Counsel, Nichols, Caffrey, Hill, Evans & Murrelle, 1984 Attorneys-at-Law Ted R. Reynolds (2) 61 Senior Partner of Reynolds & Pendergrass, P.A., 1989 Attorneys-at-Law Joseph A. McAleer 44 Chief Executive Officer and Director, Krispy Kreme Doughnut 1993 Corporation since 1992; prior thereto President and Chief Operating Officer and Director, Krispy Kreme Doughnut Corporation Luther C. Boliek 56 Vice Chairman, Southern National Corporation since January 1981 1994; prior thereto President and Chief Executive Officer and Director, The First Savings Bank, FSB since 1992; prior thereto President, Chief Operating Officer and Director, The First Savings Bank, FSB H. Ray Davis 66 Retired; former Chairman of the Board, The First Savings 1968 Bank, FSB Paul S. Goldsmith 60 President, William Goldsmith Company, Inc. (Insurance) 1970
NOMINEES FOR ELECTION AS DIRECTORS FOR TWO-YEAR TERMS EXPIRING IN 1996
DIRECTOR PRINCIPAL OCCUPATION OF CORPORATION DURING THE PAST OR PREDECESSOR NAME AGE FIVE YEARS; OTHER DIRECTORSHIPS BANK SINCE (1) T. H. Yancey 68 Secretary and Treasurer, Yancey Motors, Inc. 1991 Robert H. Yeargin 67 Chairman and CEO, Yeargin Properties, Inc. (Construction) 1968
4 CONTINUING DIRECTORS
DIRECTOR PRINCIPAL OCCUPATION OF CORPORATION DURING THE PAST OR PREDECESSOR NAME AGE FIVE YEARS; OTHER DIRECTORSHIPS BANK SINCE (1) TERMS EXPIRING IN 1996 William F. Black 63 Retired; former Executive Vice President of Southern 1984 National Bank of North Carolina; former President and Treasurer of Community Bank of Carolina Dickson McLean, Jr. (2)(4) 66 President of McLean, Stacy, Henry, McLean, Slaughter & 1956 Ramsaur, P.A., Attorneys-at-Law C. Edward Pleasants (3) 53 President, Chief Executive Officer and Director, Pleasants 1993 Hardware Company Nido R. Qubein (4) 45 Chief Executive Officer of Creative Services, Inc. 1990 (International management consulting) A. Bruce Williams 66 Retired; former President, Chief Administrative and 1977 Operating Officer of Southern National Bank of North Carolina; former Executive Vice President of the Corporation; former Vice President of Southern National Bank of South Carolina A. Tab Williams, Jr. 66 Chairman and Chief Executive Officer of A. T. Williams Oil 1982 Company Edward M. Williams (4) 70 President of W.S.W. Company and Sanford Notions, Inc. 1965 (Textiles) TERMS EXPIRING IN 1995 L. Glenn Orr, Jr. 53 Chairman, Chief Executive Officer, and President of the 1982 Corporation; Chairman and Chief Executive Officer of Southern National Bank of North Carolina; Chairman of Southern National Bank of South Carolina Gary E. Carlton 53 President and Chief Operating Officer of Southern National 1986 Bank of North Carolina; Executive Vice President of the Corporation; Vice Chairman of Southern National Bank of South Carolina Ronald E. Deal (4) 50 Chairman of Wesley Hall; Investor; President of Highland 1986 House Furniture Company until 1988 Lloyd Vincent Hackley (3) 53 Chancellor; Professor of Political Science, Fayetteville 1992 State University; Vice President for Student and Special Programs, University of North Carolina Donald C. Hiscott (3) 61 President and Chief Executive Officer of SGH Healthcare 1987 Corporation Richard Janeway, M.D. (4) 61 Executive Vice President for Health Affairs and Executive 1989 Dean; Professor of Neurology and Research Associate in Radiology, Bowman Gray School of Medicine, Wake Forest University Albert O. McCauley (3) 53 Secretary and Treasurer, Quick Stop Food Marts, Inc. 1993
(1) On January 1, 1969, the Board of Directors of SNB North Carolina became the Board of Directors of the Corporation pursuant to a Plan of Reorganization in which the Corporation acquired SNB North Carolina. (2) Member of a law firm which performed legal work for the Corporation or its subsidiaries during 1993. Fees in the amount of $56,093.00 were paid to the firm of Mclean, Stacy, Henry, McLean, Slaughter & Ramsaur, P.A., fees in the amount of $182,009.94 were paid to the firm of Reynolds & Pendergrass, P.A. and fees in the amount of $49,212.38 were paid to the firm of Nichols, Caffrey, Hill, Evans & Murrelle for legal services during 1993. Fees for legal services were also paid by the Corporation or its subsidiaries to the law firm of Young, Clement, Rivers & Tisdale in the sum of $22,764.07 during 1993. J. Rutledge Young, Jr., a senior partner in that firm, is a Director of SNB South Carolina. (3) Member of the Audit Committee. (4) Member of the Compensation Committee and the Nominating Committee. 5 The Board of Directors has an Audit Committee, a Nominating Committee and a Compensation Committee. The members of the Compensation Committee also serve as members of the Nominating Committee. The Audit Committee recommends engaging and discharging the independent auditors; directs and supervises special investigations; reviews with the independent auditors the plan and result of the auditing engagement; reviews the scope and result of the Corporation's procedures for internal auditing and loan review; approves each professional service above certain limits provided by the independent auditors; considers the range of audit and non-audit fees; and reviews the adequacy of the Corporation's system of internal accounting controls. The Nominating Committee recommends to the Board of Directors nominees for election as Directors and considers the performance of incumbent Directors in determining whether or not to nominate them for re-election. The Nominating Committee will consider written nominations of candidates for election to the Board of Directors submitted by shareholders to the Secretary of the Corporation that are accompanied by biographical material, qualifications and consent of nominees. Nominations of such candidates must be received not later than 60 days prior to one year after the date of the immediately preceding Annual Meeting of Shareholders, along with such information as is disclosed in the proxy materials concerning all nominees for Director and the shareholder's name, address and number of shares owned, in order to be considered for the slate of nominees for election as Directors at the next annual meeting. The Compensation Committee recommends to the Board of Directors remuneration arrangements for senior management and Directors and adoption and administration of compensation plans in which Officers and Directors are eligible to participate. All members attended at least 75% of the Board of Directors meetings and assigned committee meetings during 1993. The Board of Directors held ten meetings during the year (seven regular meetings and three special meetings); its Nominating Committee held one meeting; its Audit Committee held six meetings; and its Compensation Committee held seven meetings. Directors receive an annual retainer fee of $7,500, Board meeting fees of $600 per regular meeting attended and $1,000 per special meeting attended and a committee meeting fee of $600 per meeting attended. Employee Directors do not receive Director fees. The Chairman of the Audit Committee, in lieu of the above Audit Committee fee, received $6,000 for 1993 as compensation for his continuous responsibility and consultation. All non-employee Directors elected prior to June 30, 1991 (Black, Deal, Geiger, Hiscott, Janeway, McLean, Nichols, Reynolds, A. T. Williams, Jr., E. M. Williams and T. H. Yancey), have executed Consulting Agreements with the Corporation to provide consulting services for a period of ten years following their retirement. Directors beginning such service during 1994, 1995, 1996, or 1997, shall receive $13,200 per year. Directors beginning such service after 1997 shall receive a sum equal to the annual retainer paid to the Corporation's directors in effect at the time they begin such service. The Consultants have agreed not to serve as directors of, or advisers to businesses which compete with the Corporation during the time they serve as consultants to the Corporation. 6 COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS The following table presents information relating to total compensation during the fiscal year ended December 31, 1993 of the Chief Executive Officer and the four next most highly compensated executive officers (the Named Executives): SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS PAYOUTS ANNUAL COMPENSATION SECURITIES LTIP NAME AND OTHER ANNUAL OPTIONS/SARS PAYOUTS ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION (2) (NO. OF SHARES) (3) ($)(4)(5) COMPENSATION (6) L. Glenn Orr, Jr. 1993 $444,184 $217,700 -- 22,459 $ 216,500 $ 74,822 Chairman & Chief 1992 427,100 224,200 -- 25,498 -- 67,953 Executive Officer (7) 1991 408,400 98,500 -- 29,134 -- Gary E. Carlton 1993 211,900 74,200 -- 8,571 73,000 38,199 Executive Vice 1992 203,700 76,400 -- 9,728 -- 69,942 President (7) 1991 186,800 45,600 -- 11,116 -- John R. Spruill 1993 186,576 65,300 -- 18,867 65,000 47,460 Executive Vice 1992 179,400 67,300 -- 8,568 -- 19,813 President & Chief 1991 167,500 41,900 -- 9,790 -- Financial Officer Michael W. Sperry 1993 181,100 63,400 -- 18,314 62,100 14,100 Executive Vice 1992 174,100 65,300 -- 8,315 -- 56,838 President 1991 160,000 38,200 -- 9,501 -- James F. Byrne 1993 173,700 60,800 -- 9,026 60,300 22,142 Executive Vice 1992 167,000 62,600 -- 7,976 -- 21,948 President 1991 153,375 38,300 -- 9,042 --
(1) Includes payment under the Short-Term Incentive Plan made in 1994 for service in 1993. Twenty-eight officers, including the five executives listed above, received payouts in 1994 under the Short-Term Incentive Plan totalling $1,249,875 for service in 1993. No non-executive Director participates in or receives payouts under the Short-Term Incentive Plan in 1994. The Executive Group, consisting of eleven executives, including the five executives listed above, received payouts in 1994 under the Short-Term Incentive Plan totalling $710,400 for service in 1993. Benefits or amounts for service in 1994 cannot be determined at this time. Under the Corporation's Capital Appreciation Plan, Byrne deferred 100% of his bonus which was payable in 1994 for performance in 1993. (2) None of the named individuals received perquisites or other personal benefits in excess of the lesser of $50,000 or 10% of the total of his salary and bonus for 1993. Amounts of Other Annual Compensation are not required for 1991 and will be phased in over the next fiscal year. (3) Options referred to in this table were granted on December 19, 1991, December 17, 1992 and December 16, 1993. The option agreement for each of these options contains an exercise schedule under which 25% of the option granted becomes exercisable each year such that at the end of the 4th year following date of grant, the option becomes fully exercisable. Options granted in 1991 and 1992 are non-qualified stock options. Options granted in 1993 are incentive stock options granted in a single grant to each named executive officer. No restricted stock awards were made to the Named Executives in 1993, 1992, or 1991. (4) Under the Corporation's Capital Appreciation Plan, Byrne deferred 100% of his LTIP award payable in 1994 under the Long-Term Cash Incentive Plan for the performance period 1991-1993. (5) Seven members of the Executive Group consisting of eleven executives, including the five executives listed above, received payouts in 1993 under the 1991-1993 Long-Term Cash Incentive Plan totalling $572,900. No non-executive Director or non-executive officer employee received payouts under the 1991-1993 Long-Term Cash Incentive Plan. (6) Components of 1993 All Other Compensation consist of the following: Corporate contributions made in 1993 under the Corporation's 401(k) ESOP and amounts accrued but not contributed under the Corporation's ESOP Excess Plan which allows payment of benefits otherwise entitled under the 401(k) ESOP except for limitations imposed by the Internal Revenue Code, in the amount of $8,994 Orr; $8,994 Carlton; $8,994 Spruill; $8,994 Sperry; and $8,994 Byrne. Amounts accrued under and interest earned on 7 deferred compensation in 1993 in excess of 120% of the long-term applicable federal rate in the amounts of $37,334 Orr; $0 Carlton; $0 Spruill; $2,327 Sperry; and $9,856 Byrne. Includes actuarial equivalent of benefit to employee from payment of annual premiums by the Corporation in 1993 under a split dollar life insurance program in the amounts of $27,030 Orr; $13,265 Carlton; $3,961 Spruill; $2,779 Sperry; and $3,292 Byrne. Includes term life insurance premiums paid by the Corporation in 1993 in the amount of $1,464 Orr. Includes relocation expenses paid by the Corporation in 1993 in the amounts of $7,636 to Carlton and $34,505 to Spruill. Amounts of All Other Compensation are not required for 1991 and will be phased in over the next fiscal year. (7) Effective June 30, 1991, separate payment to employee Directors for service as a Director was terminated and base salaries for Orr and Carlton were increased in 1991 to offset this loss of income. The following table shows all grants of options to each of the Named Executives in 1993. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM % OF TOTAL OPTIONS GRANTED TO OPTION EMPLOYEES GRANTS IN FISCAL EXERCISE EXPIRATION NAME (SHARES) (1) YEAR 1993 PRICE DATE 5% 10% L. Glenn Orr, Jr...................... 22,459 9.93% $19.77 12-15-2003 $279,729 $705,983 Gary E. Carlton....................... 8,571 3.30 19.77 12-15-2003 106,753 269,423 John R. Spruill....................... 18,867 7.35 19.77 12-15-2003 234,990 593,071 Michael W. Sperry..................... 18,314 7.13 19.77 12-15-2003 228,103 575,688 James F. Byrne........................ 7,026 2.73 19.77 12-15-2003 87,510 220,857
(1) Each option is an incentive stock option. Each option agreement vests or becomes exercisable with respect to 25% of the shares subject to the option one year from date of grant (12/16/93) and an additional 25% becomes exercisable each additional year thereafter. No options have been granted which include stock appreciation rights (SARs). The following table provides information concerning stock options exercised by each of the Named Executives in 1993, and the value of options held by each at December 31, 1993. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
VALUE OF UNEXERCISED SHARES NUMBER OF UNEXERCISED IN-THE-MONEY ACQUIRED ON VALUE OPTIONS AT FY-END (SHARES) OPTIONS AT FY-END (1) NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE L. Glenn Orr, Jr.............. -- -- 49,157 65,555 $ 382,481 $ 227,314 Gary E. Carlton............... -- -- 19,049 25,111 148,938 87,731 John R. Spruill............... -- -- 17,143 33,557 134,923 78,211 Michael W. Sperry............. -- -- 16,619 32,564 130,761 75,843 James F. Byrne................ -- -- 15,799 20,624 124,157 72,489
(1) The closing price on December 31, 1993 for Corporation Common Stock was $19.75 and is used in calculating the value of unexercised options. 8 The following table describes target performance awards planned in 1993 to be made to the Named Executives in 1996 under the Long-Term Cash Incentive Plan. Actual payment is dependent upon performance achieved in 1993 to 1995. LONG-TERM INCENTIVE PLAN AWARDS TABLE 1993-95 LONG-TERM CASH INCENTIVE PLAN
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE BASED PLANS (1) 1993-95 THRESHOLD TARGET MAXIMUM NAME AVERAGE SALARY AWARD (2) AWARD (2) AWARD (2) L. Glenn Orr, Jr............................................. $462,188 $40,441 $ 161,766 $ 242,649 Gary E. Carlton.............................................. 220,489 13,781 55,122 82,683 John R. Spruill.............................................. 194,138 12,134 48,535 72,802 Michael W. Sperry............................................ 188,441 11,778 47,110 70,665 James F. Byrne............................................... 180,740 11,296 45,185 67,778
(1) The Corporation has a Long-Term Cash Incentive Plan that provides for payments of cash awards to certain key employees of the Corporation and its subsidiaries who contribute to the success of the Corporation based upon the achievement over a three-year period of performance goals identified in the plan. Performance under the Long-Term Cash Incentive Plan is based upon growth in earnings per share as compared to an earnings per share target and return on average equity as compared to identified industry standards. Payment under the 1993-1995 Long-Term Cash Incentive Plan will be made in 1996 and will be reported in the Summary Compensation Table. (2) The cash awards payable are based on a percentage of the employees' average salaries over the three-year performance period. Accordingly, the awards identified will change to the extent the actual average compensation differs from the projected average compensation. RETIREMENT PLANS The Corporation has a defined benefit retirement plan, the Southern National Retirement Plan (the Retirement Plan), for its employees. All employees of the Corporation and its subsidiaries are eligible to participate under the Retirement Plan after completing one year of service. Contributions to the Retirement Plan are computed on an actuarial basis. An employee's normal annual retirement benefit under the Retirement Plan at age 65 is an amount equal to 1.1% of the first $6,600 of the participant's average compensation, plus 1.5% of the participant's average compensation in excess of $6,600, times the number of years of service completed with the Corporation and its subsidiaries. A participant's average compensation is his average annual compensation including salary, wages, overtime, bonuses and incentive compensation, for the five consecutive years that produce the highest average. The following table shows the estimated annual benefits payable under the Retirement Plan upon retirement at age 65 to persons in specified average compensation and years of service classifications. The amounts shown are based on a 10 year certain and life annuity and are not subject to offsets based upon social security amounts or other amounts. As of December 31, 1993, for purposes of computing benefits under the Retirement Plan, age and years of service of the Named Executives are as follows: age 53 and 21 years for Mr. Orr; age 53 and 15 years for Mr. Carlton; age 51 and five years for Mr. Spruill; age 49 and four years for Mr. Sperry; and age 62 and 31 years for Mr. Byrne. 9 ESTIMATED ANNUAL RETIREMENT BENEFITS BASED ON YEARS OF CREDITED SERVICE(1)(2)
AVERAGE COMPENSATION FOR 5 CONSECUTIVE YEARS OF HIGHEST COMPENSATION 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS $100,000......................... $ 14,736 $ 22,104 $ 29,472 $ 36,840 $ 44,208 $ 51,576 $ 58,944 150,000......................... 22,236 33,354 44,472 55,590 66,708 77,826 88,944 200,000......................... 29,736 44,604 59,472 74,340 89,208 104,076 118,944 250,000......................... 37,236 55,854 74,472 93,090 111,708 130,326 148,944 300,000......................... 44,736 67,104 89,472 111,840 134,208 156,576 178,944 350,000......................... 52,236 78,354 104,472 130,590 156,708 182,826 208,944 400,000......................... 59,736 89,604 119,472 149,340 179,208 209,076 238,944 450,000......................... 67,236 100,854 134,472 168,090 201,708 235,326 268,944 500,000......................... 74,736 112,104 149,472 186,840 224,208 261,576 298,944 550,000......................... 82,236 123,354 164,472 205,590 246,708 287,826 328,944 600,000......................... 89,736 134,604 179,472 224,340 269,208 314,076 358,944 650,000......................... 97,236 145,854 194,472 243,090 291,708 340,326 388,944 700,000......................... 104,736 157,104 209,472 261,840 314,208 366,576 418,944 750,000......................... 112,236 168,354 224,472 280,590 336,708 392,826 448,944 800,000......................... 119,736 179,604 239,472 299,340 359,208 419,076 478,944
(1) The amounts shown exceed statutory benefit limits and compensation caps under the Retirement Plan in some instances. To the extent an amount cannot be earned under the Retirement Plan, it will be earned under the Corporation's Supplemental Executive Retirement Plan. (2) If employment date is on or after January 1, 1979, basic benefit is lifetime annuity. If employment date is prior to January 1, 1979, basic benefit is 120 months certain and thereafter for participant's lifetime. EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS Mr. Orr has a contract providing for employment with the Corporation and SNB North Carolina until age 65 with a minimum base salary of $347,000 per year, subject to adjustments with respect to average changes in salaries of the highest paid Officers of the Corporation. In the event that SNB North Carolina or the Corporation is acquired such that SNB North Carolina or the Corporation is not the surviving entity, Mr. Orr may, at his option, terminate the contract and receive a severance payment totalling three (3) times his then current annual salary. Mr. Carlton has a contract providing for employment with the Corporation and SNB North Carolina until age 65 with a minimum base salary of $220,000 per year, subject to adjustments as approved annually by the Board of Directors. The contract contains a covenant not to compete in the business of banking, lending or financial services for a period of five years if he terminates his employment. Mr. Spruill, Executive Vice President and Chief Financial Officer of the Corporation, has a contract for employment with the Corporation, SNB North Carolina and SNB South Carolina. The contract has a continuing term of five years (extended daily, but not beyond May, 2007), with a minimum base salary of $140,000 per year subject to adjustments as approved annually by the Board of Directors. Either party may by written notice fix the term of five years. Mr. Spruill's contract also contains a covenant not to compete in the business of banking, lending or financial services for two years if he terminates his employment prior to the end of his initial term or any subsequent five-year term of employment. Mr. Sperry, Executive Vice President and Chief Credit Officer of the Corporation, has a change in control agreement with the Corporation. Under the contract, if a change in control (as defined under the contract) of the Corporation occurs, a three-year term of employment commences after the date of the change in control with Mr. Sperry's base salary as then in effect continuing with normal salary increases. If Mr. Sperry is terminated without just cause or voluntarily terminates after a demotion within three years after a change in control, Mr. Sperry shall receive a severance payment equal to three times the sum of his base salary and average bonuses and incentive amounts paid or payable to Mr. Sperry during the thirty-six (36) month period prior to his termination of employment and Mr. Sperry shall receive any vested benefits under the Corporation's qualified and non-qualified employee benefit plans, stock option plans, deferred compensation arrangements, and 10 life insurance based plans. If a payment under the contract would result in a parachute payment under the Internal Revenue Code, then the payment amount will be reduced to a level one dollar ($1) under the level that constitutes a parachute payment. The payment is not reduced by amounts earned by Mr. Sperry from other employment following termination by the Corporation. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee's report on executive compensation of the Board of Directors of the Corporation is set forth below. This Committee report documents the components of the Corporation's executive officer compensation programs and describes the basis on which 1993 compensation determinations were made by the Committee with respect to the executive officers of the Corporation, including the executive officers that are named in the compensation tables (the Named Executives). The report also includes the factors and criteria for compensation of the Chairman and Chief Executive Officer of the Corporation which are separately set forth below. See Discussion of Compensation for the Chairman and Chief Executive Officer below. COMPENSATION PHILOSOPHY AND OVERALL OBJECTIVES OF EXECUTIVE COMPENSATION PROGRAMS. Components of the Corporation's present compensation program were designed in 1990. An outside consultant was engaged and prepared an executive compensation program design. The consultant compared the financial performance of the Corporation to that of an industry peer group of southeastern banks for the period 1987 to 1989. The study indicated that for this period, the Corporation's average return on equity approximated the peer group's median, return on average assets was somewhat below its peer group at .86%, and its earnings per share growth was in the top quarter of its peers. Total compensation of executives in 1990 for the Chief Executive Officer and other executive officers was at or below the 25th percentile of the peer group. The study indicated the need to implement an option program to be competitive with the peer group and link cash incentives to performance measures based on earnings per share, return on assets and return on equity. Of the peer group, 100% had a long term incentive plan, 80% had a non-qualified stock option plan, and 93% had an incentive stock option plan. The study recommended stock incentives to motivate executives to align themselves with shareholders. As set forth below, these recommendations have been adopted by the Corporation and form the basis of its compensation philosophy. It is the philosophy of the Corporation to ensure that executive compensation be directly linked to continuous improvements in corporate performance which lead to increases in shareholder value. The following objectives have been adopted by the Committee as guidelines for compensation decisions. (bullet)Provide a competitive total compensation package that enables the Corporation to attract and retain key executives. (bullet)Integrate bonus programs with the Corporation's annual and long-term business objectives and strategy, and focus executive behavior on the fulfillment of those objectives. (bullet)Provide variable compensation opportunities through bonus programs that align executive remuneration with corporate performance that will serve the interests of the Corporation's shareholders. COMPENSATION PROGRAM COMPONENTS. Each year the Committee reviews the Corporation's compensation program to ensure that pay levels and incentive opportunities are competitive and reflect the performance of the Corporation. The particular elements of the compensation program for executive officers are further explained below. BASE SALARY -- Base pay levels are largely determined through comparisons with corporations of similar size and complexity as the Corporation. As noted above, base salaries were carefully evaluated in 1990 through use of a peer group study. Actual salaries are based on individual performance contributions within a competitive salary range for each position that is established through job evaluation and market comparisons. Base pay levels for the executive officers are competitive within a range that the Committee considers to be reasonable and necessary. A top five executive compensation review by a consulting firm was commissioned by the Compensation Committee which compared 1992 compensation of the Named Executives to an industry peer group of 14 southeastern banks. The study was commissioned by the Committee in 1992 to respond to the Securities and Exchange Commission's new requirements concerning executive compensation and was designed not only 11 to assist the Committee in setting 1993 compensation but also to support the Committee's review of compensation decisions made for 1992. Peer group data were obtained from 1992 proxy statements and increased by 5.8% to update the peer group data. The peer group utilized is the same peer group of bank holding companies utilized on the Performance Graph which is set forth herein. The study indicated that while compensation of Named Executives is consistent with the median salaries paid by the peer group, the Corporation's return on average assets over a three year period has improved against its peers and its growth in earnings per share and net income growth is solidly positioned in the top 25% of its peer group. According to the study, the Corporation's financial performance for the 1990-1992 period was clearly above average and for fiscal 1992, the Corporation was one of the best performing companies in the peer group. The Compensation Committee determined that, based upon the Corporation's performance, the Corporation's compensation strategy should provide for base salaries and target annual incentives that approximate the median for the peer group. A four percent (4%) increase in base salary was recommended by the Compensation Committee in fiscal 1993 for the Named Executives to ensure that base salaries plus bonuses for the Named Executives approximated the median base salary plus bonuses for the peer group. The Board of Directors acted in accordance with this recommendation. These increases represent modest merit increases in base salary for each of the Named Executives. An early 1994 review of 1993 compensation levels indicates that 1993 base salary and annual bonus (under the Short-Term Incentive Plan described below) paid to the Chief Executive Officer and the other Named Executives approximates the 1992 peer group median base salary and annual bonus for like executives. SHORT-TERM INCENTIVE PLAN -- The Corporation's officers are eligible to participate in an annual incentive compensation plan with awards based primarily on the attainment of certain earnings per share and return on assets goals. Each of these components is given equal weight in the formula to calculate awards. The objective of this plan is to deliver competitive levels of compensation for the attainment of financial objectives that the Committee believes are primary determinants of share price over time. In particular, the plan aims to focus corporate behavior on consistent and steady earnings growth. Targeted awards for executive officers of the Corporation are consistent with targeted awards of peer group companies of similar size and complexity to the Corporation which are reflected on the Performance Graph. Actual awards are subject to decrease or increase on the basis of the Corporation's performance. Historically, the earnings per share Target goal is set at the Corporation's budgeted earnings. For fiscal year 1993 earnings were budgeted at $1.95 per share, a 12.7% increase over the 1992 earnings per share originally reported of $1.73 per share. Originally reported actual earnings for 1993 were $2.03 per share or 17.3% over originally reported earnings per share for 1992. If budgeted earnings are achieved, a full payout of bonuses is made. The payout ratio decreases to 25% of full payment based on an incremental decrease in the earnings per share and return on assets from the Target goal set for earnings per share and return on assets down to a minimum or threshold level. Conversely, the payout ratio increases based on an incremental increase in the earnings per share and return on assets above the Target goal set for earnings per share and return on assets up to a Superior level. The Corporation achieved the Plan's financial performance objectives for the last three years and awards have been made to the Named Executives during that three-year period as disclosed in the Bonus column of the Summary Compensation Table. LONG-TERM CASH INCENTIVE PLAN -- The Board of Directors has adopted a Long-Term Cash Incentive Plan which provides for payments of cash awards to certain key employees of the Corporation and its subsidiaries who contribute to the success of the Corporation based upon the achievement of established performance goals identified in the plan. Performance under the Long-Term Cash Incentive Plan is based upon growth in earnings per share as compared to an earnings per share target and return on average equity as compared to the peer group. Each of these components is given equal weight in the formula to calculate awards. The first payment under the Long-Term Cash Incentive Plan was made in 1994 as a result of the Corporation achieving the Superior goal of $5.11 cumulative earnings per share and achieving results between the Target goal of 14.80% return on common equity and the Superior goal of 16% return on common equity during the performance period 1991-1993. This payment is disclosed in the Long-Term Compensation LTIP Payouts column of the Summary Compensation Table. The next payment under the Long-Term Cash Incentive Plan (based on the performance period 1992-1994) will be made in 1995 if target performance goals are achieved. Performance through the first two year period of this plan is at the Superior goal performance level established under the plan. Planned awards under the 1993-95 Long-Term Cash Incentive Plan are described in the Long-Term Incentive Plan Awards Table above. Performance through the first year of this plan is at the Superior goal 12 performance level established under the plan. Awards actually made under the 1992-1994 Long-Term Cash Incentive Plan will be dependent upon performance achieved in 1994, the final performance year of the plan. CAPITAL ACCUMULATION PLAN FOR ELIGIBLE KEY EMPLOYEES -- The Board of Directors has adopted the Capital Accumulation Plan for Eligible Key Employees of Southern National Corporation, which allows eligible participants to defer a stipulated percentage of any incentive compensation to be earned in the following calendar year. Each year interest will be credited to any amounts deferred during the following calendar year and to any prior accumulations. The interest credited to a participant's account will vary annually, and will generally track market interest rates. The limit for annual deferrals is 100% of a participant's combined awards under the Short-Term Incentive Plan and the Long-Term Incentive Plan, or any prior long-term incentive plan then in effect. The amount deferred must be in 25% increments of a participant's incentive compensation. Benefits under the Capital Accumulation Plan for Eligible Key Employees will be paid upon a participant's early or normal retirement, death, disability, hardship or separation from service. Participants may elect to receive their benefit payments in a lump sum, or in 180 equal monthly payments. STOCK OPTION PROGRAM -- The Committee strongly believes that by providing those persons who have substantial responsibility for the management and growth of the Corporation with an opportunity to increase their ownership of Corporation stock, the best interests of shareholders and executives will be closely aligned. Stock options link the executive's rewards directly to shareholder return. The Committee has awarded options both in recognition of past corporate performance (as to Mr. Spruill and Mr. Sperry) and as an incentive for future performance, the intent of option grant being to motivate those receiving grants to increase the value of corporation stock in the future. Options may be granted to key management employees or contributors who have a significant effect on the long term strategic success of the Corporation. Executives are eligible to receive stock options from time to time, giving them the right to purchase shares of Common Stock of the Corporation at a specified price in the future. The number of stock options granted to executive officers is based on competitive practices, including practices of the peer group described in the Performance Graph. While the Committee reviewed the amount and value of options currently held by executives, the Committee has not established a target ownership level for equity holdings by executives and prior grants and the number of outstanding options is not presently factored into the grant formula. Target ownership levels for equity holdings by executives may be studied by the Committee in 1994 and considered in conjunction with future grants of stock options. Options were granted in 1993 based upon a formula. For Mr. Spruill and Mr. Sperry, options were granted equal to the product of two (2) times base salary divided by the option price of $19.77 as a one-time award in recognition of improved credit quality and improvements in operating efficiency. For the other Named Executives and executive officer group, options were granted equal to the product of 80% of salary divided by the option price of $19.77; the Corporation's Secretary received options equal to the product of 50% of salary divided by the option price of $19.77. Additional information on options is set forth in the Option Grants Table and the Fiscal Year End Option Value Table above. DISCUSSION OF 1993 COMPENSATION FOR THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER. In considering the compensation for the Chairman and Chief Executive Officer for fiscal year 1993, the Committee reviewed his existing compensation arrangements and both corporate and individual performance. The employment agreement between the Corporation and Mr. Orr was structured to provide him with a fully competitive base salary and annual incentive opportunity. The Committee has made the following determinations regarding the compensation of Mr. Orr. (bullet)Base salary for Mr. Orr in 1993 increased from the base salary that was paid in 1992 by 4% to ensure that his base salary approximated the median base salary for the peer group. (bullet)A Long-Term Incentive Plan payout of $216,500 was made in 1994 based on financial performance of the Corporation during the performance period 1991-1993 as a result of the Corporation achieving the Superior goal of $5.11 cumulative earnings per share, and achieving results between the Target goal of 14.80% return on common equity and the Superior goal of 16% return on common equity during the performance period 1991-1993. (bullet)An incentive award (bonus) was paid in 1994 for fiscal 1993 performance under the Short Term Incentive Plan in the amount of $217,700 based on the Corporation's achieving earnings per share of $2.03, on a fully-diluted basis (which fell between the Target goal and the Superior goal, resulting in a payout 13 of 130% of target), and a return on assets of 1.35% which exceeded the Superior goal set under the plan. (bullet)The study conducted by a consulting firm at the request of the Committee in 1992 indicates Mr. Orr's combined base salary and bonus for 1993 approximates peer company medians of combined base salary and bonus paid to Chief Executive Officers of its peer group in 1992. This combined amount is consistent with the Committee's targeted range of compensation for Mr. Orr and is based upon the Corporation's performance in that 33% of Mr. Orr's combined salary and bonus amount paid for service in 1993 was based upon the Corporation exceeding the Target goal under the Short-Term Incentive Plan of earnings per share of $2.03 on a fully-diluted basis in 1993. The Committee determined that Mr. Orr's base salary should be maintained at a competitive level relative to its peer group. The peer group utilized in this study is the same peer group utilized in the Performance Graph set forth herein. (bullet)Stock options for shares of Corporation stock were awarded under the Corporation's stock option program to Mr. Orr. The Committee's award was based on a formula. The options granted equalled the product of 100% of Mr. Orr's base salary divided by the option price of $19.77 per share. This level of grant is competitive with the grants to CEO's in the peer group. (See the Option Grants in Last Fiscal Year Table above.) SUMMARY. The Corporation's executive compensation programs are based on financial performance. For fiscal 1993, the Committee's decisions took into consideration the fact that the Corporation's financial performance, as measured by earnings per share, was 17% above the earnings per share originally reported for fiscal year 1992. The Committee also notes that the closing price of the Corporation's Common Stock has increased from $13.875 on December 31, 1991 to $19.75 on December 31, 1993, a 42.3% increase. After its review of all existing programs, the Committee continues to believe that the total compensation program for executives of the Corporation is competitive with the compensation programs provided by other corporations with which the Corporation competes. This position was confirmed in a study conducted by outside consultants which noted the Corporation's 1992 levels of incentive compensation support the Corporation's pay-for-performance philosophy under which incentive pay is based on obtaining budgeted increases in earnings over earnings achieved in the prior year. The Committee also referred to a study conducted by another consulting firm, which determined that the budget process was reasonable and prudent. The Committee noted that the goals established under the Short-Term Incentive Plan are reasonable and dictate significant increases in 1994 performance over 1993 performance. The same reasoning was applied by the Committee in 1992 in setting the goals under the Short-Term Incentive Plan bonus earned in 1993 and paid in 1994, which is reflected in the Summary Compensation Table. The Committee believes that any amounts paid under the Short-Term Incentive Plan will be appropriately related to corporate and individual performance, yielding awards that are directly linked to the annual financial and operational results of the Corporation. The Committee also believes that the stock option program provides opportunities to participants that are consistent with the returns that are generated on the behalf of the Corporation's shareholders. Currently, all compensation paid by the Corporation to its executives is deductible. Approval of the Long-Term Incentive Plan and Short-Term Incentive Plan by shareholders (see Proposals 3 and 4) will ensure deductibility of compensation paid under such plans as performance based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended. COMPENSATION COMMITTEE Richard Janeway, M.D. -- Chairman Nido R. Qubein -- Vice-Chairman Dickson McLean, Jr. Ronald E. Deal E. M. Williams COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Nido R. Qubein, a Director of the Corporation and a member of the Compensation Committee, is owner of Creative Services, Inc., an international management consulting firm. SNB North Carolina has entered into 14 a consulting services contract with Creative Services, Inc. under which Creative Services, Inc. is advising management of the Corporation by providing organizational development expertise, including the conceptualization and creation of integrated corporate employee training materials and programs. Creative Services, Inc. was paid $183,110 under this contract in 1993. Management believes this contract is on terms as favorable as could have been obtained from others. Dickson McLean, Jr., a Director of the Corporation and a member of the Compensation Committee, is President of McLean, Stacy, Henry, McLean, Slaughter & Ramsaur, P.A., Attorneys-at-Law. The firm is under retainer to provide legal services to the Corporation and its subsidiaries. The firm was paid the sum of $56,093 in 1993. Management believes these services were provided on terms as favorable as could have been obtained from others. Mr. McLean and Mr. Qubein abstain from voting on matters relating to stock options and the Long-Term Cash Incentive Plan and Short-Term Incentive Plan. TRANSACTIONS WITH OFFICERS AND DIRECTORS Directors and officers of the Corporation and their associates are customers of and have had transactions with the Corporation's subsidiaries in the ordinary course of business. All outstanding loans and commitments included in such transactions were in the ordinary course of business, made on substantially the same terms, including rates and collateral, as those prevailing at the time for comparable transactions with other customers and did not involve more than normal risk of collectibility or present other unfavorable features. All outstanding loans to such officers and Directors and their associates are current as to principal and interest. As of December 31, 1993, loans in excess of $60,000 to Directors, executive officers and their interests totaled approximately $24 million, or approximately 4.8% of the Corporation's consolidated shareholders' equity at such date. Elizabeth T. Williams, wife of A. Tab Williams, Jr., a Director of the Corporation and formerly a Director of Forsyth Bank & Trust Co., leased to Forsyth Bank & Trust Co. the land and building used by it as a branch location at Corporation Parkway and Peters Creek Parkway in Winston-Salem, North Carolina, effective November 1, 1979, for a base period of 25 years with renewal options. The initial monthly rent under the lease is $3,680 with increases based on the Consumer Price Index at the end of the seventh year and each five years thereafter. SNB North Carolina assumed this lease upon its merger with Forsyth Bank & Trust Co. The current rent is $4,737 per month. Management believes that the lease terms are as favorable as could have been obtained from other sources. Ted R. Reynolds, a Director of the Corporation, is a 90% owner of Raleigh Place Associates, a North Carolina General Partnership that entered into a 15 year lease with SNB North Carolina, whereby the bank leases office space for one of its Raleigh bank branches located at 316 West Edenton Street, Raleigh, North Carolina. The lease has renewal options. For fiscal year 1993, 12 lease payments of $4,798 each month were paid to Raleigh Place Associates for a total of $57,576. In addition to lease payments, SNB North Carolina is obligated to share certain lease pass-through expenses of the building for operating expenses. In 1993, the bank paid approximately $19,000 to Raleigh Place Associates, which sum represented its share of operating expenses for calendar year 1993. Management believes this lease contract is on terms that are as favorable as could have been obtained from other sources. See Compensation Committee Interlocks and Insider Participation above. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires that the Corporation's directors and executive officers, and persons who own more than 10% of a registered class of the Corporation's equity securities, file with the Securities and Exchange commission initial reports of ownership and reports of change in ownership of Common Stock and other equity securities of the Corporation. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Corporation with copies of all Section 16(a) forms that they file. To the Corporation's knowledge, based solely on review of the copies of such reports furnished to the Company, and written representations that no other reports were required, during the fiscal year ended 15 December 31, 1993, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were met. PERFORMANCE GRAPH Set forth below is a graph comparing the total returns (assuming reinvestment of dividends) of Corporation Common Stock, the S&P 500 Index, and an industry peer group index of 14 southeastern banks. The graph assumes $100 invested on December 31, 1988 in Corporation Common Stock and each of the indices. The bank holding companies in the peer group index are BB&T Financial Corporation, CCB Financial Corporation, South Trust Corporation, AmSouth Bancorporation, Central Fidelity Banks, Inc., First Alabama Bancshares, Inc., First Virginia Banks, Inc., Compass Bancshares, Inc. (formerly Central Bancshares of the South, Inc.), Mercantile Bancshares Corporation, Bank South Corp., Synovus Financial Corp., Centura Banks, Inc., Baltimore Bancorp., Inc. and United Carolina Bancshares Corporation. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL SHAREHOLDER RETURN AMONG SNC, S&P 500 INDEX AND PEER GROUP (Performance Graph appears here--see appendix) [CAPTION] 1988 1989 1990 1991 1992 1993 Southern National $100 $108 $ 83 $120 $175 $182 Peer Group Index 100 118 100 163 221 233 S&P 500 100 132 127 166 179 197
16 PROPOSAL 2: APPROVAL OF THE OMNIBUS STOCK INCENTIVE PLAN The Board of Directors proposes that the shareholders approve the Southern National Corporation Omnibus Stock Incentive Plan (the Stock Plan), adopted by the Board of Directors on February 17, 1994, subject to the approval of the Corporation's shareholders. The approval of the Stock Plan requires the affirmative vote of the holders of a majority of the shares of Common Stock present or represented by properly executed and delivered proxies at the meeting. Abstentions and shares held in street name voted as to any matter at the meeting will be included in determining the number of votes present or represented at the meeting. For several years the Corporation has provided stock-based compensation opportunities to executives and key employees under the Corporation's Nonqualified Stock Option Plan (the Nonqualified Plan) and Incentive Stock Option Plan (the ISO Plan). The Board of Directors believes that the Nonqualified Plan and the ISO Plan have served their purpose of promoting a greater identity of interests between participants and shareholders and that similar opportunities should be continued under the Stock Plan. However, the number of shares available for issuance under the existing plans will likely be depleted within the next year. If the shareholders approve the Stock Plan, additional awards may, but are not required to, be made under the Nonqualified Plan and the ISO Plan, until there are no remaining authorized shares under these plans. The Stock Plan is intended to provide the Compensation Committee of the Board of Directors maximum flexibility to meet the evolving needs of the Corporation in providing stock-based compensation to its key executives over the next ten years, in order to align more closely the interests of corporate management with those of shareholders. The Stock Plan may be used to grant stock options and stock appreciation rights, and to award restricted stock and performance shares. The Stock Plan may also be used to grant stock options in conjunction with future mergers. The Stock Plan therefore eliminates the need and expense of registering additional shares of Common Stock each time the Corporation engages in a merger transaction, for example the approximately 571,049 shares that have been registered as a result of the Corporation's recent mergers. The following paragraphs summarize the principal features of the Stock Plan. This summary is subject, in all respects, to the terms of the Stock Plan. The Corporation will provide promptly, upon request and without charge, a copy of the full text of the Stock Plan to each person to whom a copy of this proxy statement is delivered. Requests should be directed to: Mr. Robert K. Borbet, Vice President, Compensation and Benefits Administrator, Southern National Bank of North Carolina, 500 North Chestnut Street, Lumberton, North Carolina 28358, (910) 671-2224. SUMMARY OF THE STOCK PLAN The Board of Directors believes that the Stock Plan will benefit the Corporation by (i) assisting it in recruiting and retaining employees with ability and initiative, (ii) providing greater incentive for employees of the Corporation or its related entities and (iii) associating the interests of employees with those of the Corporation, its related entities, and its shareholders through opportunities for increased stock ownership. A maximum of 4,000,000 shares of Common Stock may be issued under the Stock Plan, subject to a 3% replenishment percentage. However, in no event shall the number of shares authorized for issuance under the Stock Plan exceed 10% of authorized and outstanding Common Stock as of the time of any replenishment adjustment. The Compensation Committee of the Board of Directors will administer the Stock Plan. The Compensation Committee may delegate its authority to administer the Stock Plan to one or more officers of the Corporation. The Compensation Committee, however, may not delegate its authority with respect to individuals who are subject to Section 16 of the Securities Exchange Act of 1934 ( Section 16). As used in this summary, the term Administrator means the Compensation Committee and any delegate, as appropriate. Each employee of the Corporation or a related entity is eligible to participate in the Stock Plan. Certain non-employees are eligible to participate in the Stock Plan in conjunction with merger and acquisition transactions. The Administrator will select the individuals who will participate in the Stock Plan (Participants) but no person may participate in the Stock Plan while he is a member of the Compensation Committee. The Administrator may, from time to time, grant stock options, stock appreciation rights (SARs), stock awards, or 17 performance shares to Participants. Although the Stock Plan allows several different kinds of awards, the Compensation Committee intends to continue its past practice of providing stock-based compensation opportunities in the form of stock options on substantially the same basis as under the Nonqualified Plan and the ISO Plan. Options granted under the Stock Plan may be incentive stock options ( ISOs) or nonqualified stock options. A stock option entitles the Participant to purchase shares of Common Stock from the Corporation at the option price. The option price will be fixed by the Administrator at the time the option is granted, but the price cannot be less than 100% of the shares' fair market value on the date of grant in the case of ISOs, and not less than 85% of the shares' fair market value on the date of grant in the case of nonqualified stock options. The Corporation's existing Nonqualified Plan also permits the option price of nonqualified stock options to be not less than 85% of the shares' fair market value on the date of grant. However, in the past no nonqualified stock options have been granted for less than 100% of the shares' fair market value on the date of grant, and although available as an option, the Corporation does not anticipate that this practice will change in the future. The option price may be paid in cash, with shares of Common Stock, or with a combination of cash and Common Stock. SARs entitle the Participant to receive the lesser of (i) the excess of the fair market value of a share of Common Stock on the date of exercise over the initial value of the SAR or (ii) the initial value. The initial value of the SAR is determined by the Administrator at the time of the grant but cannot be less than the fair market value of a share of Common Stock on the date of grant. The amount payable upon the exercise of an SAR may be paid in cash, Common Stock, or a combination of the two. SARs may be granted in relation to option grants (Corresponding SARs) or independently of option grants. The difference between these two types of SARs is that to exercise a Corresponding SAR, the Participant must surrender unexercised that portion of the stock option to which the Corresponding SAR relates. Participants may be awarded shares of Common Stock pursuant to a restricted stock award. The Administrator, in its discretion, may prescribe that a Participant's rights in a restricted stock award shall be nontransferable or forfeitable, or both, unless certain conditions are satisfied. These conditions may include, for example, a requirement that the Participant continue employment with the Corporation or a related entity for a specified period or that the Corporation, a related entity, or the Participant achieve stated objectives. It is anticipated that the vesting period of a restricted stock award will be no less than three years, or no less than one year in the case of performance-based restricted stock awards. The Stock Plan also provides for the award of performance shares. A performance share award entitles the Participant to receive a payment equal to the fair market value of a targeted number of shares of Common Stock if certain performance standards are met. The Administrator will prescribe the requirements that must be satisfied before a performance share award is earned. The performance share requirements may include, for example, a requirement that the Participant continue employment with the Corporation or a related entity for a specified period or that Corporation, a related entity, or the Participant achieve stated objectives. A performance share award will be earned based on the performance share value during each of the five valuation periods (calendar years) following the date of the award. To the extent that performance shares are earned, the obligation may be settled in cash, in Common Stock or by a combination of the two. All awards made under the Stock Plan will be evidenced by written agreements between the Corporation and the Participant. A maximum of 30,000 shares may be granted to a Participant in any calendar year. The share limitation and the terms of outstanding awards shall be adjusted, as the Compensation Committee deems appropriate, in the event of a stock dividend, stock split, combination, reclassification, recapitalization, or other similar events. No option, SAR or stock award may be granted and no performance shares may be awarded under the Stock Plan after February 16, 2004. The Board of Directors may terminate the Stock Plan sooner without further action by shareholders. The Board of Directors also may amend the Stock Plan except that no amendment that increases the number of shares of Common Stock that may be issued under the Stock Plan or changes the class of individuals who may be selected to participate in the Stock Plan will become effective until it is approved by shareholders. 18 Neither the number of individuals who will be selected to participate in the Stock Plan nor the type or size of awards that will be approved by the Administrator can be determined. The Corporation is also unable to determine the number of individuals who would have participated in the Stock Plan or the type or size of awards that would have been made under the Stock Plan had it been in effect in 1993. FEDERAL INCOME TAX CONSEQUENCES The Corporation has been advised by counsel regarding the federal income tax consequences of the Stock Plan. No income is recognized by a Participant at the time an option is granted. If the option is an ISO, no income will be recognized upon the Participant's exercise of the option. Income is recognized by a Participant when he disposes of shares acquired under an ISO. The exercise of a nonqualified stock option generally is a taxable event that requires the Participant to recognize, as ordinary income, the difference between the shares' fair market value and the option price. No income is recognized upon the grant of an SAR. The exercise of an SAR generally is a taxable event. The Participant generally must recognize income equal to any cash that is paid and the fair market value of Common Stock that is received in settlement of an SAR. The Participant will recognize income on account of a stock award on the first day that the shares are either transferable or not subject to a substantial risk of forfeiture. The amount of income recognized by the Participant is equal to the fair market value of the Common Stock received on that date. The Participant will recognize income on account of the settlement of a performance share award. The Participant will recognize income equal to any cash that is paid and the fair market value of Common Stock (on the date that the shares are first transferable or not subject to a substantial risk of forfeiture) that is received in settlement of the award. The employer (either the Corporation or a related entity) will be entitled to claim a federal income tax deduction on account of the exercise of a nonqualified option or SAR, the vesting of a stock award, and the settlement of a performance share award. The amount of the deduction is equal to the ordinary income recognized by the Participant. The employer will not be entitled to a federal income tax deduction on account of the grant or the exercise of an ISO. The employer may claim a federal income tax deduction on account of certain dispositions of Common Stock acquired upon the exercise of an ISO. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE OMNIBUS STOCK INCENTIVE PLAN. PROPOSAL 3: APPROVAL OF THE LONG-TERM INCENTIVE PLAN The Board of Directors proposes that the shareholders approve the Southern National Corporation Long-Term Incentive Plan (the Long-Term Plan), previously adopted by the Board of Directors on December 20, 1990. The Board of Directors amended the Long-Term Plan on February 17, 1994 in order for it to qualify as performance-based compensation under applicable Internal Revenue Service laws and regulations, subject to the approval of the Corporation's shareholders. The approval of the Long-Term Plan and its amendments requires the affirmative vote of the holders of a majority of the shares of Common Stock present or represented by properly executed and delivered proxies at the meeting. Abstentions and shares held in street name voted as to any matter at the meeting will be included in determining the number of votes present or represented at the meeting. The Corporation has previously maintained long-term cash incentive plans for specified three year periods, for example the 1993-95 Long-Term Cash Incentive Plan, which were not required to be submitted for shareholder approval. Those plans will remain in effect in accordance with their terms until they terminate. It is proposed that all future long-term incentive awards be made under the Long-Term Plan. The Long-Term Plan is now being submitted for shareholder approval in order that it qualify as performance-based compensation under applicable Internal Revenue Service laws and regulations. The Board of Directors believes that the Long-Term Plan will benefit the Corporation by (i) assisting it in recruiting and retaining officers and key employees with ability and initiative, (ii) providing greater incentive 19 for officers and key employees, and (iii) associating the interests of officers and key employees with those of the Corporation and its shareholders through opportunities for increased stock ownership. The following paragraphs summarize the more significant features of the Long-Term Plan. This summary is subject, in all respects, to the terms of the Long-Term Plan. The Corporation will provide promptly, upon request and without charge, a copy of the full text of the Long-Term Plan to each person to whom a copy of this proxy statement is delivered. Requests should be directed to: Mr. Robert K. Borbet, Vice President, Compensation and Benefits Administrator, Southern National Bank of North Carolina, 500 North Chestnut Street, Lumberton, North Carolina 28358, (910) 671-2224. The Compensation Committee of the Board of Directors will administer the Long-Term Plan. The Compensation Committee will select the employees who will participate in the Long-Term Plan (Participants). Key employees of the Corporation or a related entity are eligible to participate in the Long-Term Plan. The Long-Term Plan provides cash awards to key employees who contribute to the success of the Corporation based on the achievement of goals established for a given three-fiscal-year performance period. Awards under the Long-Term Plan will be based on overall corporate performance. Corporate performance under the Long-Term Plan will be based upon growth in earnings per share as compared to an earnings per share target, and return on average equity performance as compared to identified industry standards. Each payout of an incentive award will be from the general funds of the Corporation. No special or separate fund will be established or other segregation of assets made to assure payout of any incentive award. The Board of Directors will have the power to amend the Long-Term Plan, or to suspend or terminate the Long-Term Plan in whole or in part. Neither the number of individuals who will be selected to participate in the Long-Term Plan nor the size of the incentive payments to be made under the Long-Term Plan can be determined. However, the payments made under the 1991-93 Long-Term Cash Incentive Plan in 1993 are described in Summary Compensation Table under the LTIP Payouts column. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE LONG-TERM INCENTIVE PLAN. PROPOSAL 4: APPROVAL OF THE SHORT-TERM INCENTIVE PLAN The Board of Directors proposes that the shareholders approve the Southern National Corporation Short-Term Incentive Plan (the Short-Term Plan), previously adopted by the Board of Directors on December 20, 1990. The Board of Directors amended the Short-Term Plan on February 17, 1994 in order for it to qualify as performance-based compensation under applicable Internal Revenue Service laws and regulations, subject to the approval of the Corporation's shareholders. The approval of the Short-Term Plan and its amendments requires the affirmative vote of the holders of a majority of the shares of Common Stock present or represented by properly executed and delivered proxies at the meeting. Abstentions and shares held in street name voted as to any matter at the meeting will be included in determining the number of votes present or represented at the meeting. The Corporation has previously maintained annual short-term cash incentive plans, for example the 1993 Short-Term Incentive Plan, which were not required to be submitted for shareholder approval. It is proposed that all future short-term incentive awards be made under the Short-Term Plan. The Short-Term Plan is now being submitted for shareholder approval in order that it qualify as performance-based compensation under applicable Internal Revenue Service laws and regulations. The Board of Directors believes that the Short-Term Plan will benefit the Corporation by (i) assisting it in recruiting and retaining officers and key employees with ability and initiative, (ii) providing greater incentive for officers and key employees, and (iii) associating the interests of officers and key employees with those of the Corporation and its shareholders through opportunities for increased stock ownership. The following paragraphs summarize the more significant features of the Short-Term Plan. This summary is subject, in all respects, to the terms of the Short-Term Plan. The Corporation will provide promptly, upon request and without charge, a copy of the full text of the Short-Term Plan to each person to whom a copy of 20 this proxy statement is delivered. Requests should be directed to: Mr. Robert K. Borbet, Vice President, Compensation and Benefits Administrator, Southern National Bank of North Carolina, 500 North Chestnut Street, Lumberton, North Carolina 28358, (910) 671-2224. The Compensation Committee of the Board of Directors will administer the Short-Term Plan. The Compensation Committee will select the employees who will participate in the Short-Term Plan (Participants). Key executives of the Corporation or a related entity are eligible to participate in the Short-Term Plan. The Short-Term Plan provides cash awards to key employees who contribute to the success of the Corporation based on the achievement of short-term goals established for a given fiscal year. Awards are based on corporate performance determined primarily on the attainment of certain earnings per share and return on assets goals. The size of incentive payments under the Short-Term Plan will be determined by establishing target incentive awards expressed as a percentage of base salary. Such percentages may not exceed 35% of base salary and will be established annually by the Compensation Committee. The maximum incentive award for a participant will be equal to 150% of the participant's targeted incentive awards. Actual awards are subject to decrease or increase on the basis of the Corporation's performance. The target earnings per share will be based on the Corporation's budgeted earnings. If budgeted earnings are achieved, a full payout of bonuses is made. The payout ratio decreases to 25% of full payment based on an incremental decrease in the targeted earnings per share and return on assets down to a minimum or threshold level. Conversely, the payout ratio increases based on an incremental increase in the target earnings per share and return on assets up to a superior level. Each payout of an incentive award will be from the general funds of the Corporation. No special or separate fund will be established or other segregation of assets made to assure payout of any incentive award. The Board of Directors will have the power to amend the Short-Term Plan, or to suspend or terminate the Short-Term Plan in whole or in part. Neither the number of individuals who will be selected to participate in the Short-Term Plan nor the size of the incentive payments to be made under the Short-Term Plan can be determined. However, payments made under the 1993 Short-Term Incentive Plan during 1993 are described in the Summary Compensation Table. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE SHORT-TERM INCENTIVE PLAN. PROPOSAL 5: APPROVAL OF AMENDMENTS TO THE NONQUALIFIED STOCK OPTION AND INCENTIVE STOCK OPTION PLANS The Board of Directors proposes that the shareholders approve amendments to the Southern National Corporation Nonqualified Stock Option Plan (the Nonqualified Plan) and the Southern National Corporation Incentive Stock Option Plan (the ISO Plan) (collectively, the Option Plans) adopted by the Board of Directors on February 17, 1994, subject to the approval of the Corporation's shareholders. The approval of amendments to the ISO Plan and Nonqualified Plan requires the affirmative vote of the holders of a majority of the shares of Common Stock present or represented by properly executed and delivered proxies at the meeting. Abstentions and shares held in street name voted as to any matter at the meeting will be included in determining the number of votes present or represented at the meeting. The proposed amendments will give the Compensation Committee the authority to accelerate the four year vesting schedule of nonqualified stock options and incentive stock options under appropriate circumstances, in the event of death, disability or retirement. The following paragraphs summarize the principal features of the Option Plans. This summary is subject, in all respects, to the terms of the Option Plans and the proposed amendments. The Corporation will provide promptly, upon request and without charge, a copy of the full text of the Option Plans and the proposed amendments to each person to whom a copy of this proxy statement is delivered. Requests should be directed to: Mr. Robert K. Borbet, Vice President, Compensation and Benefits Administrator, Southern National Bank of North Carolina, 500 North Chestnut Street, Lumberton, North Carolina 28358, (910) 671-2224. 21 The Option Plans are administered by the Compensation Committee of the Board of Directors. The Compensation Committee selects those key employees of the Corporation or its subsidiaries that will be eligible to receive options, and also selects the type of option to be granted, the price of each option, and the specific terms to be included in the option agreement. Options granted under the Option Plans have a term of ten years from the date of grant, subject to earlier termination in the event of death, disability or retirement. In addition, all options granted under the Option Plans are subject to a four year vesting schedule, whereby 25% of the number of shares in each option are exercisable on the first anniversary of the date of grant, and each year thereafter. The prices at which the shares of the Corporation's common stock may be purchased are determined by the Compensation Committee. However, an incentive stock option may not be granted at an option price of less than 100% of its fair market value on the date of grant, and nonqualified stock options may not be granted at an option price of less than 85% of its fair market value on the date of grant. The purpose of the Option Plans is to provide long term incentives to certain key employees of the Corporation or its subsidiaries, to remain in its employment and to use their best efforts on behalf of their employers. The Board of Directors retains the power to amend, suspend or terminate either of the Option Plans; however, the Board of Directors may not, without shareholder approval implement such changes, which may (i) increase the total amount of the share reserve for the options; (ii) change the option price except as allowable under the Option Plans; (iii) affect outstanding option rights already granted; (iv) extend the option term or decrease the option term; and (v) extend the termination date of the plans. The ISO Plan is intended to qualify for certain advantageous tax treatment under section 422 of the Internal Revenue Code of 1986, as amended (the Code). The Nonqualified Plan is not intended to qualify under Code section 422. Refer above to Proposal 2: Approval of the Omnibus Stock Incentive Plan under the caption Federal Income Tax Consequences for a discussion of the federal income tax consequences of the grant and exercise of nonqualified or incentive stock options. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE PROPOSAL TO AMEND THE NONQUALIFIED STOCK OPTION PLAN AND INCENTIVE STOCK OPTION PLAN. ANNUAL REPORT The Corporation's 1993 Annual Report to Shareholders, including financial statements, accompanies this Proxy Statement. PROPOSALS FOR 1995 ANNUAL MEETING Under regulations of the Securities and Exchange Commission, any shareholder desiring to make a proposal to be acted upon at the 1995 annual meeting of shareholders must present such proposal to the Corporation at its principal office in Lumberton, North Carolina, by November 17, 1994, for the proposal to be considered for inclusion in the Corporation's proxy statement. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a shareholder even if the proposal is not to be included in the Corporation's proxy statement, the Corporation's bylaws provide that the shareholder must give timely notice in writing to the Secretary of the Company at least 60 days prior to the date one year from the date of the immediately preceding annual meeting. As to each matter, the notice must contain (i) a brief description of the business desired to be brought before the annual meeting, (ii) the name, record address of, and class and number of shares beneficially owned by, the shareholder proposing such business and (iii) any material interest of the shareholder in such business. 22 OTHER BUSINESS The Board of Directors knows of no other matter to come before the Annual Meeting of Shareholders. However, if any other matter requiring a vote of the shareholders should arise, it is the intention of the persons named in the accompanying proxy to vote such proxy in accordance with their best judgment. By Order of the Board of Directors (Signature of David L. Craven) DAVID L. CRAVEN SECRETARY Dated: March 16, 1994 23 SOUTHERN NATIONAL CORPORATION PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 19, 1994 KNOW ALL MEN BY THESE PRESENTS, That the undersigned shareholder of Southern National Corporation (the Corporation), a North Carolina corporation, hereby constitutes and appoints H. Franklin Biggs, K. Dwight Willoughby, Felton Sealey and Laura P. Richardson, and each of them, attorneys and proxies, with full power of substitution, for and on behalf of the undersigned to act and vote, as indicated below, according to the number of shares of the Corporation's common stock held of record by the undersigned on February 17, 1994, and as fully as the undersigned would be entitled to act and vote if personally present, at the Annual Meeting of Shareholders to be held at Pine Crest Country Club, Maxton Highway, Lumberton, North Carolina on April 19, 1994 at 11:00 a.m. and at any adjournment or adjournments thereof. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF PROPERLY EXECUTED AND NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED IN FAVOR OF PROPOSALS 1, 2 3, 4 AND 5. 1. PROPOSAL TO ELECT AS DIRECTORS THE 10 NOMINEES LISTED BELOW: [] FOR electing all 10 nominees listed below [] AGAINST electing all 10 nominees [] ABSTAIN (except as marked to the contrary below) listed below
(Instruction: To withhold authority to vote for any individual Nominee, strike a line through the Nominee's name in the list below.) William N. Geiger, Jr., James A. Hardison, Jr., Charles E. Nichols, Ted R. Reynolds, Joseph A. McAleer, Luther C. Boliek, H. Ray Davis, Paul S. Goldsmith, T. H. Yancey and Robert H. Yeargin. 2. PROPOSAL TO APPROVE THE CORPORATION'S OMNIBUS STOCK INCENTIVE PLAN. [] FOR [] AGAINST [] ABSTAIN 3. PROPOSAL TO APPROVE THE CORPORATION'S LONG-TERM INCENTIVE PLAN [] FOR [] AGAINST [] ABSTAIN 4. PROPOSAL TO APPROVE THE CORPORATION'S SHORT-TERM INCENTIVE PLAN. [] FOR [] AGAINST [] ABSTAIN 5. PROPOSAL TO APPROVE AN AMENDMENT TO THE CORPORATION'S INCENTIVE STOCK OPTION PLAN AND NON-QUALIFIED STOCK OPTION PLAN. [] FOR [] AGAINST [] ABSTAIN 6. In their discretion, the proxies are authorized to act and vote upon any other business which may properly be brought before the meeting or any adjournment thereof. The undersigned hereby ratifies and confirms all that said attorneys and proxies or any of them lawfully do or cause to be done by virtue hereof. A majority of said attorneys and proxies who shall be present and acting as such at the Annual Meeting of Shareholders or any adjournment thereof, or if only one such attorney and proxy be present and acting, then that one, shall have and may exercise all the powers hereby conferred. The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of Shareholders, dated March 16, 1994, the Proxy Statement and Annual Report furnished therewith. (SEAL) (SEAL) NOTE: Please sign exactly as name appears on stock certificate. When shares are held by joint tenants, both should sign. Executors, administrators, trustees and other fiduciaries, and persons signing on behalf of corporations or partnerships, should so indicate when signing. Dated this day of , 1994. PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY PROMPTLY. THANK YOU. *************************************************************************** APPENDIX On the Notice of Annual Meeting of Shareholders page the signature of David L. Craven appears where noted. On Page 16 the Performance Graph appears where indicated. The plot points are listed in the table below that point. On Page 23 the signature of David L. Craven appears where noted. -----END PRIVACY-ENHANCED MESSAGE-----