AGREEMENT AND PLAN OF MERGER

Exhibit 2.1

EXECUTION COPY

AGREEMENT AND PLAN OF MERGER

BY AND BETWEEN

FIRST NIAGARA FINANCIAL GROUP, INC.

AND

HARLEYSVILLE NATIONAL CORPORATION

TABLE OF CONTENTS

 

 

(i)

 

(ii)

 

 

(iii)

AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER (this “Agreement”) is dated as of July 26, 2009, by and between First Niagara Financial Group, Inc., a Delaware corporation (“FNFG”), and Harleysville National Corporation, a Pennsylvania corporation (“HNC”).

WHEREAS , the Board of Directors of each of FNFG and HNC (i) has determined that this Agreement and the business combination and related transactions contemplated hereby are in the best interests of their respective companies and shareholders and (ii) has determined that this Agreement and the transactions contemplated hereby are consistent with and in furtherance of their respective business strategies, and (iii) has adopted a resolution approving this Agreement and declaring its advisability; and

WHEREAS , in accordance with the terms of this Agreement, HNC will merge with and into FNFG (the “Merger”), and immediately thereafter Harleysville National Bank, a national bank and wholly owned subsidiary of HNC (“HNB”), will be merged with and into First Niagara Bank, a federally chartered stock savings bank and wholly owned subsidiary of FNFG (“First Niagara Bank”); and

WHEREAS , as a condition to the willingness of FNFG to enter into this Agreement, each of the directors of HNC has entered into a Voting Agreement, substantially in the form of Exhibit A hereto, dated as of the date hereof, with FNFG (the “HNC Voting Agreements”), pursuant to which each such director has agreed, among other things, to vote all shares of common stock of HNC owned by such person in favor of the approval of this Agreement and the transactions contemplated hereby, upon the terms and subject to the conditions set forth in the HNC Voting Agreements; and

WHEREAS , the parties intend the Merger to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and that this Agreement be and is hereby adopted as a “plan of reorganization” within the meaning of Sections 354 and 361 of the Code; and

WHEREAS , the parties desire to make certain representations, warranties and agreements in connection with the business transactions described in this Agreement and to prescribe certain conditions thereto.

NOW, THEREFORE , in consideration of the mutual covenants, representations, warranties and agreements herein contained, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I

CERTAIN DEFINITIONS

1.1. Certain Definitions.

As used in this Agreement, the following terms have the following meanings (unless the context otherwise requires, references to Articles and Sections refer to Articles and Sections of this Agreement).

 

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“Affiliate” means any Person who directly, or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person and, without limiting the generality of the foregoing, includes any executive officer or director of such Person and any Affiliate of such executive officer or director.

“Agreement” means this agreement, and any amendment hereto.

“Applications” means the applications for regulatory approval that are required by the transactions contemplated hereby.

“Bank Merger” shall mean the merger of HNB with and into First Niagara Bank, with First Niagara Bank as the surviving institution, which merger shall occur immediately following the Merger.

“Bank Regulator” shall mean any Federal or state banking regulator, including but not limited to the OTS, OCC, the FRB, the FDIC and the Department, which regulates First Niagara Bank or HNB, or any of their respective holding companies or subsidiaries, as the case may be.

“BHCA” shall mean the Bank Holding Company Act of 1956, as amended.

“Certificate” shall mean certificates evidencing shares of HNC Common Stock.

“Closing” shall have the meaning set forth in Section 2.2.

“Closing Date” shall have the meaning set forth in Section 2.2.

“COBRA” shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Confidentiality Agreement” shall mean the confidentiality agreement referred to in Section 12.1 of this Agreement.

“Department” shall mean the Banking Department of the State of New York, and where appropriate shall include the Superintendent of Banks of the State of New York and the Banking Board of the State of New York.

“DGCL” shall mean the Delaware General Corporation Law.

“Effective Time” shall mean the date and time specified pursuant to Section 2.2 hereof as the effective time of the Merger.

“Environmental Laws” means any applicable Federal, state or local law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any governmental entity relating to (1) the protection, preservation or restoration of the environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil,

 

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plant and animal life or any other natural resource), and/or (2) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Materials of Environmental Concern. The term Environmental Laws includes without limitation (a) the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. §9601, et seq; the Resource Conservation and Recovery Act, as amended, 42 U.S.C. §6901, et seq; the Clean Air Act, as amended, 42 U.S.C. §7401, et seq; the Federal Water Pollution Control Act, as amended, 33 U.S.C. §1251, et seq; the Toxic Substances Control Act, as amended, 15 U.S.C. §2601, et seq; the Emergency Planning and Community Right to Know Act, 42 U.S.C. §11001, et seq; the Safe Drinking Water Act, 42 U.S.C. §300f, et seq; and all comparable state and local laws, and (b) any common law (including without limitation common law that may impose strict liability) that may impose liability or obligations for injuries or damages due to the presence of or exposure to any Materials of Environmental Concern.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

“Exchange Agent” shall mean American Stock Transfer & Trust Company, or such other bank or trust company or other agent designated by FNFG, and reasonably acceptable to HNC, which shall act as agent for FNFG in connection with the exchange procedures for converting Certificates into the Merger Consideration.

“Exchange Fund” shall have the meaning set forth in Section 3.2.1.

“Exchange Ratio” shall have the meaning set forth in Section 3.1.3.

“FDIA” shall mean the Federal Deposit Insurance Act, as amended.

“FDIC” shall mean the Federal Deposit Insurance Corporation or any successor thereto.

“FHLB” shall mean the Federal Home Loan Bank of New York.

“First Niagara Bank” shall mean First Niagara Bank, a federally chartered stock savings association, with its principal offices located at 6950 South Transit Road, P.O. Box 514, Lockport, New York, which is a wholly owned subsidiary of FNFG.

“First Niagara Commercial Bank” shall mean the wholly owned, commercial bank subsidiary of First Niagara Bank that is chartered under the laws of the State of New York and is limited to those activities set forth in Section 2(a)(5)(E)(ii) of the BHCA.

“FNFG” shall mean First Niagara Financial Group, Inc., a Delaware corporation, with its principal executive offices located at 6950 South Transit Road, Lockport, New York 14095.

“FNFG Common Stock” shall mean the common stock, par value $.01 per share, of FNFG.

 

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“FNFG Disclosure Schedule” shall mean a written disclosure schedule delivered by FNFG to HNC specifically referring to the appropriate section of this Agreement.

“FNFG Financial Statements” shall mean the (i) the audited consolidated statements of condition (including related notes and schedules) of FNFG and subsidiaries as of December 31, 2008 and 2007 and the consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows (including related notes and schedules, if any) of FNFG and subsidiaries for each of the three years ended December 31, 2008, 2007 and 2006, as set forth in FNFG’s annual report for the year ended December 31, 2008, and (ii) the unaudited interim consolidated financial statements of FNFG and subsidiaries as of the end of each calendar quarter following December 31, 2008, and for the periods then ended, as filed by FNFG in its Securities Documents.

“FNFG Regulatory Agreement” shall have the meaning set forth in Section 5.11.3.

“FNFG Stock Benefit Plans” shall mean the 1999 Stock Option Plan, the 1999 Recognition and Retention Plan and the 2002 Long-Term Incentive Stock Benefit Plan.

“FNFG Subsidiary” means any corporation, of which more than 50% of the capital stock is owned, either directly or indirectly, by FNFG or First Niagara Bank, except any corporation the stock of which is held in the ordinary course of the lending activities of First Niagara Bank.

“FRB” shall mean the Board of Governors of the Federal Reserve System and, where appropriate, the Federal Reserve Bank of New York.

“GAAP” shall mean accounting principles generally accepted in the United States of America, consistently applied with prior practice.

“Governmental Entity” shall mean any Federal or state court, administrative agency or commission or other governmental authority or instrumentality.

“HMS” shall mean Harleysville Management Services, LLC, a wholly-owned subsidiary of HNB.

“HNB” shall mean Harleysville National Bank, a national bank, with its principal offices located at 483 Main Street, Harleysville, Pennsylvania 19438, which is a wholly owned subsidiary of HNC.

“HNC” shall mean Harleysville National Corporation, a Pennsylvania corporation, with its principal offices located at 2483 Main Street, Harleysville, Pennsylvania 19438.

“HNC Common Stock” shall mean the common stock, par value $1.00 per share, of HNC.

“HNC Delinquent Loans” shall mean (i) all loans with principal and/or interest that are 30-89 days past due, (ii) all loans with principal and/or interest that are at least 90 days past due and still accruing, (iii) all loans with principal and/or interest that are nonaccruing, (iv) Other Real Estate Owned and (v) net charge-offs from the date of this Agreement through the last business day of the month prior to the Closing Date.

 

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“HNC Disclosure Schedule” shall mean a written disclosure schedule delivered by HNC to FNFG specifically referring to the appropriate section of this Agreement.

“HNC Financial Statements” shall mean (i) the audited consolidated balance sheets (including related notes and schedules, if any) of HNC and subsidiaries as of December 31, 2008 and 2007 and the consolidated statements of operations, stockholders’ equity and cash flows (including related notes and schedules, if any) of HNC and subsidiaries for each of the three years ended December 31, 2008, 2007 and 2006, and (ii) the unaudited interim consolidated financial statements of HNC and subsidiaries as of the end of each calendar quarter following December 31, 2008 and for the periods then ended, as filed by HNC in its Securities Documents.

“HNC Option Plans” shall mean the (i) the Harleysville National Corporation 1993 Stock Incentive Plan; (ii) the Harleysville National Corporation 1998 Independent Directors Stock Option Plan, as amended; (iii) the Harleysville National Corporation 1998 Stock Incentive Plan; (iv) the Harleysville National Corporation 2004 Omnibus Stock Incentive Plan (as amended and restated effective November 9, 2006); (v) Harleysville National Corporation 2008-2010 Restricted Stock Incentive Plan; (vi) East Penn Financial Corporation 1999 Stock Incentive Plan, as assumed by HNC; (vii) Willow Financial Bancorp, Inc. Amended and Restated 1999 Stock Option Plan, as assumed by HNC; (viii) Willow Financial Bancorp, Inc. Amended and Restated 2002 Stock Option Plan, as assumed by HNC; (ix) East Penn Financial Corporation 1999 Independent Directors Stock Incentive Plan; (x) Chester Valley Bancorp, Inc. 1997 Stock Option Plan; and (xi) Millennium Bank Stock Compensation Program, and in each case as amended.

“HNC Option” shall mean an option to purchase shares of HNC Common Stock granted pursuant to the HNC Option Plans and as set forth in HNC Disclosure Schedule 4.3.1.

“HNC Recommendation” shall have the meaning set forth in Section 8.1.

“HNC Regulatory Agreement” shall have the meaning set forth in Section 4.12.3.

“HNC Regulatory Reports” means the Call Reports of HNB and accompanying schedules, as filed with the FDIC, for each calendar quarter beginning with the quarter ended March 31, 2008, through the Closing Date, and all Reports filed with the OCC by HNC from March 31, 2008 through the Closing Date.

“HNC Shareholders Meeting” shall have the meaning set forth in Section 8.1.

“HNC Subsidiary” means any corporation, of which more than 50% of the capital stock is owned, either directly or indirectly, by HNC or HNB, except any corporation the stock of which is held in the ordinary course of the lending activities of HNB.

“HOLA” shall mean the Home Owners’ Loan Act, as amended.

“IRS” shall mean the United States Internal Revenue Service.

 

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“Knowledge” as used with respect to a Person (including references to such Person being aware of a particular matter) means those facts that are known or should have been known after due inquiry by the executive officers (as defined in Rule 3b-7 under the Exchange Act) of such Person, and in the case of HNC shall include, without limitation, those persons set forth in HNC Disclosure Schedule 1.1, and includes any facts, matters or circumstances set forth in any written notice from any Bank Regulator or any other material written notice received by that Person.

“Material Adverse Effect” shall mean, with respect to FNFG or HNC, respectively, any effect that (i) is material and adverse to the financial condition, results of operations or business of FNFG and the FNFG Subsidiaries taken as a whole, or HNC and the HNC Subsidiaries taken as a whole, respectively, or (ii) does or would materially impair the ability of either HNC, on the one hand, or FNFG, on the other hand, to perform its obligations under this Agreement or otherwise materially threaten or materially impede the consummation of the transactions contemplated by this Agreement; provided that “Material Adverse Effect” shall not be deemed to include the impact of (a) changes in laws and regulations affecting banks or thrift institutions or their holding companies generally, or interpretations thereof by courts or governmental agencies, (b) changes in GAAP or regulatory accounting principles generally applicable to financial institutions and their holding companies, (c) actions and omissions of a party hereto (or any of its Subsidiaries) taken with the prior written consent of the other party, (d) the announcement of this Agreement and the transactions contemplated hereby, and compliance with this Agreement on the business, financial condition or results of operations of the parties and their respective subsidiaries, including the expenses incurred by the parties hereto in consummating the transactions contemplated by this Agreement, (e) changes in national or international political or social conditions including the engagement by the United States in hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack upon or within the United States, or any of its territories, possessions or diplomatic or consular offices or upon any military installation, equipment or personnel of the United States, unless it uniquely affects either or both of the parties or any of their Subsidiaries (f) changes in the value of the securities or loan portfolio, or any change in the value of the deposits or borrowings, of FNFG or HNC, or any of the FNFG Subsidiaries or the HNC Subsidiaries, respectively, resulting from a change in interest rates generally, (g) changes in HNC’s stock price or trading volume, or any failure by HNC to meet internal or published projections, forecasts or revenue or earnings predictions for any period (it being agreed that the facts giving rise or contributing to any such failure may be a Material Adverse Effect); (h) the termination of any employees or independent contractors, (i) any increase in HNC Delinquent Loans, which is addressed in the last sentence of this paragraph; (j) charges or reserves taken by HNC at the request of FNFG pursuant to Section 6.11 of this Agreement; or (k) in the case of HNC and each HNC Subsidiary, the issuance in and of itself of any orders or directives by any Bank Regulator (it being agreed that the effects of the underlying facts giving rise or contributing to the issuance of such orders or directives or the effects of the issuance of the orders or directives may be a Material Adverse Effect). In addition, and without regard to any other provision of this Agreement, and without limiting other events or circumstances that may constitute a “Material Adverse Effect”, a “Material Adverse Effect” shall include, solely with respect to HNC: if the aggregate amount of HNC Delinquent Loans equals or exceeds $350,000,000 as of any month end prior to the Closing Date, excluding any month end subsequent to February 28, 2010.

 

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“Material Contracts” shall have the meaning set forth in Section 4.9.3.

“Materials of Environmental Concern” means pollutants, contaminants, wastes, toxic substances, petroleum and petroleum products, and any other hazardous or toxic materials regulated under Environmental Laws.

“Merger” shall have the meaning set forth in the preamble.

“Merger Consideration” shall mean the FNFG Common Stock in an aggregate per share amount to be paid by FNFG for each share of HNC Common Stock, as set forth in Section 3.1.

“Merger Registration Statement” shall mean the registration statement, together with all amendments, filed with the SEC under the Securities Act for the purpose of registering shares of FNFG Common Stock to be offered to holders of HNC Common Stock in connection with the Merger.

“Nasdaq” shall mean the Nasdaq Global Select Market.

“OCC” shall mean the Office of the Comptroller of the Currency.

“OTS” shall mean the Office of Thrift Supervision or any successor thereto.

“PBCL” shall mean the Pennsylvania Business Corporation Law.

“PBGC” shall mean the Pension Benefit Guaranty Corporation, or any successor thereto.

“Pension Plan” shall have the meaning set forth in Section 4.13.2.

“Person” shall mean any individual, corporation, partnership, joint venture, association, trust or “group” (as that term is defined under the Exchange Act).

“Proxy Statement-Prospectus” shall have the meaning set forth in Section 8.2.1.

“Regulatory Approvals” means the approval of any Bank Regulator that is necessary in connection with the consummation of the Merger, the Bank Merger and the related transactions contemplated by this Agreement.

“Rights” shall mean warrants, options, rights, convertible securities, stock appreciation rights and other arrangements or commitments which obligate an entity to issue or dispose of any of its capital stock or other ownership interests or which provide for compensation based on the equity appreciation of its capital stock.

“SEC” shall mean the Securities and Exchange Commission or any successor thereto.

“Securities Act” shall mean the Securities Act of 1933, as amended.

“Securities Documents” shall mean all reports, offering circulars, proxy statements, registration statements and all similar documents filed, or required to be filed, pursuant to the Securities Laws.

 

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“Securities Laws” shall mean the Securities Act; the Exchange Act; the Investment Company Act of 1940, as amended; the Investment Advisers Act of 1940, as amended; the Trust Indenture Act of 1939, as amended, and the rules and regulations of the SEC promulgated thereunder.

“Significant Subsidiary” shall have the meaning set forth in Rule 1-02 of SEC Regulation S-X promulgated under the Securities Act and the Exchange Act.

“Surviving Corporation” shall have the meaning set forth in Section 2.1 hereof.

“Termination Date” shall mean July 31, 2010.

“Treasury Stock” shall have the meaning set forth in Section 3.1.2.

Other terms used herein are defined in the preamble and elsewhere in this Agreement.

ARTICLE II

THE MERGER

2.1. Merger.

Subject to the terms and conditions of this Agreement, at the Effective Time: (a) HNC shall merge with and into FNFG, with FNFG as the resulting or surviving corporation (the “Surviving Corporation”); and (b) the separate existence of HNC shall cease and all of the rights, privileges, powers, franchises, properties, assets, liabilities and obligations of HNC shall be vested in and assumed by FNFG. As part of the Merger, each share of HNC Common Stock (other than Treasury Stock) will be converted into the right to receive the Merger Consideration pursuant to the terms of Article III hereof. Immediately after the Merger, HNB shall merge with and into First Niagara Bank, with First Niagara Bank as the resulting institution.

2.2. Effective Time.

The closing (“Closing”) shall occur no later than the close of business on the fifth business day following the satisfaction or (to the extent permitted by applicable law) waiver of the conditions set forth in Article IX (other than those conditions that by their terms are to be satisfied at the Closing, but subject to the satisfaction or (to the extent permitted by applicable law) waiver of those conditions), or such other date that may be agreed to in writing by the parties. Notwithstanding the foregoing, the Closing shall not occur prior to January 4, 2010, unless FNFG agrees otherwise. The Merger shall be effected by the filing of a certificate of merger with the Delaware Office of the Secretary of State and the Pennsylvania Department of State on the day of the Closing (the “Closing Date”), in accordance with the DGCL and the PBCL. The “Effective Time” means the date and time upon which the certificate of merger is filed with the Delaware Office of the Secretary of State, or as otherwise stated in the certificate of merger, in accordance with the DGCL and the PBCL.

 

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2.3. Certificate of Incorporation and Bylaws.

The Certificate of Incorporation and Bylaws of FNFG as in effect immediately prior to the Effective Time shall be the Certificate of Incorporation and Bylaws of the Surviving Corporation, until thereafter amended as provided therein and by applicable law.

2.4. Directors and Officers of Surviving Corporation.

The directors of FNFG immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation. The officers of FNFG immediately prior to the Effective Time shall be the initial officers of Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified.

2.5. Effects of the Merger.

At and after the Effective Time, the Merger shall have the effects as set forth in the DGCL and the PBCL.

2.6. Tax Consequences.

It is intended that the Merger shall constitute a reorganization within the meaning of Section 368(a) of the Code, and that this Agreement shall constitute a “plan of reorganization” as that term is used in Sections 354 and 361 of the Code. From and after the date of this Agreement and until the Closing, each party hereto shall use its reasonable best efforts to cause the Merger to qualify, and will not knowingly take any action, cause any action to be taken, fail to take any action or cause any action to fail to be taken which action or failure to act could prevent the Merger from qualifying as a reorganization under Section 368(a) of the Code. Following the Closing, neither FNFG, HNC nor any of their affiliates shall knowingly take any action, cause any action to be taken, fail to take any action or cause any action to fail to be taken, which action or failure to act could cause the Merger to fail to qualify as a reorganization under Section 368(a) of the Code. FNFG and HNC each hereby agrees to deliver certificates substantially in compliance with IRS published advance ruling guidelines, with customary exceptions and modifications thereto, to enable counsel to deliver the legal opinion contemplated by Section 9.1.6, which certificates shall be effective as of the date of such opinion.

2.7. Possible Alternative Structures.

Notwithstanding anything to the contrary contained in this Agreement, prior to the Effective Time FNFG shall be entitled to revise the structure of the Merger or the Bank Merger, including without limitation, by merging HNC into a wholly-owned subsidiary of FNFG, provided that (i) any such subsidiary shall become a party to, and shall agree to be bound by, the terms of this Agreement (ii) there are no adverse Federal or state income tax or other adverse tax consequences to HNC shareholders as a result of the modification; (iii) the consideration to be paid to the holders of HNC Common Stock under this Agreement is not thereby changed in kind or value or reduced in amount; and (iv) such modification will not delay or jeopardize the receipt of Regulatory Approvals or other consents and approvals relating to the consummation of the Merger and the Bank Merger, otherwise delay or jeopardize the satisfaction of any condition to

 

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Closing set forth in Article IX or otherwise adversely affect HNC or the holders of HNC Common Stock. The parties hereto agree to appropriately amend this Agreement and any related documents in order to reflect any such revised structure.

2.8. Bank Merger.

FNFG and HNC shall use their reasonable best efforts to cause the Bank Merger to occur as soon as practicable after the Effective Time. In addition, following the execution and delivery of this Agreement, FNFG will cause First Niagara Bank, and HNC will cause HNB, to execute and deliver the Plan of Bank Merger substantially in the form attached to this Agreement as Exhibit B.

ARTICLE III CONVERSION OF SHARES

3.1. Conversion of HNC Common Stock; Merger Consideration.

At the Effective Time, by virtue of the Merger and without any action on the part of FNFG, HNC or the holders of any of the shares of HNC Common Stock, the Merger shall be effected in accordance with the following terms:

3.1.1. Each share of FNFG Common Stock that is issued and outstanding immediately prior to the Effective Time shall remain issued and outstanding following the Effective Time and shall be unchanged by the Merger.

3.1.2. All shares of HNC Common Stock held in the treasury of HNC (“Treasury Stock”) and each share of HNC Common Stock owned by FNFG immediately prior to the Effective Time (other than shares held in a fiduciary capacity or in connection with debts previously contracted) shall, at the Effective Time, cease to exist, and the certificates for such shares shall be canceled as promptly as practicable thereafter, and no payment or distribution shall be made in consideration therefore.

3.1.3. Subject to the provisions of this Article III, each share of HNC Common Stock issued and outstanding immediately prior to the Effective Time (other than Treasury Stock) shall become and be converted into, as provided in and subject to the limitations set forth in this Agreement, the right to receive 0.474 shares of FNFG Common Stock (the “Exchange Ratio”), subject to adjustment in accordance with Section 3.1.7.

3.1.4. After the Effective Time, shares of HNC Common Stock shall be no longer outstanding and shall automatically be canceled and shall cease to exist, and shall thereafter by operation of this section represent the right to receive the Merger Consideration and any dividends or distributions with respect thereto or any dividends or distributions with a record date prior to the Effective Time that were declared or made by HNC on such shares of HNC Common Stock in accordance with the terms of this Agreement on or prior to the Effective Time and which remain unpaid at the Effective Time.

3.1.5. In the event FNFG changes (or establishes a record date for changing) the number of, or provides for the exchange of, shares of FNFG Common Stock issued and

 

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outstanding prior to the Effective Time as a result of a stock split, stock dividend, recapitalization, reclassification, or similar transaction with respect to the outstanding FNFG Common Stock and the record date therefor shall be prior to the Effective Time, the Exchange Ratio shall be proportionately and appropriately adjusted; provided , that no such adjustment shall be made with regard to FNFG Common Stock if FNFG issues additional shares of FNFG Common Stock and receives fair market value consideration for such shares.

3.1.6. No Fractional Shares . Notwithstanding anything to the contrary contained herein, no certificates or scrip representing fractional shares of FNFG Common Stock shall be issued upon the surrender for exchange of Certificates, no dividend or distribution with respect to FNFG Common Stock shall be payable on or with respect to any fractional share interest, and such fractional share interests shall not entitle the owner thereof to vote or to any other rights of a shareholder of FNFG. In lieu of the issuance of any such fractional share, FNFG shall pay to each former holder of HNC Common Stock who otherwise would be entitled to receive a fractional share of FNFG Common Stock, an amount in cash, rounded to the nearest cent and without interest, equal to the product of (i) the fraction of a share to which such holder would otherwise have been entitled and (ii) the average of the daily closing sales prices of a share of FNFG Common Stock as reported on the Nasdaq for the five consecutive trading days immediately preceding the Closing Date. For purposes of determining any fractional share interest, all shares of HNC Common Stock owned by an HNC shareholder shall be combined so as to calculate the maximum number of whole shares of FNFG Common Stock issuable to such HNC shareholder.

3.1.7. Adjustment to Exchange Ratio. If the aggregate amount of HNC Delinquent Loans as of the month end prior to the Closing Date is $237,500,000 or greater, the Exchange Ratio shall adjust in the manner set forth in Exhibit C (which Exchange Ratio as adjusted in accordance with Exhibit C shall become the “Exchange Ratio” for purposes of this Agreement). Provided further, that if the Closing Date is subsequent to March 31, 2010, the aggregate amount of HNC Delinquent Loans shall be calculated as of February 28, 2010 for purposes of any adjustment in the Exchange Ratio.

3.2. Procedures for Exchange of HNC Common Stock.

3.2.1. FNFG to Make Merger Consideration Available. At or prior to the Effective Time, FNFG shall deposit, or shall cause to be deposited, with the Exchange Agent for the benefit of the holders of HNC Common Stock, for exchange in accordance with this Section 3.2, certificates representing the shares of FNFG Common Stock and an aggregate amount of cash sufficient to pay the aggregate amount of cash payable pursuant to this Article III (including any cash that may be payable in lieu of any fractional shares of HNC Common Stock) (such cash and certificates for shares of FNFG Common Stock, together with any dividends or distributions with respect thereto, being hereinafter referred to as the “Exchange Fund”).

3.2.2. Exchange of Certificates . FNFG shall cause the Exchange Agent, within five (5) business days after the Effective Time, to mail to each holder of a Certificate or Certificates, a form letter of transmittal for return to the Exchange Agent and instructions for use in effecting the surrender of the Certificates for the Merger Consideration and cash in lieu of fractional shares, if any, into which the HNC Common Stock represented by such Certificates

 

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shall have been converted as a result of the Merger. The letter of transmittal shall be subject to the approval of HNC (which shall not be unreasonably withheld, conditioned or delayed) and specify that delivery shall be affected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent. Upon proper surrender of a Certificate for exchange and cancellation to the Exchange Agent, together with a properly completed letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor, as applicable, (i) a certificate representing that number of shares of FNFG Common Stock (if any) to which such former holder of HNC Common Stock shall have become entitled pursuant to the provisions of Section 3.1 hereof and (ii) a check representing the amount of cash (if any) payable in lieu of fractional shares of FNFG Common Stock, which such former holder has the right to receive in respect of the Certificate surrendered pursuant to the provisions of Section 3.2, and the Certificate so surrendered shall forthwith be cancelled. No interest will be paid or accrued on the cash payable in lieu of fractional shares.

3.2.3. Rights of Certificate Holders after the Effective Time . The holder of a Certificate that prior to the Merger represented issued and outstanding HNC Common Stock shall have no rights, after the Effective Time, with respect to such HNC Common Stock except to surrender the Certificate in exchange for the Merger Consideration as provided in this Agreement. No dividends or other distributions declared after the Effective Time with respect to FNFG Common Stock shall be paid to the holder of any unsurrendered Certificate until the holder thereof shall surrender such Certificate in accordance with this Section 3.2. After the surrender of a Certificate in accordance with this Section 3.2, the record holder thereof shall be entitled to receive, without any interest thereon, any such dividends or other distributions with a record date after the Effective Time, which theretofore had become payable with respect to shares of FNFG Common Stock represented by such Certificate.

3.2.4. Surrender by Persons Other than Record Holders . If the Person surrendering a Certificate and signing the accompanying letter of transmittal is not the record holder thereof, then it shall be a condition of the payment of the Merger Consideration that: (i) such Certificate is properly endorsed to such Person or is accompanied by appropriate stock powers, in either case signed exactly as the name of the record holder appears on such Certificate, and is otherwise in proper form for transfer, or is accompanied by appropriate evidence of the authority of the Person surrendering such Certificate and signing the letter of transmittal to do so on behalf of the record holder; and (ii) the Person requesting such exchange shall pay to the Exchange Agent in advance any transfer or other taxes required by reason of the payment to a Person other than the registered holder of the Certificate surrendered, or required for any other reason, or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable.

3.2.5. Closing of Transfer Books . From and after the Effective Time, there shall be no transfers on the stock transfer books of HNC of the HNC Common Stock that were issued and outstanding immediately prior to the Effective Time other than to settle transfers of HNC Common Stock that occurred prior to the Effective Time. If, after the Effective Time, Certificates representing such shares are presented for transfer to the Exchange Agent, they shall be exchanged for the Merger Consideration and canceled as provided in this Section 3.2.

 

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3.2.6. Return of Exchange Fund . At any time following the twelve (12) month period after the Effective Time, FNFG shall be entitled to require the Exchange Agent to deliver to it any portions of the Exchange Fund which had been made available to the Exchange Agent and not disbursed to holders of Certificates (including, without limitation, all interest and other income received by the Exchange Agent in respect of all funds made available to it), and thereafter such holders shall be entitled to look to FNFG (subject to abandoned property, escheat and other similar laws) with respect to any Merger Consideration that may be payable upon due surrender of the Certificates held by them. Notwithstanding the foregoing, neither FNFG nor the Exchange Agent shall be liable to any holder of a Certificate for any Merger Consideration delivered in respect of such Certificate to a public official pursuant to applicable abandoned property, escheat or other similar law.

3.2.7. Lost, Stolen or Destroyed Certificates . In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if reasonably required by FNFG, the posting by such person of a bond in such amount as FNFG may reasonably direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration deliverable in respect thereof.

3.2.8. Withholding . FNFG or the Exchange Agent will be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement or the transactions contemplated hereby to any holder of HNC Common Stock such amounts as FNFG (or any Affiliate thereof) or the Exchange Agent are required to deduct and withhold with respect to the making of such payment under the Code, or any applicable provision of U.S. federal, state, local or non-U.S. tax law. To the extent that such amounts are properly withheld by FNFG or the Exchange Agent, such withheld amounts will be treated for all purposes of this Agreement as having been paid to the holder of the HNC Common Stock in respect of whom such deduction and withholding were made by FNFG or the Exchange Agent.

3.2.9. Treatment of HNC Options . HNC Disclosure Schedule 3.2.9 sets forth all of the outstanding HNC Options as of the date hereof, which schedule includes, for each option grant, the name of the individual grantee, the date of grant, the exercise price, the vesting schedule and the expiration date.

(a) At the Effective Time, all HNC Options which are outstanding and unexercised immediately prior thereto shall become fully vested and exercisable and be converted, in their entirety, automatically into fully vested and exercisable options to purchase shares of FNFG Common Stock (the “Continuing Options”) in an amount and at an exercise price determined as provided below (and otherwise subject to the terms of HNC Option Plans):

(1) The number of shares of FNFG Common Stock to be subject to the Continuing Options shall be equal to the product of the number of shares of HNC Common Stock subject to the HNC Options and the Exchange Ratio, provided that any fractional shares of FNFG Common Stock resulting from such multiplication shall be rounded down to the nearest share; and

 

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(2) The exercise price per share of FNFG Common Stock under the Continuing Options shall be equal to the exercise price per share of HNC Common Stock under the HNC Options divided by the Exchange Ratio, provided that such exercise price shall be rounded up to the nearest cent.

The adjustment provided herein with respect to any options which are “incentive stock options” (as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)) shall be and is intended to be effected in a manner which is consistent with Section 424(a) of the Code. The duration and other terms of the Continuing Options shall be the same as the HNC Options, except that all references to HNC shall be deemed to be references to FNFG.

(b) At all times after the Effective Time, FNFG shall reserve for issuance such number of shares of FNFG Common Stock as necessary so as to permit the exercise of Continuing Options in the manner contemplated by this Agreement and in the instruments pursuant to which such options were granted.

3.2.10. Continuing Options may be exercised in accordance with the terms of the HNC Options in effect immediately prior to the Effective Time, subject to applicable law and regulation.

3.2.11. Reservation of Shares . FNFG shall reserve for issuance a sufficient number of shares of the FNFG Common Stock for the purpose of issuing shares of FNFG Common Stock to the HNC shareholders in accordance with this Article III.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF HNC

HNC represents and warrants to FNFG that the statements contained in this Article IV are correct and complete as of the date of this Agreement, except as set forth in the HNC Disclosure Schedules delivered by HNC to FNFG on the date hereof. HNC has made a good faith effort to ensure that the disclosure on each schedule of the HNC Disclosure Schedule corresponds to the section referenced herein. However, for purposes of the HNC Disclosure Schedule, any item disclosed on any schedule therein is deemed to be fully disclosed with respect to all schedules under which such item may be relevant as and to the extent that it is reasonably clear on the face of such schedule that such item applies to such other schedule. References to the Knowledge of HNC shall include the Knowledge of HNB.

4.1. Reserved.

4.2. Organization.

4.2.1. HNC is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania, and is duly registered as a bank holding company under the BHCA. HNC has the requisite corporate power and authority to carry on its business as now conducted and is duly licensed or qualified to do business in the states of the United States and foreign jurisdictions where its ownership or leasing of property or the conduct of its business requires such qualification.

 

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4.2.2. HNB is a national bank duly organized and validly existing under the laws of the United States. The deposits of HNB are insured by the FDIC to the fullest extent permitted by law, and all premiums and assessments required to be paid in connection therewith have been paid by HNB when due. HNB is a member in good standing of the FHLB and owns the requisite amount of stock therein.

4.2.3. HNC Disclosure Schedule 4.2.3 sets forth each HNC Subsidiary. Each HNC Subsidiary is a corporation, limited liability company or other entity duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization.

4.2.4. The respective minute books of HNC, HNB and each other HNC Subsidiary accurately records, in all material respects, all material corporate actions of their respective shareholders and boards of directors (including committees).

4.2.5. Prior to the date of this Agreement, HNC has made available to FNFG true and correct copies of the articles of incorporation or charter and bylaws of HNC, HNB and each other HNC Subsidiary.

4.3. Capitalization.

4.3.1. The authorized capital stock of HNC consists of 200,000,000 shares of common stock, $1.00 par value per share, of which 43,090,911 shares are outstanding, validly issued, fully paid and nonassessable and free of preemptive rights. There are 22,718 shares of HNC Common Stock held by HNC as treasury stock. Neither HNC nor any HNC Subsidiary has or is bound by any Rights of any character relating to the purchase, sale or issuance or voting of, or right to receive dividends or other distributions on any shares of HNC Common Stock, or any other security of HNC or an HNC Subsidiary or any securities representing the right to vote, purchase or otherwise receive any shares of HNC Common Stock or any other security of HNC or any HNC Subsidiary, other than (i) shares issuable under the HNC Option Plans, (ii) capital securities issued by HNC Statutory Trusts I, II, III and IV (the “Trusts”); (iii) debentures issued by HNC to the Trusts; (iv) the guarantee issued by HNC to the holders of the capital securities issued by the Trusts, and (v) the warrants listed on HNC Disclosure Schedule 4.3.1. HNC Disclosure Schedule 4.3.1 sets forth the name of each holder of options to purchase HNC Common Stock, the number of shares each such individual may acquire pursuant to the exercise of such options, the grant and vesting dates, and the exercise price relating to the options held.

4.3.2. HNC owns all of the capital stock of HNB, free and clear of any lien or encumbrance. Except for the HNC Subsidiaries, HNC does not possess, directly or indirectly, any material equity interest in any corporate entity, except for equity interests held in the investment portfolios of HNC Subsidiaries, equity interests held by HNC Subsidiaries in a fiduciary capacity, and equity interests held in connection with the lending activities of HNC Subsidiaries, including stock in the FHLB. Either HNC or HNB owns all of the outstanding shares of capital stock of each HNC Subsidiary free and clear of all liens, security interests, pledges, charges, encumbrances, agreements and restrictions of any kind or nature, except that, in the case of the Trusts, HNC owns 100% of the common securities and less than 100% of the preferred securities.

 

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4.3.3. To HNC’s Knowledge, no Person or “group” (as that term is used in Section 13(d)(3) of the Exchange Act), is the beneficial owner (as defined in Section 13(d) of the Exchange Act) of 5% or more of the outstanding shares of HNC Common Stock.

4.4. Authority; No Violation.

4.4.1. HNC has full corporate power and authority to execute and deliver this Agreement and, subject to the receipt of the Regulatory Approvals and the approval of this Agreement by HNC’s shareholders, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by HNC and the consummation by HNC of the transactions contemplated hereby, including the Merger, have been duly and validly approved by the Board of Directors of HNC, and no other corporate proceedings on the part of HNC, except for the approval of the HNC shareholders, is necessary to consummate the transactions contemplated hereby, including the Merger. This Agreement has been duly and validly executed and delivered by HNC, and subject to approval by the shareholders of HNC and receipt of the Regulatory Approvals and due and valid execution and delivery of this Agreement by FNFG, constitutes the valid and binding obligation of HNC, enforceable against HNC in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally, and subject, as to enforceability, to general principles of equity.

4.4.2. Subject to receipt of Regulatory Approvals and HNC’s and FNFG’s compliance with any conditions contained therein, and to the receipt of the approval of the shareholders of HNC, (A) the execution and delivery of this Agreement by HNC, (B) the consummation of the transactions contemplated hereby, and (C) compliance by HNC with any of the terms or provisions hereof will not (i) conflict with or result in a breach of any provision of the certificate of incorporation or bylaws of HNC or any HNC Subsidiary or the charter and bylaws of HNB; (ii) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to HNC or any HNC Subsidiary or any of their respective properties or assets; or (iii) violate, conflict with, result in a breach of any provisions of, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default), under, result in the termination of, accelerate the performance required by, or result in a right of termination or acceleration or the creation of any lien, security interest, charge or other encumbrance upon any of the properties or assets of HNC or HNB under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other investment or obligation to which HNC or HNB is a party, or by which they or any of their respective properties or assets may be bound or affected, except for such violations, conflicts, breaches or defaults under clause (ii) or (iii) hereof which, either individually or in the aggregate, will not have a Material Adverse Effect on HNC and the HNC Subsidiaries taken as a whole.

4.5. Consents.

Except for (a) filings with Bank Regulators, the receipt of the Regulatory Approvals, and compliance with any conditions contained therein, (b) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware, (c) the filing with the SEC of (i) the Merger Registration Statement and (ii) such reports under Sections 13(a), 13(d), 13(g) and 16(a) of the Exchange Act as may be required in connection with this Agreement and the transactions

 

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contemplated hereby and the obtaining from the SEC of such orders as may be required in connection therewith, (d) approval of the listing of FNFG Common Stock to be issued in the Merger on the Nasdaq, (e) such filings and approvals as are required to be made or obtained under the securities or “Blue Sky” laws of various states in connection with the issuance of the shares of FNFG Common Stock pursuant to this Agreement, and (f) the approval of this Agreement by the requisite vote of the shareholders of HNC, no consents, waivers or approvals of, or filings or registrations with, any Governmental Entity are necessary, and, to HNC’s Knowledge, no consents, waivers or approvals of, or filings or registrations with, any other third parties are necessary, in connection with (x) the execution and delivery of this Agreement by HNC, and (y) the completion of the Merger and the Bank Merger by HNC. HNC has no reason to believe that any Regulatory Approvals or other required consents or approvals will not be received.

4.6. Financial Statements.

4.6.1. HNC has previously made available to FNFG the HNC Regulatory Reports. The HNC Regulatory Reports have been prepared in all material respects in accordance with applicable regulatory accounting principles and practices throughout the periods covered by such statements.

4.6.2. HNC has previously made available to FNFG the HNC Financial Statements. The HNC Financial Statements have been prepared in accordance with GAAP, and (including the related notes where applicable) fairly present in each case in all material respects (subject in the case of the unaudited interim statements to normal year-end adjustments and to any other adjustments described therein), the consolidated financial position, results of operations and cash flows of HNC and the HNC Subsidiaries on a consolidated basis as of and for the respective periods ending on the dates thereof, in accordance with GAAP during the periods involved, except as indicated in the notes thereto, or in the case of unaudited statements, as permitted by Form 10-Q.

4.6.3. At the date of each balance sheet included in the HNC Financial Statements or the HNC Regulatory Reports, neither HNC nor HNB, as applicable, had any liabilities, obligations or loss contingencies of any nature (whether absolute, accrued, contingent or otherwise) of a type required to be reflected in such HNC Financial Statements or HNC Regulatory Reports or in the footnotes thereto which are not fully reflected or reserved against therein or fully disclosed in a footnote thereto, except for liabilities, obligations and loss contingencies which are not material individually or in the aggregate or which are incurred in the ordinary course of business, consistent with past practice, and except for liabilities, obligations and loss contingencies which are within the subject matter of a specific representation and warranty herein and subject, in the case of any unaudited statements, to normal, recurring audit adjustments and the absence of footnotes.

4.6.4. The records, systems, controls, data and information of HNC and its Subsidiaries are recorded, stored, maintained and operated under means (including any electronic, mechanical or photographic process, whether computerized or not) that are under the exclusive ownership and direct control of HNC or its Subsidiaries or accountants (including all means of access thereto and there from), except for any non-exclusive ownership and non-direct control

 

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that would not reasonably be expected to have a material adverse effect on the system of internal accounting controls described below in this Section 4.6.4. HNC (x) has implemented and maintains a system of internal control over financial reporting (as required by Rule 13a-15(a) of the Exchange Act) that is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of its financial statements for external purposes in accordance with GAAP, (y) has implemented and maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) to ensure that material information relating to HNC, including its consolidated Subsidiaries, is made known to the chief executive officer and the chief financial officer of HNC by others within those entities, and (z) has disclosed, based on its most recent evaluation prior to the date hereof, to HNC’s outside auditors and the audit committee of HNC’s Board of Directors (i) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) which are reasonably likely to adversely affect HNC’s ability to record, process, summarize and report financial information and (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in HNC’s internal control over financial reporting. These disclosures (if any) were made in writing by management to HNC’s auditors and audit committee and a copy has previously been made available to FNFG. As of the date hereof, to the knowledge of HNC, its chief executive officer and chief financial officer will be able to give the certifications required pursuant to the rules and regulations adopted pursuant to Section 302 of the Sarbanes-Oxley Act, without qualification, when next due.

4.6.5. Since December 31, 2008, (i) neither HNC nor any of its Subsidiaries nor, to the Knowledge of HNC, any director, officer, employee, auditor, accountant or representative of HNC or any of its Subsidiaries has received or otherwise had or obtained knowledge of any material complaint, allegation, assertion or claim, whether written or oral, regarding the accounting or auditing practices, procedures, methodologies or methods of HNC or any of its Subsidiaries or their respective internal accounting controls, including any material complaint, allegation, assertion or claim that HNC or any of its Subsidiaries has engaged in illegal accounting or auditing practices, and (ii) no attorney representing HNC or any of its Subsidiaries, whether or not employed by HNC or any of its Subsidiaries, has reported evidence of a material violation of Securities Laws, breach of fiduciary duty or similar violation by HNC or any of its officers, directors, employees or agents to the Board of Directors of HNC or any committee thereof or to any director or officer of HNC.

4.7. Taxes.

HNC and the HNC Subsidiaries are members of the same affiliated group within the meaning of Code Section 1504(a). HNC and each HNC Subsidiary has duly filed all federal, state and material local tax returns required to be filed by or with respect to HNC and every HNC Subsidiary on or prior to the Closing Date, taking into account any extensions (all such returns, to HNC’s Knowledge, being accurate and correct in all material respects) and has duly paid or made provisions for the payment of all material federal, state and local taxes which have been incurred by or are due or claimed to be due from HNC and any HNC Subsidiary by any taxing authority or pursuant to any written tax sharing agreement on or prior to the Closing Date other than taxes or other charges which (i) are not delinquent, (ii) are being contested in good faith, or (iii) have not yet been fully determined. Except as set forth in HNC Disclosure Schedule 4.7, as of the date of this Agreement, HNC has received no written notice of, and to HNC’s Knowledge

 

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there is no audit examination, deficiency assessment, tax investigation or refund litigation with respect to any taxes of HNC or any HNC Subsidiary, and no written claim has been made by any authority in a jurisdiction where HNC or any HNC Subsidiary does not file tax returns that HNC or any HNC Subsidiary is subject to taxation in that jurisdiction. HNC and the HNC Subsidiaries have not executed an extension or waiver of any statute of limitations on the assessment or collection of any material tax due that is currently in effect. HNC and each HNC Subsidiary has withheld and paid all taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder or other third party, and HNC and each HNC Subsidiary, to HNC’s Knowledge, has timely complied with all applicable information reporting requirements under Part III, Subchapter A of Chapter 61 of the Code and similar applicable state and local information reporting requirements.

4.8. No Material Adverse Effect.

HNC has not suffered any Material Adverse Effect since March 31, 2009 and no event has occurred or circumstance arisen since that date which, in the aggregate, has had or is reasonably likely to have a Material Adverse Effect on HNC.

4.9. Material Contracts; Leases; Defaults.

4.9.1. Except as set forth in HNC Disclosure Schedule 4.9.1, neither HNC nor any HNC Subsidiary is a party to or subject to: (i) any employment, consulting or severance contract or material arrangement with any past or present officer, director or employee of HNC or any HNC Subsidiary, except for “at will” arrangements; (ii) any plan, material arrangement or contract providing for bonuses, pensions, options, deferred compensation, retirement payments, profit sharing or similar material arrangements for or with any past or present officers, directors or employees of HNC or any HNC Subsidiary; (iii) any collective bargaining agreement with any labor union relating to employees of HNC or any HNC Subsidiary; (iv) any agreement which by its terms limits the payment of dividends by HNC or any HNC Subsidiary; (v) any instrument evidencing or related to material indebtedness for borrowed money whether directly or indirectly, by way of purchase money obligation, conditional sale, lease purchase, guaranty or otherwise, in respect of which HNC or any HNC Subsidiary is an obligor to any person, which instrument evidences or relates to indebtedness other than deposits, repurchase agreements, FHLB advances, bankers’ acceptances, and “treasury tax and loan” accounts and transactions in “federal funds” in each case established in the ordinary course of business consistent with past practice, or which contains financial covenants or other restrictions (other than those relating to the payment of principal and interest when due) which would be applicable on or after the Closing Date to FNFG or any FNFG Subsidiary; (vi) any other agreement, written or oral, that obligates HNC or any HNC Subsidiary for the payment of more than $50,000 annually or for the payment of more than $100,000 over its remaining term, which is not terminable without cause on 60 days’ or less notice without penalty or payment (other than agreements for commercially available “off-the- shelf” software), or (vii) any agreement (other than this Agreement), contract, arrangement, commitment or understanding (whether written or oral) that restricts or limits in any material way the conduct of business by HNC or any HNC Subsidiary (it being understood that any non-compete or similar provision shall be deemed material, but any limitation on the scope of any license granted under any such agreement shall not be deemed material).

 

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4.9.2. Each real estate lease that requires the consent of the lessor or its agent resulting from the Merger or the Bank Merger by virtue of the terms of any such lease, is listed in HNC Disclosure Schedule 4.9.2 identifying the section of the lease that contains such prohibition or restriction. Subject to any consents that may be required as a result of the transactions contemplated by this Agreement, to its Knowledge, neither HNC nor any HNC Subsidiary is in default in any material respect under any material contract, agreement, commitment, arrangement, lease, insurance policy or other instrument to which it is a party, by which its assets, business, or operations may be bound or affected, or under which it or its assets, business, or operations receive benefits, and there has not occurred any event that, with the lapse of time or the giving of notice or both, would constitute such a default.

4.9.3. True and correct copies of agreements, contracts, arrangements and instruments referred to in Section 4.9.1 and 4.9.2 (“Material Contracts”) have been made available to FNFG on or before the date hereof, and are in full force and effect on the date hereof and neither HNC nor any HNC Subsidiary (nor, to the Knowledge of HNC, any other party to any such contract, arrangement or instrument) has materially breached any provision of, or is in default in any respect under any term of, any Material Contract. Except as listed on HNC Disclosure Schedule 4.9.3, no party to any Material Contract will have the right to terminate any or all of the provisions of any such Material Contract as a result of the execution of, and the consummation of the transactions contemplated by, this Agreement.

4.9.4. Since December 31, 2008, through and including the date of this Agreement, except as publicly disclosed by HNC in the Securities Documents filed or furnished by HNC prior to the date hereof, neither HNC nor any HNC Subsidiary has (i) except for (A) normal increases for employees (other than officers and directors subject to the reporting requirements of Section 16(a) of the Exchange Act) made in the ordinary course of business consistent with past practice, or (B) as required by applicable law, increased the wages, salaries, compensation, pension, or other fringe benefits or perquisites payable to any executive officer, employee, or director from the amount thereof in effect as of December 31, 2008 (which amounts have been previously made available to FNFG), granted any severance or termination pay, entered into any contract to make or grant any severance or termination pay (except as required under the terms of agreements or severance plans listed on HNC Disclosure Schedule 4.13.1, as in effect as of the date hereof), or paid any bonus other than the customary year-end bonuses in amounts consistent with past practice, (ii) granted any options to purchase shares of HNC Common Stock, or any right to acquire any shares of its capital stock to any executive officer, director or employee other than grants to employees (other than officers subject to the reporting requirements of Section 16(a) of the Exchange Act) made in the ordinary course of business consistent with past practice under HNC Option Plans, (iii) increased or established any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, stock option (including, without limitation, the granting of stock options, stock appreciation rights, performance awards, or restricted stock awards), stock purchase or other employee benefit plan, (iv) made any material election for federal or state income tax purposes, (v) made any material change in the credit policies or procedures of HNC or any of its Subsidiaries, the effect of which was or is to make any such policy or procedure less restrictive in any material respect, (vi) made any material acquisition or disposition of any assets or properties, or any contract for any such acquisition or disposition entered into other than loans and loan commitments, (vii) entered into any lease of real or personal property requiring annual payments in excess of $100,000, other than

 

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in connection with foreclosed property or in the ordinary course of business consistent with past practice, (viii) changed any accounting methods, principles or practices of HNC or its Subsidiaries affecting its assets, liabilities or businesses, including any reserving, renewal or residual method, practice or policy or (ix) suffered any strike, work stoppage, slow-down, or other labor disturbance.

4.10. Ownership of Property; Insurance Coverage.

4.10.1. HNC and each HNC Subsidiary has good and, as to real property, marketable title to all material assets and properties owned by HNC or each HNC Subsidiary in the conduct of its businesses, whether such assets and properties are real or personal, tangible or intangible, including assets and property reflected in the balance sheets contained in the HNC Regulatory Reports and in the HNC Financial Statements or acquired subsequent thereto (except to the extent that such assets and properties have been disposed of in the ordinary course of business, since the date of such balance sheets), subject to no material encumbrances, liens, mortgages, security interests or pledges, except (i) those items which secure liabilities for public or statutory obligations or any discount with, borrowing from or other obligations to FHLB, inter-bank credit facilities, or any transaction by an HNC Subsidiary acting in a fiduciary capacity, (ii) statutory liens for amounts not yet delinquent or which are being contested in good faith, (iii) non-monetary liens affecting real property which do not adversely affect the value or use of such real property, and (iv) those described and reflected in the HNC Financial Statements. HNC and the HNC Subsidiaries, as lessee, have the right under valid and existing leases of real and personal properties used by HNC and its Subsidiaries in the conduct of their businesses to occupy or use all such properties as presently occupied and used by each of them.

4.10.2. With respect to all material agreements pursuant to which HNC or any HNC Subsidiary has purchased securities subject to an agreement to resell, if any, HNC or such HNC Subsidiary, as the case may be, has a lien or security interest (which to HNC’s Knowledge is a valid, perfected first lien) in the securities or other collateral securing the repurchase agreement, and the value of such collateral equals or exceeds the amount of the debt secured thereby.

4.10.3. HNC and each HNC Subsidiary currently maintain insurance considered by each of them to be reasonable for their respective operations. Neither HNC nor any HNC Subsidiary, except as disclosed in HNC Disclosure Schedule 4.10.3, has received notice from any insurance carrier during the past five years that (i) such insurance will be canceled or that coverage thereunder will be reduced or eliminated, or (ii) premium costs (other than with respect to health or disability insurance) with respect to such policies of insurance will be substantially increased. There are presently no material claims pending under such policies of insurance and no notices have been given by HNC or any HNC Subsidiary under such policies (other than with respect to health or disability insurance). All such insurance is valid and enforceable and in full force and effect, and within the last three years HNC and each HNC Subsidiary has received each type of insurance coverage for which it has applied and during such periods has not been denied indemnification for any material claims submitted under any of its insurance policies. HNC Disclosure Schedule 4.10.3 identifies all material policies of insurance maintained by HNC and each HNC Subsidiary as well as the other matters required to be disclosed under this Section.

 

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4.11. Legal Proceedings.

Neither HNC nor any HNC Subsidiary is a party to any, and there are no pending or, to HNC’s Knowledge, threatened legal, administrative, arbitration or other proceedings, claims (whether asserted or unasserted), actions or governmental investigations or inquiries of any nature (i) against HNC or any HNC Subsidiary, (ii) to which HNC or any HNC Subsidiary’s assets are or may be subject, (iii) challenging the validity or propriety of any of the transactions contemplated by this Agreement, or (iv) which could adversely affect the ability of HNC or HNB to perform under this Agreement, except for any proceeding, claim, action, investigation or inquiry which, if adversely determined, individually or in the aggregate, would not be reasonably expected to have a Material Adverse Effect on HNC.

4.12. Compliance With Applicable Law.

4.12.1. To HNC’s Knowledge, each of HNC and each HNC Subsidiary is in compliance in all material respects with all applicable federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders or decrees applicable to it, its properties, assets and deposits, its business, and its conduct of business and its relationship with its employees, including, without limitation, the USA PATRIOT Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act of 1977, the Home Mortgage Disclosure Act, and all other applicable fair lending laws and other laws relating to discriminatory business practices and neither HNC nor any HNC Subsidiary has received any written notice to the contrary. The Board of Directors of HNB has adopted and HNB has implemented an anti-money laundering program that contains adequate and appropriate customer identification verification procedures that has not been deemed ineffective by any Governmental Entity and that meets the requirements of Sections 352 and 326 of the USA PATRIOT Act and the regulations thereunder.

4.12.2. Each of HNC and each HNC Subsidiary has all material permits, licenses, authorizations, orders and approvals of, and has made all filings, applications and registrations with, all Governmental Entities and Bank Regulators that are required in order to permit it to own or lease its properties and to conduct its business as presently conducted except where the failure to hold such permits, licensees, authorizations, orders or approvals, or the failure to make such filings, applications or registrations would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on HNC; all such permits, licenses, certificates of authority, orders and approvals are in full force and effect in all material respects and, to the Knowledge of HNC, no suspension or cancellation of any such permit, license, certificate, order or approval is threatened or will result from the consummation of the transactions contemplated by this Agreement, subject to obtaining Regulatory Approvals.

4.12.3. Other than those listed on HNC Disclosure Schedule 4.12.3, for the period beginning January 1, 2007, neither HNC nor any HNC Subsidiary has received any written notification or, to HNC’s Knowledge, any other communication from any Bank Regulator (i) asserting that HNC or any HNC Subsidiary is not in material compliance with any of the statutes, regulations or ordinances which such Bank Regulator enforces; (ii) threatening to revoke any license, franchise, permit or governmental authorization which is material to HNC or any HNC Subsidiary; (iii) requiring, or threatening to require, HNC or any HNC Subsidiary, or indicating

 

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that HNC or any HNC Subsidiary may be required, to enter into a cease and desist order, agreement or memorandum of understanding or any other agreement with any federal or state governmental agency or authority which is charged with the supervision or regulation of banks or engages in the insurance of bank deposits restricting or limiting, or purporting to restrict or limit, in any material respect the operations of HNC or any HNC Subsidiary, including without limitation any restriction on the payment of dividends; or (iv) directing, restricting or limiting, or purporting to direct, restrict or limit, in any manner the operations of HNC or any HNC Subsidiary, including without limitation any restriction on the payment of dividends (any such notice, communication, memorandum, agreement or order described in this sentence is hereinafter referred to as a “HNC Regulatory Agreement”). Neither HNC nor any HNC Subsidiary has consented to or entered into any HNC Regulatory Agreement that is currently in effect or that was in effect since January 1, 2008. The most recent regulatory rating given to HNB as to compliance with the Community Reinvestment Act (“CRA”) is satisfactory or better.

4.12.4. Since January 1, 2007, HNC has been and is in compliance in all material respects with (i) the applicable provisions of the Sarbanes-Oxley Act and (ii) the applicable listing and corporate governance rules and regulations of the Nasdaq. HNC Disclosure Schedule 4.12.4 sets forth, as of December 31, 2008, a schedule of all executive officers and directors of HNC who have outstanding loans from HNC or HNB, and there has been no default on, or forgiveness or waiver of, in whole or in part, any such loan during the two years immediately preceding the date hereof.

4.13. Employee Benefit Plans.

4.13.1. HNC Disclosure Schedule 4.13.1 includes a list of all existing bonus, incentive, deferred compensation, supplemental executive retirement plans, pension, retirement, profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, restricted stock, stock option, stock appreciation, phantom stock, severance, welfare benefit plans (including paid time off policies and other material benefit policies and procedures), fringe benefit plans, employment, consulting, settlement and change in control agreements and all other material benefit practices, policies and arrangements maintained by HNC or any HNC Subsidiary in which any employee or former employee, consultant or former consultant or director or former director of HNC or any HNC Subsidiary participates or to which any such employee, consultant or director is a party or is otherwise entitled to receive benefits (the “HNC Compensation and Benefit Plans”). Neither HNC nor any HNC Subsidiary has any commitment to create any additional HNC Compensation and Benefit Plan or to materially modify, change or renew any existing HNC Compensation and Benefit Plan (any modification or change that increases the cost of such plans would be deemed material), except as required to maintain the qualified status thereof, HNC has made available to FNFG true and correct copies of the HNC Compensation and Benefit Plans.

4.13.2. To the Knowledge of HNC, HNB and HMS and except as disclosed in HNC Disclosure Schedule 4.13.2, each HNC Compensation and Benefit Plan has been operated and administered in all material respects in accordance with its terms and with applicable law, including, but not limited to, ERISA, the Code, the Securities Act, the Exchange Act, the Age Discrimination in Employment Act, COBRA, the Health Insurance Portability and Accountability Act (“HIPAA”) and any regulations or rules promulgated thereunder, and all material filings,

 

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disclosures and notices required by ERISA, the Code, the Securities Act, the Exchange Act, the Age Discrimination in Employment Act, COBRA and HIPAA and any other applicable law have been timely made or any interest, fines, penalties or other impositions for late filings have been paid in full. Each HNC Compensation and Benefit Plan which is an “employee pension benefit plan” within the meaning of Section 3(2) of ERISA (a “Pension Plan”) and which is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the IRS, and HNC is not aware of any circumstances which are reasonably likely to result in revocation of any such favorable determination letter. There is no material pending or, to the Knowledge of HNC, HNB and HMS, threatened action, suit or claim relating to any of the HNC Compensation and Benefit Plans (other than routine claims for benefits). Neither HNC nor any HNC Subsidiary has engaged in a transaction, or omitted to take any action, with respect to any HNC Compensation and Benefit Plan that would reasonably be expected to subject HNC or any HNC Subsidiary to a material unpaid tax or penalty imposed by either Section 4975 of the Code or Section 502 of ERISA.

4.13.3. No liability under Title IV of ERISA has been incurred by HNC or any HNC Subsidiary with respect to any HNC Compensation and Benefit Plan which is subject to Title IV of ERISA (“HNC Pension Plan”) currently or formerly maintained by HNC or any entity which is considered one employer with HNC under Section 4001(b)(1) of ERISA or Section 414 of the Code (an “HNC ERISA Affiliate”) since the effective date of ERISA that has not been satisfied in full, and no condition exists that presents a material risk to HNC or any HNC ERISA Affiliate of incurring a liability under such Title. No HNC Pension Plan had an “accumulated funding deficiency” (as defined in Section 302 of ERISA), whether or not waived, as of the last day of the end of the most recent plan year ending prior to the date hereof; the fair market value of the assets of each HNC Pension Plan exceeds the present value of the “benefit liabilities” (as defined in Section 4001(a)(16) of ERISA) under such HNC Pension Plan as of the end of the most recent plan year with respect to the respective HNC Pension Plan ending prior to the date hereof, calculated on the basis of the actuarial assumptions used in the most recent actuarial valuation for such HNC Pension Plan as of the date hereof; there is not currently pending with the PBGC any filing with respect to any reportable event under Section 4043 of ERISA nor has any reportable event occurred as to which a filing is required and has not been made (other than as might be required with respect to this Agreement and the transactions contemplated thereby). Neither HNC nor any HNC ERISA Affiliate has contributed to any “multiemployer plan,” as defined in Section 3(37) of ERISA. Neither HNC, nor any HNC ERISA Affiliate, nor any HNC Compensation and Benefit Plan, including any HNC Pension Plan, nor any trust created thereunder, nor any trustee or administrator thereof has engaged in a transaction in connection with which HNC, any HNC ERISA Affiliate, and any HNC Compensation and Benefit Plan, including any HNC Pension Plan or any such trust or any trustee or administrator thereof, could reasonably be expected to be subject to either a civil liability or penalty pursuant to Section 409, 502(i) or 502(l) of ERISA or a tax imposed pursuant to Chapter 43 of the Code.

4.13.4. All material contributions required to be made under the terms of any HNC Compensation and Benefit Plan have been timely made, and all anticipated contributions and funding obligations are accrued on HNC’s consolidated financial statements to the extent required by GAAP. HNC and each HNC Subsidiary has expensed and accrued as a liability the present value of future benefits under each applicable HNC Compensation and Benefit Plan for financial reporting purposes as required by GAAP.

 

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4.13.5. Neither HNC nor any HNC Subsidiary has any obligations to provide retiree health, life insurance, or disability insurance, or, except as set forth in HNC Disclosure Schedule 4.13.5, any retiree death benefits under any HNC Compensation and Benefit Plan, other than benefits mandated by Section 4980B of the Code. Except as set forth in HNC Disclosure Schedule 4.13.5, there has been no communication to employees by HNC or any HNC Subsidiary that would reasonably be expected to promise or guarantee such employees retiree health, life insurance, or disability insurance, or any retiree death benefits, other than as set forth in HNC Disclosure Schedule 4.13.5.

4.13.6. HNC and its Subsidiaries do not maintain any HNC Compensation and Benefit Plans covering employees who are not United States residents.

4.13.7. With respect to each HNC Compensation and Benefit Plan, if applicable, HNC has provided or made available to FNFG copies of the: (A) trust instruments and insurance contracts; (B) three most recent Forms 5500 filed with the IRS; (C) three most recent actuarial reports and financial statements; (D) most recent summary plan description; (E) most recent determination letter issued by the IRS; (F) any Form 5310 or Form 5330 filed with the IRS within the last three years; (G) most recent nondiscrimination tests performed under ERISA and the Code (including 401(k) and 401(m) tests); and (H) PBGC Form 500 and 501 filings, along with the Notice of Intent to Terminate, ERISA Section 204(h) Notice, Notice of Plan Benefits, and all other documentation related to the termination of the HNC Pension Plan.

4.13.8. Except as provided in HNC Disclosure Schedule 4.13.8 and in Section 3.2.9, the consummation of the Merger will not, directly or indirectly (including, without limitation, as a result of any termination of employment or service at any time prior to or following the Effective Time) (A) entitle any employee, consultant or director to any payment or benefit (including severance pay, change in control benefit, or similar compensation) or any increase in compensation, (B) entitle any employee or independent contractor to terminate any plan, agreement or arrangement without cause and continue to accrue future benefits thereunder, or result in the vesting or acceleration of any benefits under any HNC Compensation and Benefit Plan, (C) result in any material increase in benefits payable under any HNC Compensation and Benefit Plan, or (D) entitle any current or former employee, director or independent contractor of HNC or any HNC Subsidiary to any actual or deemed payment (or benefit) which could constitute a “parachute payment” (as such term is defined in Section 280G of the Code).

4.13.9. Except as disclosed in HNC Disclosure Schedule 4.13.9, neither HNC nor any HNC Subsidiary maintains any compensation plans, programs or arrangements under which any payment is reasonably likely to become non-deductible, in whole or in part, for tax reporting purposes as a result of the limitations under Section 162(m) of the Code and the regulations issued thereunder.

4.13.10. Except as disclosed in HNC Disclosure Schedule 4.13.10, all deferred compensation plans, programs or arrangements are in material compliance, both in form and operation, with Section 409A of the Code and all guidance issued thereunder.

 

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4.13.11. Except as disclosed in HNC Disclosure Schedule 4.13.11, there are no stock options, stock appreciation or similar rights, earned dividends or dividend equivalents, or shares of restricted stock, outstanding under any of the HNC Compensation and Benefit Plans or otherwise as of the date hereof and none will be granted, awarded, or credited after the date hereof.

4.13.12. HNC Disclosure Schedule 4.13.12 sets forth, as of the payroll date immediately preceding the date of this Agreement, a list of the full names of all officers, and employees whose annual rate of salary is $50,000 or greater, of HNB or HNC, their title and rate of salary, and their date of hire.

4.14. Brokers, Finders and Financial Advisors.

Neither HNC nor any HNC Subsidiary, nor any of their respective officers, directors, employees or agents, has employed any broker, finder or financial advisor in connection with the transactions contemplated by this Agreement, or incurred any liability or commitment for any fees or commissions to any such person in connection with the transactions contemplated by this Agreement except for the retention of JPMorgan Securities, Inc. (“JP Morgan”) by HNC and the fee payable pursuant thereto. A true and correct copy of the engagement agreement with JPMorgan, setting forth the fee payable to JPMorgan for its services rendered to HNC in connection with the Merger and transactions contemplated by this Agreement, is attached to HNC Disclosure Schedule 4.14.

4.15. Environmental Matters.

4.15.1. Except as may be set forth in HNC Disclosure Schedule 4.15 and any Phase I Environmental Report identified therein, with respect to HNC and each HNC Subsidiary:

(A) To the Knowledge of HNC, neither the conduct nor operation of its business nor any condition of any property currently or previously owned or operated by it (including Participation Facilities) (including, without limitation, in a fiduciary or agency capacity), or on which it holds a lien, results or resulted in a violation of any Environmental Laws that is reasonably likely to impose a material liability (including a material remediation obligation) upon HNC or any HNC Subsidiary. To the Knowledge of HNC, no condition has existed or event has occurred with respect to any of them or any such property that, with notice or the passage of time, or both, is reasonably likely to result in any material liability to HNC or any HNC Subsidiary by reason of any Environmental Laws. Neither HNC nor any HNC Subsidiary during the past five years has received any written notice from any Person or Governmental Entity that HNC or any HNC Subsidiary or the operation or condition of any property ever owned, operated (including Participation Facilities), or held as collateral or in a fiduciary capacity by any of them are currently in violation of or otherwise are alleged to have liability under any Environmental Laws or relating to Materials of Environmental Concern (including, but not limited to, responsibility (or potential responsibility) for the cleanup or other remediation of any Materials of Environmental Concern at, on, beneath, or originating from any such property) for which a material liability is reasonably likely to be imposed upon HNC or any HNC Subsidiary;

 

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(B) There is no suit, claim, action, demand, executive or administrative order, directive, investigation or proceeding pending or, to the HNC ‘s Knowledge, threatened, before any court, governmental agency or other forum against HNC or any HNC Subsidiary (x) for alleged noncompliance (including by any predecessor) with, or liability under, any Environmental Law or (y) relating to the presence of or release (defined herein) into the environment of any Materials of Environmental Concern (as defined herein), whether or not occurring at or on a site owned, leased or operated by HNC or any HNC Subsidiary;

(C) To HNC’s Knowledge, there are no underground storage tanks on, in or under any properties owned or operated by HNC or any of the HNC Subsidiaries, and to HNC’s Knowledge, no underground storage tanks have been closed or removed from any properties owned or operated by HNC or any of the HNC Subsidiaries or any Participation Facility except in compliance with Environmental Laws in all material respects; and

(D) “Participation Facility” means any facility in which HNC or its Subsidiaries participates in the management , whether as a fiduciary, lender in control of the facility, owner or operator.

4.16. Loan Portfolio.

4.16.1. The allowance for loan losses reflected in HNC’s audited consolidated balance sheet at December 31, 2008 was, and the allowance for loan losses shown on the balance sheets in HNC’s Securities Documents for periods ending after December 31, 2008 was, adequate, as of the date thereof, under GAAP.

4.16.2. HNC Disclosure Schedule 4.16.2 sets forth a listing, as of June 30, 2009, by acc