MERGER AGREEMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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MERGER AGREEMENT

THIS MERGER AGREEMENT (this “ Agreement ” ), dated as of the 29 ^th day of April, 2009, is by and among:

FOUR OAKS FINCORP, INC., a North Carolina corporation and a financial holding company registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended, and a North Carolina bank holding company (the “ Parent ” );

FOUR OAKS BANK & TRUST COMPANY, a North Carolina banking corporation and a state chartered member of the Federal Reserve System (the “ Buyer ” ); and

NUESTRO BANCO, a North Carolina banking corporation (the “ Company ” ).

BACKGROUND STATEMENT

The Parent, the Buyer and the Company desire to effect a merger pursuant to which the Company will merge into the Buyer, with the Buyer being the surviving corporation (the “ Merger ” ).  In consideration of the Merger, the shareholders of the Company will receive shares of common stock of the Parent.  It is intended that the Merger qualify as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended.

STATEMENT OF AGREEMENT

In consideration of the premises and the mutual representations, warranties, covenants, agreements and conditions contained herein, the parties hereto agree as follows:

ARTICLE I

DEFINED TERMS

1.1.             DEFINITIONS.   As used in this Agreement, the following terms have the following meanings:

“ Accounting Records ” means, with respect to a Person, the general ledger with respect to its business and the subsidiary ledgers and supporting schedules that support the general ledger balances.

“ Acquisition Proposal ” has the meaning given to it in Section 6.1(c) .

“ Advisory Board ” has the meaning given to it in Section 6.2(b) .

“ Affiliate ” means, with respect to any Person, each of the Persons that directly or indirectly, through one or more intermediaries, owns or Controls, or is Controlled by or under common Control with, such Person.  For the purpose of this Agreement, “ Control ” means the possession, directly or indirectly, of the power to direct or cause the direction of management and policies, whether through the ownership of voting securities, by contract or otherwise. Without limiting the foregoing, as used with respect to the Company, the term “ Affiliates ”   includes the Company’s Subsidiaries, if any.

“ Agreement ” has the meaning given to it in the introductory paragraph hereof.

“ Assets ” means all of the assets, properties, businesses and rights of a Person of every kind, nature, character and description, whether real, personal or mixed, tangible or intangible, accrued or contingent, whether or not carried on any books and records of such Person, whether or not owned in such Person’s name and wherever located.

“ Benefit Plans ” means all pension, retirement, profit-sharing, deferred compensation, stock option, employee stock ownership, restricted stock, severance pay, vacation, bonus, or other incentive plan, all other written employee programs or agreements, all medical, vision, dental, or other health plans, welfare plans, all life insurance plans, and all other employee benefit plans, arrangements, fringe benefit plans or perquisites, whether written or unwritten, including without limitation “employee benefit plans” as that term is defined in Section 3(3) of ERISA maintained, sponsored in whole or in part, or contributed to, by a Person or any of its subsidiaries for the benefit of employees, retirees, dependents, spouses, directors, independent contractors, or any other beneficiaries and under which employees, retirees, dependents, spouses, directors, independent contractors, or any other beneficiaries are eligible to participate.

“ Business Day ” means any day excluding (i) Saturday, (ii) Sunday and (iii) any day that is a legal holiday in the State of North Carolina.

“ Buyer ” has the meaning given to it in the introductory paragraph hereof.

“ Cause ”   means:   (i) any act of an employee in connection with his or her employment and relating to the Buyer’s business including, but not limited to, negligence, which is materially detrimental to the Buyer’s interests; (ii) any act of misconduct, unlawfulness or dishonesty by an employee in connection with his or her employment which is detrimental to the Buyer’s interests; (iii) an employee’s unsatisfactory job performance or failure to comply with the Buyer’s board of directors’ reasonable directions; or (iv) an employee’s material breach of any agreement between such employee and the Buyer.

“ Closing ”   means the closing of the Merger, as identified more specifically in ARTICLE III.

“ Closing Date ”   has the meaning given to it in Section 3.1 .

“ Code ”   means the Internal Revenue Code of 1986, as amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time.  References to sections of the Code shall be construed also to refer to any successor sections.

“ Company ” has the meaning given to it in the introductory paragraph hereof.

“ Company Benefit Plans ” has the meaning given to it in Section 4.13(a) .

“ Company Contracts ”   has the meaning given to it in Section 4.14 .

“ Company Financial Statements ”   means, with respect to the Company, the audited statements of income and shareholder’s equity and cash flows for the years ended December 31, 2008 (if applicable) and 2007 and audited balance sheets as of December 31, 2008 and 2007, as well as the interim unaudited statements of income and shareholders’ equity and cash flows for each of the completed fiscal quarters since December 31, 2007, and the interim balance sheet as of each such quarter.

“ Company Option ”   means an option or other right to purchase Company Shares.

“ Company Shares ”   has the meaning given to it in Section 2.2(a) .

“ Company Warrant ”   means a warrant to purchase Company Shares.

“Company Warrantholder” has the meaning given to it in Section 2.6 .

“ Company’s Disclosure Schedule ”   has the meaning given to it in the preamble to ARTICLE IV.

“ Confidential Information ”   has the meaning given to it in Section 7.4(b) .

“ Confidentiality Agreement ” has the meaning given to it in Section 6.1(c) .

“ Consent ”   means any consent, approval, authorization, clearance, exemption, waiver or similar affirmation by any Person given or granted with respect to any Contract, Law, Order or Permit.

“ Contract ”   means any agreement, warranty, indenture, mortgage, guaranty, lease, license or other contract, agreement, arrangement, commitment or understanding, written or oral, to which a Person is a party.

“ Default ” means (i) any breach or violation of or default under any Contract, Order or Permit (including any noncompliance with restrictions on assignment, where assignment is defined to include a change of control of the parties to this Agreement or any of their Affiliates or the merger or consolidation of any of them with another Person), (ii) any occurrence of any event that, with the passage of time or the giving of notice or both, would constitute such a breach or violation of or default under any Contract, Order or Permit, or (iii) any occurrence of any event that, with or without the passage of time or the giving of notice, would give rise to a right to terminate or revoke, change the current terms of, or renegotiate, or to accelerate, increase, or impose any Liability under, any Contract, Order or Permit.

“ Dissenting Shares ”   has the meaning given to it in Section 2.7 .

“ Effective Time ” has the meaning given to it in Section 2.1(e) .

“ Environmental Laws ” means any federal, state or local law, statute, ordinance, rule, regulation, permit, directive, license, approval, guidance, interpretation, order or other legal requirement relating to the protection of human health or the environment, including but not limited to any requirement pertaining to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, handling, reporting, licensing, permitting, investigation or remediation of materials that are or may constitute a threat to human health or the environment. Without limiting the foregoing, each of the following is an Environmental Law: the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. §§ 9601 et seq.), the Hazardous Material Transportation Act (49 U.S.C. §§ 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. §§ 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. §§ 1251 et seq.), the Clean Air Act (42 U.S.C. §§ 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. §§ 2601 et seq.), the Safe Drinking Water Act (42 U.S.C. §§ 300 et seq.) and the Occupational Safety and Health Act (29 U.S.C. §§ 651 et seq.), as such laws and regulations have been or are in the future amended or supplemented, and each similar federal, state or local statute, and each rule and regulation promulgated under such federal, state and local laws.

“ Environmental Survey ” has the meaning given to it in Section 7.3 .

“ ERISA ”   means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time.  References to sections of ERISA shall be construed also to refer to any successor sections.

“ ERISA Plan ”   means any Benefit Plan that is an “employee welfare benefit plan,” as that term is defined in Section 3(l) of ERISA, or an “employee pension benefit plan,” as that term is defined in Section 3(2) of ERISA.

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

“ Exchange Agent ” has the meaning given to it in Section 2.4(a) .

“ Exchange Ratio ” means 0.2697.

“ FDIC ” means the Federal Deposit Insurance Corporation.

  “ GAAP ” means generally accepted accounting principles as recognized by the American Institute of Certified Public Accountants, as in effect from time to time, consistently applied and maintained on a consistent basis for a Person throughout the period indicated and consistent with such Person’s prior financial practice.

“ Governmental Authority ” means any nation, province or state, or any political subdivision thereof, and any agency, department, natural person or other entity exercising executive, legislative, regulatory or administrative functions of or pertaining to government, including Regulatory Authorities.

“ Hazardous Material ” means any substance or material that either is or contains a substance designated as a hazardous waste, hazardous substance, hazardous material, pollutant, contaminant or toxic substance under any Environmental Law or is otherwise regulated under any Environmental Law, or the presence of which in some quantity requires investigation, notification or remediation under any Environmental Law.

“ IIPI ”   has the meaning given to it in Section 4.29(a) .

“ Informing Party ”   has the meaning given to it in Section 7.4(b) .

“ Intellectual Property ” means all copyrights, patents, trademarks, service marks, service names, trade names, applications therefor, technology rights and licenses, computer software (including any source or object codes and documentation relating thereto), trade secrets, franchises, know-how, inventions, and other intellectual property rights.

“ IRA ” means an “individual retirement account” or similar deposit account established in accordance with the provisions of Section 408 of the Code for which the Company acts as custodian or trustee, but as to which (i) the Company may not exercise investment discretion and (ii) the Company’s customer for whom the IRA is established may not direct securities investment while the Company acts as custodian or trustee.

“ Knowledge of the Company ”   means the knowledge of any of the directors and executive officers of the Company, including facts of which the directors and executive officers, in the reasonably prudent exercise of their duties, should be aware.

“ Knowledge of the Parent and the Buyer ”   means the knowledge of any of the directors and officers of the Parent or the Buyer or any of their respective Subsidiaries, including facts of which the directors and officers, in the reasonably prudent exercise of their duties, should be aware.

“ Law ”   means any code, law, ordinance, rule, regulation, reporting or licensing requirement, or statute applicable to a Person or its Assets, Liabilities, business or operations promulgated, interpreted or enforced by any Governmental Authority.

“ Liability ”   means any direct or indirect, primary or secondary, liability, indebtedness, obligation, penalty, cost or expense (including costs of investigation, collection and defense), claim, deficiency, guaranty or endorsement of or by any Person (other than endorsements of notes, bills, checks, and drafts presented for collection or deposit in the ordinary course of business) of any type, whether accrued, absolute or contingent, liquidated or unliquidated, matured or unmatured or otherwise.

“ Lien ”   means, whether contractual or statutory, any conditional sale agreement, participation or repurchase agreement, assignment, default of title, easement, encroachment, encumbrance, hypothecation, infringement, lien, mortgage, pledge, reservation, restriction, security interest, title retention or other security arrangement, or any adverse right or interest, charge or claim of any nature whatsoever of, on, or with respect to any property or property interest, other than (i) Liens for current property Taxes not yet due and payable, (ii) easements, restrictions of record and title exceptions that could not reasonably be expected to have a Material Adverse Effect, and (iii) pledges to secure deposits and other Liens incurred in the ordinary course of the banking business.

“ Litigation ”   means any action, arbitration, cause of action, complaint, criminal prosecution, governmental investigation, hearing, or administrative or other proceeding, but shall not include regular, periodic examinations of depository institutions and their Affiliates by Regulatory Authorities.

“ Loan Collateral ”   means all of the assets, properties, businesses and rights of every kind, nature, character and description, whether real, personal, or mixed, tangible or intangible, accrued or contingent, owned by whomever and wherever located, in which any Person has taken a security interest with respect to, on which any Person has placed a Lien with respect to, or which is otherwise used to secure, any loan made by any Person or any note, account, or other receivable payable to any Person.

“ Material ” means having meaningful consequences and, for purposes of this Agreement, shall be determined reasonably in light of the facts and circumstances of the matter in question; provided that any specific monetary amount stated in this Agreement shall determine materiality in that instance.

“ Material Adverse Effect ” on a Person shall mean an event, change, or occurrence that, individually or together with any other event, change, or occurrence, has a Material adverse impact on (i) the financial condition, results of operations, or business of such Person and its subsidiaries, taken as a whole, or (ii) the ability of such Person to perform its obligations under this Agreement or to consummate the Merger or the other transactions contemplated by this Agreement, provided that “ Material Adverse Effect ” shall not be deemed to include the impact of (a) changes in banking and similar Laws of general applicability or interpretations thereof by courts or Governmental Authorities, (b) changes in market interest rates, real estate markets, securities markets or other market conditions applicable to banks or thrift institutions generally, (c) changes in GAAP or regulatory accounting principles generally applicable to banks and their holding companies, (d) actions and omissions of a party hereto (or any of its Affiliates) taken with the prior informed consent of the other parties hereto in contemplation of the transactions contemplated hereby, and (e) the Merger (and the reasonable expenses incurred in connection therewith) and compliance with the provisions of this Agreement on the operating performance of the parties hereto.

“ Merger ”   has the meaning given to it in the Background Statement hereof.

“ Merger Consideration ”   has the meaning given to it in Section 2.3(a) .

“New Parent Warrants” has the meaning given to it in Section 2.6 .

“ North Carolina Securities Permit ” has the meaning given to it in Section 6.3(f)(i) .

“ OFAC ”   means the Office of Foreign Assets Control of the United States Department of the Treasury.

“ Order ”   means any administrative decision or award, decree, injunction, judgment, order, quasi-judicial decision or award, ruling, or writ of any federal, state, local, foreign or other court, arbitrator, mediator, tribunal, administrative agency or Governmental Authority.

“ Parent ”   has the meaning given to it in the introductory paragraph hereof.

“ Parent Financial Statements ” means, with respect to the Parent and its Subsidiaries, the consolidated audited statements of income and shareholder’s equity and cash flows for the years ended December 31, 2008, 2007 and 2006 and consolidated audited balance sheets as of December 31, 2008, 2007 and 2006, as well as the interim unaudited consolidated statements of income and shareholders’ equity and cash flows for each of the completed fiscal quarters since December 31, 2008, and the consolidated interim balance sheet as of each such quarter.

“ Parent SEC Reports ” has the meaning given to it in Section 5.4(a) .

“ Parent’s Stock ”   means the common stock of the Parent, par value $1.00 per share, as traded on the OTC Bulletin Board.

“ Pension Plan ”   means any ERISA Plan that also is a “defined benefit plan” (as defined in Section 414(j) of the Code or Section 3(35) of ERISA).

“ Permit ”   means any approval, authorization, certificate, easement, filing, franchise, license, notice, permit, or right given by a Governmental Authority to which any Person is a party or that is or may be binding upon or inure to the benefit of any Person or its securities, Assets or business.

“ Person ”   means a corporation, a company, an association, a joint venture, a partnership, an organization, a business, an individual, a trust, a Governmental Authority or any other legal entity.

“ Real Property ”   means all of the land, buildings, premises, or other real property in which a Person has ownership or possessory rights, whether by title, lease or otherwise (including banking facilities and any foreclosed properties). Notwithstanding the foregoing, “ Real Property ” , as used with respect to any Person, does not include any Loan Collateral not yet foreclosed and conveyed to the Person as of the date with respect to which the term “ Real Property ” is being used.

“ Receiving Party ”   has the meaning given to it in Section 7.4(b) .

“ Regulatory Authorities ”   means, collectively, the United States Department of Justice, the Federal Reserve Board and the Federal Reserve Bank of Richmond, OFAC, the FDIC, the North Carolina Banking Commission, the North Carolina Commissioner of Banks, the Financial Industry Regulatory Authority, the SEC, and any other regulatory agencies having primary regulatory authority over the parties hereto, their respective Affiliates, and the Merger and other transactions contemplated by this Agreement.

“ Rights ”   shall mean all arrangements, calls, commitments, Contracts, options, rights to subscribe to, scrip, understandings, warrants, or other binding obligations of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, shares of the capital stock of a Person or by which a Person is or may be bound to issue additional shares of its capital stock or other Rights.

“ Sarbanes-Oxley ” means the Sarbanes-Oxley Act of 2002, as amended.

“ SEC ”   means the Securities and Exchange Commission.

“ Securities Act ”   means the Securities Act of 1933, as amended.

“ Securities Laws ” means the Securities Act, the Exchange Act, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Trust Indenture Act of 1939, each as amended, and the rules and regulations of any Governmental Authority promulgated under each.

“ Separation Agreement ”   has the meaning given to it in Section 6.2(c)(v) .

“ Subsidiary ” means, with respect to any Person, each of the Persons that directly or indirectly, through one or more intermediaries, is controlled by such Person.

“ Superior Proposal ” means a bona fide, written and unsolicited proposal or offer (including a new or solicited proposal received by the Company after execution of this Agreement from a person whose initial contact with the Company may have been solicited by the Company or its representatives prior to the execution of this Agreement) made by any person or group (other than the Parent or any of its Subsidiaries) with respect to an Acquisition Proposal on terms which the Board of Directors of the Company determines in good faith, and in the exercise of reasonable judgment (based on the advice of independent financial advisors and outside legal counsel), to be reasonably capable of being consummated and to be superior from a financial point of view to the holders of Company Shares than the transactions contemplated hereby, taking into consideration all elements of the transactions contemplated hereby including, without limitation, the non-taxable element of such transactions (based on the written opinion, with only customary qualifications, of the Company’s financial advisor).

“ Surviving Bank ” has the meaning given to it in Section 2.1(a) .

“ Tax ” or “ Taxes ” means any and all taxes, charges, fees, levies or other assessments (whether federal, state, local or foreign), including without limitation income, gross receipts, excise, property, estate, sales, use, value added, transfer, license, payroll, franchise, ad valorem, withholding, Social Security and unemployment taxes, as well as any interest, penalties and other additions to such taxes, charges, fees, levies or other assessments.

“ Tax Return ” means any report, return or other information required to be supplied to a taxing authority in connection with Taxes.

“ Taxable Period ” shall mean any period prescribed by any Governmental Authority, including the United States or any state, local, or foreign government or subdivision or agency thereof for which a Tax Return is required to be filed or Tax is required to be paid.

“ Technology Systems ” has the meaning given to it in Section 4.30(a) .

“ Voting Agreement ”   has the meaning given to it in Section 4.27 .

ARTICLE II

THE MERGER; CONVERSION AND EXCHANGE OF COMPANY SHARES

2.1.           THE MERGER.

(a)            The Merger .  On the terms and subject to the conditions of this Agreement, the Plan of Merger in respect of the Merger, which shall be substantially in the form attached hereto as EXHIBIT A, and North Carolina Law, the Company shall merge into the Buyer, the separate existence of the Company shall cease, and the Buyer shall be the surviving corporation (the “ Surviving Bank ” ) and shall continue its corporate existence under the laws of the State of North Carolina.

(b)            Governing Documents .  The articles of incorporation of the Buyer in effect at the Effective Time of the Merger shall be the articles of incorporation of the Surviving Bank until further amended in accordance with applicable Law.  The bylaws of the Buyer in effect at such Effective Time shall be the bylaws of the Surviving Bank until further amended in accordance with applicable Law.

(c)            Directors and Officers .  From and after the Effective Time of the Merger, until successors or additional directors are duly elected or appointed in accordance with applicable law, (i) the directors of the Buyer at the Effective Time shall be the directors of the Surviving Bank and (ii) the officers of the Buyer at the Effective Time shall be the officers of the Surviving Bank.

(d)            Approval .  The parties hereto shall take and cause to be taken all action necessary to approve and authorize (i) this Agreement and the other documents contemplated hereby (including without limitation the above-referenced Plan of Merger) and (ii) the Merger and the other transactions contemplated hereby.

(e)            Effective Time .  The Merger shall become effective on the date and at the time of filing of the related Articles of Merger, in the form required by and executed in accordance with North Carolina Law, or at such other time as is specified therein.  The date and time when the Merger shall become effective is herein referred to as the “ Effective Time. ”

(f)            Filing of Articles of Merger .  At the Closing, the Buyer and the Company shall cause the Articles of Merger (containing the above-referenced Plan of Merger) in respect of the Merger to be executed and filed with the Secretary of State of North Carolina as required by North Carolina Law and shall take any and all other actions and do any and all other things to cause the Merger to become effective as contemplated hereby.

2.2           COMPANY SHARES.

(a)           Each share of the Company’s capital stock (the “ Company Shares ” and each a “ Company Share ” ), $4.80   par value per share, issued and outstanding immediately prior to the Effective Time (other than Company Shares to be canceled pursuant to this Section 2.2 and Dissenting Shares) shall, by virtue of the Merger and without any action on the part of the holders thereof, be canceled in exchange, at the Effective Time, for the right to receive the Merger Consideration in accordance with this ARTICLE II.

(b)           Each Company Share, by virtue of the Merger and without any action on the part of the holder thereof, shall at the Effective Time no longer be outstanding, shall be canceled and retired and shall cease to exist, and each holder of certificates representing any such Company Shares shall thereafter cease to have any rights with respect to such shares, except for the right to receive the Merger Consideration.

(c)           Notwithstanding anything contained in this Section 2.2 to the contrary, any Company Shares held in the treasury of the Company immediately prior to the Effective Time shall be canceled without any conversion thereof, and no payment shall be made with respect thereto.

(d)           From and after the Effective Time of the Merger, there shall be no transfers on the stock transfer books of the Surviving Bank of Company Shares that were outstanding immediately prior to the Effective Time.  If, after the Effective Time, certificates representing Company Shares are presented to the Surviving Bank, they shall be canceled and exchanged for the Merger Consideration as provided for herein.

2.3           MERGER CONSIDERATION.

(a)           Subject to Sections 2.2 , 2.4 and 2.7 , at the Effective Time, the holders of Company Shares outstanding at the Effective Time, other than the Parent and its Affiliates, shall be entitled to receive, and the Buyer shall issue and deliver, for each Company Share held by such Person: 1.0 share of the Parent’s Stock multiplied by the Exchange Ratio.  The foregoing consideration, collectively and in the aggregate, shall be referred to herein as the “ Merger Consideration. ”

(b)           No fractional shares of the Parent’s Stock shall be issued or delivered in connection with the Merger.  Instead, the number of shares of the Parent’s Stock which a holder of the Company Shares is entitled to receive pursuant to this ARTICLE II shall be rounded to the nearest whole share (with 0.5 share rounded up to the nearest whole share).

2.4           EXCHANGE PROCEDURES.

(a)           After the Effective Time, the Parent or the Buyer shall cause an exchange agent selected by the Parent (the “ Exchange Agent ” ) to mail to the shareholders of the Company of record at the Effective Time appropriate transmittal materials (which shall specify that delivery shall be effected, and risk of loss and title to the certificates representing Company Shares prior to such Effective Time shall pass, only upon proper delivery of such certificates to the Exchange Agent).  After the Effective Time, each holder of Company Shares issued and outstanding at the Effective Time (other than any of such shares held by the Parent or any Affiliate thereof or canceled pursuant to Section 2.2(c) or (d) ) shall surrender the certificate or certificates representing such shares to the Exchange Agent and upon surrender thereof and completion of all requirements contained in this ARTICLE II and the letter of transmittal sent by the Exchange Agent receive in exchange therefor the number of shares of the Parent’s Stock (if any) to which such holder is entitled hereunder.  None of the Parent, the Buyer or the Exchange Agent shall be obligated to deliver any of such consideration until such holder surrenders the certificate(s) representing such holder’s Company Shares.  The certificate(s) so surrendered shall be duly endorsed as the Exchange Agent may require.  Any other provision of this Agreement notwithstanding, none of the Parent, the Buyer or the Exchange Agent shall be liable to any holder of Company Shares for any amounts paid or properly delivered in good faith to a public official pursuant to any applicable abandoned property Law.

(b)           To the extent permissible under applicable law, former shareholders of record of the Company shall not be entitled to vote at any meeting of the Parent’s shareholders until such holders have exchanged their certificates representing such Company Shares for certificates representing the Parent’s Stock in accordance with the provisions of this Agreement.  To the extent permissible under applicable law, whenever a dividend or other distribution is declared by the Parent on the Parent’s Stock, the record date for which is at or after the Effective Time, the declaration shall only include dividends or other distributions on shares of the Parent’s Stock actually issued at such time, and no dividend or other distribution payable to the holders of record of the Parent’s Stock as of any time subsequent to the Effective Time shall be delivered to the holder of any certificate representing any of the Company Shares who has not, as of the record date for such dividend or distribution, exchanged the certificates representing such Company Shares for certificates representing the Parent’s Stock.

(a)           At the Effective Time, Parent shall cause each Company Option that is outstanding and unexercised immediately prior to the Effective Time, whether or not vested, to become an option to purchase the Parent’s Stock by assuming such Company Option in accordance with, and to the extent permitted by, the terms (as in effect as of the date of this Agreement) of the stock incentive plans under which such Company Option was issued and the terms of the stock option agreement by which such Company Option is evidenced.  From and after the Effective Time, (i) each Company Option assumed by the Parent may be exercised solely for shares of the Parent’s Stock, (ii) the number of shares of the Parent’s Stock subject to each Company Option assumed by the Parent shall be equal to the number of Company Shares subject to such Company Option immediately prior to the Effective Time multiplied by the Exchange Ratio, rounding down to the nearest whole share, (iii) the per share exercise price under each Company Option assumed by the Parent shall be adjusted by dividing the per share exercise price under such Company Option by the Exchange Ratio and rounding up to the nearest whole cent, and (iv) any restriction on the exercise of any Company Option assumed by the Parent shall continue in full force and effect and the term, exercisability and other provisions of such Company Option shall otherwise remain unchanged; provided, however , that consistent with the express terms (as in effect on the date of this Agreement) of the stock incentive plans under which such Company Option was issued, because the transactions contemplated by this Agreement will occur within three (3) years of the date of such plan, no change in the Company Option will be triggered by such transactions; further provided, that each Company Option assumed by the Parent in accordance with this Section 2.5(a) shall, in accordance with its terms, be subject to further adjustment as appropriate to reflect any stock split, division or subdivision of shares, stock dividend, reverse stock split, consolidation of shares, reclassification, recapitalization or other similar transaction subsequent to the Effective Time.  The Parent shall file with the SEC, as soon as reasonably practicable and no later than ninety (90) days after the Effective Time, a registration statement on Form S-8 relating to the shares of the Parent’s Stock issuable with respect to the Company Options assumed by the Parent in accordance with this Section 2.5(a) .  Notwithstanding anything to the contrary contained in this Section 2.5 , in lieu of assuming an outstanding Company Option in accordance with this Section 2.5(a) , the Parent may, at its election, cause such Company Option to be replaced by issuing a reasonably equivalent replacement stock option in substitution therefor.

(b)           Prior to the Effective Time, the Company shall take all action that may be necessary (under each plan pursuant to which any Company Option is outstanding and otherwise) to effectuate the provisions of this Section 2.5 and to ensure that, from and after the Effective Time, any holder of a Company Option has no rights with respect thereto other than those specifically provided in this Section 2.5 .  Each Company Option, by virtue of the Merger and without any action on the part of the holder thereof, shall at the Effective Time no longer be outstanding, shall be canceled and retired and shall cease to exist.

2.6             WARRANTS .   Subject to Section 6.1(j), at the Effective Time, each Company Warrant issued and outstanding at the Effective Time shall be canceled in exchange for the right to receive a warrant to purchase the Parent’s Stock (each, a “New Parent Warrant” ).  The number of shares of the Parent’s Stock subject to each New Parent Warrant shall be equal to the number of Company Shares subject to the applicable replaced Company Warrant immediately prior to the Effective Time multiplied by the Exchange Ratio, rounding down to the nearest whole share.  The per share exercise price under each New Parent Warrant issued by the Parent shall be equal to the per share exercise price under the applicable replaced Company Warrant divided by the Exchange Ratio, rounding up to the nearest whole cent.  Notwithstanding anything in this Agreement to the contrary, (a) the Parent shall have no obligation to issue a New Parent Warrant to any former holder of a Company Warrant (each, a “Company Warrantholder” ) who does not execute a written termination referenced in Section 6.1(j), (b) the Parent shall have no obligation to file any registration statement relating to the shares of the Parent’s Stock issuable with respect to the New Parent Warrants, and (c) the issuance of the Parent’s Stock upon exercise of the New Parent Warrants shall be conditional upon the availability of an exemption from the registration requirements of the Securities Act.

2.7             DISSENTING SHARES.   Notwithstanding any other provision of this Agreement to the contrary, Company Shares that are outstanding immediately prior to the Effective Time and that are held by shareholders who shall have not voted in favor of the Merger or consented thereto in writing and who properly shall have exercised dissenter’s rights with respect to such shares in accordance with Article 13 of the North Carolina Business Corporation Act (collectively, the “ Dissenting Shares ” ) shall not be converted into or represent the right to receive the Merger Consideration.  Such shareholders instead shall be entitled to receive payment of the appraised value of such shares held by them in accordance with the provisions of the North Carolina Business Corporation Act, except that all Dissenting Shares held by shareholders who shall have failed to perfect or who effectively shall have withdrawn or otherwise lost their dissenter’s rights under Article 13 of the North Carolina Business Corporation Act shall cease to be Dissenting Shares and shall be deemed to have been converted into and to have become exchangeable, as of the Effective Time, for the right to receive, without any interest thereon, the Merger Consideration upon delivery of the documents specified in Section 2.4(a) with respect to such Company Shares.  Prior to the Effective Time, the Company shall give the Parent (a) prompt notice of any written dissenter’s notices it receives relating to any Company Shares or purported withdrawals of such notices, or any other documents it receives relating to the exercise of dissenters’ rights as to Company Shares, and (b) the opportunity to participate in all negotiations and proceedings with respect to demands under the North Carolina Business Corporation Act consistent with the obligations of the Company thereunder.  The Company shall not, except with the prior written consent of the Parent, (x) make any payment with respect to such demand, (y) offer to settle or settle any demand for appraisal or (z) waive any failure to timely deliver a written demand for appraisal or timely take any other action to perfect appraisal rights in accordance with North Carolina Law.

ARTICLE III

THE CLOSING

3.1             CLOSING.   The Closing of the Merger shall take place at the offices of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. in Raleigh, North Carolina as soon as reasonably practical after all conditions to Closing have been met, or on such other date or at such other location as the Parent, the Buyer and the Company may mutually agree (such date, the “ Closing Date ” ).  At the Closing, the parties will execute, deliver and file all documents necessary to effect the transactions contemplated with respect to the Merger, including the Articles of Merger in respect of the Merger.

3.2             DELIVERIES BY THE COMPANY.   At or by the Closing, the Company shall have caused the following documents to be executed and delivered:

(a)           the agreements, opinions, certificates, instruments and other documents contemplated in Section 8.3 ; and

(b)           all other documents, certificates and instruments required hereunder to be delivered to the Parent or the Buyer or as may reasonably be requested by the Parent or the Buyer at or prior to the Closing.

3.3             DELIVERIES BY THE PARENT AND THE BUYER.   At or by the Closing, the Parent and the Buyer shall have caused the following documents to be executed and delivered:

(a)           the agreements, opinions, certificates, instruments and other documents contemplated in Section 8.2 ; and

(b)           all other documents, certificates and instruments required hereunder to be delivered to the Company, or as may reasonably be requested by the Company at or prior to the Closing.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

Except as set forth on the Company’s Disclosure Schedule (the “ Company’s Disclosure Schedule ” ), the Company represents and warrants to the Parent and the Buyer that the statements contained in this ARTICLE IV are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date.

4.1             ORGANIZATION, STANDING AND POWER .  The Company is a banking corporation, duly organized, validly existing and in good standing under North Carolina Law.  The Company is an “insured depository institution” as defined in the Federal Deposit Insurance Act and, subject to dollar limits under such Act, all deposits with the Company are fully insured by the FDIC to the extent permitted by Law.  The Company has the corporate power and authority to carry on, in all Material respects, its businesses as now conducted and to own, lease and operate its Assets.  The Company is duly qualified or licensed to transact business as a foreign corporation in good standing in the States of the United States and foreign jurisdictions where the character of its Assets or the nature or conduct of its business requires it to be so qualified or licensed, except where the failure to be so qualified or licensed could not reasonably be expected to have a Material Adverse Effect on the Company.

4.2             AUTHORITY; NO CONFLICTS .

(a)           Subject to required regulatory and shareholder approvals, the Company has the corporate power and authority necessary to execute, deliver and perform its obligations under this Agreement and to consummate the transactions contemplated hereby.  Subject to required shareholder approval, the execution, delivery and performance of the Company’s obligations under this Agreement and the other documents contemplated hereby and the consummation of the transactions contemplated herein, including the Merger, have been duly and validly authorized by all necessary corporate action in respect thereof on the part of the Company.  This Agreement represents a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms (except in all cases as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting the enforcement of creditors’ rights generally and except that the availability of specific performance, injunctive relief and other equitable remedies is subject to the discretion of the court before which any proceeding may be brought).  To the Knowledge of the Company, there is no fact or condition relating to the Company that would prevent all regulatory approvals required for the consummation of the transactions contemplated hereby from being obtained.

(b)           Neither the execution and delivery of this Agreement by the Company, nor the consummation by the Company of the transactions contemplated hereby, nor compliance by the Company with any of the provisions hereof, will (i) conflict with or result in a breach of any provision of the Company’s articles of incorporation, charter, bylaws or any other similar governing document, (ii) constitute or result in a Default under, or require any Consent pursuant to, or result in the creation of any Lien on any Asset of the Company under, any Contract or Permit of the Company, except as could not reasonably be expected to have a Material Adverse Effect on the Company, or (iii) subject to obtaining the requisite Consents referred to in Section 8.1 , violate any Law or Order applicable to the Company or any of its respective Assets.

(c)           Other than in connection or compliance with the provisions of the Securities Laws and banking Regulatory Authorities, no notice to, filing with, or Consent of, any Governmental Authority is necessary for the consummation by the Company of the Merger and the other transactions contemplated in this Agreement.

4.3             CAPITAL STOCK; SUBSIDIARIES .

(a)           The authorized capital stock of the Company consists of 10,000,000   shares of common stock, $4.80 par value per share, of which 1,324,061 shares are issued and outstanding as of the date of this Agreement, and 1,000,000   shares of preferred stock, no par value per share, of which no shares are issued and outstanding as of the date of this Agreement.  Except for the 1,324,061 shares of common stock referenced in the preceding sentence, there are no shares of capital stock or other equity securities of the Company outstanding.  There are options to purchase 80,447 shares of common stock of the Company outstanding as of the date of this Agreement.  There are warrants to purchase 172,453 shares of common stock of the Company outstanding as of the date of this Agreement.  Except  for such options covering 80,447 shares of common stock of the Company and such warrants covering 172,453 shares of common stock of the Company, there are no options, Company Options, warrants, Rights or Contracts requiring the Company to issue additional shares of its capital stock.  There are 80,447 shares of capital stock reserved with respect to such options, and there are 172,453 shares of capital stock reserved with respect to such warrants.  The Company has no direct or indirect Subsidiaries.

(b)           All of the issued and outstanding shares of capital stock of the Company are duly and validly issued and outstanding and are fully paid and nonassessable, except to the extent set forth in Section 53-42 of the North Carolina General Statutes.  None of the outstanding shares of capital stock of the Company has been issued in violation of any preemptive rights of the current or past shareholders of the Company.  Except as set forth in Section 4.3(a) above,  there are no Contracts by which the Company is bound to issue (other than to the Company) additional shares of its capital stock or Rights or by which the Company is or may be bound to transfer any shares of the capital stock of the Company (other than to the Company).  There are no equity securities reserved for any of the foregoing purposes (except as set forth in Section 4.3(a) above), and there are no Contracts relating to the Rights of the Company.

4.4             COMPANY FINANCIAL STATEMENTS .

(a)           The Company Financial Statements have been prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements, or, in the case of unaudited statements, as permitted by applicable Law), and fairly presented the financial position of the Company as of the respective dates and the results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments that were not or are not expected to be Material in amount or effect (except as may be indicated in such financial statements or notes thereto).  No financial statements of any Person other than the Company are required by GAAP to be included in the financial statements of the Company.  The Company has provided true, correct and complete copies of the Company Financial Statements to the Buyer.

(b)           The Company maintains adequate internal accounting controls which provide assurance that (i) transactions are executed with management’s authorization, (ii) transactions are recorded as necessary to permit preparation of the financial statements of the Company in accordance with GAAP and to maintain accountability for the Company’s assets, (iii) access to the Company’s assets is permitted only in accordance with management’s authorization, (iv) the reporting of the Company’s assets is compared with existing assets at regular intervals, and (v) accounts, notes and other receivables and inventory are recorded accurately and proper and adequate procedures are implemented to effect the collection thereof on a current and timely basis.

4.5             ABSENCE OF UNDISCLOSED LIABILITIES .  As of the date of this Agreement, the Company has no Liabilities, except (a) Liabilities that are accrued or reserved against in the balance sheet of the Company as of March 31, 2009, included in the Company Financial Statements or reflected in the notes thereto, (b) increases in deposit accounts in the ordinary course of business since March 31, 2009, (c) unfunded commitments to make, issue or extend loans, lines of credit or other extensions of credit which do not exceed $100,000 in the case of any one commitment, or (d) Federal Home Loan Bank advances.  The Company has not incurred or paid any Liability since March 31, 2009, except for (i) Liabilities incurred or paid in the ordinary course of business consistent with past business practice and (ii) Liabilities that could not reasonably be expected to have a Material Adverse Effect on the Company.  To the Knowledge of the Company, no facts or circumstances exist that could reasonably be expected to serve as the basis for any other Liabilities of the Company, except as could not reasonably be expected to have a Material Adverse Effect on the Company.  No securitization transactions or “off-balance sheet arrangements” (as defined in Item 303(a)(4)(ii) of Regulation S-K of the Exchange Act) have been effected by the Company other than letters of credit and unfunded loan commitments or credit lines. 

4.6             ABSENCE OF CERTAIN CHANGES OR EVENTS.   Since March 31, 2009, (a) there have been no events, changes, or occurrences that have had, or could reasonably be expected to have, a Material Adverse Effect on the Company, (b) the Company has conducted in all Material respects its business in the ordinary and usual course (excluding the incurrence of expenses in connection with this Agreement and the transactions contemplated hereby), (c) the Company has not declared, set aside for payment or paid any dividend to holders of, or declared or made any distribution on, any Company Shares, and (d) the Company has not taken any action, or failed to take any action, prior to the date of this Agreement, which action or failure, if taken after the date of this Agreement, would represent or result in a material breach or violation of any of the covenants and agreements of the Company provided in ARTICLE VI.  Except as may result from the transactions contemplated by this Agreement, the Company has not, since March 31, 2009:

4.7           TAX MATTERS.

(a)           All Tax Returns required to be filed by or on behalf of the Company have been timely filed, or requests for extensions have been timely filed, granted, and have not expired for periods ended on or before December 31, 2007, and all Tax Returns filed are complete and accurate in all Material respects.  All Tax Returns for periods ending on or before the date of the most recent fiscal year end immediately preceding the Effective Time will be timely filed or requests for extensions will be timely filed.  All Taxes shown on filed Tax Returns have been paid.  There is no pending or, to the Knowledge of the Company, threatened audit examination, deficiency, or refund Litigation with respect to any Taxes that could have a Material Adverse Effect on the Company, except to the extent reserved against in the Company Financial Statements dated prior to the date of this Agreement.  All Taxes and other Liabilities due with respect to completed and settled examinations or concluded Litigation have been paid.

(b)      None of the Company or its Affiliates has executed an extension or waiver of any statute of limitations on the assessment or collection of any Tax due (excluding such statutes that relate to years currently under examination by the Internal Revenue Service or other applicable taxing authorities) that is currently in effect.

(c)      Adequate provision for any Material Taxes due or to become due for the Company for the period or periods through and including the date of the respective Company Financial Statements has been made and is reflected on such Company Financial Statements.

(d)      The Company is in compliance with, and its records contain all information and documents (including properly completed IRS Forms W-9) necessary to comply with, all applicable information reporting and Tax withholding requirements under federal, state, and local Tax Laws, and such records identify with specificity all accounts subject to backup withholding under Section 3406 of the Code.

(e)      The Company has not made any payments, is not obligated to make any payments, and is not a party to any Contract, agreement, or other arrangement that could obligate it to make any payments that would be disallowed as a deduction under Section 280G or Section 162(m) of the Code.

(f)      There are no Material Liens with respect to Taxes upon any of the Assets of the Company.

(g)      There has not been an ownership change, as defined in Code Section 382(g), of the Company and any Subsidiary that occurred during any Taxable Period in which the Company has incurred a net operating loss that carries over to another Taxable Period ending after December 31, 2008.

(h)     The Company has not filed any consent under Section 341(f) of the Code concerning collapsible corporations.

(i)      The Company does not have and has not had a permanent establishment in any foreign country, as defined in any applicable tax treaty or convention between the United States and such foreign country.

4.8             ASSETS.   The Company has good and marketable title, free and clear of all Liens, to all of its Assets.  All tangible properties used in the business of the Company are in good condition, reasonable wear and tear excepted, and are usable in the ordinary course of business consistent with past practice.  All Material Assets held under leases or subleases by the Company are held under valid Contracts enforceable in accordance with their respective terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting the enforcement of creditors’ rights generally and except that the availability of specific performance, injunctive relief and other equitable remedies is subject to the discretion of the court before which any proceeding may be brought), and each such Contract is in full force and effect.  The Company currently maintains insurance in amounts, scope, and coverage necessary for its operations.  The Company has not received notice from any insurance carrier that (a) such insurance will be canceled or that coverage thereunder will be reduced or eliminated, or (b) premium costs with respect to such policies of insurance will be increased.  The Assets of the Company include all Assets required to operate its business taken as a whole as presently conducted.

4.9     SECURITIES PORTFOLIO AND INVESTMENTS.   All securities owned by the Company (whether owned of record or beneficially) are held free and clear of all Liens that would impair the ability of the Company to dispose freely of any such security and/or otherwise to realize the benefits of ownership thereof at any time.  There are no voting trusts or other agreements or undertakings to which the Company is a party with respect to the voting of any such securities.  Except for fluctuations in the market values of United States Treasury and agency or municipal securities, since March 31, 2009, there has been no significant deterioration or adverse change in the quality, or any decrease in the value, of the securities portfolio of the Company.

4.10         ENVIRONMENTAL MATTERS.

(a)      Each of the Company and its Real Property is in compliance with all Environmental Laws, except where noncompliance could not reasonably be expected to have a Material Adverse Effect on the Company.

(b)            There is no Litigation pending or, to the Knowledge of the Company, threatened before any Governmental Authority in which the Company is or, with respect to threatened Litigation, may be expected to be, named as a respondent (i) for alleged noncompliance (including by any predecessor) with any Environmental Law or (ii) relating to the release into the environment of any Hazardous Material, whether or not occurring at, on, under, or involving the Company’s Real Property or a site owned, leased, or operated by the Company.

(c)           To the Knowledge of the Company, during and prior to the period of the Company’s rental or operation of the Real Property, there have been no releases of Hazardous Material in, on, under, or affecting (or potentially affecting) such Real Property.

(d)           To the Knowledge of the Company, there is no asbestos or asbestos-containing material at its Real Property that is friable, readily crumbled, capable of becoming airborne, or in any state or condition which would render the site or building in noncompliance with applicable Laws.

(e)           To the Knowledge of the Company, there are no aboveground or underground storage tanks or related equipment (including without limitation pipes and lines) at, on or under any of its Real Property.

4.11           COMPLIANCE WITH LAWS.

(a)      The Company has in effect all Permits necessary for it to own, lease, or operate its Material Assets and to carry on its business as now conducted, except for those Permits the absence of which could not reasonably be expected to have a Material Adverse Effect on the Company, and there has occurred no Default under any such Permit, other than Defaults that could not reasonably be expected to have a Material Adverse Effect on the Company.  The Company: (i) is not in violation of any Laws, Orders, or Permits applicable to its business or employees conducting its business (including without limitation the USA PATRIOT Act, the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, and any other federal or state lending, consumer credit or consumer privacy law), except for violations that could not reasonably be expected to have a Material Adverse Effect on the Company ( provided that this clause (i) shall not apply to Environmental Laws, which are covered in Section 4.10 above); or (ii) has not received any notification or communication from any agency or department of federal, state, or local Governmental Authority or any Regulatory Authority or the staff thereof (A) asserting that the Company is not in compliance with any of the Laws or Orders that such Governmental Authority or Regulatory Authority enforces, except where such noncompliance could not reasonably be expected to have a Material Adverse Effect on the Company, (B) threatening to revoke any Permits, except where the revocation of which could not reasonably be expected to have a Material Adverse Effect on the Company, or (C) requiring the Company (1) to enter into or consent to the issuance of a cease and desist order, formal agreement, directive, commitment, or memorandum of understanding, or (2) to adopt any board or directors resolution or similar undertaking that restricts the conduct of its business, or in any manner relates to its capital adequacy, its credit or reserve policies, its management, or the payment of dividends.

(b)      There are no pending or, to the Knowledge of the Company, threatened actions against any director or officer of the Company pursuant to Section 8A or 20(b) of the Securities Act, 15 U.S.C. §§ 77h-1 or 77t(b), or Section 21(d) or 21C of the Exchange Act, 15 U.S.C. §§ 78u(d) or 78u-3.  The Company has not received any communication from counsel relating to any Material failure to comply with Securities Laws.

4.12            LABOR RELATIONS.   The Company is not the subject of any Litigation asserting that it has committed an unfair labor practice (within the meaning of the National Labor Relations Act or comparable state Law) or seeking to compel it to bargain with any labor organization as to wages or conditions of employment, nor is the Company a party to or bound by any collective bargaining agreement, Contract, or other agreement or understanding with a labor union or labor organization, nor is there any strike or other labor dispute involving the Company, pending or, to the Knowledge of the Company, threatened.  To the Knowledge of the Company, there is not currently any activity involving any of the Company’s employees seeking to certify a collective bargaining unit or engaging in any other organization activity.

4.13          EMPLOYEE BENEFIT PLANS.

(a)       Section 4.13 of the Company’s Disclosure Schedule sets forth all Benefit Plans in which Company employees (including leased employees) participate (the “ Company Benefit Plans ”).  The Company has made available to the Parent and the Buyer prior to the execution of this Agreement (i) correct and complete copies in each case of all Company Benefits Plans, (ii) all trust agreements or other funding arrangements for such Company Benefit Plans (including insurance contracts), and all amendments thereto; (iii) with respect to any such Company Benefit Plans or amendments, all determination letters, rulings, opinion letters, information letters, or advisory opinions issued by the Internal Revenue Service, the United States Department of Labor, or the Pension Benefit Guaranty Corporation after December 31, 1994; (iv) annual reports or returns, audited or unaudited financial statements, actuarial valuations and reports, and summary annual reports prepared for any Company Benefit Plan with respect to the three (3) most recent plan years; and (v) the most recent summary plan descriptions and any modifications thereto.

(b)      Neither the Company nor any of its Affiliates maintains or has ever maintained or otherwise had any obligation to contribute to a Pension Plan or other plan subject to Title IV of ERISA, a “Multiemployer Plan” as defined in Section 3(37) of ERISA, or a multiple employer welfare arrangement (MEWA) as defined in Section 3(40) of ERISA.

(c)      All Company Benefit Plans are in compliance with the applicable terms of ERISA, the Code, and any other applicable Laws.

(d)      There is no Litigation pending or, to the Knowledge of the Company, threatened relating to any Company Benefit Plan.

(e)      Each Company ERISA Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service, and, to the Knowledge of the Company, there is no circumstance that will or could reasonably be expected to result in revocation of any such favorable determination letter or in such Plan’s failure to be so qualified.  Each trust created under any Company ERISA Plan has been determined to be exempt from Tax under Section 501(a) of the Code, and the Company is not aware of any circumstance that will or could be expected to result in revocation of such exemption.  With respect to each such Company Benefit Plan, to the Knowledge of the Company, no event has occurred that will or could be expected to give rise to a loss of any intended Tax consequences under the Code or to any Tax under Section 511 of the Code.

(f)      Neither the Company nor any of its Affiliates has engaged in a transaction with respect to any Company Benefit Plan that, assuming the Taxable Period of such transaction expired as of the date of this Agreement, would subject the Company or any of its Affiliates to a Material tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA.  Neither the Company nor any of its Affiliates nor any administrator or fiduciary of any Company Benefit Plan (or any agent of any of the foregoing) has engaged in any transaction, or acted or failed to act in any manner, that could subject the Company or any of its Affiliates to any direct or indirect Liability (by indemnity or otherwise) for breach of any fiduciary, co-fiduciary, or other duty under ERISA.  No oral or written representation or communication with respect to any aspect of the Company Benefit Plans has been made to employees of the Company or any of its Affiliates that is not in accordance with the written or otherwise preexisting terms and provisions of such plans.

(g)      Neither the Company nor any of its Affiliates has any obligation for retiree health and retiree life benefits under any of the Company Benefit Plans other than with respect to benefit coverage mandated by applicable Law.

(h)     Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will, by themselves, (i) result in any payment (including without limitation severance, unemployment compensation, golden parachute, or otherwise) becoming due to any director or any employee of the Company or its Affiliates from the Company or any of its Affiliates under any Company Benefit Plan or otherwise, (ii) increase any benefit otherwise payable under any Company Benefit Plan, or (iii) result in any acceleration of the time of any payment or vesting of any benefit.

(i)      Each Company Benefit Plan that is a nonqualified deferred compensation plan subject to Code § 409A has been operated and administered in compliance with Code § 409A.  No compensation paid or required to be paid under any Company Benefit Plan is or will be subject to additional tax under Code § 409A(a)(1)(B).

(k)     All Company Options have been granted in compliance in all material respects with applicable Law and the terms of the Company stock incentive plan and have (or, with respect to Company Options which have been exercised as of the date of this Agreement, had) a per share exercise price that is (or, with respect to Company Options which have been exercised as of the date of this Agreement, was) at least equal to the fair market value of a share of the underlying stock as of the date the Company Option was granted (determined in accordance with applicable Law, including, to the extent applicable, Code Section § 409A).

4.14           MATERIAL CONTRACTS.   The Company is not a party to, and is not bound or affected by, or entitled to benefits under, (a) any employment, severance, termination, consulting, change of control or retirement Contract, (b) any Contract relating to the borrowing of money by the Company or the guarantee by the Company of any such obligation (other than Contracts made in the ordinary course of business relating to deposit liabilities, purchases of federal funds, fully-secured repurchase agreements, Federal Reserve or Federal Home Loan Bank advances, trade payables, and borrowings and guarantees), (c) any Contract requiring the payment of a termination fee in excess of $10,000 upon a termination of such Contract, (d) any Contract that cannot be terminated without cause at the option of the Company by notice of thirty (30) days or less, or (e) any other Contract or amendment thereto that would be required to be filed as an exhibit to an Annual Report on Form 10-K pursuant to Item 601 of Regulation S-K in the event that the Company’s common stock was registered under the Securities Exchange Act of 1934, as of the date of this Agreement, has not been identified to the Parent (together with all Contracts referred to in Sections 4.8 and 4.13(a) of this Agreement, the “ Company Contracts ” ).  With respect to each Company Contract: (i) the Contract is in full force and effect; (ii) the Company is not in Default thereunder; (iii) the Company has not repudiated or waived any Material provision of any such Contract; and (iv) no other party to any such Contract is, to the Knowledge of the Company, in Default in any respect, or has repudiated or waived any provision thereunder.  All of the indebtedness of the Company for money borrowed (not including deposit Liabilities and Federal Home Loan Bank advances) is prepayable at any time without penalty or premium.

4.15           LEGAL PROCEEDINGS.   There is no Litigation instituted or pending, or, to the Knowledge of the Company, threatened against the Company or against any Asset, employee benefit plan, interest, or right of the Company, except as could not reasonably be expected to have a Material Adverse Effect on the Company, nor are there any Orders of any Regulatory Authorities, other Governmental Authorities, or arbitrators outstanding against the Company, except as could not reasonably be expected to have a Material Adverse Effect on the Company.  There is no Litigation to which the Company is a party that names the Company as a defendant, counterclaim defendant, or cross-claim defendant and where the maximum exposure is estimated to be $25,000   or more.

4.16           REGULATORY REPORTS .  Since the date of organization, the Company has timely filed and made available to the Buyer all reports and statements, together with any amendments required to be made with respect thereto, that it was required to file with any Regulatory Authorities.  As of their respective dates, each of such reports and documents, including the financial statements, exhibits, and schedules thereto, complied with all applicable Laws.

4.17           ACCOUNTING, TAX, AND REGULATORY MATTERS.   To the Knowledge of the Company, the Company has neither taken nor agreed to take any action that could (a) prevent the transactions contemplated hereby, including the Merger, from qualifying as a reorganization within the meaning of Section 368(a) of the Code, or (b) impede or delay receipt of any Consents of Regulatory Authorities referred to in Section 8.1 of this Agreement.

4.18           CHARTER PROVISIONS.   Complete and accurate copies of the articles of incorporation and bylaws of the Company have been made available to the Parent.  Entering into this Agreement and consummating the Merger and the other transactions contemplated by this Agreement do not and will not grant any Rights to any Person under the Company’s articles of incorporation, bylaws or Contracts.

4.19           BOOKS AND RECORDS.   The books and records of the Company, including the Accounting Records, are complete and correct in all respects and have been maintained in accordance in all respects with good business practices.  The stock books of the Company contain complete and accurate records of the record share ownership of the issued and outstanding shares of stock thereof.  The minute books of the Company contain accurate and complete records of all meetings held of, and corporate action taken by, the shareholders, the board of directors and committees of the board of directors of the Company, and no meeting of any such shareholders, board of directors or committees has been held for which minutes have not been prepared and are not contained in such minute books.  The Accounting Records have been prepared in accordance with all applicable Laws and GAAP consistently applied throughout the periods involved.  The Accounting Records fairly present in all material respects the financial position of the Company as of the date thereof, and the results of operations of the Company’s business for the periods referred to therein.  At the Closing, all of those books and records will be in the possession of the Company.

4.20           DERIVATIVES.   The Company is not a party to and has not agreed to enter into an exchange-traded or over-the-counter swap, forward, future, option, cap, floor, or collar financial Contract, or any other interest rate or foreign currency protection contract not included on its balance sheets in the Company Financial Statements, which is a financial derivative contract (including various combinations thereof), except for options and forwards entered into in the ordinary course of its mortgage lending business consistent with past practice and current policy.  All interest rate swaps, caps, floors, option agreements, futures and forward contracts, and other similar risk management arrangements, whether entered into for the account of the Company or its Affiliates or their customers were entered into (a) in accordance with prudent business practices and all applicable Laws, and (b) with counterparties believed to be financially responsible.  The Company has not pledged collateral having a value at the time of entering into such pledge that exceeds the amount required under any interest rate swap or other similar agreement currently outstanding.

4.21           INVESTMENT COMPANY.   The Company is not an “investment company” as defined in the Investment Company Act of 1940, as amended.

4.22           LOANS; ALLOWANCE FOR LOAN LOSSES .

 

(a)           All of the loans, leases, installment sales contracts and other credit transactions on the books of the Company are valid and properly documented and were made in the ordinary course of business, and the security therefor, if any, is valid and properly perfected.  Neither the terms of such loans, leases, installment sales contracts and other credit transactions, nor any of the documentation evidencing such transactions, nor the manner in which such loans, leases, installment sales contracts and other credit transactions have been solicited, administered or serviced, nor the Company’s procedures and practices of approving or rejecting applications for such transactions, violates any federal, state or local law, rule, regulation or ordinance applicable thereto, including without limitation the Truth in Lending Act, Regulations O and Z of the Federal Reserve Board, the Community Reinvestment Act, the Equal Credit Opportunity Act, as amended, and state laws, rules and regulations relating to consumer protection, installment sales and usury.

(b)           Each note evidencing a loan referenced in Section 4.22(a) and any related security instrument (including, without limitation, any guaranty or similar instrument) constitutes a valid and legally binding obligation of the obligor or guarantor thereunder, enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfers, reorganization, moratorium, and similar laws of general applicability relating to or affecting creditors’ rights, and to general equity principles.  No claims, counterclaims, set-off rights, or other rights exist, nor do the grounds for any such claim, counterclaim, set-off rights, or other rights exist, with respect to such loan which could impair the collectibility thereof.

 

(c)           The allowances for losses respecting loans, leases, installment sales contracts and other credit transactions reflected on the balance sheets included in the Company Financial Statements are adequate as of their respective dates under the requirements of GAAP and applicable regulatory requirements and guidelines.  The methodology employed to calculate such allowances was in accordance with GAAP as of the respective dates of calculation.

4.23           REPURCHASE AGREEMENTS .   With respect to all agreements currently outstanding pursuant to which the Company has purchased securities subject to an agreement to resell, the Company has a valid, perfected first Lien or security interest in the securities or other collateral securing such agreement, and the value of such collateral equals or exceeds the amount of the debt secured thereby.  With respect to all agreements currently outstanding pursuant to which the Company has sold securities subject to an agreement to repurchase, the Company has not pledged collateral having a value at the time of entering into such pledge that exceeds the amount of the debt secured thereby.

 

4.24           DEPOSIT ACCOUNTS.   The Company is an “insured institution” as defined in the Federal Deposit Insurance Act and applicable regulations thereunder.  The deposits of each depositor of the Company are insured by the FDIC to the maximum amount provided by law, all deposit insurance premiums due from the Company to the FDIC have been paid in full in a timely fashion, and, to the Knowledge of the Company, no proceedings have been commenced or are contemplated by the FDIC or otherwise to terminate such insurance.  Such deposits (a) are genuine and enforceable obligations of the Company and have been acquired and maintained in compliance with all applicable laws, including, without limitation, the Truth in Savings Act and regulations promulgated thereunder; (b) were acquired in the ordinary course of the Company’s business; and (c) are not subject to any Liens that are superior to the rights of persons shown on the records delivered to the Buyer indicating the owners of the deposits, other than claims against such deposit owners, such as state and federal tax liens, garnishments, and other judgment claims, which have matured or may mature into claims against the respective deposits.  The Company has provided the Buyer with a list setting forth the name, address, telephone number (if available), account number, and account balance of each deposit account holder as of the date hereof.  Other than with respect to IRAs, the Company has no trust or fiduciary relationship or obligations in respect of any of the deposits or in respect of any other Assets or Liabilities.

4.25           RELATED PARTY TRANSACTIONS.   The Company has disclosed all existing transactions, investments and loans, including loan guarantees existing as of the date hereof, to which the Company is a party with any director, executive officer or five percent (5%) shareholder of the Company, any present or former spouse or family member of any of the foregoing, or any person, corporation, or enterprise controlling, controlled by or under common control with any of the foregoing.  All such transactions, investments and loans were negotiated at arm’s length and are on terms and conditions that are substantially the same as those prevailing for comparable transactions with other persons and do not involve more than the normal risk of repayment or present other unfavorable features.

4.26           FINANCIAL ADVISORY FEES.   Except for its arrangements with Sandler O’Neill + Partners, LP, no broker, finder or other Person is entitled to any brokerage fees, financial advisory fees, commissions or finder’s fees in connection with the transactions contemplated hereby by reason of any action taken by the Company or any of the Company’s shareholders.

4.27           VOTING AGREEMENTS.   Concurrently with the execution and delivery of this Agreement, each Company shareholder listed on Schedule 4.27 of the Company’s Disclosure Schedules, each Company officer and each Company director has executed and delivered to the Parent a Voting Agreement substantially in the form of EXHIBIT B (each, a “ Voting Agreement ”).

4.28           INTELLECTUAL PROPERTY .   The Company owns or has a license to use all Intellectual Property used by Company in its business.  The Company owns or has a license to any Intellectual Property sold or licensed to a third party by the Company in connection with the Company’s business operations, and the Company has the right to convey by sale or license any Intellectual Property so conveyed.  The Company has not received notice of breach or default under any of its Intellectual Property licenses.  No proceedings have been instituted, or are pending or overtly threatened, that challenge the rights of the Company with respect to Intellectual Property used, sold or licensed by the Company in its business, nor has any Person claimed or alleged any rights to such Intellectual Property.  The conduct of the Company’s business does not infringe any Intellectual Property of any other Person.  The Company is not obligated to pay any recurring royalties to any Person with respect to any such Intellectual Property.

4.29           PRIVACY OF CUSTOMER INFORMATION .

(a)           The Company is the sole owner or, in the case of participated loans, a co-owner with the other participant(s), of all individually identifiable personal information (“ IIPI ”) relating to customers, former customers and prospective customers that will be transferred to the Parent and the Buyer pursuant to this Agreement and the other transactions contemplated hereby.  “IIPI” shall include any information relating to an identified or identifiable natural person.

(b)           The collection and use of IIPI by the Company, the transfer of IIPI to the Parent and the Buyer, and the use of IIPI by the Parent and the Buyer as contemplated by this Agreement complies in all material respects with all applicable privacy policies, the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act and all other applicable state, federal and foreign privacy law, and any contract or industry standard relating to privacy.

4.30           TECHNOLOGY SYSTEMS .

(a)      No action will be necessary as a result of the transactions contemplated by this Agreement to enable use of the electronic data processing, information, record keeping, communications, telecommunications, hardware, third party software, networks, peripherals, portfolio trading and computer systems, including any outsourced systems and processes, and Intellectual Property that are used by the Company (collectively, the “ Technology Systems ”) to continue by the Parent and the Buyer to the same extent and in the same manner that it has been used by the Company.

(b)      Since January 1, 2007, the Technology Systems have not suffered unplanned disruption causing a Material Adverse Effect with respect to the Company.  Except for ongoing payments due under relevant third party agreements, the Company’s use of the Technology Systems is free from any Liens and encumbrances.  Access to business critical parts of the Technology Systems is not shared with any third party.

(c)      Details of the Company’s disaster recovery and business continuity arrangements (if any) have been provided to the Parent and the Buyer.

(d)      To the Knowledge of the Company, there are no circumstances, including without limitation the execution of this Agreement, that would enable any third party to terminate any of the Company’s agreements or arrangements relating to the Technology Systems (including maintenance and support).

4.31            BANK SECRECY ACT COMPLIANCE; USA PATRIOT ACT; OFAC .  The Company is in compliance in all Material respects with the provisions of the USA PATRIOT Act and the Bank Secrecy Act of 1970, and all regulations promulgated thereunder, including those provisions of the Bank Secrecy Act that address suspicious activity reports and compliance programs.  The Compan