DEFM14A 1 v319784_defm14a.htm DEFM14A

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

 

Filed by the registrant x

Filed by a party other than the registrant ¨

Check the appropriate box:

¨Preliminary proxy statement
¨Confidential, for use of the Commission only (as permitted by Rule 14a-6(c)(2))
xDefinitive proxy statement
¨Definitive additional materials
¨Soliciting material pursuant to Rule 14a-12

 

SOUTHERN COMMUNITY FINANCIAL CORPORATION
(Name of Registrant as Specified in Its Charter)
 
 
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of filing fee (Check the appropriate box):

xNo fee required.
¨Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

(1)Title of each class of securities to which transaction applies:

 

 

(2)Aggregate number of securities to which transactions applies:

 

 

(3)Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11:

 

 

(4)Proposed maximum aggregate value of transaction:

 

 

(5)Total fee paid:

 

 

xFee paid previously with preliminary materials.

 

 

¨Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11 (a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

 

 

(1)Amount previously paid:

 

 

(2)Form, schedule or registration statement no.:

 

 

(3)Filing party:

 

 

(4)Date filed:

 

 
 

 

SOUTHERN COMMUNITY FINANCIAL CORPORATION

 

4605 Country Club Road

Winston-Salem, North Carolina 27104

Telephone: (336) 768-8500

 

July 30, 2012

 

Dear Southern Community Financial Corporation Shareholder:

 

You are cordially invited to attend a Special Meeting of the shareholders of Southern Community Financial Corporation, to be held on September 19, 2012 at 3:00 p.m., local time. At the Special Meeting, you will be asked to consider and vote upon a proposal to adopt an Agreement and Plan of Merger, dated as of March 26, 2012 and amended as of June 25, 2012 (which we refer to as the “merger agreement”), under which Southern Community will be acquired by Capital Bank Financial Corp. through the merger of a wholly owned subsidiary of Capital Bank Financial with Southern Community. If the merger is completed, holders of Southern Community common stock will be entitled to receive for each share of Southern Community common stock owned by them as of immediately prior to the merger:

 

·$3.11 in cash, without interest and less any applicable withholding taxes (other than shares of Southern Community common stock held by Capital Bank Financial or Southern Community, which will be cancelled without payment);

 

·one non-transferable contingent value right; and

 

·if Capital Bank Financial and the U.S. Treasury agree to a repurchase by Capital Bank Financial of the securities issued by Southern Community to the U.S. Department of the Treasury at a discount to the stated repurchase price, an additional cash payment.

 

Upon completion of the merger, shares of Southern Community common stock will no longer be listed on any stock exchange or quotation system, and you will not participate in the company resulting from the merger.

 

The merger requires the approval of Southern Community shareholders, and you are being asked to adopt the merger agreement at the Special Meeting. We cannot complete the merger unless we receive the required regulatory approvals and shareholder approvals.

 

The Southern Community Board of Directors recommends that you vote “FOR” the adoption of the merger agreement.

 

Your vote is very important. We cannot complete the merger unless the merger agreement is adopted by the affirmative vote of a majority of the outstanding shares of Southern Community common stock entitled to vote at the Special Meeting. Therefore, the failure of any shareholder to vote will have the same effect as a vote against the adoption of the merger agreement. Whether or not you plan to attend the Special Meeting, please complete, date, sign and return, as promptly as possible, the enclosed appointment of proxy in the accompanying reply envelope, or submit your proxy by telephone or the Internet. If you attend the Special Meeting and vote in person, your vote by ballot will revoke any proxy previously submitted.

 

 
 

 

The enclosed proxy statement provides you with detailed information about the Special Meeting, the merger agreement and the merger. We urge you to read it carefully. Thank you in advance for your continued support and your consideration of this matter.

 

  Sincerely,
   
 
   
  William G. Ward, Sr., M.D.
   
  Chairman of the Board

 

 

Neither the U.S. Securities and Exchange Commission nor any state securities regulator has approved or disapproved of the transactions described in this document or determined if the information contained in this document is accurate or adequate. Any representation to the contrary is a criminal offense.

 

This proxy statement is dated July 30, 2012, and is first being given or sent to shareholders on or about August 1, 2012.

 

 
 

 

SOUTHERN COMMUNITY FINANCIAL CORPORATION

 

4605 Country Club Road

Winston-Salem, North Carolina 27104

Telephone: (336) 768-8500

 

 

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

September 19, 2012

 

 

 

To the Shareholders:

 

A Special Meeting of the Shareholders of Southern Community Financial Corporation (the “Company” and “Southern Community”) will be held on September 19, 2012 at 3:00 p.m. (local time) at:

 

The Village Inn Event Center

Exit 184, Interstate 40

Clemmons (Forsyth County), North Carolina

 

The purpose of the Special Meeting is:

 

1.To consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger, dated as of March 26, 2012 and amended as of June 25, 2012, by and between Southern Community Financial Corporation, Capital Bank Financial Corp. and Winston 23 Corporation, a subsidiary of Capital Bank Financial, pursuant to which the Company will merge with Winston 23 as more fully described in the attached proxy statement;
2.To consider and vote, on an advisory (nonbinding) basis, on a proposal to approve the compensation that may be paid or become payable to the Company’s named executive officers in connection with the merger including the agreements and understandings pursuant to which such compensation may be paid or become payable; and
3.To consider and vote on a proposal to adjourn the meeting to a later date, if necessary or appropriate, in order to solicit additional proxies in favor of the approval of the merger agreement if there are insufficient votes at the time of such adjournment to approve the merger agreement.

 

These proposals are described in detail in the attached proxy statement. Only shareholders of record at the close of business on July 18, 2012 are entitled to notice of, and to vote, at the meeting and any adjournments thereof.

 

The Company's Board of Directors has approved the merger and the merger agreement and recommends that shareholders vote “FOR” approval of the merger agreement, “FOR” the approval, on an advisory (nonbinding) basis, of the compensation that may be paid or become payable to Southern Community’s named executive officers in connection with the merger, and “FOR” the approval of the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies in favor of the approval of the merger agreement.

 

Your vote is important regardless of the number of shares you own. We cannot complete the merger unless the merger agreement and the transactions contemplated thereby are approved by the affirmative vote of the holders of at least a majority of the shares of Southern Community common stock entitled to vote at the special meeting. The failure to vote your shares of Southern Community common stock will have the same effect as a vote against approval of the merger agreement and the transactions contemplated thereby. Whether or not you plan to attend the meeting in person, we encourage you to promptly vote your shares. You may vote your shares on the Internet, or by using a toll-free telephone number or by completing the enclosed proxy card and returning it in the pre-paid envelope. Instructions for using these convenient services are provided on your proxy card. If your shares of Southern Community common stock are held in “street name” by your bank, broker or other nominee, your bank, broker or other nominee will be unable to vote your shares of Southern Community common stock without instructions from you. You should instruct your bank, broker or other nominee to vote your shares of Southern Community common stock in accordance with the procedures provided by your bank, broker or other nominee. You may revoke your proxy card in the manner described in the proxy statement at any time before it is exercised. If you attend the Special Meeting, you may vote in person if you wish, even if you have previously returned your proxy card.

 

i
 

 

The enclosed proxy statement provides a detailed description of the Special Meeting, the merger, the documents related to the merger and other related matters. We urge you to read the proxy statement and its appendices carefully and in their entirety. If you have any questions concerning the merger or the proxy statement, would like additional copies of the proxy statement or need help voting your shares of Southern Community common stock, please contact Investor Relations at investor.relations@smallenoughtocare.com or 4605 Country Club Road, Winston-Salem, North Carolina 27104.

 

Under North Carolina law, Southern Community shareholders are entitled to appraisal rights with respect to their shares of common stock to be exchanged for cash and other consideration in the proposed merger and to obtain payment of the fair value of their shares upon compliance with the requirements of Chapter 13 of the North Carolina Business Corporation Act. We have included a copy of Chapter 13 of the North Carolina Business Corporation Act as Appendix C to the proxy statement. We urge any of our shareholders who wish to assert appraisal rights to read the statute carefully and to consult legal counsel before attempting to assert their appraisal rights.

 

  By order of the Board of Directors.
   
 
   
  William G. Ward, Sr., M.D.
July 30, 2012 Chairman of the Board

 

ii
 

 

TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING   1
The Special Meeting   1
The Merger Agreement   5
SUMMARY TERM SHEET   8
The Merger   8
Parties to the Merger   8
In the Merger, Southern Community Shareholders Will Receive $3.11 in Cash Per Share of Southern Community Common Stock  and a Contingent Value Right   9
Special Meeting on September 19, 2012   9
Southern Community’s Board of Directors Recommends that Southern Community Shareholders Vote “FOR” Approval of the Merger Agreement and the Transactions contemplated Thereby (Including the Merger)   10
Stifel, Nicolaus & Company, Incorporated Has Provided an Opinion to Southern Community’s Board of Directors Regarding the Merger consideration   10
What Holders of Southern Community Stock Options and Other Equity-Based Awards Will Receive   11
The Merger Will Be a Taxable Transaction for U.S. Holders of Southern Community Common Stock   11
Interests of Southern Community’s Directors and Executive Officers in the Merger that Differ from Your Interests   11
Security Ownership of Certain Beneficial Owners and Management   12
Appraisal Rights   12
Conditions that Must Be Satisfied or Waived for the Merger to Occur   12
Termination of the Merger Agreement   12
Termination Fee   13
Regulatory Approvals Required for the Merger   13
Board of Directors of CBF Following Completion of the Merger   14
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS   15
THE SPECIAL MEETING   16
Date, Time, Location and Purpose of Special Meeting   16
Record Date   16
Recommendation of Southern Community’s Board of Directors   16
Voting of Proxies and Revocation   17
Quorum   18
How Your Votes Will Be Counted   18
Adjournments and Postponements   18
Expenses of Solicitation   18
Voting Securities   19
Shares Held by Directors and Officers   19
Questions and Additional Information   19
PROPOSAL 1 – APPROVAL OF THE MERGER AGREEMENT   20
Parties to the Merger   20
Background of the Merger   20
Reasons for the Merger and Recommendation of Southern Community’s Board of Directors   24
Opinion of Southern Community Financial Corporation’s Financial Advisor   25
Southern Community Unaudited Prospective Financial Information   31
Board of Directors of CBF After the Merger   32
Interests of Southern Community’s Directors and Executive Officers in the Merger   32
Indemnification of Directors and Officers; Directors’ and Officers’ Insurance   36
Public Trading Markets   36
Effects on Southern Community if the Merger is Not Completed   37
Appraisal Rights   37
Regulatory Approvals Required for the Merger   40
Additional Regulatory Approvals and Notices   41
Accounting Treatment   41

 

iii
 

 

THE MERGER AGREEMENT   42
Structure of the Merger   42
Merger Consideration   42
Surviving Corporation, Governing Documents and Directors   42
Treatment of Southern Community Stock Options and Other Equity-Based Awards   43
Redemption of Preferred Stock and Related Warrant Held by the United States Department of the Treasury   43
Closing and Effective Time of the Merger   43
Conversion of Shares; Exchange of Certificates   43
Representations and Warranties   44
Covenants and Agreements   46
Southern Community Shareholder Meeting and Recommendation of Southern Community’s Board of Directors   49
Agreement Not to Solicit Other Offers   50
Conditions to Complete the Merger   51
Termination of the Merger Agreement   52
Effect of Termination   52
Termination Fee   52
Expenses and Fees   53
Amendment, Waiver and Extension of the Merger Agreement   53
THE CVRs   53
Characteristics of the CVRs   53
Calculation of Cash Payment   54
Payments   54
Special Committee Determines Payment Amount   54
CVRs Are Nontransferable   54
Issuance of the CVRs   54
Amendment of CVR Agreement   54
Redemption   55
Change of Control   55
Termination of the CVR Agreement   55
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER   56
Tax Consequences of the Merger Generally   57
Treatment as Open Transaction   57
Treatment as Closed Transaction   58
Payments Under the CVR   58
Backup Withholding   58
BENEFICAL OWNERSHIP OF SECURITIES   59
HISTORICAL MARKET PRICES AND DIVIDEND INFORMATION   60
PROPOSAL 2 – ADVISORY VOTE REGARDING CERTAIN EXECUTIVE COMPENSATION   61
Summary   61
Vote Required   61
Board Recommendation   61
PROPOSAL 3 – APPROVAL OF ADJOURNMENT OF THE SPECIAL MEETING TO SOLICIT ADDITIONAL PROXIES   62
Summary   62
Vote Required   62
Board Recommendation   62
OTHER MATTERS   62
SHAREHOLDER PROPOSALS   62
WHERE YOU CAN FIND MORE INFORMATION   63
Appendix A – Agreement and Plan of Merger, dated as of March 26, 2012, as amended June 25, 2012  
Appendix B – Opinion of Stifel, Nicolaus & Company, Incorporated  
Appendix C – Appraisal Rights Under the North Carolina Business Corporation Act  
Appendix D – Southern Community’s Annual Report on Form 10-K for the year ending December 31, 2011 and Quarterly Report on Form 10-Q for the period ending March 31, 2012  

 

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SOUTHERN COMMUNITY FINANCIAL CORPORATION

4605 Country Club Road

Winston-Salem, North Carolina 27104

Telephone: (336) 768-8500

 

 

 

PROXY STATEMENT

 

 

 

QUESTIONS AND ANSWERS

ABOUT THE MERGER AND THE SPECIAL MEETING

 

The following are some questions that you, as a shareholder of Southern Community, may have regarding the merger and the Southern Community Special Meeting. We urge you to read carefully the entirety of this proxy statement, including the appendices and the other documents to which this proxy statement refers, because the information in this section does not provide all the information that might be important to you with respect to the merger.

 

THE SPECIAL MEETING

 

Q:Why am I receiving this proxy statement?

 

A:Southern Community has entered into a merger agreement, pursuant to which Southern Community will merge with and into a subsidiary of Capital Bank Financial Corp. (“Capital Bank Financial” or “CBF”) with Southern Community continuing as the surviving corporation as a direct, wholly-owned subsidiary of Capital Bank Financial and ceasing to be a publicly held corporation. To complete the merger, Southern Community shareholders must vote to approve and adopt the merger agreement and Southern Community is holding a Special Meeting of shareholders to seek such shareholder approval.

 

This document is the proxy statement by which Southern Community’s Board of Directors is soliciting proxies from you to vote on the approval of the merger agreement and the transactions contemplated thereby (including the merger) at the Special Meeting or at any adjournment or postponement of the Special Meeting.

 

q:when and where is the Special Meeting?

 

A:The Special Meeting will be held on September 19, 2012 at 3:00 p.m. (local time) at The Village Inn Event Center.

 

Q:What am I being asked to vote on?

 

A:Southern Community shareholders are being asked to vote on the following proposals:

 

·to approve the merger agreement and the transactions contemplated thereby (including the merger):

 

·to approve, on an advisory (non-binding) basis, the compensation that may be paid or become payable to Southern Community’s named executive officers in connection with the merger, including the agreements and understandings pursuant to which such compensation may be paid or become payable; and

 

·to approve the adjournment of the meeting to a later date, if necessary or appropriate, to solicit additional proxies in favor of the approval of the merger agreement if there are insufficient votes at the time of such adjournment to approve the merger agreement.

 

1
 

 

The approval by Southern Community shareholders of the merger agreement and the transactions contemplated thereby (including the merger) is a condition to the obligations of Capital Bank Financial and Southern Community to complete the merger.

 

Q:What shareholder vote is required for the approval of each proposal?

 

A:Approval of the merger agreement and the transactions contemplated thereby (including the merger) requires the affirmative vote of holders of a majority of the outstanding shares of Southern Community common stock entitled to vote at the Special Meeting. Because approval is based on the affirmative vote of a majority of the shares outstanding, a failure to vote, a broker non-vote or an abstention will have the same effect as a vote against this proposal.

 

Approval of the advisory (non-binding) vote on compensation that may be paid or become payable to Southern Community’s named executive officers in connection with the merger requires that the number of votes cast in person and by proxy at the Special Meeting in favor of the proposal must exceed the number of votes cast against it. An abstention, a failure to vote or a broker non-vote will have no effect on the outcome of this proposal.

 

Approval of the proposal to adjourn the meeting to a later date, if necessary or appropriate, to solicit additional proxies in favor of the approval of the merger agreement requires that the number of shares cast in person and by proxy at the Special Meeting in favor of the proposal exceeds the number of votes cast against it. An abstention, a failure to vote or a broker non-vote will have no effect on the outcome of this proposal.

 

Q:What happens if Southern Community’s shareholders do not approve, on an advisory (non-binding basis), the compensation payable to Southern Community’s named executive officers in connection, with the merger?

 

A:The vote on the compensation proposal is a vote separate and apart from the vote to approve the merger agreement. You may vote for the compensation proposal and against the proposal to approve the merger agreement and vice versa. Because the vote on the compensation proposal is advisory only, it will not be binding on either Southern Community or Capital Bank Financial. Because Southern Community is contractually obligated to pay the compensation, the compensation will be payable if the merger is completed subject only to the conditions applicable thereto, regardless of the outcome of the advisory (non-binding) vote.

 

q:what should I do?

 

A:Please carefully read this proxy statement. If you are a record shareholder, please respond by completing, signing and dating your proxy card and returning it in the enclosed postage-paid envelope or by submitting your proxy by telephone or through the Internet as soon as possible so that your shares of Southern Community common stock will be represented and voted at the Special Meeting.

 

If your shares of Southern Community common stock are held in the name of a bank, broker or other nominee (which we refer to as a “street name” shareholder), please refer to your proxy card or the information forwarded by your bank, broker or other nominee to see which voting options are available to you.

 

The method by which you submit a proxy will in no way limit your right to vote at the Special Meeting if you later decide to attend the meeting in person. If you are a “street name” shareholder, you must obtain a proxy, executed in your favor, from the holder of record, to be able to vote in person at the Special Meeting.

 

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Q:If my shares are held in “street name” by my bank, broker or other nominee, will they automatically vote my shares for me?

 

A:No, if you hold shares of Southern Community common stock in an account at a bank, broker or other nominee and do not choose to attend the Special Meeting in person, you must provide your bank, broker or other nominee with instructions as to how to vote your shares of Southern Community common stock. Your failure to instruct your broker to vote your shares will result in your shares not being voted. You may also vote in person at the Special Meeting; however, if you wish to do so you must bring a legal proxy from the bank, broker or other nominee identifying you as the beneficial owner of such shares of Southern Community common stock and authorizing you to vote. If you fail to vote your shares at the Special Meeting or instruct your bank, broker or nominee how to vote your shares, the effect will be the same as a vote “AGAINST” the merger agreement.

 

Q:What constitutes a quorum for the Special Meeting?

 

A:The presence in person or by proxy of the holders of a majority of the outstanding shares of Southern Community common stock is necessary to constitute a quorum at the Special Meeting. If a shareholder is not present in person or represented by proxy at the Special Meeting, such shareholder’s shares will not be counted for purposes of calculating a quorum. Abstentions and broker non-votes count as present for establishing a quorum. A broker non-vote occurs under stock exchange rules when a broker is not permitted to vote on a matter without instructions from the beneficial owner of the shares and no instruction is given.

 

Q:Is my vote important?

 

A:Yes, your vote is very important. If you do not submit a proxy or vote in person at the Special Meeting, it will be more difficult for Southern Community to obtain the necessary quorum to hold the Special Meeting. In addition, if you abstain or fail to vote, that will have the same effect as a vote “AGAINST” the approval and adoption of the merger agreement. If you are a “street name” shareholder who holds your shares through a bank, broker or other nominee, your bank, broker or other nominee will not be able to cast a vote on the approval and adoption of the merger agreement without instructions from you.

 

Q:What will happen if I sign and return my proxy card without indicating how I wish to vote?

 

A:Signed and dated proxies received by Southern Community without an indication of how the shareholder intends to vote will be voted “FOR” approval of the merger agreement and the transactions contemplated thereby (including the merger), “FOR” approval, on an advisory (non-binding) basis, of the compensation that may be paid or become payable to Southern Community’s named executive officers in connection with the merger, including the agreements and understandings pursuant to which such compensation may be paid or become payable, and “FOR” adjournment of the Special Meeting to a later date, if necessary or appropriate, in order to solicit additional proxies in favor of the approval of the merger agreement if there are insufficient votes at the time of such adjournment to approve the merger agreement.

 

Q:Who can vote at the Special Meeting?

 

A:All holders of Southern Community common stock who held shares at the close of business on July 18, 2012, the record date for the Special Meeting, are entitled to receive notice of and to vote at the Special Meeting provided that such shares remain outstanding on the date of the Special Meeting or any adjournment or postponement thereof. As of the close of business on July 18, 2012, there were 16,854,775 shares of Southern Community common stock outstanding and entitled to vote, held by approximately 6,534 holders of record. Each share of Southern Community common stock is entitled to one vote.

 

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Q:How do I vote?

 

A:If you are a shareholder of record, you may vote your shares of Southern Community common stock on matters presented at the Special Meeting in any of the following ways:

 

·in person – you may attend the Special Meeting and cast your vote there;

 

·by proxy – shareholders of record have a choice of voting by proxy;

 

·by completing, signing and dating your proxy card and returning it in the enclosed postage-paid envelope;

 

·over the Internet – the website for Internet voting is on your proxy card; or

 

·by using a toll-free telephone number noted on your proxy card.

 

If you are a beneficial owner, please refer to the instructions provided by your bank, broker or other nominee to see which of the above choices are available to you. Please note that if you are a beneficial owner and wish to vote in person at the Special Meeting, you must provide a legal proxy from your bank, broker or other nominee at the Special Meeting.

 

Q:Can I revoke or change my vote after I have submitted my proxy with voting instructions?

 

A:Yes. You may revoke or change your proxy at any time, unless noted below before your proxy is voted. If you are a shareholder of record (meaning that your shares of Southern Community common stock are registered in your own name), you may:

 

·deliver to Southern Community’s Corporate Secretary a signed written notice of revocation bearing a date later than the date of the proxy, stating that the proxy is revoked;

 

·attend the Special Meeting and vote in person (your attendance at the meeting will not, by itself, revoke your proxy; you must vote in person at the meeting);

 

·sign and deliver a new proxy card, relating to the same shares of Southern Community common stock and bearing a later date; or

 

·submit another proxy by telephone or on the Internet by prior to 5:00 p.m. Eastern Time on September 18, 2012 (the deadline for telephone or Internet voting).

Attendance at the Special Meeting will not automatically revoke your proxy. A revocation or later-dated proxy received by Southern Community after your proxy is exercised will not affect your vote. Southern Community’s Corporate Secretary’s mailing address is Secretary, Southern Community Financial Corporation, 4605 Country Club Road, Winston-Salem, North Carolina 27104.

 

If your shares of Southern Community common stock are held in “street name”, you should contact your broker, bank or other nominee to obtain instructions as to how to change or revoke your proxy

 

Q:What happens if I sell my shares after the record date but before the date of the Special Meeting?

 

A:The record date for the Special Meeting is earlier than the date of the Special Meeting and the date that the merger is expected to be completed. If you sell or otherwise transfer your Southern Community shares after the record date but before the date of the Special Meeting, you will retain your right to vote at the Special Meeting. However, you will not have the right to receive the merger consideration to be received by Southern Community shareholders in the merger. In order to receive the merger consideration, you must hold your shares through completion of the merger.

 

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Q:What does it mean if I receive more than one appointment of proxy or vote instruction form?

 

A:If your shares are registered differently and are in more than one account, you may receive more than one appointment of proxy or voting instruction form. Please complete, sign, date and return all of the appointments of proxy and voting instruction forms you receive regarding this Special Meeting (or submit your proxy for all shares by telephone or Internet) to ensure that all of your shares are voted.

 

Q:Should I send my Southern Community stock certificates with my proxy?

 

A:No. Do not send in your stock certificates with your proxy. If you hold your shares in your name as a shareholder of record, when the merger is completed you will receive a letter of transmittal with instructions informing you how to send in your stock certificates to the paying agent in order to receive the merger consideration. You should use the letter of transmittal to exchange your stock certificates for the merger consideration that you are entitled to receive as a result of the merger. If you hold your shares in “street name” through a bank, broker or other nominee, then you will receive instructions from your bank, broker or other nominee as to how to effect the surrender of your “street name” shares in exchange for the merger consideration.

 

Q:When will there be a 2012 Annual Meeting of the shareholders?

 

A:If the merger is completed, Southern Community will have no public shareholders and no public participation in any of our future shareholder meetings. We intend to hold an Annual Meeting of shareholders in 2012 only if the merger is not completed.

 

THE MERGER AGREEMENT

 

Q:Why did Southern Community agree to the merger agreement with Capital Bank Financial?

 

A:For a description of the transaction process, including the factors that the Southern Community Board of Directors considered in determining whether to enter into the merger agreement and to recommend that Southern Community’s shareholders approve the merger agreement, see “Proposal 1: Approval of the Merger AgreementBackground of the Merger” and “Proposal 1: Approval of the Merger Agreement—Reasons for the Merger and Recommendation of Southern Community’s Board of Directors.”

 

Q:What will I receive in the merger?

 

A:If the merger is completed, you will receive $3.11 in cash without interest, less any applicable withholding taxes for each of your shares of Southern Community common stock. The closing sale price of Southern Community’s common stock as quoted on the NASDAQ Global Market on March 26, 2012 and June 25, 2012, the last trading day prior to announcement of the execution of the merger agreement and prior to announcement of the execution of the amendment to the merger agreement, was $1.96 per share and $2.67 per share respectively. Therefore, the $3.11 cash per share to be paid for each share of Southern Community common stock in the merger represents a premium of approximately 58.7% to the closing sale price on March 26, 2012 and approximately 16.5% to the closing sale price on June 25, 2012.

 

You will also receive one non-transferable contingent value right (which we refer to as a “CVR”) per share of Southern Community common stock, with each CVR eligible to receive a cash payment equal to 75% of the excess, if any, of (i) $87 million over (ii) the amount of net credit losses (charge-offs net of recoveries) from Southern Community’s cumulative legacy loan and foreclosed property portfolio for a period of five years from the closing date of the merger, with a maximum payment of $1.30 per CVR. You may also receive an additional cash payment if Capital Bank Financial reaches an agreement to repurchase the securities issued by Southern Community to the U.S. Department of the Treasury (which we refer to as the Treasury) at a discount to their stated repurchase price.

 

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Q:Does the Board of Directors recommend approval of the merger agreement?

 

A:Yes. The Southern Community Board of Directors approved the merger agreement and the transactions contemplated thereby, including the merger, and determined that these transactions are advisable and in the best interests of Southern Community and its shareholders. Therefore, the Board of Directors recommends that you vote “FOR” the proposal to approve and adopt the merger agreement.

 

In considering the recommendation of Southern Community’s Board of Directors, you should be aware that members of Southern Community’s Board of Directors and its executive officers have agreements and arrangements that provide them with interests in the merger that may be different from, or in addition to, those of Southern Community shareholders generally. See the section entitled “The Merger—Interests of Southern Community’s Directors and Executive Officers in the Merger.”

 

Q:Must Southern Community submit the proposal to approve the merger agreement to a shareholder vote even if its Board of Directors has withdrawn, modified or qualified its recommendation?

 

A:Yes. Unless the merger agreement is terminated before the Special Meeting, we must submit the proposal to approve the merger agreement to a shareholder vote even if Southern Community’s Board of Directors has withdrawn, modified or qualified its recommendation.

 

Q:What effects will the merger have on Southern Community?

 

A:Upon completion of the proposed merger, Southern Community will cease to be a publicly traded company and will become wholly owned by Capital Bank Financial. As a result, you will no longer have any interest in the company resulting from the merger. Following completion of the merger, the registration of our common stock and our reporting obligations with respect to our common stock under the Securities Exchange Act of 1934, as amended (which we refer to as the Exchange Act), are expected to be terminated. In addition, upon completion of the merger, shares of our common stock will no longer be listed on the NASDAQ Global Select Market or any other stock exchange or quotation system.

 

Q:What happens if the merger is not completed?

 

A:If the merger agreement is not approved by our shareholders or if the merger is not completed for any other reason, we will remain subject to the Federal Reserve Bank Written Agreement (“Written Agreement”) and Southern Community Bank and Trust will remain subject to the Consent Order with the FDIC/North Carolina Commissioner of Banks (“Consent Order”) and shareholders will not receive any payment for their shares in connection with the merger. Instead, we will remain an independent public company and our common stock will continue to be registered under the Exchange Act and listed and traded on NASDAQ. The value of shares of our common stock will continue to be subject to the risks and uncertainties identified in our Annual Report on Form 10-K for the year ended December 31, 2011, included as Appendix D to this proxy statement, and any updates to those risks and uncertainties set forth in our current and quarterly reports and press releases we file with the SEC. Under specified circumstances, we may be required to pay Capital Bank Financial a termination fee and reimburse them for certain expenses.

 

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Q:What are the United States federal income tax consequences of the merger?

 

A:The receipt of the cash and CVRs by a U.S. holder in exchange for shares of Southern Community common stock in the merger will be a taxable transaction for United States federal income tax purposes. The amount of gain or loss a U.S. holder recognizes, and the timing of such gain or loss, depends in part on the United States federal income tax treatment of the CVRs, with respect to which there is substantial uncertainty. A Southern Community shareholder’s gain or loss will also be determined by the shareholder’s tax basis in his or her shares of Southern Community common stock. For a more complete description of the tax consequences of the merger, see the section entitled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 56 of this proxy statement.

 

Tax matters are very complicated, and the tax consequences of the merger to a particular shareholder will depend in part on such shareholder’s circumstances. Accordingly, you are urged to consult your own tax advisor for a full understanding of the tax consequences of the merger to you, including the applicability and effect of federal, state, local and foreign income and other tax laws.

 

Q:When does Southern Community and Capital Bank expect to complete the merger?

 

A:Southern Community and Capital Bank are working toward completing the transaction as quickly as possible and expect to close the transaction in September 2012. Completion of the merger is subject to the approval of the merger agreement by Southern Community shareholders, governmental and regulatory approvals and other customary closing conditions. However, no assurance can be given as to when, or if, the merger will occur. See the section entitled “The Merger Agreement — Conditions to Complete the Merger.”

 

Q:Am I entitled to seek appraisal of my shares rather than take the consideration from the merger?

 

A:Yes. Under the North Carolina Business Corporation Act (which we refer to as the NCBCA), shareholders of Southern Community have appraisal rights. If you follow the procedures prescribed by the NCBCA, you may exercise appraisal rights and, if the merger is consummated, obtain the payment of the “fair value” of your shares of Southern Community common stock (plus interest accrued to the date of payment in accordance with North Carolina law). To perfect your appraisal rights, you must follow precisely the required statutory procedures. To the extent you are successful in pursuing your appraisal rights, the fair value of your shares of Southern Community common stock, determined in the manner prescribed by the NCBCA, which may be more or less than the value you would receive in the merger if you do not exercise your appraisal rights, will be paid to you in cash. See “The Merger — Appraisal Rights.” Please see Appendix C for the text of the applicable provisions of the NCBCA as in effect with respect to the merger.

 

Q:Who can answer my questions?

 

A:Southern Community shareholders should contact Southern Community Investor Relations at 4605 Country Club Road, Winston-Salem, North Carolina 27104 or (336) 768-8500 with any questions about this proxy statement, the merger or the Special Meeting, or to obtain additional copies of this proxy statement or of the enclosed appointment of proxy.

 

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SUMMARY TERM SHEET

 

This summary highlights selected information from this proxy statement. It may not contain all of the information that is important to you. We urge you to carefully read the entire proxy statement, including the appendices, and the other documents to which we refer in order to fully understand the merger. See the section entitled “Where You Can Find More Information.” Each item in this summary refers to the page of this proxy statement on which that subject is discussed in more detail.

 

The Merger (page 20)

 

If Southern Community shareholders approve the merger agreement at the Special Meeting, subject to the receipt of necessary regulatory approvals and the satisfaction or waiver of all other conditions to the merger, Winston 23 Corporation, a wholly-owned subsidiary of Capital Bank Financial, will merge with and into Southern Community with Southern Community being the surviving corporation. As a result of the merger, Southern Community will become a wholly-owned subsidiary of Capital Bank Financial. Upon completion of the merger, shares of Southern Community common stock will no longer be listed on any stock exchange or quotation system and each such outstanding share of Southern Community common stock will be converted into the right to receive approximately $3.11 in cash, without interest and less any applicable withholding taxes. We currently expect to complete the merger in September 2012; however, we cannot predict the exact timing of the consummation of the merger or whether the merger will be consummated.

 

The merger agreement governs the merger. The merger agreement is included in this proxy statement as Appendix A. Please read the merger agreement carefully. All descriptions in this summary and elsewhere in this proxy statement of the terms and conditions of the merger are qualified by reference to the merger agreement.

 

Parties to the Merger (page 20)

 

Southern Community Financial Corporation

 

Southern Community Financial Corporation is a bank holding company headquartered in Winston-Salem, North Carolina and carries out its principal business through Southern Community Bank and Trust, a wholly-owned community banking subsidiary. Headquartered in Winston-Salem, and with approximately $1.5 billion in assets at March 31, 2012, Southern Community Bank offers a full range of financial services to individuals, business and nonprofit organizations in the communities it serves, including checking and savings accounts; commercial, installment, mortgage and personal loans; trust and investment services; safe deposit boxes and other associated services. Southern Community Bank operates 22 banking offices throughout North Carolina. Southern Community’s common stock and one of its trust preferred security issues are listed on the NASDAQ Global Market under the symbols “SCMF” and “SCMFO,” respectively.

 

Capital Bank Financial Corp.

 

Capital Bank Financial Corp. is a bank holding company incorporated in late 2009 with the goal of creating a regional banking franchise in the southeastern region of the United States through organic growth and acquisitions of other banks. Capital Bank Financial was founded by a group of experienced bankers with a record of leading, operating, acquiring and integrating financial institutions. In December 2009 and January 2010, Capital Bank Financial raised approximately $900 million to make acquisitions through a series of private placements of CBF common stock. On June 24, 2011, Capital Bank Financial filed a registration statement with the SEC related to a proposed initial public offering of up to $300 million of Capital Bank Financial Class A common stock.

 

Since its founding, Capital Bank Financial has acquired six depository institutions, including the assets and certain deposits of three failed banks from the FDIC, and operates branches located in North Carolina, South Carolina, Florida, Tennessee and Virginia. Through its branches, CBF offers a wide range of commercial and consumer loans and deposits, as well as ancillary financial services. CBF’s banking business is primarily conducted through its majority held subsidiary, Capital Bank, N.A.

 

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Winston 23 Corporation

 

Winston 23 Corporation, a wholly-owned subsidiary of CBF, is a North Carolina corporation formed on March 26, 2012 for the purpose of effecting the merger. At the effective time of the merger, Winston 23 Corporation will be merged with and into Southern Community, and the name of the resulting company will be Southern Community Financial Corporation. Winston 23 has not conducted any activities other than those incidental to its formation and the matters contemplated by the merger agreement.

 

In the Merger, Southern Community Shareholders Will Receive $3.11 in Cash per Share of Southern Community Common Stock and a Contingent Value Right (page 42)

 

If the merger is completed, you will receive $3.11 in cash, without interest and less any applicable withholding taxes, for each share of Southern Community common stock you held immediately prior to the merger. In addition, for each share of Southern Community common stock you hold immediately prior to the merger, you will receive a contingent value right (“CVR”) entitling you to receive up to $1.30 in cash, payable five years after the effective time of the merger, with the payment (if any) determined based on the credit performance of Southern Community’s loans and foreclosed properties (which we refer to as REO) existing as of the effective time of the merger (which we refer to as Southern Community’s legacy loan and REO portfolio). The cash payment will be equal, on a per CVR basis, to 75% of the excess, if any, of (i) $87 million over (ii) net charge-offs and net realized losses on Southern Community’s legacy loan and REO portfolio during the five-year period beginning at the effective time of the merger, with a maximum payment of $1.30 per CVR.

 

The CVRs will not be equity or voting securities of CBF, will not have any dividend rights and will not represent equity or ownership interests in CBF. They will not confer any rights of a shareholder, either at law or in equity. The CVRs will be unsecured obligations of CBF, and interest will not accrue on amounts payable on them. Subject to limited exceptions, CVR holders will not be able to be sell, pledge, assign, transfer or otherwise dispose of their CVRs, in whole or in part. The CVRs will not be listed on a securities exchange.

 

For additional information about the CVRs, see the section of this proxy statement titled “The CVRs.” The full text of the term sheet defining the material terms of the CVRs is attached as Exhibit A to the merger agreement, a copy of which is attached as Appendix A to this proxy statement.

 

In addition, if CBF and the Treasury agree on the terms of a repurchase by CBF of Southern Community’s Series A Preferred Perpetual Stock and related warrant issued to the Treasury (which we refer to as the TARP securities) at a discount to the stated repurchase price, you will receive an additional cash payment equal to 50% of any repurchase discount (on a per-share basis), calculated as the difference, if any, between (a) the purchase price agreed between CBF and the Treasury with respect to CBF’s repayment of the TARP securities and (b) the stated repurchase price of the TARP securities. We refer to this amount as the “per-share TARP discount amount.”

 

Special Meeting on September 19, 2012 (page 16)

 

The Special Meeting of Southern Community shareholders will be held on September 19, 2012 at 3:00 p.m. (local time) at The Village Inn Event Center, Exit 184, Interstate 40, Clemmons (Forsyth County), North Carolina. At the Special Meeting, Southern Community shareholders will be asked to:

 

·approve the merger agreement and the transactions contemplated thereby (including the merger);

 

·approve, on an advisory (non-binding) basis, the compensation that may be paid or become payable to Southern Community’s named executive officers in connection with the merger, including the agreements and understandings pursuant to which such compensation may be paid or become payable; and

 

·approve the adjournment of the meeting to a later date, if necessary or appropriate, in order to solicit additional proxies in favor of the approval of the merger agreement if there are insufficient votes at the time of such adjournment to approve the merger agreement.

 

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Only holders of record at the close of business on July 18, 2012 will be entitled to vote at the Special Meeting. Each share of Southern Community common stock is entitled to one vote on each proposal to be considered at the Special Meeting. As of the record date, there were 16,854,775 shares of Southern Community common stock outstanding and entitled to vote at the Special Meeting.

 

As of the June 30, 2012, directors and executive officers of Southern Community and their affiliates beneficially owned and were entitled to vote approximately 1,097,405 shares of Southern Community common stock, representing approximately 6.6% of the shares of Southern Community common stock outstanding on that date. Directors and executive officers of Southern Community and their affiliates also held options to purchase 224,750 shares of Southern Community common stock and 1,000 shares underlying restricted stock awards. All of these stock options have exercise prices above the $3.11 purchase price. As of the record date, CBF and its subsidiaries held no shares of Southern Community common stock (other than shares held as fiduciary, custodian or agent), and its directors and executive officers or their affiliates held in the aggregate no shares of Southern Community common stock. See “The Merger — Interests of Southern Community’s Directors and Executive Officers in the Merger.”

 

Approval of the merger agreement and the transactions contemplated thereby (including the merger) requires the affirmative vote of holders of a majority of the outstanding shares of Southern Community common stock entitled to vote at the Special Meeting. Because approval is based on the affirmative vote of a majority of the shares outstanding, a failure to vote, broker non-vote or abstention will have the same effect as a vote AGAINST the merger agreement.

 

Approval of the advisory (non-binding) vote on compensation that may be paid or become payable to Southern Community’s named executive officers in connection with the merger requires the affirmative vote of a majority of shares of Southern Community common stock entitled to vote and represented in person or by proxy at the Special Meeting. An abstention, a failure to or a broker non-vote will have no effect on the outcome of this proposal.

 

Approval of the adjournment proposal requires the affirmative vote of a majority of shares of Southern Community common stock entitled to vote and represented in person or by proxy at the Special Meeting, even if less than a quorum. An abstention, a failure to vote or a broker non-vote will have no effect on the outcome of this proposal.

 

Southern Community’s Board of Directors Recommends that Southern Community Shareholders Vote “FOR” Approval of the Merger Agreement and the Transactions Contemplated Thereby (Including the Merger) (page 24)

 

Southern Community’s Board of Directors has determined that the merger agreement and the transactions contemplated thereby (including the merger) are fair to and in the best interests of Southern Community and its shareholders, and approved the merger agreement and the transactions contemplated thereby (including the merger). Southern Community’s Board of Directors recommends that Southern Community shareholders vote “FOR” approval of the merger agreement and the transactions contemplated thereby (including the merger). For the factors considered by Southern Community’s Board of Directors in reaching its decision to approve the merger agreement and the transactions contemplated thereby (including the merger), see the section entitled “The Merger—Reasons for the Merger and Recommendation of Southern Community’s Board of Directors.”

 

Stifel, Nicolaus & Company, Incorporated Has Provided an Opinion to Southern Community’s Board of Directors Regarding the Merger Consideration (page 25)

 

Southern Community retained Stifel, Nicolaus & Company, Incorporated, to render an opinion to Southern Community in connection with the merger. On June 25, 2012, Stifel delivered its written opinion to Southern Community’s Board of Directors that, as of such date, and based upon and subject to factors and assumptions set forth therein, the consideration to be received in the merger was fair, from a financial point of view, to the shareholders of Southern Community. The full text of Stifel’s written opinion, dated June 25, 2012, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken, in connection with the opinion, is attached as Appendix B to this document and is incorporated herein by reference. You are encouraged to carefully read the opinion and the description beginning on pages B-1 and 25, respectively, and in their entirety. See “The Merger—Fairness Opinion from Stifel.”

 

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What Holders of Southern Community Stock Options and Other Equity-Based Awards Will Receive (page 43)

 

Each option to acquire Southern Community common stock, which we refer to as a Southern Community option, will become fully vested and exercisable no later than 10 business days prior to the completion of the merger. Any Southern Community option that has not been exercised will be cancelled at the effective time of the merger, and holders of such Southern Community options will be entitled to receive, for each Southern Community option, an amount in cash equal to the excess, if any, of $3.11 over the per-share exercise price for each Southern Community option, less applicable tax withholding.

 

Each outstanding restricted share of Southern Community common stock will vest in full and be entitled to receive the merger consideration on the terms provided in the merger agreement. Prior to the effective time of the merger, Southern Community’s Board will take all necessary actions to ensure that no rights to acquire or receive Southern Community common stock remain outstanding following the merger. For more information, see “The Merger — Interests of Southern Community’s Directors and Executive Officers in the Merger.”

 

The Merger Will Be a Taxable Transaction for U.S. Holders of Southern Community Common Stock (page 56)

 

The receipt of the cash and CVRs by a U.S. holder in exchange for shares of Southern Community common stock in the merger will be a taxable transaction for United States federal income tax purposes. The amount of gain or loss a U.S. holder recognizes, and the timing of such gain or loss, depends in part on the United States federal income tax treatment of the CVRs, with respect to which there is substantial uncertainty. A Southern Community shareholder’s gain or loss will also be determined by the shareholder’s tax basis in his or her shares of Southern Community common stock. For a more complete description of the tax consequences of the merger, see the section entitled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger”.

 

Tax matters are very complicated, and the tax consequences of the merger to a particular shareholder will depend in part on such shareholder’s circumstances. Accordingly, you are urged to consult your own tax advisor for a full understanding of the tax consequences of the merger to you, including the applicability and effect of federal, state, local and foreign income and other tax laws.

 

Interests of Southern Community’s Directors and Executive Officers in the Merger that Differ from Your Interests (page 32)

 

Southern Community shareholders should be aware that some of Southern Community’s directors and executive officers have interests in the merger that are different from, or in addition to, the interests of Southern Community shareholders. The members of the Southern Community’s Board were aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending to the Southern Community shareholders that the merger agreement be approved and adopted. For purposes of all of the Southern Community agreements and plans described below, the completion of the transactions contemplated by the merger agreement is assumed to constitute a change in control.

 

These interests include the following:

 

·The vesting of certain equity compensation awards held by the executive officers accelerates as a result of the completion of the merger.

 

·All of Southern Community’s executive officers, including all of its named executive officers, are eligible to receive benefits in connection with a change in control, either solely as a result of the change in control or in the case of qualifying terminations of employment (such as a termination of employment by Southern Community without "cause") in connection with a change in control, under individual employment agreements with Southern Community.

 

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·Under Southern Community's salary continuation agreements with certain executive officers, upon the completion of the merger, the deferred compensation accounts under such agreements for each participant will be distributed in a lump sum.

 

·Two of Southern Community's directors will be appointed directors of Capital Bank following the merger, with one such Southern Community director also being appointed as a director of CBF.

 

·Executive officers and directors of Southern Community also have rights to indemnification and directors' and officers' liability insurance that will survive the completion of the merger.

 

For a more complete description of these interests, see the sections entitled “The Merger—Interests of Southern Community’s Directors and Executive Officers in the Merger” and “The Merger Agreement—Treatment of Southern Community Stock Options and Other Equity-Based Awards.”

 

Security Ownership of Certain Beneficial Owners and Management (page 59)

 

As of June 30, 2012, the directors and executive officers of Southern Community beneficially owned in the aggregate approximately 1,096,233 shares of the outstanding common stock entitled to vote at the Special Meeting or approximately 6.5% of Southern Community’s outstanding common stock.

 

Appraisal Rights (page 37)

 

As a shareholder of Southern Community, you have the right under the NCBCA to exercise appraisal rights and, if the merger is consummated, obtain the payment of the “fair value” of your shares of common stock (plus interest accrued to the date of payment in accordance with North Carolina law). The fair value of shares of Southern Community common stock, as determined in accordance with North Carolina law, may be more or less than, or equal to, the merger consideration to be paid to shareholders in the merger pursuant to the merger agreement. To preserve your appraisal rights, if you wish to exercise appraisal rights, you must not vote your shares of Southern Community common stock in favor of the proposal to approve the merger agreement and you must follow precisely the specific procedures provided under North Carolina law for perfecting appraisal rights or your appraisal rights may be lost. These procedures are described in this proxy statement, and a copy of Chapter 13 of the NCBCA, which grants appraisal rights and governs such procedures, is attached as Appendix C hereto. See “The Merger — Dissenters’ or Appraisal Rights.” We encourage you to read these provisions carefully and in their entirety and consult your legal advisors.

 

Conditions That Must Be Satisfied or Waived for the Merger to Occur (page 51)

 

As more fully described in this proxy statement and in the merger agreement, the completion of the merger depends on a number of conditions being satisfied or, where legally permissible, waived. These conditions include, among others, the execution of certain amendments or waivers with respect to Southern Community’s compensation-related arrangements, the achievement of certain performance thresholds by Southern Community’s loan portfolios, approval of the merger agreement by Southern Community’s shareholders and the receipt of certain required regulatory approvals.

 

Neither Southern Community nor CBF can be certain when, or if, the conditions to the merger will be satisfied or waived, or that the merger will be completed.

 

Termination of the Merger Agreement (page 52)

 

The merger agreement can be terminated at any time prior to completion of the merger by mutual consent, or by either party in the following circumstances:

 

·the merger has not been completed by September 26, 2012 (if the failure to complete the merger by that date is not caused by the terminating party's breach of the merger agreement);

 

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·if any required regulatory approval has been denied and this denial has become final and nonappealable, or a regulatory authority has issued a final, nonappealable injunction permanently enjoining or otherwise prohibiting the completion of the merger of the other transactions contemplated by the merger agreement (provided that the terminating party has used its reasonable best efforts to contest, appeal and remove such denial or injunction);

 

·there is a breach by the other party of any of its representations, warranties or obligations under the merger agreement that would cause the failure of any of the closing conditions to the merger and the breach is not cured within 30 days following written notice of the breach or cannot be cured during such time period (provided that the terminating party is not in breach, in any material respect, of any of its material covenants or agreements contained in the merger agreement); or

 

·Southern Community shareholders fail to approve the merger agreement.

 

In addition, CBF may terminate the merger agreement in the following circumstances:

 

·Southern Community's Board of Directors fails to recommend to Southern Community shareholders that they approve the merger agreement or withdraws, modifies or qualifies such recommendation in a manner adverse to CBF; or

 

·Southern Community's Board of Directors knowingly or materially breaches its non-solicitation obligations described below in "The Merger Agreement—Agreement Not to Solicit Other Offers" or its obligations with respect to calling shareholder meetings described below in "The Merger Agreement—Southern Community Shareholder Meeting and Recommendation of Southern Community's Board of Directors.”

 

Termination Fee (page 52)

 

If the merger agreement is terminated under certain circumstances, including circumstances involving a change in recommendation by Southern Community’s Board of Directors, Southern Community may be required to pay CBF a termination fee of $4 million and/or to reimburse up to $1 million of CBF’s expenses incurred in connection with the merger agreement and the transactions contemplated thereby. The termination fee could discourage other companies from seeking to acquire or merge with Southern Community.

 

Regulatory Approvals Required for the Merger (page 40)

 

Both Southern Community and CBF have agreed to use their reasonable best efforts to obtain all regulatory approvals required to complete the transactions contemplated by the merger agreement. These approvals include approval from the Board of Governors of the Federal Reserve System, (which we refer to as the Federal Reserve Board). Although it is not a condition to the merger, approval from the Office of the Comptroller of the Currency (which we refer to as the OCC) will be required in order for Southern Community Bank to merge into Capital Bank immediately following the closing of the merger, as CBF currently intends. CBF and Southern Community have filed applications and notifications to obtain the required regulatory approvals. The OCC has approved the merger of Southern Community Bank into Capital Bank, subject to a commitment by CBF to provide additional capital to Capital Bank, N.A..

 

Although neither Southern Community nor CBF knows of any reason why they would not be able to obtain these remaining regulatory approvals in a timely manner, Southern Community and CBF cannot be certain when or if they will be obtained.

 

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Board of Directors of CBF Following Completion of the Merger (page 32)

 

Upon completion of the merger, the number of directors constituting CBF’s Board of Directors will be increased by one, and Dr. William G. Ward, Sr., currently the Chairman of Southern Community’s Board of Directors, will be appointed to CBF’s Board of Directors. In addition, upon completion of the merger, Dr. Ward and James G. Chrysson, who is currently Vice-Chairman of Southern Community’s Board of Directors, will be appointed to the Board of Capital Bank, N.A..

 

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CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This proxy statement contains statements that are not historical facts and are considered “forward-looking.” You can identify these statements by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on our current expectations about future events. Further, statements that include words such as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue,” “predicts,” “potential,” “ongoing” or “pursue” or the negative or other words or expressions of similar meaning may identify forward-looking statements. These forward-looking statements are found at various places throughout this proxy statement. These forward-looking statements, including without limitation those relating to future actions, effects on Southern Community if the merger is not completed, strategies, future performance, the outcome of contingencies such as legal proceedings and future financial results, wherever they occur in this proxy statement, are necessarily estimates reflecting the best judgment of Southern Community’s management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors set forth from time to time in our filings with the SEC. In addition to other factors and matters contained in this document, these statements are subject to risks, uncertainties and other factors, including, among others:

 

·we may be unable to obtain the required shareholder approval for the merger at the Special Meeting;

 

·the merger agreement may be terminated prior to completion, which would, under certain circumstances, require us to pay a $4 million termination fee and/or reimburse up to $1 million of CBF’s expenses incurred in connection with the merger agreement and the transactions contemplated thereby;

 

·the conditions to the completion of the merger may not be satisfied, or the regulatory approvals required for the merger may not be obtained on the terms expected or on the anticipated schedule;

 

·disruptions and uncertainty, including diversion of management attention, resulting from the merger may make it more difficult for us to maintain relationships with other customers, employees or suppliers, and as a result, our business may suffer;

 

·the restrictions on our conduct prior to closing contained in the merger agreement may have a negative effect on our flexibility and our business operations;

 

·we have incurred and will continue to incur significant expenses related to the merger prior to its completion and the merger may involve unexpected costs or unexpected liabilities;

 

·legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators, changes in the scope and cost of FDIC insurance and other coverages, increases in regulatory capital requirements and changes in the U.S. Treasury’s Troubled Asset Relief Program (TARP);

 

·Southern Community’s ability to comply with any requirements imposed on us and Southern Community Bank by our respective regulators, and the potential negative consequences that may result;

 

·the outcome of any legal proceedings that may be instituted against Southern Community or CBF and others related to the merger agreement;

 

·changes in accounting principles, policies and guidelines applicable to bank holding companies and banking;

 

·changes in general economic business conditions;

 

·inability to attract and retain deposits;

 

·changes in the level of nonperforming assets and charge-offs;

 

·changes in the financial performance and/or condition of borrowers;

 

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·inflation, interest rate, cost of funds, securities market and monetary fluctuations;

 

·changes in the competitive environment in which we operate;

 

·declines in the value of commercial and residential real estate in Southern Community’s banking markets; and

 

·additional factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2011 under the headings “Risk Factors” and “Quantitative and Qualitative Disclosures About Market Risk.”

 

See the section entitled “Where You Can Find More Information.” You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

THE SPECIAL MEETING

 

Date, Time, Location and Purpose of the Special Meeting

 

This proxy statement is being furnished to Southern Community’s shareholders as part of the solicitation of proxies by Southern Community’s Board of Directors for use at the Special Meeting to be held on September 19, 2012, starting at 3:00 p.m. (local time) at The Village Inn Event Center, or at any adjournment or postponement thereof. The purpose of the Special Meeting is for Southern Community’s shareholders to consider and vote on the approval of the merger agreement and the transactions contemplated thereby (including the merger), the approval, on an advisory (non-binding) basis, of the compensation that may be paid or become payable to Southern Community’s names executive officers in connection with the merger, including agreements and understandings pursuant to which such compensation may be paid or become payable and the approval of the adjournment of the meeting to a later date, if necessary or appropriate, in order to solicit additional proxies in favor of the approval of the merger agreement if there are insufficient votes at the time of such adjournment to approve the merger agreement. If Southern Community’s shareholders fail to approve the merger agreement, the merger will not occur. A copy of the merger agreement is included in this proxy statement as Appendix A. You are urged to read the merger agreement in its entirety.

 

Record Date

 

The Board has fixed the close of business on July 18, 2012, as the record date for the determination of shareholders entitled to notice of and to vote at the Special Meeting. Included with these proxy materials is the 2011 Annual Report to Shareholders on Form 10-K. The Company anticipates mailing this Proxy Statement on or about August 1, 2012.

 

You are invited to attend the Special Meeting. Even if you plan to attend the Special Meeting, you are requested to vote on the proposals described in this Proxy Statement by returning the enclosed appointment of proxy or by voting over the internet or by telephone.

 

Recommendation of Southern Community’s Board of Directors

 

Southern Community’s Board of Directors has determined that the merger agreement and the transactions contemplated thereby (including the merger) are fair and in the best interest of Southern Community and its shareholders, and approved the merger agreement and the transactions contemplated thereby (including the merger). Southern Community’s Board of Directors recommends that Southern Community shareholders vote “FOR” approval of the merger agreement and the transactions contemplated thereby (including the merger), “FOR” approval, on an advisory (non-binding) basis, of the compensation that may be paid or become payable to Southern Community’s named executive officers in connection with the merger, including the agreements and understandings pursuant to which such compensation may be paid or become payable, and “FOR” adjournment of the meeting to a later date, if necessary or appropriate, in order to solicit additional proxies in favor of the approval of the merger agreement if there are insufficient votes at the time of such adjournment to approve the merger agreement. See the section entitled “The Merger—Reasons for the Merger and Recommendation of Southern Community’s Board of Directors.”

 

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Voting of Proxies and Revocation

 

Your vote is important. Your shares can be voted at the Special Meeting only if you attend the meeting or vote the enclosed appointment of proxy. You do not have to attend the meeting to vote. If you are a shareholder of record of your shares of Southern Community common stock, you may vote your shares using any of the following methods:

 

·Vote over the internet: You may access our internet voting site by going to: www.proxyvote.com.
·Vote by telephone: You may vote by calling 1-800-690-6903.
·Vote by mail: You may vote by executing and returning the enclosed appointment of proxy in the pre-addressed pre-paid envelope provided with this proxy statement.

 

The internet and telephone voting procedures are designed to authenticate shareholders and to allow you to confirm that your instructions have been properly followed. The internet and telephone voting facilities for eligible shareholders will close at 5:00 p.m. Eastern Time on September 18, 2012.

 

The Southern Community Board of Directors has named Merle B. Andrews and James C. Monroe, Jr. (the “Proxies”) as management proxies in the enclosed appointment of proxy. When appointments of proxy in the enclosed form are properly executed and returned in time for the Special Meeting (or voted over the internet or telephone), the shares they represent will be voted at the meeting in accordance with the directions given. If you complete and return your appointment of proxy without giving any direction on how to vote your shares, your shares will be voted “FOR” approval of the merger agreement in Proposal 1, “FOR” approval of the compensation payable to the Company’s named executive officers in connection with the merger in Proposal 2, and “FOR” the adjournment of the meeting to a later date, if necessary or appropriate, in order to solicit additional proxies in favor of the approval of the merger agreement if there are insufficient votes at the time of such adjournment to approve the merger agreement in Proposal 3 and in accordance with the recommendation of Southern Community’s Board of Directors on any other matters properly brought before the Special Meeting, or at any adjournment or postponement thereof.

 

Record Holders. If you hold shares in your own name, you are a “record” shareholder. Record shareholders may complete and sign the accompanying proxy card and mail it in the pre-paid envelope provided, deliver it in person to the Company or you may vote your shares over the internet or by telephone.

 

Street Name Holders. If you hold shares through a bank, broker or other nominee, please follow the voting instructions provided by your bank, broker or other nominee in order to vote your shares at the Special Meeting.

 

The method by which you vote will not limit in any way your right to vote at the Special Meeting if you later decide to attend the Special Meeting and vote in person.

 

You may revoke a proxy at any time before it is exercised. To revoke your proxy:

 

·vote again over the internet or the telephone prior to 5:00 p.m. Eastern Time on September 18, 2012,
·notify the Company’s Secretary in writing,
·execute another proxy card bearing a later date prior to the meeting and file it with the Secretary, or
·vote in person at the Special Meeting as described below.

 

The address for the Secretary is:

 

Elizabeth H. Prince, Secretary

Southern Community Financial Corporation

4605 Country Club Road

Winston-Salem, North Carolina 27104

 

If you return an executed proxy card, you may still attend the Special Meeting and vote in person. When you arrive at the Special Meeting, first notify the Secretary of your desire to vote in person. You will then be given a ballot to vote in person, and, provided you do vote in person or otherwise validly revoke your prior proxy as described above, your prior proxy will be disregarded.

 

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If you attend the meeting in person, you may vote your shares without returning the enclosed appointment of proxy. However, if your plans change and you are not able to attend, your shares will not be voted. Even if you plan to attend the meeting, the best way to ensure that your shares will be voted is to return the enclosed appointment of proxy, vote over the internet or by telephone and, when you get to the meeting notify the Secretary that you wish to vote in person.

 

Quorum

 

The Company's Bylaws provide that the holders of a majority of the Company's outstanding common stock, no par value per share (sometimes referred to herein as the “Shares”), represented in person or by proxy, shall constitute a quorum at the Special Meeting, and that if there is no quorum present at the opening of the meeting, the Special Meeting may be adjourned by the vote of a majority of the Shares voting on the motion to adjourn. Abstentions and broker non-votes will be counted as present and entitled to vote for purposes of determining whether a quorum is present at the Special Meeting. A broker non-vote occurs when an institution holding shares as a nominee does not have discretionary voting authority with respect to a proposal and has not received voting instructions from the beneficial owner of the shares.

 

How Your Votes Will Be Counted

 

Each share of Southern Community common stock is entitled to one vote for each matter submitted for a vote. Appointments of proxy will be tabulated by one or more inspectors of election designated by the Board.

 

Proposal 1 — Approval of Merger Agreement. To be approved, a majority of the shares eligible to vote at the Special Meeting must be cast in person and by proxy at the Special Meeting in favor of Proposal 1. If you do not vote (including broker non-votes), this will have the same effect as a vote “AGAINST” the merger agreement. In addition, if you submit a proxy card in which you abstain from voting, that will also have the same effect as a vote AGAINST the merger agreement, although your shares will be counted toward the required quorum for the Special Meeting.

 

Proposal 2 — Approval, on a non-binding, advisory basis, of executive compensation to be paid in the merger. To be approved on a non-binding, advisory basis, the number of votes cast in person and by proxy at the Special Meeting in favor of Proposal 2 must exceed the number of votes cast against it. Shares not voted (including abstentions and broker non-votes) will have no effect on the outcome of this proposal.

 

Proposal 3 – Approval of adjournment of the Special Meeting to solicit additional proxies. To be approved, the number of votes cast in person and by proxy at the Special Meeting in favor of Proposal 3 must exceed the number of votes cast against it. Shares not voted (including abstentions and broker non-votes) will have no effect on the outcome of this proposal.

 

Adjournments and Postponements

The Special Meeting may be adjourned or postponed for the purpose of soliciting additional proxies. At any subsequent reconvening of the Special Meeting, all proxies will be voted in the same manner as the proxies would have been voted at the original convening of the Special Meeting, except for any proxies that have been effectively revoked or withdrawn prior to subsequent reconvening.

 

Expenses of Solicitation

 

We will pay the cost of this proxy solicitation. We have engaged the firm of Phoenix Advisory Partners, LLC, New York, NY to act as our proxy solicitor and have agreed to pay $3,500 plus reasonable expenses for such services. In addition to solicitation by our proxy solicitor or by mail, the Company’s directors, officers and regular employees may solicit appointments of proxy in person or by telephone. None of these employees will receive any additional or special compensation for this solicitation. We will, on request, reimburse brokerage houses and other nominees their reasonable expenses for sending these proxy soliciting materials to the beneficial owners of the Company’s stock held of record by such persons.

 

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Voting Securities

 

As of the record date for the Special Meeting, there were approximately 16,854,775 shares issued and outstanding and entitled to vote at the Special Meeting. The Company is currently authorized to issue 30,000,000 shares of common stock and 1,000,000 shares of preferred stock. As of the record date for the Special Meeting, there were 42,750 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, outstanding, all of which were issued to the United States Department of the Treasury (“Treasury”) in connection with the Company’s participation in the Capital Purchase Program (“TARP”) under the Emergency Economic Stabilization Act of 2008. The shares of preferred stock held by the Treasury are not entitled to vote at the Special Meeting. As of the record date for the Special Meeting, there were approximately 6,534 holders of record of the Company's common stock entitled to vote at the Special Meeting.

 

Shares Held by Directors and Officers

 

As of the record date, directors and executive officers of Southern Community and their affiliates beneficially owned and were entitled to vote approximately 1,322,155 shares of Southern Community common stock, representing approximately 7.6% of the shares of Southern Community common stock outstanding on that date, and held options to purchase 224,750 shares of Southern Community common stock and 1,000 shares underlying restricted stock awards. As of the record date, Capital Bank Financial and its subsidiaries held no shares of Southern Community common stock (other than shares held as fiduciary, custodian or agent), and its directors and executive officers or their affiliates held in the aggregate no shares of Southern Community common stock. See “The Merger—Interests of Southern Community’s Directors and Executive Officers in the Merger.”

 

Questions and Additional Information

 

Southern Community shareholders should contact Southern Community Investor Relations at 4605 Country Club Road, Winston-Salem, North Carolina 27104 or (336) 768-8500 with any questions about this proxy statement, the merger or the Special Meeting, or to obtain additional copies of this proxy statement or appointments of proxy.

 

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PROPOSAL 1: APPROVAL OF THE MERGER AGREEMENT

 

The following information describes the material aspects of the merger. This description does not purport to be complete, and is qualified in its entirety by reference to the merger agreement which is included in this proxy statement as Appendix A. All shareholders are urged to read the merger agreement in its entirety.

 

Parties to the Merger

 

Southern Community Financial Corporation

 

Southern Community Financial Corporation is a bank holding company headquartered in Winston-Salem, North Carolina and carries out its principal business through Southern Community Bank and Trust, a wholly owned community banking subsidiary. Headquartered in Winston-Salem, with approximately $1.5 billion in assets at March 31, 2012, Southern Community Bank and Trust offers a full range of financial services to individuals, business and nonprofit organizations in the communities it serves, including checking and savings accounts; commercial, installment, mortgage and personal loans; trust and investment services; safe deposit boxes and other associated services. Southern Community Bank and Trust operates 22 banking offices throughout North Carolina. Southern Community’s common stock and one of its trust preferred security issues are listed on the NASDAQ Global Market under the symbols “SCMF” and “SCMFO,” respectively. Southern Community’s principal executive offices are located at 4605 Country Club Road, Winston-Salem, North Carolina and its phone number is (336) 768-8500.

 

Capital Bank Financial Corp.

 

Capital Bank Financial Corp. is a bank holding company incorporated in late 2009 with the goal of creating a regional banking franchise in the southeastern region of the United States through organic growth and acquisitions of other banks. CBF was founded by a group of experienced bankers with a record of leading, operating, acquiring and integrating financial institutions. In December 2009 and January 2010, CBF raised approximately $900 million to make acquisitions through a series of private placements of CBF common stock. On June 24, 2011, CBF filed a registration statement with the SEC related to a proposed initial public offering of up to $300 million of CBF Class A common stock.

 

Since its founding, CBF has acquired six depository institutions, including the assets and certain deposits of three failed banks from the FDIC, and operates branches located in North Carolina, South Carolina, Florida, Tennessee and Virginia. Through its branches, CBF offers a wide range of commercial and consumer loans and deposits, as well as ancillary financial services. CBF’s banking business is primarily conducted through its majority held subsidiary, Capital Bank, N.A.. CBF’s principal executive offices are located at 121 Alhambra Plaza, Suite 1601, Coral Gables, Florida 33134 and CBF’s telephone number is (305) 670-0200.

 

Winston 23 Corporation

 

Winston 23 Corporation, a wholly-owned subsidiary of CBF, is a North Carolina corporation formed on March 26, 2012 for the purpose of effecting the merger. At the effective time of the merger, Winston 23 Corporation will be merged with and into Southern Community, and the name of the resulting company will be Southern Community Financial Corporation. Winston 23 has not conducted any activities other than those incidental to its formation and the matters contemplated by the merger agreement. Winston 23’s principal executive offices are located at 121 Alhambra Plaza, Suite 1601, Coral Gables, Florida 33134 and Winston’s telephone number is (305) 670-0200.

 

Background of the Merger

 

Southern Community’s Board of Directors has from time to time engaged with its executive management in reviews and discussions of potential strategic alternatives, and has considered ways to enhance its performance and prospects in light of competitive and other relevant developments. These reviews have included periodic discussions with respect to potential transactions that would further its strategic objectives, and the potential benefits and risks of those transactions.

 

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Since raising approximately $900 million in December 2009 and January 2010, CBF has pursued acquisition opportunities consistent with its business strategy that it believes will produce attractive returns for its stockholders.

 

On September 1, 2010, a special meeting of the Board of Directors of Southern Community was called for the purpose of conducting a strategic discussion of the status of Southern Community in light of the difficult regulatory and economic environment, including Southern Community’s expectation that it might need to raise additional capital based on regulatory guidance. At this meeting, following a discussion of strategic alternatives with representatives of Stieven Capital Advisors (Stieven), the board of directors decided to explore engaging an investment banker and a financial advisor to assist with an evaluation of these options.

 

At a special board meeting on September 14, 2010, management advised the Board of Directors of Southern Community that it had met with representatives of Stieven Capital Advisors and Stifel, Nicolaus & Company, Incorporated (Stifel), an investment banking firm with experience in the banking industry which had previously served as the investment banker for Southern Community. Management also discussed with the board a list of potential merger partners. The Board approved the joint engagement of Stieven Capital Advisors and Stifel. A joint engagement letter was executed on September 20, 2010.

 

On September 22, 2010, the Southern Community Board of Directors held a regularly scheduled meeting, which was attended by representatives of Stieven Capital Advisors and Stifel. At this meeting, management informed the Board that a Consent Order from the FDIC was expected to be issued to Southern Community Bank and Trust (which Southern Community Bank and Trust ultimately entered into with the FDIC and the North Carolina Commissioner of Banks on February 25, 2011). During this period and continuing until February 2011, Stifel assisted management in contacting over 30 potential buyers, including CBF.

 

On March 16, 2011, the Southern Community Board of Directors held a regularly scheduled meeting, which was attended by representatives of Stifel. Stifel reported that it had received no written indications of interest in response to its initial contacts. Certain members of Southern Community’s management team reported that they had received a nonbinding verbal proposal regarding a potential transaction from a potential merger partner, which we refer to as Bank A. The Southern Community Board of Directors discussed the proposal from Bank A with the Stifel representatives. Following this discussion, the Board determined not to proceed with continuing discussions with Bank A at that time, due to the contingencies in Bank A’s proposal, the wide price range contemplated, the fact that Bank A had not presented its proposal in writing and that no other potential partners had submitted a proposal (and accordingly, Bank A would be receiving de facto exclusivity).

 

Southern Community filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2010 in March 2011 (which we refer to as the 2010 10-K). In the 2010 10-K, Southern Community disclosed that it planned to consider a variety of strategies in order to achieve compliance with the Consent Order. In accordance with the terms of the Consent Order, Southern Community established a committee of the Board of Directors to oversee compliance with the Consent Order, and began considering a capital plan prepared by Southern Community’s management and approved by the regulators. Southern Community Bank and Trust also engaged an independent consultant to prepare a management plan, as required by the Consent Order. Furthermore, on June 23, 2011, the Company entered into a Written Agreement with the Federal Reserve Board, which we refer to as the Written Agreement, which imposed certain conditions on the operation of Southern Community.

 

On June 8, 2011, at a special meeting of the Southern Community Board of Directors, due to certain concerns regarding the terms of the proposed management plan, the Board authorized management to resume discussions with Bank A and to approach Bank B, one of the parties originally contacted by Stifel, to solicit interest in proceeding with a merger transaction.

 

At the monthly Board meeting on June 22, 2011, Scott Bauer, Southern Community’s Chief Executive Officer and the Chairman of the Board, and James G. Chrysson, Vice Chairman of the Southern Community Board reported that both Bank A and Bank B had expressed interest in further negotiations. The Board authorized management to continue discussions with both Bank A and Bank B, subject to setting a final date for the receipt of indications of interest.

 

On August 15, 2011, Bank A submitted a nonbinding written indication of interest for a transaction in which Bank A would issue stock in exchange for the outstanding shares of Southern Community stock, offering consideration consisting of a share exchange valuing Southern Community’s common stock at $2.00 per-share plus $1.00 in a CVR on the loan portfolio. On August 17, 2011, Bank B submitted a nonbinding written indication of interest, stating a preference for cash consideration in any potential transaction, offering consideration worth between $1.00 and $2.00 per-share of Southern Community Common Stock. The Southern Community Board of Directors discussed both proposals at a regularly scheduled meeting on August 17, 2011, at which representatives of Stifel were present. The board determined it was not advisable to proceed with either transaction at that time, due to the belief that the offers were inadequate.

 

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At a special meeting of the Southern Community Board of Directors held on August 31, 2011, the Southern Community Board resolved to engage a management consultant to work with management, rather than enacting certain proposed changes to Southern Community’s management team proposed by the previously engaged independent consultant. At a special meeting of the Southern Community Board of Directors held on September 7, 2011, the management plan prepared by the independent consultant was approved and submitted to Southern Community’s regulators for their approval.

 

At a regularly scheduled meeting held on October 19, 2011, in accordance with the previously approved plan, the Southern Community Board of Directors approved the election of Dr. William Ward as the Chairman of the Board, subject to regulatory approval (which was approved on December 2, 2011). Mr. Bauer stepped down from the Board, but continued to serve as Chief Executive Officer, effective upon regulatory approval of Dr. Ward’s appointment as Chairman.

 

In late November 2011, Christopher G. Marshall, the Chief Financial Officer of CBF, called Mr. Bauer and requested a meeting. On November 30, 2011, Mr. Marshall and R. Eugene Taylor, the Chief Executive Officer of CBF, met with Mr. Bauer and Jeff Clark, President of Southern Community. At this meeting, Mr. Bauer and Mr. Clark advised the representatives of CBF that the Southern Community Board of Directors had not authorized discussions regarding a potential transaction with CBF.

 

Effective December 2, 2011, Dr. Ward was approved as Chairman of the Board and Mr. Bauer stepped down from the Board. Mr. Bauer assumed the position of President as well as CEO. At a special meeting of the Southern Community Board of Directors held on December 5, 2011, the Board interviewed potential management consulting firms.

 

On December 17, 2011, at a regularly scheduled meeting of the Southern Community Board of Directors, Mr. Bauer and Mr. Clark discussed the inquiry from CBF with the Board. On January 9, 2012, Dr. Ward and Mr. Bauer met with Mr. Taylor and Mr. Marshall. In the following weeks, the parties continued to engage in discussions regarding a potential transaction between the two parties, with each informing their respective boards of the progress of discussions. On January 19, 2012, the parties executed a mutual confidentiality agreement.

 

On February 2, 2012, Mr. Marshall sent a draft term sheet for a potential transaction to Dr. Ward, offering consideration worth $1.75 per-share of Southern Community common stock and a CVR of $0.75 per share. At a regularly scheduled meeting of the Southern Community Board of Directors held on February 22, 2012, Dr. Ward discussed the contents of the term sheet with the Board, including a presentation from representatives of Stifel. The Southern Community Board of Directors determined not to proceed with a transaction as described in the term sheet at that time, due to a determination that the offer was inadequate, but authorized the parties to continue discussions. The Southern Community Board of Directors also discussed ongoing negotiations with a potential management consultant, including the fact that hiring a consultant would not be necessary if Southern Community ultimately entered into a transaction with CBF or another party.

 

Following further discussions between the parties, Mr. Taylor, Mr. Marshall and R. Bruce Singletary, the Chief Risk Officer of CBF, were invited to attend a special meeting of the Southern Community Board of Directors held on March 5, 2012 to discuss a revised proposal for a transaction, consisting of a cash price of $2.50 per-share of Southern Community common stock and a CVR of $1.00 per share. Representatives of one of CBF’s investment bankers were also present on behalf of CBF. Following discussion, the Southern Community Board of Directors met in executive sessions and determined that the offer was inadequate and authorized further discussions between the parties.

 

At a regularly scheduled meeting of the Board of Directors of Southern Community held on March 14, 2012, Dr. Ward reviewed an updated transaction proposal from CBF with the Board.

 

On March 16, 2012, CBF submitted a nonbinding letter of intent to Southern Community, offering consideration of $2.875 per-share of Southern Community common stock and a CVR of $1.30 per share. The Southern Community Board of Directors approved the terms set forth in the letter of intent, and authorized a due diligence committee of the Board consisting of Dr. Ward and three other Board members to conduct due diligence and to continue discussions with CBF.

 

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On March 17, 2012, Wachtell, Lipton, Rosen & Katz, counsel to CBF, sent a proposed draft of the merger agreement to Williams Mullen, counsel to Southern Community. During this period, the parties continued to conduct due diligence on each other, and to negotiate the terms of a definitive transaction agreement through their respective legal counsel.

 

On March 24, 2012, Mr. Taylor described the terms of the potential transaction and the draft merger agreement to the CBF Board of Directors, which unanimously approved the merger and the draft merger agreement.

 

On March 26, 2012, the due diligence committee of the Southern Community Board of Directors met. Following a review of the terms and conditions of the draft merger agreement with legal counsel, the due diligence committee agreed to recommend approval of the definitive transaction agreement to the full Board.

 

At a special meeting of the Southern Community Board of Directors on March 26, 2012, the Board reviewed the terms of the draft merger agreement with legal counsel, received a presentation from management and received the opinion of Stifel that the consideration in the proposed transaction was fair, from a financial point of view, to Southern Community’s shareholders, as of the date of the opinion.

 

Following extensive discussion, the Southern Community Board, by a 7 – 2 majority vote, approved the merger agreement and the transactions contemplated by the merger agreement, including the merger, and authorized Dr. Ward to execute the merger agreement.

 

Following the close of trading on March 26, 2012, the merger agreement was executed by both parties. The following morning, Southern Community and CBF issued a joint press release announcing the execution of the merger agreement and the terms of the proposed merger.

 

In early June 2012, as a part of his continuing discussions with CBF management, Dr. Ward became aware that certain closing conditions in the merger agreement were not likely to occur prior to the mutual termination date. In a meeting on June 6, 2012, Dr. Ward and two of the other directors met with Mr. Taylor and Mr. Marshall to discuss various alternatives that might preserve the financial aspects of the merger for Southern Community shareholders and allow the parties to close by the mutual termination date. Following the meeting, CBF and Southern Community discussed various alternative transaction structures, including a merger in which the consideration paid by CBF consisted solely of cash and the CVRs.

 

In a conference call on June 15, 2012, the Board considered the various alternatives that had been discussed with CBF and requested that Mr. Taylor and Mr. Marshall be present at the regular board meeting on June 20, 2012 to discuss various alternatives. Mr. Taylor and Mr. Marshall did attend the regular board meeting and discussed the various alternatives with the Board, including an all cash acquisition at $2.875 per share. Following their departure from the meeting, the Board instructed Dr. Ward to continue the negotiation of an all cash transaction at $3.11 per share.

 

Following the board meeting, Dr. Ward continued to discuss various alternatives with Mr. Taylor and Mr. Marshall, CBF proposed a transaction in which the stock component of the merger consideration would be eliminated, the cash component of the merger consideration would be increased to an amount of $3.11 per share of Southern Community common stock, and certain of the conditions to the closing of the merger related to the registration of CBF’s common stock would be eliminated.

 

At a special meeting of the Southern Community Board of Directors held on June 25, 2012, the Board reviewed the terms of an amendment to the merger agreement implementing CBF’s proposed amendments with its legal counsel and received the opinion of Stifel that the consideration to be paid in the merger was fair, from a financial point of view, to Southern Community’s shareholders, as of the date of the opinion. For more information about the fairness opinion from Stifel, see “—Fairness Opinion of Stifel” and Appendix B to this proxy statement, which includes the full text of such opinion.

 

Following extensive discussion, the Southern Community Board of Directors, by a 7 – 2 majority vote, approved the amendment and authorized Dr. Ward to execute the amendment. Following the close of trading on June 25, 2012, the amendment was executed by both parties. The following morning, Southern Community and CBF issued a joint press release announcing the execution of the amendment.

 

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Reasons for the Merger and Recommendation of Southern Community’s Board of Directors

 

Southern Community’s Board of Directors believes that the merger is fair to and in the best interests of Southern Community and its shareholders. Accordingly, Southern Community’s Board of Directors has approved the merger agreement and the transactions contemplated thereby (including the merger), and recommends that Southern Community shareholders vote “FOR” the proposal to approve the merger agreement and the transactions contemplated thereby (including the merger).

 

In reaching its decision to approve the merger and the merger agreement, as amended, and recommend adoption of the merger agreement by Southern Community shareholders, the Southern Community Board of Directors consulted with Southern Community’s executive management, as well as Southern Community’s legal and financial advisors, and considered a number of factors, including the following material factors:

 

·the fact that the consideration offered in the merger represented a premium over the trading prices of Southern Community's common stock during the year prior to the execution of the merger agreement;

 

·the fact that Southern Community received proposals from only two other potential merger partners after initially contacting approximately thirty entities, and that the proposals received from both Bank A and Bank B were less attractive than the terms of the merger;

 

·the Southern Community Board of Directors' knowledge of Southern Community's business, operations, financial condition, earnings and prospects, and of CBF’s business, operations, financial condition, earnings and prospects, taking into account the results of Southern Community's due diligence review of CBF;

 

·the oral opinion delivered to Southern Community by Stifel on June 25, 2012, which was subsequently confirmed in a written opinion delivered to Southern Community by Stifel, to the effect that, as of June 25, 2012, and based upon and subject to the assumptions, procedures, considerations, qualifications and limitations set forth in the opinion, the consideration under the merger agreement was fair, from a financial point of view, to the holders of Southern Community common stock;

 

·the fact that the merger could enhance the likelihood of repayment or early redemption of the preferred stock of Southern Community purchased by the Treasury;

 

·the possible post-merger employment opportunities for Southern Community's employees in a larger, more diverse institution;

 

·the fact that other options to raise additional capital would likely be dilutive to existing Southern Community shareholders;

 

·the fact that Southern Community's capital position and relationships with its regulators continued to present ongoing risks to operations;

 

·Southern Community's need to continue to address ongoing regulatory concerns, including compliance with the Consent Order and the Written Agreement; and

 

·the fact that Southern Community would have to engage a management consultant in order to attempt to develop and implement a revised strategic plan in the absence of a merger transaction, which the Southern Community Board viewed as producing less value for shareholders than a transaction with CBF.

 

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Southern Community’s Board of Directors also considered potential risks and potentially negative factors concerning the merger in connection with the deliberations of the proposed transaction, including the following material factors:

 

·whether it was more advantageous for Southern Community to wait to see if several more quarters of earnings would attract a better sale of control proposal;

 

·whether there was sufficient urgency to consider a sale of control transaction at this time since Southern Community Bank and Trust has been in capital compliance and profitable every quarter since execution of the Consent Order and, to Southern Community’s knowledge, has satisfactorily complied with the key provisions of the Consent Order, including in particular the prescribed reductions in adversely classified assets, within the scheduled time frames;

 

·the potential impact of the restrictions imposed by the merger agreement on Southern Community's ability to take specified actions during the period prior to the completion of the merger, which may delay or prevent Southern Community from undertaking business opportunities that may arise pending completion of the merger;

 

·the transaction costs to be incurred in connection with the merger;

 

·the potential risk of diverting management focus and resources from other strategic opportunities and from operational matters while working to implement the merger;

 

·the provisions of the merger agreement restricting Southern Community's solicitation of third-party acquisition proposals, requiring Southern Community to hold a special meeting of its shareholders to vote on the approval of the merger agreement and providing for the payment of a termination fee in certain circumstances, which Southern Community's Board of Directors understood, while potentially limiting the willingness of a third party to propose a competing business combination transaction with Southern Community, were a condition to CBF's willingness to enter into the merger agreement; and

 

·the fact that some of Southern Community's directors and executive officers have other interests in the merger that are different from, or in addition to, their interests as Southern Community shareholders. See "—Interests of Southern Community's Directors and Executive Officers in the Merger.”

 

The foregoing discussion of the factors considered by the Southern Community Board is not intended to be exhaustive, but is believed to include all material factors considered by the Southern Community Board. In view of the wide variety of the factors considered in connection with its evaluation of the merger and the complexity of these matters, Southern Community’s Board of Directors did not find it useful, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, the individual members of Southern Community’s Board of Directors may have given different weight to different factors. Southern Community’s Board of Directors conducted an overall analysis of the factors described above, including thorough discussions with, and questioning of, Southern Community management and Southern Community’s legal and financial advisors, and considered the factors overall to be favorable to, and to support, its determination.

 

The foregoing explanation of Southern Community’s Board of Directors’ reasoning and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed in the section entitled “Cautionary Note About Forward-Looking Statements.”

 

Opinion of Southern Community Financial Corporation’s Financial Advisor

 

Stifel, Nicolaus & Company, Incorporated (“Stifel”) acted as Southern Community’s financial advisor in connection with the merger. Stifel is a nationally recognized investment banking and securities firm with membership on all the principal United States securities exchanges and substantial expertise in transactions similar to the merger. As part of its investment banking activities, Stifel is regularly engaged in the independent valuation of businesses and securities in connection with mergers, acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes.

 

On June 25, 2012, Stifel rendered its oral opinion, which was confirmed in writing, to the Board of Directors of SCMF (the “Board”) that, as of that date, the merger consideration to be received by the holders of shares of Southern Community common stock pursuant to the merger agreement was fair to such holders, from a financial point of view.

 

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The full text of Stifel's written opinion dated, June 25, 2012, which sets forth the assumptions made, matters considered and limitations of the review undertaken, is attached as Appendix B to this proxy statement and is incorporated herein by reference. Holders of Southern Community’s common stock are urged to, and should, read this opinion carefully and in its entirety. The summary of the opinion of Stifel set forth in this proxy statement is qualified in its entirety by reference to the full text of such opinion. The opinion of Stifel does not reflect any developments that have occurred after its date or may occur prior to the completion of the merger. Stifel has no obligation to update, revise or reaffirm its opinion and SCMF does not currently expect that it will request an updated opinion from Stifel.

 

No limitations were imposed by Southern Community on the scope of Stifel’s investigation or the procedures to be followed by Stifel in rendering its opinion. In arriving at its opinion, Stifel did not ascribe a specific range of values to Southern Community. Stifel’s opinion was approved by its fairness opinion committee. Stifel’s opinion is for the information of, and directed to, the Board for its information and assistance in connection with its consideration of the financial terms of the merger. Stifel’s opinion does not constitute a recommendation to the Board as to how the Board should vote on the merger, to any shareholder of Southern Community as to how any such shareholder should vote at any shareholders’ meeting at which the merger is considered, or whether or not any Southern Community shareholder should enter into a voting, shareholders’, or affiliates’ agreement with respect to the merger, or exercise any dissenters’ or appraisal rights that may be available to such shareholder. In addition, Stifel’s opinion does not compare the relative merits of the merger with any other alternative transaction or business strategy which may have been available to Southern Community and does not address the underlying business decision of the Board or Southern Community to proceed with the merger or any aspect thereof. In 2010 and early 2011, at the direction of the Board, Stifel explored potential transactions with respect to a sale of Southern Community. Other than in connection with the previously announced merger agreement, dated March 26, 2012, in connection with this opinion and since Southern Community began discussions with CBF, Southern Community and Stifel have not explored alternative transactions to the merger and have not solicited the interest of other parties in pursuing potential alternative transactions with Southern Community.

 

In connection with its opinion, Stifel, among other things:

 

·reviewed and analyzed a copy of the merger agreement;

 

·reviewed and analyzed the audited consolidated financial statements of Southern Community for the three years ended December 31, 2011 and the unaudited consolidated financial statements of Southern Community for the quarter ended March 31, 2012;

 

·reviewed and analyzed the Consent Order, dated February 16, 2011, issued to Southern Community Bank and Trust by the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks;

 

·reviewed and analyzed certain other publicly available information concerning Southern Community;

 

·reviewed certain non-publicly available information concerning Southern Community, including, without limitation, internal financial analyses and forecasts prepared by its management and held discussions with Southern Community executive management regarding recent developments and regulatory matters;

 

·participated in certain discussions and negotiations between representatives of Southern Community and CBF;

 

·reviewed the reported prices and trading activity of the equity securities of Southern Community;

 

·analyzed certain publicly available information concerning the terms of selected merger and acquisition transactions that Stifel considered relevant to its analysis;

 

·reviewed and analyzed certain publicly available financial and stock market data relating to selected public companies that Stifel deemed relevant to its analysis;

 

·conducted such other financial studies, analyses and investigations and considered such other information as Stifel deemed necessary or appropriate for purposes of its opinion; and

 

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·took into account Stifel’s assessment of general economic, market and financial conditions and its experience in other transactions, as well as Stifel’s experience in securities valuations and its knowledge of the banking industry generally.

 

In connection with its review, Stifel relied upon and assumed, without independent verification, the accuracy and completeness of all of the financial and other information that was provided to Stifel, by or on behalf of Southern Community, or that was otherwise reviewed by Stifel and did not assume any responsibility for independently verifying any of such information. Stifel further relied upon the assurances by the management of Southern Community that it is unaware of any facts that would make any of the information provided to Stifel inaccurate, incomplete or misleading. With respect to the financial forecasts supplied to Stifel by Southern Community, Stifel assumed that the forecasts were reasonably prepared on the basis reflecting the best currently available estimates and judgments of the management of Southern Community, as to the future operating and financial performance of Southern Community, and that they provided a reasonable basis upon which Stifel could form its opinion. Such forecasts and projections were not prepared with the expectation of public disclosure. All such projected financial information is based on numerous variables and assumptions that are inherently uncertain, including, without limitation, factors related to general economic, market and competitive conditions. Accordingly, actual results could vary significantly from those set forth in such projected financial information. Stifel relied on this projected information without independent verification or analyses and does not in any respect assume any responsibility for the accuracy or completeness thereof.

 

Stifel also assumed that there were no material changes in the assets, liabilities, financial condition, results of operations, business or prospects of Southern Community since the date of the last financial statements of Southern Community made available to Stifel. Stifel also assumed, without independent verification and with SCMF’s consent, that the aggregate allowances for loan losses set forth in the financial statements of Southern Community are in the aggregate adequate to cover all such losses. Stifel was not requested to make or obtain, and did not make or obtain, any independent evaluation, appraisal or physical inspection of Southern Community’s assets or liabilities, the collateral securing any of such assets or liabilities, or the collectability of any such assets, nor did Stifel review loan or credit files of Southern Community. Estimates of values of companies and assets do not purport to be appraisals or necessarily reflect the prices at which companies or assets may actually be sold. Because such estimates are inherently subject to uncertainty, Stifel assumes no responsibility for their accuracy. Stifel relied on advice of Southern Community’s counsel as to certain legal matters with respect to Southern Community, the merger agreement and the merger and other matters contained or contemplated therein. Stifel assumed, with Southern Community’s consent, that there are no factors that would delay or subject to any adverse conditions any necessary regulatory or governmental approval and that all conditions to the merger will be satisfied and not waived. Stifel also assumed that the merger will be consummated substantially on the terms and conditions described in the merger agreement, without any waiver of material terms or conditions by Southern Community or any other party, and that obtaining any necessary regulatory approvals or satisfying any other conditions for consummation of the merger will not have an adverse effect on Southern Community. Stifel has assumed that the merger will be consummated in a manner that complies in all respects with the applicable provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and all other applicable federal and state statutes, rules and regulations.

 

Stifel’s opinion is limited to whether the merger consideration to be received by the holders of the shares of Southern Community common stock is fair to such holders, from a financial point of view, solely as of the date thereof. Stifel’s opinion does not consider, address or include: (i) any other strategic alternatives currently (or which have been or may be) contemplated by the Board or the Company; (ii) the legal, tax or accounting consequences of the merger on Southern Community or the holders of Southern Community’s common stock; (iii) the fairness of the amount or nature of any compensation to any of Southern Community’s officers, directors or employees, or class of such persons, relative to the compensation to the holders of Southern Community’s securities; (iv) the treatment of, or the effect of the merger on, Southern Community’s Series A preferred stock and related warrants or the holders thereof; (v) the treatment of, or effect of the merger on, Southern Community’s Stock Options (as defined in the merger agreement), or any other class of securities of Southern Community other than the shares of Southern Community common stock or the holders thereof; (vi) the Contingent Value Rights to be issued to holders of Southern Community Common Stock in connection with the merger; (vii) the potential for additional merger consideration upon redemption of Southern Community’s Series A preferred stock at a discount; or (viii) any advice or opinions provided by any other advisor to Southern Community.

 

Stifel’s opinion is necessarily based solely on economic, market, monetary, financial and other conditions as they exist on, and on the information made available to Stifel as of, the date of its opinion. It is understood that subsequent developments may affect the conclusions reached in Stifel’s opinion and that Stifel does not have, and does not assume, any obligation to update, revise or reaffirm its opinion.

 

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In connection with rendering its opinion, Stifel performed a variety of financial analyses that are summarized below. Such summary does not purport to be a complete description of such analyses. Stifel believes that its analyses and the summary set forth herein must be considered as a whole and that selecting portions of such analyses and the factors considered therein, without considering all factors and analyses, could be misleading. The preparation of a fairness opinion is a complex process involving subjective judgments and is not necessarily susceptible to partial analysis or summary description. The range of valuations resulting from any particular analysis described below should not be taken to be Stifel’s view of the actual value of Southern Community. In its analyses, Stifel made numerous assumptions with respect to industry performance, business and economic conditions, and other matters, many of which are beyond the control of Southern Community. Any estimates contained in Stifel's analyses are not necessarily indicative of actual future values or results, which may be significantly more or less favorable than suggested by such estimates. No company or transaction utilized in Stifel's analyses was identical to Southern Community or the merger. Accordingly, an analysis of the results described below is not mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other facts that could affect the public trading value of the companies to which they are being compared. In arriving at its opinion, none of the analyses performed by Stifel were assigned a greater significance by Stifel than any other, nor does the order of analyses described represent relative importance or weight given to those analyses by Stifel. The analyses described below do not purport to be indicative of actual future results, or to reflect the prices at which Southern Community’s common stock may trade in the public markets, which may vary depending upon various factors, including changes in interest rates, dividend rates, market conditions, economic conditions and other factors that influence the price of securities.

 

In accordance with customary investment banking practice, Stifel employed generally accepted valuation methods in reaching its opinion. The following is a summary of the material financial analyses that Stifel used in providing its opinion. Some of the summaries of financial analyses are presented in tabular format. In order to understand the financial analyses used by Stifel more fully, you should read the tables together with the text of each summary. The tables alone do not constitute a complete description of Stifel’s financial analyses, including the methodologies and assumptions underlying the analyses, and if viewed in isolation could create a misleading or incomplete view of the financial analyses performed by Stifel. The summary data set forth below do not represent and should not be viewed by anyone as constituting conclusions reached by Stifel with respect to any of the analyses performed by it in connection with its opinion. Rather, Stifel made its determination as to the fairness to the shareholders of Southern Community of the merger consideration, from a financial point of view, on the basis of its experience and professional judgment after considering the results of all of the analyses performed. Accordingly, the data included in the summary tables and the corresponding imputed ranges of value for Southern Community should be considered as a whole and in the context of the full narrative description of all of the financial analyses set forth in the following pages, including the assumptions underlying these analyses.

 

In connection with rendering its opinion and based upon the terms of the merger agreement reviewed by it, Stifel assumed the aggregate consideration for the common stock to be $52.5 million and the per share consideration to be $3.11. Stifel noted this represented a premium of 13% over Southern Community’s closing price of $2.75 on June 22, 2012 and a 59% premium over Southern Community’s closing price of $1.96 on March 26, 2012, the last closing price prior to the original announcement of the signing of a definitive agreement between Southern Community and CBF. For purposes of its opinion, at Southern Community’s direction, Stifel did not attribute any value to the Per Share TARP Discount Amount or CVRs.

 

Comparison of Selected Companies. Stifel reviewed and compared certain multiples and ratios implied by the merger with three publicly traded peer groups defined as “Regional” peers, “Asset Quality” peers and “TARP Deferral” peers. Regional peers consisted of seven institutions headquartered in North Carolina with similar asset sizes to Southern Community. Asset Quality peers consisted of seven institutions with similar size and asset quality ratios to Southern Community. TARP Deferral peers consisted of 12 institutions of similar size to Southern Community that have been deferring TARP dividend payments since at least November 2011. In order to calculate a range of imputed values per share of Southern Community’s common stock, Stifel utilized prices to tangible book value per share and premiums over tangible book value to core deposits for the selected companies, as of or for the quarter ended March 31, 2012, based upon market price information as of June 22, 2012. Stifel then applied the resulting range of multiples and ratios for each peer group specified above to the appropriate financial results of Southern Community. This analysis resulted in a range of imputed values for Southern Community of between $1.51 and $2.69 based upon the information for the Regional peers, between $1.45 and $3.37 based upon the information for the Asset Quality peers and between $0.79 and $1.74 based upon the information for the TARP Deferral peers.

 

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Additionally, Stifel calculated the following ratios with respect to the merger and the three peer groups:

 

   Implied Share Price 
Ratios  25th Percentile   Median   75th Percentile 
             
Regional Peer Group(2)               
Price Per Share/Tangible Book Value Per Share  $1.94   $2.45   $2.69 
Premium over Tangible Book Value/Core Deposits(1)  $1.51   $1.63   $2.27 
                
Asset Quality Peer Group(3)               
Price Per Share/Tangible Book Value Per Share  $1.63   $2.36   $3.37 
Premium over Tangible Book Value/Core Deposits(1)  $1.45   $2.02   $3.28 
                
TARP Deferral Peer Group(4)               
Price Per Share/Tangible Book Value Per Share  $1.33   $1.53   $1.68 
Premium over Tangible Book Value/Core Deposits(1)  $0.79   $1.56   $1.74 

 

(1)Core deposits defined as total deposits less certificates of deposit with balances greater than $100,000.
(2)Selected “Regional” comparable banking institutions include First Bancorp, BNC Bancorp, FNB United Corp., Yadkin Valley Financial Corporation, NewBridge Bancorp, Park Sterling Corporation and Peoples Bancorp of North Carolina, Inc.
(3)Selected “Asset Quality” comparable banking institutions include Capital City Bank Group, Inc., FNB United Corp., Seacoast Banking Corporation of Florida, Hampton Roads Bankshares, Inc., Yadkin Valley Financial Corporation, Palmetto Bancshares, Inc. and First Security Group, Inc.
(4)Selected “TARP Deferral” comparable banking institutions include Citizens Republic Bancorp, Inc., Yadkin Valley Financial Corporation, Intervest Bancshares Corporation, Old Second Bancorp, Inc., Porter Bancorp, Inc., First United Corporation, PremierWest Bancorp, First Financial Service Corporation, First Security Group, Inc., Community Bankers Trust Corporation, Princeton National Bancorp, Inc. and Eastern Virginia Bankshares, Inc.

 

Analysis of Selected Bank Merger Transactions. Stifel analyzed certain information related to two groups of recent transactions in the banking industry. The first group consisted of 22 U.S. bank holding company, bank, thrift holding company and thrift acquisitions announced between June 30, 2010 and June 22, 2012 which involved targets headquartered in the Southeast with deal values between $10 million and $100 million (“Regional” transaction group), excluding mergers of equals and terminated transactions. The second group consisted of 31 U.S. bank holding company, bank, thrift holding company and thrift acquisitions announced between June 30, 2010 and June 22, 2012 with announced transaction values between $10 million and $100 million and where the target had nonperforming assets to total assets greater than 5.0% at announcement (“Asset Quality” transaction group), excluding mergers of equals and terminated transactions. Stifel then applied the resulting range of multiples and ratios for the comparable transaction groups specified above to the appropriate financial results of Southern Community. This analysis resulted in a range of imputed values for Southern Community common stock of between $0.87 and $3.23 based upon the information for the Regional group of transactions and $1.05 and $3.72 based upon the information for the Asset Quality group of transactions. Stifel calculated the following ratios with respect to the merger and the selected transactions:

   Implied Share Price 
Ratios  25th Percentile   Median   75th Percentile 
Regional Group               
Price Per Share/Tangible Book Value Per Share  $2.03   $2.62   $3.23 
Premium over Tangible Book Value/Core Deposits(1)  $0.87   $1.82   $3.03 
Asset Quality Group               
Price Per Share/Tangible Book Value Per Share  $1.83   $2.64   $3.52 
Premium over Tangible Book Value/Core Deposits(1)  $1.05   $2.30   $3.72 

 

(1)Core deposits defined as total deposits less certificates of deposit with balances greater than $100,000.

 

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Discounted Dividend Analysis. Using a discounted dividend analysis, Stifel estimated the net present value of the future streams of after-tax cash flow that Southern Community could theoretically produce for dividends to common shareholders, referred to below as dividendable net income. In this analysis, Stifel assumed that Southern Community would perform in accordance with management’s estimates and calculated assumed potential after-tax distributions to common shareholders such that Southern Community’s tangible common equity ratio would reach 7.5% of tangible assets in 2015. Stifel calculated the range of implied values by taking the sum of (1) the assumed dividendable net income stream per share in the year 2015, and (2) the terminal value of Southern Community’s common stock. These cash flows were then discounted to present values at assumed discount rates ranging from 14.0% to 18.0%. In calculating the terminal value of Southern Community’s common stock, Stifel applied multiples ranging from 10.0 times to 14.0 times management’s 2016 forecasted earnings. This discounted dividend analysis indicated an implied equity value reference range of $1.38 to $2.63 per share of Southern Community’s common stock. This analysis does not purport to be indicative of actual future results and does not purport to reflect the prices at which shares of Southern Community’s common stock may trade in the public markets. A discounted dividend analysis was included because it is a widely used valuation methodology, but the results of such methodology are highly dependent upon the numerous assumptions that must be made, including earnings and balance sheet growth rates, dividend payout rates and discount rates.

 

As described above, Stifel's opinion was among the many factors taken into consideration by the Board in making its determination to approve the merger.

 

Stifel will receive a fee for acting as financial advisor to Southern Community in connection with the merger, a substantial portion of which is contingent upon the completion of the merger. Stifel received a fee upon the delivery of the March 26, 2012 opinion that was not contingent upon consummation of the merger. Additionally, Stifel received a fee upon the delivery of this opinion that is not contingent upon consummation of the merger. In addition, Southern Community has agreed to indemnify Stifel for certain liabilities arising out of Stifel’s engagement. Stifel has historically provided investment banking services to Southern Community, including acting as financial advisor in 2003 in connection with the acquisition of Community Bank, for which Stifel received customary fees, and has sought to provide investment banking services to CBF, including with respect to CBF’s expected initial public offering. Additionally, Stifel acted as underwriter for two trust preferred securities offerings for Southern Community in 2001 and 2003 for which Stifel received customary fees. Furthermore, Stifel, as well as certain employees of Stifel, are investors in Stieven Financial Investors, LP, which is a shareholder of Southern Community. Stifel Financial Corp., Stifel’s parent entity, holds a participating convertible note in FSI Group LLC, a shareholder of CBF. Other than the foregoing, there are no other material relationships that existed during the two years prior to the date of Stifel’s opinion or that are mutually understood to be contemplated in which any compensation was received or is intended to be received as a result of the relationship between Stifel and any party to the merger. Stifel may seek to provide investment banking services to CBF or its affiliates in the future, for which Stifel would seek customary compensation. In the ordinary course of business, Stifel may trade Southern Community’s or CBF’s securities for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities.

 

Stifel’s Compensation and Other Relationships with Southern Community and CBF

 

Stifel, as part of its investment banking services, is regularly engaged in the independent valuation of businesses and securities in connection with mergers, acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. Stifel acted as Southern Community’s financial advisor in connection with the proposed merger and will receive a transaction fee in connection with the merger, a substantial portion of which is contingent upon closing, and a fee associated with the delivery of the fairness opinion, which fee has been paid and is not contingent on closing. In addition, Southern Community has agreed to indemnify Stifel for certain liabilities arising out of Stifel’s engagement. Stifel has historically provided investment banking services to Southern Community, including acting as financial advisor in 2003 in connection with the acquisition of Community Bank and as underwriter for two trust preferred securities offerings for Southern Community in 2001 and 2003. Stifel and certain of its employees are investors in Stieven Financial Investors, LP, which is a shareholder of Southern Community.

 

Stifel did not act as financial advisor to any of CBF or its subsidiaries in connection with, and has not participated in the negotiations leading to, the merger with Southern Community. Stifel sought unsuccessfully to provide investment banking services to CBF, including with respect to CBF’s planned initial public offering. In addition, Stifel Financial Corp., Stifel’s parent entity, holds a participating convertible note in a shareholder of CBF.

 

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Other than the engagements and beneficial ownership described in the preceding three paragraphs, no material relationships or mutual understandings with respect to compensation have existed between Stifel and any of Southern Community or CBF or their respective affiliates during the two years prior to March 26, 2012, the date of Stifel’s initial fairness opinion. Stifel may seek to provide investment banking services to CBF or its affiliates in the future. In the ordinary course of business, Stifel may trade CBF’s securities for its own account and for the accounts of its customers and may therefore hold a long or short position in such securities at any time.

 

Southern Community Unaudited Prospective Financial Information

 

Southern Community does not, as a matter of course, publicly disclose forecasts as to future performance, earnings or other results due to the unpredictability of the underlying assumptions and estimates. However, in connection with the initial financial analysis conducted by its financial advisor to prepare the initial fairness opinion dated March 26, 2012, Southern Community provided Stifel with certain non-public unaudited prospective financial information based on estimates by Southern Community management. These estimates were based on data available as of the end of February 2012 and were updated with unaudited financial data as of March 31, 2012. Stifel utilized this same financial data in both their March 26, 2012 and June 25, 2012 fairness opinions. These estimates were prepared with respect to prospective financial information in connection with evaluation of the merger and were not prepared with a view toward public disclosure or toward complying with the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial data, published guidelines of the SEC regarding forward-looking statements or in conformity with accounting principles generally accepted in the United States of America (US GAAP).

 

While the financial forecasts were prepared in good faith, no assurance can be made regarding future events. The estimates and assumptions underlying the financial forecasts involve judgments with respect to, among other things, future economic, competitive and financial market conditions and future business decisions that may not be realized and that are inherently subject to significant business, economic and competitive uncertainties and contingencies. These include, among other things, the inherent uncertainty of the business and economic conditions affecting the banking industry and the risks and uncertainties described under “Risk Factors” in Southern Community’s Annual Report on Form 10-K, as updated by subsequent Quarterly Reports on Form 10-Q, and in the section of this proxy statement titled “Cautionary Note Regarding Forward-Looking Statements,” all of which are difficult to predict and many of which are outside the control of Southern Community and will be beyond the control of the surviving corporation. There can be no assurance that the underlying assumptions will prove to be accurate or that the projected results will be realized, and actual results likely will differ, and may differ materially, from those reflected in the financial forecasts, whether or not the merger is completed. The inclusion in this document of the unaudited prospective financial information below should not be regarded as an indication that Southern Community or its Board of Directors considered, or now considers, these projections and forecasts to be a reliable predictor of future results. The financial forecasts are not fact and should not be relied upon as being necessarily indicative of future results, and readers of this document are cautioned not to place undue reliance on this information. None of the financial forecasts reflects any impact of the merger.

 

Dixon Hughes Goodman LLP (Southern Community’s independent registered public accounting firm) has not examined, compiled or otherwise performed any procedures with respect to the prospective financial information contained in these financial forecasts and, accordingly, Dixon Hughes Goodman LLP has not expressed any opinion or given any other form of assurance with respect thereto and they assume no responsibility for the prospective financial information.

 

By including in this document a summary of certain financial forecasts, neither Southern Community nor any of its representatives has made or makes any representation to any person regarding the ultimate performance of Southern Community or the surviving corporation compared to the information contained in the financial forecasts. The financial forecasts summarized in this section have not been updated to reflect any changes since the date they were prepared or the actual results of operation of Southern Community. Other than as required by law, Southern Community does not undertake any obligation to update or otherwise revise the financial forecasts or financial information to reflect circumstances existing since their preparation or to reflect the occurrence of unanticipated events, even in the event that any or all of the underlying assumptions are shown to be in error, or to reflect changes in general economic or industry conditions.

 

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A summary of the unaudited projected financial information for Southern Community provided to Stifel is as follows:

 

   At or For Years Ended 
   December 31, 
   2012   2013 
Asset Quality Ratios          
Allowance for loan losses (ALL)/Total loans   2.26%   1.83%
Non-performing assets/Total assets   7.64%   7.02%
Net charge-offs/Avg loans   1.36%   0.87%
           
Operating Ratios          
Return on average assets (ROAA)   0.21%   0.57%
Return on average equity (ROE)   3.08%   8.02%
Net interest margin   3.26%   3.36%
Tier 1 leverage capital/assets   9.11%   9.46%
           
Per Share Data          
Diluted EPS  $0.03   $0.33 
Tangible book value  $3.32   $3.66 

 

In preparing the foregoing unaudited projected financial information, Southern Community made a number of assumptions regarding, among other things, interest rates, changes in balance sheet components, impacts and levels of nonperforming assets, income tax provisions and recapture of valuation allowance on deferred tax assets and the amount of general and administrative expenses.

 

Board of Directors of CBF After the Merger

 

Upon completion of the merger, Dr. William G. Ward, Sr., who is currently the Chairman of the Board of Directors of Southern Community, will be appointed to CBF’s Board of Directors. In addition, upon completion of the merger, Dr. Ward and James G. Chrysson, who is currently Vice-Chairman of the Board of Directors of Southern Community, will be appointed to the Board of Directors of Capital Bank, N.A.. Information about CBF’s compensation policy for directors can be found in the section entitled “Interests of Southern Community’s Directors and Executive Officers in the Merger - Continued Service on Board of Directors.”

 

Interests of Southern Community’s Directors and Executive Officers in the Merger

 

In considering the recommendation of the Southern Community Board of Directors that you vote to approve and adopt the merger agreement, you should be aware that some of Southern Community’s executive officers and directors have interests in the merger that are different from, or in addition to, those of Southern Community’s shareholders generally. The members of the Southern Community Board of Directors were aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending to the shareholders that the merger agreement be approved and adopted. For purposes of all of the Southern Community equity awards, agreements and plans described below, the completion of the transactions contemplated by the merger agreement are assumed to constitute a change in control.

 

Continued Service on Board of Directors

 

The merger agreement provides that, on or prior to the effective time of the merger, Dr. William G. Ward, Sr., will be appointed a member of the Board of Directors of both CBF and Capital Bank, N.A. and Mr. James G. Chrysson will be appointed a member of the Board of Directors of Capital Bank, N.A. Dr. Ward and Mr. Chrysson will be entitled to receive compensation with respect to their service as non-employee directors on the applicable Board of Directors. The current compensation for non-employee directors of CBF and Capital Bank, N.A. is as follows:

 

·each non-employee director of CBF receives an annual cash retainer fee equal to $50,000 and the chair of each committee of the CBF Board of Directors receives an additional $10,000 per year. Non-employee directors of CBF are eligible to receive equity awards, but none have been granted since December 2009; and

 

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·each non-employee director of Capital Bank, N.A. receives an annual cash retainer fee equal to $30,000, as long as they attend at least 75% of the board meetings.

 

Equity Compensation Awards

 

The merger agreement provides that each option to acquire Southern Community common stock, or Southern Community option, will become fully vested and exercisable no later than ten business days prior to the completion of the merger. Any Southern Community option that has not been exercised will be cancelled at the effective time of the merger, and holders of such Southern Community options will be entitled to receive, for each Southern Community option, an amount in cash equal to the excess, if any, of $3.11 over the per-share exercise price for each Southern Community option, less applicable tax withholding.

 

Each outstanding restricted share of Southern Community common stock will vest in full and be entitled to receive the merger consideration on the terms provided in the merger agreement. Prior to the effective time of the merger, Southern Community’s Board of Directors will take all necessary actions to ensure that no rights to acquire or receive Southern Community common stock remain outstanding following the merger.

 

The following table summarizes, with respect to (1) each Southern Community executive officer (whom we refer to herein as the named executive officers) and (2) all directors, as a group, the aggregate, positive difference in value between $3.11 and the per-share exercise prices (which we refer to as the Spread Value) of the unvested stock options to purchase shares of Southern Community common stock held by such directors and executive officers as of June 30, 2012 and the value of the shares of restricted stock for which vesting will be accelerated immediately prior to the effective time.

 

   Shares of             
   Southern             
   Community   Aggregate       Aggregate 
   Common Stock   Spread       Value of 
   Subject to   Value of   Shares of   Shares of 
   Unvested   Unvested   Restricted   Restricted 
Name  Options (#)   Options ($)   Stock (#)   Stock ($) 
F. Scott Bauer   -   $-    -   $- 
Jeff T. Clark   -   $-    -   $- 
James Hastings   -   $-    -   $- 
James C. Monroe   -   $-    1,000   $3,110 
Merle B. Andrews   -   $-    -   $- 
Non Employee Directors (9 individuals)   -   $-    -   $- 

 

Executive Officer Agreements

 

Background

 

On December 5, 2008, Southern Community sold preferred stock and a warrant to purchase common stock to the Treasury under TARP. As a condition to the purchase of Southern Community’s preferred stock by the Treasury, Southern Community’s executive officers agreed to certain restrictions on their compensation, including limitations on amounts payable under severance arrangements and change in control provisions of employment contracts. In June 2009, the Treasury adopted new rules to implement the requirements of the American Recovery and Reinvestment Act of 2009, which imposed a number of restrictions on executive compensation in addition to those agreed to by the executive officers of Southern Community at the time of the Treasury investment. Under these rules, a payment, or a right to payment, generally will be treated as a payment for services performed or benefits accrued only if the payment would be made regardless of whether the employee departs or the change in control event occurs, or if payment is due upon departure of the employee, regardless of whether the departure is voluntary or involuntary.

 

Employment Agreements. Each of Southern Community’s executive officers previously entered into employment agreements with Southern Community or one of its subsidiaries and each of these employment agreements provide for benefits or the enhancement of benefits in connection with a change in control, either solely as a result of a change in control or following a qualifying termination of employment that occurs in connection with a change in control. As noted above, Southern Community became subject to certain executive compensation restrictions under federal law and Treasury regulations because of its participation in TARP in December 2008 and the Treasury’s preferred stock investment in Southern Community is still outstanding. Under these rules, while the Treasury holds an investment in Southern Community preferred stock, Southern Community is prohibited from paying certain officers, including our named executive officers, any compensation other than for accrued benefits or current services, even if there was a contractual obligation of Southern Community to make those payments that existed prior to the TARP investment.

 

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It is a condition to the completion of the merger that certain amendments to the employment agreements described below are executed as described under “Amendments relating to Compensation Arrangements for Executive Officers in Connection with the Merger” set forth below.

 

Messrs. Bauer and Clark. On July 25, 2012, the Board terminated the employment of Messrs. Bauer and Clark effective September 22, 2012. Their employment agreements, which will terminate as of such date, contain change in control provisions that provide for a lump sum payment equal to three times the sum of the applicable officer’s base salary for the year of the change in control and the incentive compensation paid in the year prior to the change in control. These terminated employment agreements also provided that, if any payments to Mr. Bauer or Mr. Clark would have caused the imposition of excise taxes under Section 280G and Section 4999 of the Internal Revenue Code of 1986, as amended (the Code), Southern Community or Southern Community Bank and Trust would have been required to reimburse the officer an amount necessary to compensate the officer for any applicable excise tax payments, net of all income, payroll, and excise taxes. As noted above, due to the restrictions relating to Southern Community’s participation in TARP, none of these severance or change in control payments can be made or benefits provided while the Treasury holds an investment in Southern Community, which was the case as of July 25, 2012 and will continue to be the case through September 22, 2012. As a condition to the closing of the merger, both the amounts and the terms of potential change in control payments under the employment agreements with Messrs. Bauer and Clark were required to be amended in the manner described below. We anticipate that the terminations of both Messrs. Bauer and Clark will have become effective prior to the closing of the merger. As a result, amendments to their employment agreements will not be required as a condition to closing of the merger.

 

Mr. Hastings, Ms. Andrews and Mr. Monroe. The employment agreements with Mr. Hastings, Ms. Andrews and Mr. Monroe have been amended as required by the conditions to the closing of the merger. The terms of the amended employment agreements with each of Mr. Hastings, Ms. Andrews and Mr. Monroe are set forth below.

 

In summary, as previously disclosed in Southern Community’s Form 10-K/A, Amendment No. 1 for the year ended December 31, 2011, the following would have been the estimated cost to the Company in the event of a change in control as of January 1, 2012 pursuant to the employment agreements and Salary Continuation Agreements and assuming that the Treasury’s investment in Southern Community was repaid in full prior to any termination of employment, the Company was no longer under regulatory restrictions and not taking into account the amendments contemplated by the merger agreement. On behalf of Messrs. Bauer and Clark, the estimated cost to the Company would have been approximately $2,622,297 and $1,366,220, respectively. We anticipate that the terminations of both Messrs. Bauer and Mr. Clark will have become effective prior to the closing of the merger. Assuming additionally that one of the “termination events” (as defined in the employment agreements) occurred following the change- in-control, the estimated cost to the Company on behalf of Messers. Hastings and Monroe and Ms. Andrews would have been approximately $706,626, $587,771 and $798,402, respectively (not taking into account the amendments that have been executed in contemplation of the merger). The amounts set forth in the required table under the heading “Golden Parachute Compensation for Southern Community’s Named Executive Officers” takes into account the impact of Messrs. Bauer and Clark’s termination of employment with Southern Community and the amendments to the employment agreements and salary continuation agreements for Messrs. Hastings and Monroe and Ms. Andrews.

 

Nonqualified Deferred Compensation Plans

 

Salary Continuation Agreements. Each of the named executive officers is a party to a Salary Continuation Agreement. The benefits under the Salary Continuation Agreements are unfunded, although Southern Community or a subsidiary has purchased, and is the primary beneficiary of, life insurance policies on certain officers which are intended to offset the cost of these retirement benefits. Upon attainment of normal retirement age, the Salary Continuation Agreements provide each of the named executive officers with an annual retirement benefit for the life of each officer based on the accrued balances frozen at December 31, 2011. Pursuant to the current terms of the Salary Continuation Agreements (prior to the amendments described below), if a change in control occurs while the executive is employed by Southern Community Bank and Trust, then Southern Community Bank and Trust would be required to pay a retirement benefit under the Salary Continuation Agreement in one lump sum within 10 days following a change in control of the Company. The retirement benefit actually paid to the officers other than Messrs. Bauer and Clark following the consummation of this merger will be determined taking into account the amendments to the Salary Continuation Agreements described below.

 

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Supplemental 401(k) Plan. The Bank maintains a supplemental non-qualified 401(k) plan (the Supplemental Plan) for highly compensated employees, including the named executive officers. The Supplemental Plan does not provide for any enhancement upon a change in control and all amounts under the Supplemental Plan are fully vested as of June 30, 2012.

 

Amendments relating to Compensation Arrangements for Executive Officers in Connection with the Merger

 

The merger agreement provides that, as a condition to closing the merger, each of the named executive officers are required to amend his or her employment agreement and Salary Continuation Agreement in the manner prescribed on a schedule to the merger agreement. The description of the provisions of the amendments to the employment agreements and Salary Continuation Agreements for each of the named executive officers as reflected below are based on the amounts agreed to by Southern Community in connection with entering into the merger agreement. The amendments for each of the named executive officers other than Messrs. Bauer and Clark have been completed and executed. The completion and execution of such amendments is a condition to the closing of this transaction. (See “Conditions to Complete the Merger – The Merger Agreement.”)

 

Amendments to Employment Agreements. As a condition to the closing of the transaction, the merger agreement requires that the employment agreements with each of the named executive officers will be amended to provide for an agreed-upon severance-and-retention payment following the closing of the transaction, to eliminate certain other termination benefits and rights to resign with “good reason”, to require the execution of a waiver and release in order to receive payments, to extend restrictive covenants to the post-change in control period, to restrict payments if prohibited by a governmental or regulatory authority and to confirm that each named executive officer has no rights to severance or change in control payments under any other arrangement.

 

On July 25, 2012, the Board terminated the employment of Messrs. Bauer and Clark effective September 22, 2012. The amended agreements presented to Messrs. Bauer and Clark for execution provided for them to, as required as a condition to the closing of the merger, be eligible for severance/retention payments equal to $700,000 and $400,000, respectively, with one-half of such payments to be paid, subject to execution and nonrevocation of a waiver and release, in a lump sum following the closing date of the merger and the remaining portion of the severance-and-retention payment to be paid, subject to the execution and nonrevocation of an updated release and waiver, six months after the closing date of the merger, subject to continued employment through such payment date. We anticipate that the terminations of both Messrs. Bauer and Mr. Clark will have become effective prior to the closing the merger, and that therefore these amounts will not be payable.

 

The amended agreements executed by Messrs. Hastings and Monroe and Ms. Andrews provide for them to, as required as a condition to the closing of the merger, be eligible to receive severance/retention awards equal to up to $250,000, $200,000 and $200,000, respectively. The severance/retention payments to each of Messrs. Hastings and Monroe and Ms. Andrews are expected be paid, subject to the execution and nonrevocation of a waiver and release, upon the named executive officer’s termination of employment, provided that, if the named executive officer resigns for no reason or is terminated for cause prior to the earlier of (i) the 60th day following the conversion date and (ii) the six month anniversary of the consummation of the merger, he or she is only entitled to 50% of the severance/retention payment.

 

Amendments to Salary Continuation Agreements. As a condition to the closing of the merger, the Salary Continuation Agreements with the named executive officers are required to be amended to provide for an agreed-upon payment upon a change in control, with such payment to be made, subject to the execution and nonrevocation of a waiver and release, in one lump sum 10 days following the completion of the merger. Messrs. Hastings and Monroe and Ms. Andrews have executed amendments to their Salary Continuation Agreements that provide for payments, which are equal to their frozen accrued balances of $65,211, $149,709 and $290,203, respectively. Messrs. Bauer and Clark did not execute amendments to their Salary Continuation Agreements but their frozen accrued balances are $774,405 and $180,990 and these frozen accrued balances are expected to be paid in accordance with the terms of the Salary Continuation Agreements.

 

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Golden Parachute Compensation for Southern Community’s Named Executive Officers

 

The following table sets forth the proposed amount of payments and benefits that each named executive officer of Southern Community would receive in connection with the merger, assuming the closing of the merger occurred on July 1, 2012 and that the terminations of Messrs. Bauer and Clark had taken effect prior to that date, the amendments to the named executive officer compensation related agreements, as required as a condition to the merger agreement, were effective and the employment of the applicable named executive officer was terminated on such date by the surviving corporation of the merger for any reason other than cause, death, disability or retirement or by the named executive officer for good reason. The payments and benefits are subject to an advisory (nonbinding) vote of Southern Community’s shareholders, as described under Proposal 2 - Advisory Vote Regarding Certain Executive Compensation.

 

Golden Parachute Compensation

 

           Pension/   Prerequisites/   Tax     
   Cash   Equity   NQDC   Benefits   Reimbursement   Total 
Name  ($)   ($)   ($)   ($)   ($)   ($) 
(a)  (b)(1)   (c)(2)   (d)(3)   (e)   (f)   (g) 
F. Scott Bauer  $-   $-   $774,405   $-   $-   $774,405 
Jeff T. Clark  $-   $-   $180,990   $-   $-   $180,990 
James Hastings  $250,000   $-   $65,211   $-   $-   $315,211 
James C. Monroe, Jr.  $200,000   $3,110   $149,709   $-   $-   $352,819 
Merle B. Andrews  $200,000   $-   $290,203   $-   $-   $490,203 

 

 

(1)With respect to Messrs. Hastings and Monroe and Ms. Andrews, the amounts disclosed in this column are based on the amounts noted in the merger agreement. The amendments with each of the named executive officers have been completed as required as a condition to closing the transaction. One-half of the payments to each named executive officer in this column is subject to forfeiture and is therefore double trigger. The remaining portion will be modified double trigger

 

(2)Based on a price of $3.11 per-share for shares of Southern Community common stock.

 

(3)The payments in this column are single-trigger for each of the named executive officers (the amounts under the salary continuation agreement vest and are paid upon the completion of the merger and no other action other than, for Messrs. Hastings and Monroe and Ms. Andrews, the execution and nonrevocation of a release is required) and do not require the named executive officer to terminate employment in order to receive the benefit.

  

In addition, Mr. Hastings and Ms. Andrews are each subject to (i) a covenant not to solicit employees for a one-year period immediately following the termination of his or her employment and (ii) a covenant not to solicit customers for a two-year period immediately following the termination of his or her employment.

 

 

No Compensation Payable to CBF Executive Officers

 

None of CBF’s executive officers are entitled to receive compensation that is based on or otherwise related to the merger.

 

Indemnification of Directors and Officers; Directors’ and Officers’ Insurance

 

The merger agreement provides that after the completion of the merger, CBF will cause the surviving corporation in the merger to observe all rights to indemnification under Southern Community’s governing documents or indemnification contracts or undertakings in favor of present and former directors and officers of Southern Community. The merger agreement requires CBF to maintain for a period of six years after completion of the merger Southern Community’s existing directors’ and officers’ liability insurance and civil money penalty insurance policies, with respect to claims arising from facts or events that occurred prior to the completion of the merger (including transactions contemplated by the merger agreement), and covering current and former directors and officers of Southern Community. CBF is not required, however, to incur annual premium payments greater than 200% of Southern Community’s current annual directors’ and officers’ liability insurance premium. In lieu of the insurance described in the preceding sentence, prior to the completion of the merger, CBF may obtain a six-year “tail” prepaid policy providing coverage no less favorable than the Company’s existing policies.

 

Public Trading Markets

 

Southern Community common stock is quoted for trading on the NASDAQ Global Market under the symbol “SCMF.” There is currently no public market for CBF common stock. Upon completion of the merger, Southern Community common stock will no longer be quoted on the NASDAQ Global market.

 

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Effects on Southern Community if the Merger is Not Completed

 

If the merger is not consummated for any reason, our shareholders will not receive the merger consideration, we will remain subject to the Written Agreement and Southern Community Bank and Trust will remain subject to the Consent Order. Our current management, under the direction of our Board of Directors, would continue to manage us as a stand-alone, independent business, and the value of shares of our common stock would continue to be subject to the risks and uncertainties identified in the Annual Report on Form 10-K for the year ended December 31, 2011 included as Appendix D to this proxy statement and any updates to those risks and uncertainties set forth in the subsequent current and quarterly reports and press releases we file with the SEC. See also “Where You Can Find More Information.”

 

Appraisal Rights

 

Holders of Southern Community common stock will have appraisal rights in connection with the merger, and therefore may elect to be paid in cash for such shareholder’s shares in accordance with the procedures set forth in Article 13 of the North Carolina Business Corporation Act (which we refer to as the NCBCA). The following is a summary of the material terms of the statutory procedures to be followed by holders of Southern Community common stock in order to dissent from the merger and perfect appraisal rights under the NCBCA. In the following discussion, references to “Southern Community” with respect to actions taken or to be taken at any time following the effectiveness of the merger will mean CBF as the parent of the surviving corporation of the merger.

 

The following is a discussion of the material provisions, but not a complete description, of the law relating to appraisal rights available under North Carolina law and is qualified in its entirety by the full text of Article 13 of the NCBCA, which is reprinted in its entirety as Appendix C to this document. Southern Community’s annual report on Form 10K, including financial statements and Southern Community’s latest available quarterly financial statements are attached as Appendix D to this document. If you wish to exercise appraisal rights, you should review carefully the following discussion and Appendices C and D. Southern Community urges you to consult a lawyer before electing or attempting to exercise these rights.

 

If the merger is completed, and you are a holder of Southern Community common stock who did not vote your shares of Southern Community common stock in favor of the merger and who fully complies with Article 13 of the NCBCA, you will be entitled to demand and receive payment in cash of an amount equal to the fair value of your shares of Southern Community common stock. The amount you would receive in connection with the exercise of statutory appraisal rights would be the fair value of your common stock immediately before the merger completion date, excluding any appreciation or depreciation in anticipation of the merger unless exclusion would be inequitable, using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal, and without discounting for lack of marketability or minority status.

 

Under Article 13 of the NCBCA, all holders of Southern Community common stock entitled to appraisal rights in the merger must be notified in the meeting notice relating to the merger that shareholders are entitled to assert appraisal rights. This document constitutes that notice.

 

If you are a holder of Southern Community common stock and desire to dissent and receive cash payment for the fair value of your Southern Community common stock, you must:

 

·Deliver to Southern Community, prior to the shareholder vote on the merger proposal, a written notice of your intent to demand payment if the merger is completed.

 

·Not vote, or cause to permit to be voted, any of your Southern Community shares in favor of the approval of the plan of merger contained in the merger agreement and the merger.

 

If you do not satisfy both of those conditions and the merger is consummated, you will not be entitled to payment for your shares under the provisions of Article 13 of the NCBCA.

 

Except as described in the following sentence, the notice of intent to demand payment for your shares of Southern Community common stock must be executed by the holder of record of shares of Southern Community common stock as to which appraisal rights are to be exercised. A beneficial owner who is not the holder of record may assert appraisal rights only if the beneficial owner does both of the following: (i) submits to Southern Community the record holder’s written consent to the assertion of rights no fewer than 40 nor more than 60 days after the date the appraisal notice and form described below are sent, and (ii) submits the written consent with respect to all common stock they beneficially own. A record owner, such as a broker or bank, who holds shares of Southern Community common stock as a nominee for others, may exercise appraisal rights as to fewer than all the shares registered in the record shareholder’s name but owned by a beneficial shareholder only if the record shareholder (i) objects with respect to all common stock owned by the beneficial shareholder, and (ii) notifies the corporation in writing of the name and address of each beneficial shareholder on whose behalf appraisal rights are being asserted.

 

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If the merger proposal becomes effective, Southern Community will deliver to all holders of Southern Community common stock who have satisfied the requirements described above a written appraisal notice and form described below. The appraisal notice must be sent no earlier than the date the merger proposal becomes effective and no later than ten days after that date, and it must include the following:

 

·A form (i) specifying the first date of any announcement to shareholders, made prior to the date the merger became effective, of the principal terms of the proposed merger, or if such an announcement was made, the form shall require a shareholder asserting appraisal rights to certify whether beneficial ownership of those shares for which appraisal rights are asserted was acquired before that date, and (ii) requiring a shareholder asserting appraisal rights to certify that the common stock holder did not vote for or consent to the merger.

 

·Disclosure of where the form must be sent and where certificates for certificated shares must be deposited, as well as the date by which those certificates must be deposited. The certificate deposit date must not be earlier than the date for receiving the appraisal form described in the next sentence.

 

·Disclosure of the date by which Southern Community must receive the payment demand, which date may not be fewer than 40 nor more than 60 days after the date the appraisal notice and form are sent. The form shall also state that the shareholder shall have waived the right to demand appraisal with respect to the shares unless the form is received by Southern Community by the specified date.

 

·Disclosure of Southern Community’s estimate of the fair value of the shares.

 

·Disclosure that, if requested in writing, Southern Community will provide to the shareholder so requesting, within 10 days after the date the appraisal notice and form are sent, the number of shareholders who return the forms by the specified date and the total number of shares owned by them.

 

·Disclosure of the date by which the notice to withdraw from the appraisal process must be received, which date must be within 20 days after the date the appraisal form must be received by Southern Community.

 

·A copy of Article 13 of the NCBCA.

 

A holder of Southern Community common stock who receives an appraisal notice must demand payment and deposit the shareholder’s Southern Community common stock certificates in accordance with the terms of the appraisal notice. A holder of Southern Community common stock who demands payment and deposits common stock certificates loses all rights as a shareholder, unless the shareholder withdraws from the appraisal process. A holder of Southern Community common stock who does not sign and return the form and, in the case of certificated shares, deposit that shareholder’s share certificates where required, each by the date set forth in the appraisal notice, will not be entitled to payment under Article 13 of the NCBCA.

 

Except in the case of After-Acquired Shares (as defined below), within 30 days after the appraisal form is due, Southern Community will pay in cash to the shareholders who complied with the statutory requirements the amount that Southern Community estimates to be the fair value of its common stock, plus interest. Southern Community’s payment to each shareholder will be accompanied by the following:

 

·Southern Community’s annual financial statements. The date of the financial statements will not be more than 16 months before the date of payment and will comply with the NCBCA. If annual financial statements that meet these requirements are not reasonably available, Southern Community will provide reasonably equivalent financial information.

 

·Southern Community’s latest available quarterly financial statements, if any.

 

·A statement of Southern Community’s estimate of the fair value of the shares. The estimate must equal or exceed Southern Community’s estimate provided in its appraisal notice and form.

 

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·A statement that if you have perfected your appraisal rights, you have the right to demand further payment under Section 55-13-28 of the NCBCA and that if you do not do so within the time period specified therein, then you shall be deemed to have accepted such payment in full satisfaction of Southern Community’s obligations under Article 13 of the NCBCA.

 

Southern Community may elect to withhold payment from you if you were required to, but did not certify, that beneficial ownership of all of your shares for which appraisal rights are asserted were acquired before the date the principal terms of the proposed corporate action were first announced to shareholders (which we refer to as After-Acquired Shares). If Southern Community elects to withhold payment under these circumstances, within 30 days after the appraisal form is due, Southern Community will notify you of the following:

 

·Southern Community’s financial statements must accompany Southern Community’s payment listed above.

 

·Southern Community’s estimate of fair value of your shares.

 

·That you may accept Southern Community’s estimate of fair value, plus interest, in full satisfaction of your demands or may demand appraisal.

 

·That, if you wish to accept Southern Community’s offer, you must notify Southern Community of your acceptance of the offer within 30 days after receiving the offer.

 

·That if you do not satisfy the requirements for demanding appraisal under Article 13 of the NCBCA, you shall be deemed to have accepted Southern Community’s offer.

 

If you accept Southern Community’s estimate of fair value, plus interest, in full satisfaction of your demands, then Southern Community must pay in cash the amount it offered within 10 days after receiving your acceptance. If you neither accept Southern Community’s estimate of fair value nor demand appraisal, Southern Community will pay in cash its estimate of fair value to you within 40 days after sending its notice to you regarding your After-Acquired Shares as described above. If Southern Community pays you its estimation of the fair value of its common stock, and you are dissatisfied with the amount of payment, you must notify Southern Community in writing of your own estimate of the fair value of your stock, and demand payment of that estimate, plus interest (less any payment made by Southern Community as a result of Southern Community’s estimation of the fair value of its shares).

 

If you are offered payment by Southern Community for your After-Acquired Shares and are dissatisfied with that offer, you must reject the offer and demand payment of your stated estimate of the fair value of the shares, plus interest.

 

You waive the right to demand payment, and will only be entitled to the payment of fair value offered by Southern Community if you fail to notify Southern Community in writing of your demand to be paid your stated estimate of the fair value within 30 days after receiving Southern Community’s payment or offer of payment.

 

If, within 60 days of Southern Community receiving a shareholder’s demand for payment, the payment amount has not been settled, Southern Community will commence a proceeding by filing a complaint with the Superior Court Division of the North Carolina General Court of Justice requesting that the fair value of the shareholder’s Southern Community common stock and the accrued interest be determined. You will not have a right to a trial by jury. The court will have discretion to make all holders of Southern Community common stock whose demands remain unsettled parties to the proceeding.

 

If Southern Community does not commence the proceeding within the 60-day period, Southern Community will pay you in cash the amount you demanded, plus interest.

 

The court in an appraisal proceeding also may assess the expenses for the respective parties, in the amounts the court finds equitable, as follows:

 

·against Southern Community if the court finds that Southern Community did not substantially comply with the procedures for the exercise of appraisal rights prescribed by Article 13 of the NCBCA; or

 

·against Southern Community or the shareholders demanding appraisal, if the court finds that the party against whom the expenses are assessed acted arbitrarily, vexatiously or not in good faith.

 

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If the court in an appraisal proceeding finds that the expenses of any shareholder were of substantial benefit to other shareholders and that these expenses should not be assessed against Southern Community, the court may direct that the expenses be paid out of the amounts awarded the shareholders who were benefited. In the event Southern Community fails to make a required payment under Article 13 of the NCBCA, the shareholder may sue directly for the amount owed and, to the extent successful, will be entitled to recover from Southern Community all expenses of the suit.

 

In view of the complexity of these provisions and the requirement that they be strictly complied with, if you hold Southern Community common stock and are considering exercising your appraisal rights under the NCBCA, you should consult a lawyer promptly.

 

The NCBCA provides that the exercise of appraisal rights will generally be the exclusive method for a holder of Southern Community common stock to challenge the merger in the absence of a showing that the merger was either (1) unauthorized under the NCBCA, Southern Community’s articles of incorporation or bylaws, or the board resolution authorizing the merger, (2) procured as a result of fraud, a material misrepresentation, or an omission of a material fact necessary to make statements made, in light of the circumstances in which they were made, not misleading or (3) constitutes an interested transaction unless authorized under the NCBCA. All written communications from shareholders with respect to the exercise of appraisal rights should be mailed to:

 

Investor Relations

Southern Community Financial Corporation

4605 Country Club Road

Winston-Salem, NC 27104

 

Southern Community recommends that such communications be sent by registered or certified mail, return receipt requested.

 

Not voting in favor of the merger proposal is not sufficient to perfect your appraisal rights and receive the fair value of your Southern Community common stock, plus interest. You must also comply with all other conditions set forth in Article 13 of the NCBCA, including the conditions relating to the separate written notice of intent to demand payment, the separate written demand for payment of the fair value of your shares of Southern Community common stock, the deposit of your Southern Community common stock certificates, and the separate notification and demand for payment in excess of an initial payment made by Southern Community.

 

The summary set forth above does not purport to be a complete statement of the provisions of the NCBCA relating to the rights of dissenting shareholders and is qualified in its entirety by reference to the applicable sections of the NCBCA, which are included as Appendix C to this document.

 

Regulatory Approvals Required for the Merger

 

CBF and Southern Community have agreed to use their reasonable best efforts to obtain all regulatory approvals required to complete the transactions contemplated by the merger agreement. These approvals include approval from the Federal Reserve Board. Although it is not a condition to the merger, approval from the OCC will be required in order for Southern Community Bank and Trust to merge into Capital Bank immediately following the closing of the merger, as CBF and Southern Community currently expect. CBF and Southern Community have filed, or are in the process of filing, applications and notifications to obtain the required regulatory approvals. As discussed below, the OCC has approved the merger of Southern Community Bank and Trust into Capital Bank, subject to a commitment by CBF to inject additional capital into Capital Bank.

 

Federal Reserve Board

 

The merger of Southern Community with CBF must be approved by the Federal Reserve Board under Section 3 of the BHC Act. In considering the approval of a transaction such as the merger, the BHC Act requires the Federal Reserve Board to review, with respect to the bank holding companies and the banks concerned: (1) the competitive impact of the transaction, (2) the financial condition and future prospects, including capital positions and managerial resources, (3) the convenience and needs of the communities to be served and the record of the insured depository institution subsidiaries of the bank holding companies under the Community Reinvestment Act, (4) the effectiveness of the companies and the depository institutions concerned in combating money-laundering activities and (5) the extent to which the proposal would result in greater or more concentrated risks to the stability of the United States banking or financial system. In connection with its review, the Federal Reserve Board provides an opportunity for public comment on the application and is authorized to hold a public meeting or other proceeding if they determine that would be appropriate. CBF and Southern Community filed an application with the Federal Reserve Board on April 18, 2012 and the comment period has ended.

 

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Office of the Comptroller of the Currency

 

CBF and Southern Community expect that immediately following the closing of the merger, Southern Community’s banking subsidiary, Southern Community Bank and Trust, will merge with and into Capital Bank, with Capital Bank as the surviving entity. The merger of Southern Community Bank and Capital Bank and Trust and Capital Bank is not part of the merger agreement on which Southern Community shareholders will vote and it is not a condition to the closing of the merger of CBF and Southern Community. The merger of Capital Bank and Southern Community Bank and Trust must be approved by the OCC under the Bank Merger Act. An application for approval of the bank merger has been filed with the OCC, and a 30-day comment and review period by the OCC has already elapsed. In evaluating an application filed under the Bank Merger Act, the OCC generally considers: (1) the competitive impact of the transaction, (2) financial and managerial resources of the banks party to the bank merger, (3) the convenience and needs of the community to be served and the record of the banks under the Community Reinvestment Act, (4) the banks’ effectiveness in combating money-laundering activities and (5) the extent to which the bank merger or mergers would result in greater or more concentrated risks to the stability of the United States banking or financial system. In connection with its review, the OCC provides an opportunity for public comment on the application for the bank mergers, and is authorized to hold a public meeting or other proceeding if they determine that would be appropriate. On June 1, 2012, the OCC granted approval to merge the two banks, subject to a commitment by CBF to inject additional capital into Capital Bank. If the merger is not consummated within one year from the approval date, the approval automatically terminates, unless the OCC grants an extension of the time period. The OCC may modify, suspend or rescind its approval if a material change in the information on which it relied occurs prior to closing.

 

Additional Regulatory Approvals and Notices

 

Notifications and/or applications requesting approval may be submitted to various other federal and state regulatory authorities and self-regulatory organizations. Southern Community and CBF believe that the merger does not raise substantial antitrust or other significant regulatory concerns and that we will be able to obtain all requisite regulatory approvals on a timely basis without the imposition of any condition that would have a material adverse effect on Southern Community or CBF. Nevertheless, neither Southern Community nor CBF can assure you that all of the regulatory approvals described above will be obtained and, if obtained, we cannot assure you as to the timing of any such approvals, our ability to obtain the approvals on satisfactory terms or the absence of any litigation challenging such approvals. The parties’ obligation to complete the merger is conditioned upon the receipt of all required regulatory approvals. Southern Community and CBF will use their respective reasonable best efforts to resolve any objections that may be asserted by any regulatory authority with respect to the merger agreement or the merger or the other transactions contemplated by the merger agreement.

 

Accounting Treatment

 

The merger will be accounted for as an acquisition by CBF using the acquisition method of accounting. Accordingly, the assets (including identifiable intangible assets) and liabilities (including executory contracts and other commitments) of Southern Community as of the effective time of the merger will be recorded at their respective fair values and added to those of CBF. Any excess of purchase price over the fair values is recorded as goodwill.

 

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THE MERGER AGREEMENT

 

The following describes the material provisions of the merger agreement. The following description of the merger agreement is subject, and qualified in its entirety by reference, to merger agreement, which is attached to this document as Appendix A and is incorporated by reference into this document. We urge you to read the merger agreement carefully and in its entirety, as it is the legal document governing the merger.

 

Structure of the Merger

 

The merger agreement provides for the merger of Southern Community with Winston 23, a wholly owned subsidiary of CBF formed to effect the merger. Southern Community will be the surviving entity in the merger. As a result of the merger, Southern Community will become a wholly-owned subsidiary of CBF. Southern Community Bank and Trust will merge with and into Capital Bank, with Capital Bank as the surviving bank.

 

Merger Consideration

 

Cash

 

Each share of Southern Community common stock issued and outstanding immediately prior to the completion of the merger, except for shares for which appraisal rights are properly exercised and except for shares of Southern Community common stock held by CBF, Winston 23 or Southern Community, will receive $3.11 in cash without interest, less any applicable withholding taxes.

 

Contingent Value Rights

 

In addition to the cash merger consideration described above, each share of Southern Community common stock issued and outstanding immediately prior to the merger will receive a CVR entitling the holder to up to $1.30 in cash, payable five years after the effective time of the merger based on the credit performance of Southern Community’s loans and REO existing as of the effective time of the merger (which we also refer to as Southern Community’s legacy loan and REO portfolio). The cash payment will be equal, on a per CVR basis, to 75% of the excess, if any, of (i) $87 million over (ii) net charge-offs and net realized losses on Southern Community’s legacy loan and REO portfolio during the five-year period beginning at the effective time of the merger, with a maximum payment of $1.30 per CVR.

 

The CVRs will not be equity or voting securities of CBF, will not have any dividend rights and will not represent equity or ownership interests in CBF. They will not confer any rights of a shareholder, either at law or in equity. The CVRs will be unsecured obligations of CBF, and interest will not accrue on amounts payable on them. Subject to limited exceptions, CVR holders will not be able to be sell, pledge, assign, transfer or otherwise dispose of their CVRs, in whole or in part. The CVRs will not be listed on a securities exchange.

 

For additional information about the CVRs, see the section of this proxy statement titled “The CVRs.” The full text of the term sheet defining the material terms of the CVRs is attached as Exhibit A to the merger agreement, a copy of which is attached as Appendix A to this proxy statement.

 

Repurchase or Redemption of TARP Securities

 

If the United States Department of the Treasury and CBF agree on the terms of a redemption or repurchase of Southern Community’s Series A Preferred Perpetual Stock issued to the Treasury and related warrant (which we refer to as the TARP securities) at a discount, you will receive a cash payment equal to 50% of any repurchase discount (on a per-share basis), calculated as the difference, if any, between (a) the purchase price agreed between CBF and the Treasury with respect to CBF’s purchase of the TARP securities and (b) the stated repurchase price of the TARP securities. We refer to this amount as the per-share TARP discount amount. CBF is under no obligation to repurchase or redeem the TARP securities from the Treasury, and may elect not to do so.

 

Surviving Corporation, Governing Documents and Directors

 

At the effective time of the merger, the certificate of incorporation of Southern Community in effect immediately prior to the effective time will be the certificate of incorporation of the surviving corporation after completion of the merger until thereafter amended in accordance with applicable law. The bylaws of Winston 23 immediately prior to the effective time will be the bylaws of the surviving corporation after completion of the merger until thereafter amended in accordance with their terms and applicable law. At the effective time of the merger, the officers of Southern Community immediately prior to the effective time will be the officers of the surviving corporation until their respective successors are duly elected and qualified, or their earlier death, resignation or removal. The directors of Winston 23 immediately prior to the effective time will be the directors of the surviving corporation until their respective successors are duly elected and qualified, or their earlier death, resignation or removal.

 

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Upon completion of the merger, Dr. William G. Ward, Sr., currently the Chairman of Southern Community’s Board of Directors, will be appointed to CBF’s Board of Directors. In addition, upon completion of the merger, Dr. Ward and James G. Chrysson, who is currently Vice-Chairman of Southern Community’s Board of Directors, will be appointed to the Board of Directors of Capital Bank, N.A.

 

Treatment of Southern Community Stock Options and Other Equity-Based Awards

 

Southern Community Options

 

The directors, executive officers and other employees of Southern Community held options to purchase an aggregate of 485,950 shares of common stock as of June 30, 2012. Of this total, only options to purchase 2,400 shares of common stock have exercise prices per-share less than $3.11. Each Southern Community option will become fully vested and exercisable no later than the election deadline with respect to the merger consideration. Any Southern Community option that has not been exercised prior to the effective time of the merger will be cancelled at the effective time of the merger, and holders of such Southern Community options will be entitled to receive, for each Southern Community option, an amount in cash equal to the excess, if any, of $3.11 over the per-share exercise price for each Southern Community option, less applicable tax withholding.

 

Southern Community Restricted Shares

 

Each outstanding restricted share of Southern Community common stock will vest in full and be entitled to receive the merger consideration on the terms and provided in the merger agreement. Prior to the effective time of the merger, Southern Community’s Board will take all necessary actions to ensure that no rights to acquire or receive Southern Community common stock remain outstanding following the merger.

 

For further information on the treatment of the Southern Community equity or equity-based awards, see “The Merger—Interests of Southern Community’s Directors and Executive Officers in the Merger.”

 

Redemption of Preferred Stock and Related Warrant Held by the United States Department of the Treasury

 

Southern Community has agreed to use its reasonable best efforts to cause or facilitate the repurchase or redemption by CBF (or one of its subsidiaries) concurrently with or immediately after the completion of the merger of all (or such portion as CBF may designate) of the issued and outstanding shares of Southern Community Series A Preferred Stock and the related Treasury warrant issued in connection with the Treasury’s Capital Purchase Program (we refer to this repurchase or redemption as the TARP redemption), at CBF’s request. CBF is under no obligation to repurchase or redeem the TARP securities from the Treasury, and may elect not to do so.

 

Closing and Effective Time of the Merger

 

The merger will be completed only if all conditions to the merger discussed in this proxy statement and set forth in the merger agreement are either satisfied or waived. See “—Conditions to Complete the Merger.”

 

The merger will become effective when the articles of merger are filed with the North Carolina Secretary of State. The completion of the merger will occur at 10 a.m., New York City time, on a date no later than five business days after the satisfaction or waiver of the last of the conditions specified in the merger agreement, or such other date as mutually agreed to by the parties. It currently is anticipated that the completion of the merger will occur by the end of September 2012 subject to the receipt of regulatory approvals and other customary closing conditions, but neither Southern Community nor CBF can guarantee when or if the merger will be completed.

 

Conversion of Shares; Exchange of Certificates

 

The conversion of Southern Community common stock into the right to receive merger consideration will occur automatically at the effective time of the merger. As soon as reasonably practicable after completion of the merger, the exchange agent will exchange certificates or book-entry shares representing or evidencing shares of Southern Community common stock for the merger consideration to be received pursuant to the terms of the merger agreement. The exchange agent will be appointed prior to closing.

 

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Letter of Transmittal

 

As soon as reasonably practicable after the completion of the merger, the exchange agent will mail a letter of transmittal to each record holder of Southern Community common stock certificates at the effective time of the merger. This mailing will contain instructions on how to surrender Southern Community common stock certificates in exchange for the merger consideration the holder is entitled to receive under the merger agreement.

 

If a certificate for Southern Community common stock has been lost, stolen or destroyed, the exchange agent will issue the merger consideration deliverable under the merger agreement upon receipt of (1) an affidavit of that fact by the claimant and (2) such bond as CBF may determine is reasonably necessary as indemnity against any claim that may be made against CBF with respect to the certificate. After completion of the merger, there will be no further transfers of Southern Community common stock on the stock transfer books of Southern Community, except as required to settle trades executed prior to the completion of the merger.

 

Withholding

 

CBF and the exchange agent will be entitled to deduct and withhold from the consideration otherwise payable to any Southern Community shareholder the amounts CBF or the exchange agent, as the case may be, is required to deduct and withhold under any applicable federal, state, local or foreign tax law. If CBF or the exchange agent withholds any amounts, these amounts will be treated for all purposes of the merger as having been paid to the shareholders from whom they were withheld.

 

Representations and Warranties

 

The representations, warranties and covenants described below and included in the merger agreement were made only for purposes of the merger agreement and as of specific dates, are solely for the benefit of CBF and Southern Community, may be subject to limitations, qualifications or exceptions agreed-upon by the parties, including those included in confidential disclosures made for the purposes of, among other things, allocating contractual risk between CBF and Southern Community rather than establishing matters as facts, and may be subject to standards of materiality that differ from those standards relevant to investors. You should not rely on the representations, warranties, covenants or any description thereof as characterizations of the actual state of facts or condition of CBF, Southern Community or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the merger agreement, which subsequent information may or may not be fully reflected in public disclosures by CBF or Southern Community. The representations and warranties and other provisions of the merger agreement should not be read alone, but instead should be read only in conjunction with the information provided elsewhere in this proxy statement. See “Where You Can Find More Information.”

 

The merger agreement contains customary representations and warranties of CBF and Southern Community relating to their respective businesses. The representations and warranties in the merger agreement do not survive the effective time of the merger.

 

The merger agreement contains representations and warranties made by Southern Community to CBF relating to a number of matters, including the following:

 

·corporate matters, including due organization and qualification and subsidiaries;

 

·capitalization;

 

·authority relative to execution and delivery of the merger agreement and the absence of conflicts with, or violations of, organizational documents or other obligations as a result of the merger;

 

·required governmental and other regulatory filings and consents in connection with the merger;

 

·reports to regulatory authorities;

 

·financial statements, internal controls and absence of undisclosed liabilities;

 

·the absence of certain changes or events;

 

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·legal proceedings;

 

·tax matters;

 

·employee benefit matters;

 

·labor matters;

 

·compliance with applicable laws;

 

·certain material contracts;

 

·agreements with regulatory agencies;

 

·inapplicability of the Investment Company Act of 1940, as amended;

 

·derivative instruments and transactions;

 

·environmental matters;

 

·insurance matters;

 

·real and personal property;

 

·intellectual property matters;

 

·loan matters;

 

·inapplicability of takeover statutes;

 

·knowledge of impediments to receipt of required regulatory approvals;

 

·broker’s fees payable in connection with the merger;

 

·related party transactions;

 

·trust or wealth management customer relationships;

 

·the accuracy of information supplied for inclusion in this proxy statement and other similar documents; and

 

·the Foreign Corrupt Practices Act of 1977, as amended.

 

The merger agreement contains representations and warranties made by CBF to Southern Community relating to a number of matters, including the following:

 

·corporate matters, including due organization and qualification;

 

·authority relative to execution and delivery of the merger agreement and the absence of conflicts with, or violations of, organizational documents or other obligations as a result of the merger;

 

·required governmental and other regulatory filings and consents in connection with the merger;

 

·ability to pay the cash merger consideration;

 

·business of Winston 23;

 

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·the accuracy of information supplied for inclusion in this proxy statement and other similar documents; and

 

·broker’s fees payable in connection with the merger.

 

Certain representations and warranties of CBF and Southern Community are qualified as to “materiality” or “material adverse effect.” For purposes of the merger agreement, a “material adverse effect,” when used in reference to CBF, means any event, development, change or effect that prevents or would reasonably be likely to prevent CBF from consummating the transactions contemplated by the merger agreement. For purposes of the merger agreement, a “material adverse effect,” when used in reference to Southern Community means any fact, circumstance, event, change, effect, development or occurrence that, individually or in the aggregate with all other facts, circumstances, events, changes, effects, developments or occurrences, directly or indirectly, has had or would be reasonably likely to result in a material adverse effect on the condition (financial or otherwise), results of operations or business of Southern Community and its subsidiaries, taken as a whole. For purposes of the merger agreement, a “material adverse effect,” when used with respect to CBF, means any event, development, change or effect that prevents, or would be reasonably likely to prevent, CBF from consummating the transactions contemplated hereby.

 

Covenants and Agreements

 

Conduct of Businesses Prior to the Completion of the Merger

 

Southern Community has agreed that, prior to the effective time of the merger, it will, and will cause each of its subsidiaries to, conduct its business in the usual, regular and ordinary course consistent with past practice, use reasonable best efforts to preserve intact its business organization and its current relationships and take no action that is intended to or would reasonably be expected to adversely affect or materially delay the ability of Southern Community or CBF to obtain any required regulatory approvals or to perform their respective obligations under the merger agreement.

 

Additionally, Southern Community has agreed that prior to the effective time of the merger, except as expressly required by the merger agreement or with the prior written consent of CBF, Southern Community will not, and will not permit any of its subsidiaries to, subject to certain exceptions, undertake the following actions:

 

·incur indebtedness or guarantee indebtedness of another person or make any loan or advance;

 

·incur any capital expenditures;

 

·adjust, split, combine or reclassify, or purchase, redeem or otherwise acquire, any capital stock;

 

·make, declare or pay any dividend or distribution (other than dividends paid in the ordinary course of business by any subsidiary) or make any other distribution on any shares of its capital stock any securities or obligations convertible into or exchangeable for any shares of its capital stock; grant any stock appreciation rights, restricted stock units or other equity-based compensation or grant any right to acquire any shares of its capital stock;

 

·issue any additional shares of capital stock or sell, lease, transfer, mortgage, encumber or otherwise dispose of any capital stock in any subsidiary;

 

·enter into any agreement, understanding or arrangement with respect to the sale or voting of its capital stock;

 

·sell, lease, transfer, mortgage, encumber or otherwise dispose of any of its properties or assets (other than to a subsidiary) or cancel, release or assign any indebtedness exception in the ordinary course of business consistent with past practices to non-affiliates;

 

·acquire any business entity or make any other investment by purchase of stock or securities, contributions to capital, property transfers, or purchase of any property or assets;

 

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·grant any Southern Community stock options, restricted shares, awards based on the value of Southern Community’s capital stock or other equity-based award, or grant any right to acquire any shares of Southern Community capital stock;

 

·except as required under applicable law or the terms of any Southern Community employee benefit plan, (1) increase the compensation or benefits payable to any current or former employee, officer or director (other than any annual base compensation raises in the ordinary course of business consistent with past practice, which must not exceed 3% in the aggregate or 4% for any individual (on an annualized basis) to employees at a level below vice president; (2) pay or commit to pay severance, bonus, retirement or retention payments to any current or former employee, officer or director; (3) enter into, adopt, amend or terminate any employee benefit plan; (4) accelerate the vesting or payment or cause to be funded or otherwise secure any compensation and/or benefits; (5) enter into any new, or amend any existing, collective bargaining agreement or benefit plan or make material determinations not in the ordinary course of business consistent with past practice under such benefit plans, (6) hire or terminate the employment of any employee who has a target annual compensation of $65,000 or more; or (7) change the actuarial or other assumptions used to calculate benefit plan obligations or change the manner in which contributions to such plans are made or the basis on which contributions are determined;

 

·settle any claim, action or proceeding other than in the ordinary course of business consistent with past practice involving solely money damages not in excess of $25,000 individually or $100,000 in the aggregate;

 

·waive or release any material rights or claims other than in the ordinary course of business consistent with past practice;

 

·pay, discharge or satisfy any claims, liabilities or obligations, other than in the ordinary course of business and consistent with past practice;

 

·make any change in accounting methods or systems of internal accounting controls, except as required by GAAP as concurred in by Southern Community’s independent auditors, or revalue in any material respect any of Southern Community’s assets, except as required by GAAP and in the ordinary course of business consistent with past practice;

 

·make, change or revoke any tax election, change an annual tax accounting period, adopt or change any tax accounting method, file any amended tax return, enter into any closing agreement with respect to taxes, or settle any tax claim, audit, assessment or dispute or surrender any right to claim a refund of taxes;

 

·amend its articles of incorporation or bylaws or comparable organizational documents;

 

·materially restructure or materially change its investment securities portfolio or its gap position or the manner in which the portfolio is classified or reported;

 

·enter into, modify, amend, terminate or assign any material rights or claims under any material contract, other than in the ordinary course of business consistent with past practice or enter into certain types of material contracts or contracts that call for aggregate annual payments of $50,000 or more unless such contracts are terminable on 30 days’ or less notice without penalty or payment of a premium;

 

·except as required by applicable law, regulation or policies, change in any material respect its loan underwriting, pricing, originating, acquiring, selling or servicing policies and practices, or policies and practices with respect to buying or selling rights to service loans;

 

·except to the extent approved and committed to prior to the date of the merger agreement, make or acquire any loan or issue a commitment (or renew or extend an existing commitment) for any loan relationship aggregating in excess of $5 million, or amend or modify in any material respect any existing loan relationship that would result in total credit exposure to the applicable borrower (and its affiliates) in excess of $5 million;

 

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·except as required by applicable law, regulation or policies, enter into any new line of business or change in any material respect its lending, investment, underwriting, risk and asset liability management and other banking and operating policies;

 

·file any application or take any other action to establish, relocate or terminate the operation of any banking office;

 

·take any action that is intended to or would be reasonably likely to result in any of the conditions to the completion of the merger not being satisfied or prevent or materially delay the completion of the transactions contemplated by the merger agreement, except as may be required by applicable laws; and

 

·agree to take, make any commitment to take any of the above prohibited actions.

 

Regulatory Matters

 

CBF and Southern Community have agreed to use their respective reasonable best efforts to take all actions that are necessary and proper to comply promptly with all legal requirements with respect to the merger and the other transactions contemplated by the merger agreement and to obtain all consents, authorizations or approvals of or exemptions by, any regulatory authority required or advisable in connection with the merger and the other transactions contemplated by the merger agreement. CBF and Southern Community will cooperate and promptly prepare and file all necessary documentation. CBF and Southern Community will use their respective reasonable best efforts to resolve any objections that may be asserted by any regulatory authority with respect to the merger agreement or the merger or the other transactions contemplated by the merger agreement. However, in no event will CBF be required to take any action or agree to any condition or restriction if such action, condition or restriction would reasonably be expected to have a material adverse effect on the business, results of operations or financial condition of CBF or Southern Community (measured on a scale relative to Southern Community and its subsidiaries, taken as a whole).

 

Employee Matters

 

Southern Community has agreed to terminate its Employee Stock Purchase Plan and distribute all account balances thereunder in accordance with its terms effective immediately prior to the completion of the merger.

 

D&O Indemnification and Insurance

 

The merger agreement provides that after the completion of the merger, CBF will cause the surviving corporation in the merger to observe all rights to indemnification under Southern Community’s governing documents or indemnification contracts or undertakings in favor of present and former directors and officers of Southern Community.

 

The merger agreement requires CBF to maintain for a period of six years after completion of the merger Southern Community’s existing directors’ and officers’ liability insurance and civil money penalty insurance policies, with respect to claims arising from facts or events that occurred prior to the completion of the merger (including transactions contemplated by the merger agreement), and covering current and former directors and officers of Southern Community. Prior to the completion of the merger, CBF is expected to obtain a six-year “tail” prepaid policy providing coverage no less favorable than the Company’s CBF’s existing policies.

 

Charge-Offs

 

The merger agreement provides that no later than three calendar days prior to closing, Southern Community must provide to CBF a schedule reporting loan charge-offs in any completed fiscal quarter starting with Q1 of 2012 and the most recent interim quarterly period commencing March 26, 2012 and ending five calendar days prior to closing.

 

Certain Additional Covenants

 

The merger agreement also contains additional covenants, including covenants relating to the filing of this proxy statement, obtaining required consents, access to information of the other company and public announcements with respect to the transactions contemplated by the merger agreement.

 

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Southern Community Shareholder Meeting and Recommendation of Southern Community’s Board of Directors

 

Southern Community has agreed to hold a meeting of its shareholders for the purpose of voting upon approval of the merger agreement as promptly as practicable. Southern Community will use its reasonable best efforts to obtain from its shareholders the requisite shareholder approval of the merger agreement, including by recommending that its shareholders approve the merger agreement (subject to the provisions governing making a change in Southern Community’s recommendation as described below).

 

Southern Community’s Board of Directors has agreed to recommend that Southern Community’s shareholders vote in favor of approval of the merger agreement and to not withdraw, qualify or modify such recommendation in any manner adverse to CBF or take any action or make any public statement, filing or release inconsistent with such recommendation (which we refer to as a change in Southern Community’s recommendation), except that Southern Community’s Board of Directors may effect a change in Southern Community’s recommendation if and only to the extent that:

 

·Southern Community has received an unsolicited bona fide “acquisition proposal” (as described below) that constitutes a “superior proposal” (as described below), and Southern Community’s Board of Directors determines in good faith, after consultation with outside legal counsel, that Southern Community’s Board of Directors would be in violation of its fiduciary duties under applicable laws if it failed to effect a change in Southern Community’s recommendation;

 

·Southern Community has given at least five calendar days’ written notice to CBF of its intention to effect a change in Southern Community’s recommendation absent modification of the terms and conditions of the merger agreement;

 

·Southern Community specifies in its notice to CBF the materials terms and conditions of the proposal, including the identity of the person or group making such proposal;

 

·Southern Community negotiates in good faith with CBF (to the extent CBF desires to so negotiate) to adjust the terms and conditions of the merger agreement so that the superior proposal ceases to be superior, and causes its financial advisors and legal counsel to engage in such negotiations; and

 

·if applicable, after giving effect to any amendments to the merger agreement proposed by CBF, the Board concludes in good faith that such acquisition proposal continues to constitute a superior proposal.

 

In the event of any revisions to the superior proposal, Southern Community will be required to deliver a new written notice to CBF two calendar days in advance and to comply with the other requirements described above.

 

The merger agreement requires Southern Community to submit the merger agreement to a shareholder vote even if Southern Community’s Board of Directors effects a change in Southern Community’s recommendation.

 

If Southern Community shareholders do not approve the merger at the Southern Community shareholder meeting, then, unless the merger agreement has been terminated, CBF and Southern Community will use reasonable best efforts to negotiate a restructuring of the merger and Southern Community must submit the restructured merger agreement to its shareholders at a second shareholder meeting (and to comply with the other requirements described above as if such second shareholder meeting was treated as the first shareholder meeting). Neither CBF nor Southern Community has any obligation to alter or change the amount or kind of merger consideration or the tax treatment of the merger in a manner adverse to it or its shareholders.

 

For purposes of the merger agreement:

 

·an “acquisition proposal” means any proposal, offer, inquiry, or indication of interest (whether binding or nonbinding, and whether communicated to Southern Community or publicly announced to Southern Community’s shareholders) by any person (other than CBF or its affiliates) relating to an “acquisition transaction.”

 

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·an “acquisition transaction” means any transaction or series of related transactions (other than the transactions contemplated by the merger agreement) involving: (i) any acquisition (whether direct or indirect, including by way of merger, share exchange, consolidation, business combination, consolidation or similar transaction) or purchase from Southern Community by any person or group (other than CBF or its affiliates) of 20% or more in interest of the total outstanding voting securities of Southern Community or its subsidiaries, or any tender offer or exchange offer that if consummated would result in any person or group (other than CBF or its affiliates) beneficially owning 20% or more in interest of the total outstanding voting securities of Southern Community or its subsidiaries, or any merger, consolidation, business combination or similar transaction involving Southern Community pursuant to which the shareholders of Southern Community immediately preceding such transaction hold less than 80% of the equity interests in the surviving or resulting entity (which includes the parent corporation of any constituent corporation to any such transaction) of such transaction; (ii) any sale or lease or exchange, transfer, license, acquisition or disposition of a business, deposits or assets that constitute 20% or more of the assets, business, revenues, net income, assets or deposits of Southern Community; or (iii) any liquidation or dissolution of Southern Community; and

 

·a “superior proposal” means a bona fide written acquisition proposal with respect to which the Board of Directors of Southern Community determines in its good faith judgment to be more favorable from a financial point of view to Southern Community’s shareholders than the merger and to be reasonably capable of being consummated on the terms proposed, after (i) receiving the advice of outside counsel and a financial advisor, and (ii) taking into account all relevant factors (including the likelihood of consummation of such transaction on the terms set forth therein; any proposed changes to the merger agreement that may be proposed by CBF in response to such acquisition proposal; and all legal (with the advice of outside counsel), financial (including the financing terms of any such proposal), regulatory and other aspects of such proposal (including any expense reimbursement provisions and conditions to closing). For purposes of the definition of “superior proposal,” the references to “20%” in the definition of acquisition transaction are deemed to be references to “80%.”

 

Agreement Not to Solicit Other Offers

 

Southern Community also has agreed that it will not, and will cause each of its subsidiaries and its and their respective officers, directors, employees, agents and representatives not to, directly or indirectly:

 

·solicit, initiate, encourage or facilitate (including by furnishing information) or take any action designed to induce or facilitate an acquisition proposal or an inquiry, offer or proposal that is reasonably likely to lead to an acquisition proposal;

 

·participate in any discussions or negotiations regarding an alternative transaction or acquisition proposal;

 

·furnish any confidential or nonpublic information with respect to or in connection with an acquisition proposal;

 

·take any other action to facilitate any inquiries or the making of any proposal that constitutes or that may reasonably be expected to lead to an acquisition proposal;

 

·approve, endorse or recommend any acquisition proposal or related agreement, or propose to do so;

 

·enter into any agreement regarding any alternative transaction or acquisition proposal; or

 

·propose or agree to any of the foregoing.

 

Notwithstanding the above, Southern Community may furnish confidential or nonpublic information to a party making an acquisition proposal, or inquiry, proposal or offer that is reasonably likely to lead to an acquisition proposal, or participate in discussions regarding an acquisition proposal, if:

 

·Southern Community receives an unsolicited bona fide written acquisition proposal;

 

·the Southern Community Board of Directors determines, in its good faith judgment (after consultation with Southern Community’s financial advisors and outside legal counsel) to constitute or be reasonably likely to constitute a “superior proposal”;

 

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·the Southern Community Board of Directors determines, in its good faith judgment (after consultation with Southern Community’s financial advisors and outside legal counsel) that the failure to take such action would cause it to violate its fiduciary duties under applicable law; and

 

·prior to providing any confidential or nonpublic information, Southern Community has obtained a customary confidentiality agreement from such person or group.

 

Southern Community has also agreed to provide CBF written notice within twenty-four hours following the receipt of any acquisition proposal or request for nonpublic information or inquiry that would reasonably be expected to lead to an acquisition proposal. The notice will indicate the identity of the person making the acquisition proposal, requesting nonpublic information or making inquiries and the material terms of the acquisition proposal. Southern Community also agreed to keep CBF promptly apprised of any related developments on a current basis and to simultaneously provide to CBF any confidential or nonpublic information provided to the party making the acquisition proposal, requesting nonpublic information or making inquiries.

 

Southern Community and its subsidiaries have agreed to (1) immediately cease and cause to be terminated any existing discussions or negotiations conducted with any third party with respect to any acquisition proposal, (2) request the prompt return or destruction of all confidential information previously furnished in connection with such discussions or negotiations, and (3) enforce and not waive, amend, modify or release any third party from the confidentiality and standstill provisions of any agreement to which Southern Community or its subsidiaries is a party.

 

The merger agreement provides that the above-described restrictions on Southern Community do not prohibit Southern Community or Southern Community’s Board of Directors from issuing a “stop, look and listen” communication pursuant to Rule 14d-9(f) under the Securities Exchange Act of 1934, as amended, or from complying with Rules 14d-9 and 14e-2(a)(2)-(3) promulgated under the Exchange Act.

 

Conditions to Complete the Merger

 

CBF’s and Southern Community’s respective obligations to complete the merger are subject to the fulfillment or waiver of the following conditions:

 

·the approval of the merger agreement by Southern Community’s shareholders;

 

·the receipt of required regulatory approvals and the expiration or termination of all related statutory waiting periods;

 

·the absence of any order, injunction, decree or judgment by any court or governmental body or agency of competent jurisdiction or other legal restraint or prohibition preventing the completion of the merger or the other transactions contemplated by the merger agreement; and

 

·the accuracy of the representations and warranties of each other party in the merger agreement as of the closing date of the merger, subject to the materiality standards provided in the merger agreement and the performance of the other party in all material respects of all obligations required to be performed by it at or prior to the effective time of the merger under the merger agreement (and the receipt by each party of certificates from the other party to such effects).

 

CBF’s obligations to complete the merger are further subject to:

 

·the absence of a material adverse effect with respect to Southern Community;

 

·the absence of a regulatory condition or restriction that would reasonably be expected to have a material adverse effect on the business, results of operations or financial condition of CBF or Southern Community (measured on a scale relative to Southern Community and its subsidiaries, taken as a whole);

 

·the amendment or waiver of certain of Southern Community’s compensation-related arrangements with all of Southern Community’s remaining executive officers and a number of other employees;

 

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·receipt of true, and complete certifications, dated and effective as of the closing, required by Southern Community, its officers and its Board of Directors and Compensation Committee pursuant to the Treasury’s TARP rules on executive compensation and governance (contained at 31 C.F.R. Part 30) and section 111 of the Emergency Economic Stabilization Act, as amended, together with documentation and supporting information required in order to make such certifications to; and

 

·the requirement that Southern Community’s loan net charge-offs for any completed fiscal quarter beginning with first quarter of 2012 not exceed $5 million, and net charge-offs in the most recent interim quarter beginning July 1, 2012 and ending five calendar days prior to closing not exceed $5 million prorated by the number of days in the interim period.

 

Neither Southern Community nor CBF can provide assurance as to when or if all of the conditions to the merger can or will be satisfied or waived by the appropriate party. As of the date of this proxy statement, neither Southern Community nor CBF has reason to believe that any of these conditions will not be satisfied.

 

Termination of the Merger Agreement

 

The merger agreement can be terminated at any time prior to completion of the merger by mutual consent, or by either party in the following circumstances:

 

·the merger has not been completed by September 26, 2012 (if the failure to complete the merger by that date is not caused by the terminating party’s breach of the merger agreement);

 

·if any required regulatory approval has been denied and this denial has become final and nonappealable, or a regulatory authority has issued a final, nonappealable injunction permanently enjoining or otherwise prohibiting the completion of the merger of the other transactions contemplated by the merger agreement (provided that the terminating party has used its reasonable best efforts to contest, appeal and remove such denial or injunction);

 

·there is a breach by the other party of any of its representations, warranties or obligations under the merger agreement that would cause the failure of any of the closing conditions to the merger, and the breach is not cured within 30 days following written notice of the breach or cannot be cured during such time period (provided that the terminating party is not in breach, in any material respect, of any of its material covenants or agreements contained in the merger agreement); or

 

·Southern Community shareholders fail to approve the merger agreement at the shareholder meeting.

 

In addition, CBF may terminate the merger agreement in the following circumstances:

 

·Southern Community’s Board of Directors fails to recommend to the Southern Community shareholders that they approve the merger agreement or withdraws, modifies or qualifies such recommendation in a manner adverse to CBF; or

 

·Southern Community’s Board of Directors breaches its non-solicitation obligations described above in “— Agreement Not to Solicit Other Offers” or its obligations with respect to calling shareholder meetings described above in “— Southern Community Shareholder Meeting and Recommendation of Southern Community’s Board of Directors.”

 

Effect of Termination

 

If the merger agreement is terminated, it will become void, except that (1) any liability of either CBF or Southern Community for any willful and material breach of the merger agreement shall survive and (2) designated provisions of the merger agreement will survive the termination, including those relating to payment of fees and expenses and the confidential treatment of information.

 

Termination Fee

 

Southern Community will pay CBF a $4 million termination fee in the following circumstances:

 

·If the merger agreement is terminated by CBF in the following circumstances:

 

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·Southern Community’s Board of Directors fails to recommend to the Southern Community shareholders that they approve the merger agreement or withdraws, modifies or qualifies such recommendation in a manner adverse to CBF, or takes any action or makes any public statement, filing or release inconsistent with such recommendation; or

 

·Southern Community’s Board of Directors knowingly or materially breaches its non-solicitation obligations described above in “— Agreement Not to Solicit Other Offers” or its obligations with respect to calling shareholder meetings and acquisition proposals described above in “— Southern Community Shareholder Meeting and Recommendation of Southern Community’s Board of Directors.”

 

·If the merger agreement is terminated by CBF or Southern Community in the following circumstances:

 

·a third party proposes or publicly announces an acquisition proposal after the date of the merger agreement; thereafter (1) the merger agreement is terminated by CBF or Southern Community because Southern Community’s shareholders have not approved the merger agreement, and (2) Southern Community completes or agrees to an alternative transaction within 12 months of the date the merger agreement is terminated.

 

If Southern Community is required to pay a termination fee or if either CBF or Southern Community terminate the merger agreement following a failure to obtain the approval of Southern Community’s shareholders (other than in a circumstance where the termination fee and expense reimbursement is payable as described above), Southern Community will be obligated to reimburse CBF for up to $1 million of its out-of-pocket expenses incurred in connection with the merger agreement and the transactions contemplated thereby, including fees and expenses of accountants, financial advisors, consultants and attorneys.

 

Expenses and Fees

 

Except as set forth above, each of CBF and Southern Community will be responsible for all costs and expenses incurred by it in connection with the negotiation and completion of the transactions contemplated by the merger agreement.

 

Amendment, Waiver and Extension of the Merger Agreement

 

Subject to applicable law, CBF and Southern Community may amend the merger agreement by written agreement. However, after any approval of the merger agreement by Southern Community’s shareholders, there may not be, without further approval of Southern Community’s shareholders, any amendment of the merger agreement that requires further approval under applicable law.

 

At any time prior to the effective time of the merger, each party, to the extent legally allowed, may extend the time for the performance of any of the obligations or other acts of the other party; waive any inaccuracies in the representations and warranties of the other party; and waive compliance by the other party with any of the agreements and conditions contained in the merger agreement.

 

THE CVRs

 

The following is a description of the material terms of the CVR agreement that CBF and Southern Community expect to execute pursuant to the terms of the merger agreement. The CVR agreement has not yet been completed and this description of the expected CVR agreement is qualified in its entirety by reference to the term sheet for contingent value rights attached as Exhibit A to the merger agreement, a copy of which is attached as Appendix A to this proxy statement and incorporated herein by reference. We encourage you to read the term sheet in its entirety.

 

Characteristics of the CVRs

 

The CVRs will not be equity or voting securities of CBF, will not have any dividend rights and will not represent equity or ownership interests in CBF. They will not confer any rights of a shareholder, either at law or in equity. The CVRs will be unsecured obligations of CBF and interest will not accrue on amounts payable on them.

 

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Calculation of Cash Payment

 

A holder of a CVR will be entitled to a cash payment five years after the effective time of the merger depending on the amount of net credit losses on Southern Community’s loans and REO existing as of the effective time of the merger (which we also refer to as Southern Community’s legacy loan and REO portfolio). The cash payment will be equal, on a per CVR basis, to 75% of the excess, if any, of (i) $87 million over (ii) the net credit losses on Southern Community’s legacy loan portfolio during the five-year period beginning at the effective time of the merger, with a maximum payment of $1.30 per CVR. We refer to this as the CVR payment amount.

 

Credit losses will be calculated as the amount of “net charge-offs” on Southern Community’s legacy loan and REO portfolio during the five years following the effective time of the merger. The CVR agreement will define “net charge-offs” as loans charged off, less recoveries, and realized losses on REO properties as reflected in and otherwise derived from the books and records of Southern Community Bank and Trust in a manner consistent with past practice, with the preparation of financial statements of Southern Community and with Southern Community Bank and Trust’s written policies in effect as of the date of the CVR agreement and any changes required by law.

 

Payments

 

The CVR agreement will provide that promptly following the fifth anniversary of the effective time of the merger, CBF will appoint a paying agent and deliver to that agent a certificate setting forth the total net credit losses on Southern Community’s legacy loan and REO portfolio and the calculation of the CVR payment amount. The paying agent will forward the certificate to CVR holders within five business days. If the CVR payment amount is greater than zero, CBF will set a payment date that is no later than 90 days from the fifth anniversary of the effective time of the merger. At least five business days prior to this payment date, CBF will deliver to the paying agent cash equal to the CVR payment amount multiplied by the number of CVRs outstanding. On the payment date, the paying agent will distribute this cash to CVR holders.

 

Special Committee Determines Payment Amount

 

A special committee of CBF’s Board of Directors will make all determinations with respect to calculations of credit losses, net charge-offs and amounts payable on the CVRs. Dr. Ward, currently the Chairman of Southern Community’s Board of Directors, will be appointed to CBF’s Board in connection with the merger agreement and will be a member of the special committee overseeing the CVRs. If Dr. Ward ceases to be a member of CBF’s Board of Directors or of the special committee, the full Board of CBF will appoint a replacement.

 

CVRs Are Nontransferable

 

Subject to limited exceptions, CVR holders will not be able to be sell, pledge, assign, transfer or otherwise dispose of their CVRs, in whole or in part. The CVRs will not be listed on a securities exchange.

 

Issuance of the CVRs

 

Pursuant to the merger agreement, CBF will issue to existing holders of Southern Community common stock one CVR for each share of Southern Community stock owned by such shareholder immediately prior to the merger. CBF will serve as the initial CVR registrar and will maintain a record of initial CVR holdings as well as any permitted transfer.

 

Amendment of CVR Agreement

 

The CVR agreement will permit CBF to amend the CVR agreement without the consent of any CVR holders for any of the following purposes:

 

·to evidence the succession of another person to CBF and the assumption by any such successor of the covenants of CBF under the CVR agreement;

 

·to evidence the termination of the CVR registrar and the succession of another person to CVR registrar and the assumption by any such successor of the obligations of the CVR registrar under the CVR agreement;

 

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·to evidence the succession of another person to paying agent and the assumption by any such successor of the covenants and obligations of the paying agent under the CVR agreement.

 

·to add to the covenants of CBF such further covenants, restrictions, conditions or provisions as CBF’s Board of Directors shall consider to be for the protection of the CVR holders; provided, that in each case, such provisions shall not adversely affect the interests of the CVR holders;

 

·to cure any ambiguity, to correct or supplement any provision in the CVR agreement that may be defective or inconsistent with any other provision therein, or to make any other provisions with respect to matters or questions arising under the CVR agreement; provided, that in each case, such provisions shall not adversely affect the interests of the CVR holders;

 

·to make any amendments or changes as may be necessary or appropriate to ensure that the CVRs are not subject to registration under the Securities Act or the Exchange Act; provided, that such provisions shall not adversely affect the interests of the CVR holders; or

 

·to add, eliminate or change any provisions of the CVR agreement that do not adversely affect the interests of the CVR holders.

 

The CVR agreement will permit CBF to modify the terms of the CVR agreement in a manner that is adverse to the interests of the CVR holders if holders of a majority of the outstanding CVRs consent to such modification.

 

Redemption

 

Southern Community (and, following closing of the merger, CBF) will be able to redeem the CVRs at any time at a price of $1.30 per CVR. CBF and Southern Community expect that the CVR agreement will provide for Southern Community or CBF to mail a notice of redemption to each CVR holder within ten days after taking action to redeem the CVRs and will appoint a paying agent that will deliver the cash due to each CVR holder as promptly as practicable.

 

Change of Control

 

The CVR agreement will provide that if Southern Community (and, following closing of the merger, CBF) experiences a “change in control” (as defined below) other than pursuant to the transactions contemplated by the merger agreement, all rights under the CVRs will be redeemed (using the procedures described in the preceding paragraph) upon closing of that transaction at $1.30 per CVR. The CVR agreement will define a “change in control” as any transaction resulting in the holders of the equity interests of CBF immediately prior to such transaction owning, directly or indirectly, less than 50% of the equity interests of CBF immediately following such transaction.

 

Termination of the CVR Agreement

 

The CVR agreement will terminate on the earlier of (a) the payment of the CVR payment amount, (b) if the CVR payment amount is zero, the date the paying agent sends a certificate to CVR holders notifying them that they will not receive a payment, and (c) redemption of the CVRs. The CVR agreement will have no force after it is terminated and that CBF will have no residual liability under the agreement.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

 

The following is a general discussion of certain material United States federal income tax consequences of the merger to U.S. holders (as defined below) of Southern Community common stock that exchange their shares of Southern Community common stock for cash and CVRs in the merger. This discussion does not address any tax consequences arising under the unearned income Medicare contribution tax pursuant to the Health Care and Education Reconciliation Act of 2010, nor does it address any tax consequences arising under the laws of any state, local or foreign jurisdiction, or under any United States federal laws other than those pertaining to the income tax. This discussion is based upon the Code, the regulations promulgated under the Code and court and administrative rulings and decisions, all as in effect on the date of this document. These authorities may change, possibly retroactively, and any change could affect the accuracy of the statements and conclusions set forth in this discussion. Neither CBF nor Southern Community has sought or will seek any ruling from the Internal Revenue Service regarding any matters relating to the merger, and as a result, there can be no assurance that the Internal Revenue Service will not assert, or that a court would not sustain, a position contrary to any of the conclusions set forth below.

 

This discussion addresses only those U.S. holders of Southern Community common stock that hold their shares of Southern Community common stock as a “capital asset” within the meaning of Section 1221 of the Code. Further, this discussion does not address all aspects of United States federal income taxation that may be relevant to particular U.S. holders in light of their individual circumstances or to U.S. holders that are subject to special treatment under the United States federal income tax laws, including:

 

·financial institutions;

 

·tax-exempt organizations;

 

·regulated investment companies;

 

·real estate investment trusts;

 

·S corporations or other pass-through entities (or investors in an S corporation or other pass-through entity);

 

·insurance companies;

 

·mutual funds;

 

·“controlled foreign corporations” or “passive foreign investment companies”;

 

·dealers or brokers in stocks and securities, or currencies;

 

·traders in securities that elect to use mark-to-market method of accounting;

 

·holders of Southern Community common stock subject to the alternative minimum tax provisions of the Code;

 

·holders of Southern Community common stock that received Southern Community common stock through the exercise of an employee stock option, through a tax qualified retirement plan or otherwise as compensation;

 

·holders of Southern Community common stock that have a functional currency other than the U.S. dollar;

 

·holders of Southern Community common stock that exercise appraisal rights in the merger;

 

·holders of Southern Community common stock that hold Southern Community common stock as part of a hedge, straddle, constructive sale, conversion or other integrated transaction;

 

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·persons that are not U.S. holders (as defined below); or

 

·United States expatriates or certain former citizens or long-term residents of the United States.

 

For purposes of this discussion, the term “U.S. holder” means a beneficial owner of Southern Community common stock that is for United States federal income tax purposes (1) an individual citizen or resident of the United States, (2) a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) organized in or under the laws of the United States or any state thereof or the District of Columbia, (3) a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) such trust has made a valid election to be treated as a U.S. person for United States federal income tax purposes, or (4) an estate, the income of which is includible in gross income for United States federal income tax purposes regardless of its source.

 

If an entity or an arrangement treated as a partnership for United States federal income tax purposes holds Southern Community common stock, and any partners in such partnership, should consult their own tax advisors.

 

Determining the actual tax consequences of the merger to you may be complex and will depend on your specific situation and on factors that are not within our control. You should consult with your own tax advisor as to the tax consequences of the merger in your particular circumstances, including the applicability and effect of the alternative minimum tax and any state, local, foreign or other tax laws and of changes in those laws.

 

Tax Consequences of the Merger Generally

 

The receipt of the cash and the CVRs by a U.S. holder pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes. The amount of gain or loss a U.S. holder recognizes, and the timing and potentially the character of a portion of such gain or loss, depends on the U.S. federal income tax treatment of the CVR, with respect to which there is substantial uncertainty.

 

The merger consideration consists of cash and a CVR; consequently, the receipt of the merger consideration may be treated as either a “closed transaction” or an “open transaction” for U.S. federal income tax purposes. The installment method of reporting any gain attributable to the receipt of a CVR will not be available because Southern Community common stock is traded on an established securities market. The following sections discuss the U.S. federal income tax consequences of the receipt of the merger consideration in the event it is treated as an open transaction and, alternatively, in the event it is treated as a closed transaction. There is no authority directly addressing whether contingent payment rights with characteristics similar to the rights under a CVR should be treated as “open transactions” or “closed transactions,” and such question is inherently factual in nature. Accordingly, holders are urged to consult their tax advisors regarding this issue. The CVRs also may be treated as debt instruments for U.S. federal income tax purposes. However, as such treatment is unlikely, the discussion below does not address the tax consequences of such a characterization. We urge you to consult your tax advisor with respect to the proper characterization of the receipt of a CVR.

 

Treatment as Open Transaction

 

The receipt of the CVRs would generally be treated as an “open transaction” if the value of the CVRs cannot be “reasonably ascertained.” If the receipt of the merger consideration is treated as an “open transaction” for United States federal income tax purposes, a U.S. holder should generally recognize capital gain for United States federal income tax purposes upon consummation of the merger if and to the extent the amount of cash received exceeds such U.S. holder’s adjusted tax basis in the Southern Community common stock surrendered pursuant to the merger.

 

Subject to the Section 483 rules discussed below, if the transaction is “open” for United States federal income tax purposes, the CVRs would not be taken into account in determining the holder’s taxable gain upon receipt of the merger consideration and a U.S. holder would take no tax basis in the CVRs, but would recognize capital gain as payments with respect to the CVRs are made or deemed made in accordance with the U.S. holder’s regular method of accounting, but only to the extent the sum of such payments (and all previous payments under the CVRs), together with the amount received upon consummation of the merger discussed above, exceeds such U.S. holder’s adjusted tax basis in the Southern Community common stock surrendered pursuant the merger.

 

Subject to the Section 483 rules discussed below, if the transaction is “open” for United States federal income tax purposes, a U.S. holder who does not receive cumulative payments pursuant to the merger with a fair market value at least equal to such U.S. holder’s adjusted tax basis in the Southern Community common stock surrendered pursuant the merger, will recognize a capital loss in the year that the U.S. holder’s right to receive further payments under the CVRs terminates.

 

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Gain or loss recognized in the transaction must be determined separately for each identifiable block of Southern Community common stock surrendered in the merger (i.e., shares of Southern Community common stock acquired at the same cost in a single transaction). Any such gain or loss will be long-term if the Southern Community common stock is held for more than one year before such disposition. Long-term capital gains recognized by non-corporate U.S. holders are currently subject to reduced tax rates. The deductibility of both long-term and short-term capital loss is subject to certain limitations.

 

Treatment as Closed Transaction

 

If the value of the CVRs can be “reasonably ascertained”, the transaction should generally be treated as “closed” for United States federal income tax purposes, in which event a U.S. holder should generally recognize capital gain or loss for United States federal income tax purposes upon consummation of the merger equal to the difference between (x) the sum of (i) the fair market value of the CVRs received, and (ii) the amount of cash received, and (y) such U.S. holder’s adjusted tax basis in the Southern Community common stock surrendered pursuant the merger.

 

If the transaction is “closed” for United States federal income tax purposes, a U.S. holder’s initial tax basis in the CVRs will equal the fair market value of the CVRs on the date of the consummation of the merger. The holding period of the CVRs will begin on the day following the date of the consummation of the merger.

 

Payments Under the CVR

 

Treatment as Open Transaction

 

If the transaction is treated as an “open transaction,” a payment in the future to a U.S. holder of a CVR should be treated as a payment under a contract for the sale or exchange of Southern Community common stock to which Section 483 of the Code applies. Under Section 483, a portion of a payment made pursuant to the CVR more than one year after the date of the exchange of Southern Community common stock for the merger consideration will be treated as interest, which will be ordinary income to the U.S. holder of the CVR. The interest amount will equal the excess of the amount received over its present value at the consummation of the merger, calculated using the applicable federal rate as the discount rate and using such U.S. holder’s regular method of accounting (such amount being taken into account when paid, in the case of a cash method holder, and, when fixed, in the case of an accrual method holder). The portion of the payment pursuant to the CVR that is not treated as interest under Section 483 of the Code should be treated as gain from the sale of a capital asset, as discussed above.

 

Treatment as Closed Transaction

 

There is no authority directly on point with respect to the treatment of payments similar to those under the CVR. You should therefore consult your tax advisor as to the taxation of such payments. Under characterization as a “closed transaction,” a payment with respect to each CVR would likely be treated as a non-taxable return of a U.S. holder’s adjusted tax basis in the CVR to the extent thereof. A payment in excess of such amount may be treated as either (i) payment with respect to a sale of a capital asset, (ii) income taxed at ordinary rates, or (iii) dividends. Additionally, it is possible that, were a payment to be treated as being with respect to the sale of a capital asset, a portion of such payment would constitute imputed interest under Section 483 of the Code (as described directly above under “Treatment as Open Transaction”).

 

Due to the legal and factual uncertainty regarding the valuation and tax treatment of the CVR, you are urged to consult your tax advisors concerning the recognition of gain, if any, resulting from the receipt of the CVR in the merger.

 

Backup Withholding

 

If you are a non-corporate holder of Southern Community common stock you may be subject, under certain circumstances, to information reporting and backup withholding (currently at a rate of 28%) on any cash payments you receive. You generally will not be subject to backup withholding, however, if you:

 

·furnish a correct taxpayer identification number, certify that you are not subject to backup withholding on the substitute Form W-9 or successor form included in the election form/letter of transmittal you will receive and otherwise comply with all the applicable requirements of the backup withholding rules; or

 

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·provide proof that you are otherwise exempt from backup withholding.

 

Any amounts withheld under the backup withholding rules are not an additional tax and will generally be allowed as a refund or credit against your United States federal income tax liability, provided you timely furnish the required information to the Internal Revenue Service.

 

This discussion of certain material U.S. federal income tax consequences is for general information only and is not tax advice. Holders of Southern Community common stock are urged to consult their tax advisors with respect to the application of United States federal income tax laws to their particular situations as well as any tax consequences arising under the United States federal estate or gift tax rules, or under the laws of any state, local, foreign or other taxing jurisdiction or under any applicable tax treaty.

 

BENEFICIAL OWNERSHIP OF SECURITIES

 

The following table shows, as of June 30, 2012, the number of shares of common stock owned by each director and principal officer and by all directors and principal officers of the Company as a group. To the knowledge of Southern Community, no person or entity is the beneficial owner of more than 5% of the outstanding shares of Southern Community common stock. The address for each of the named persons is c/o Southern Community Financial Corporation, 4605 County Club Road, Winston-Salem, North Carolina 27104. Unless otherwise noted, the named persons have sole voting and investment power with respect to the shares indicated.

 

       Percentage of 
   Shares   Common 
   Currently   Stock Owned 
Beneficial owner (position)  Owned (1)   (2) 
Merle B. Andrews (Executive Vice President and Senior Operating Officer)   47,305    * 
F. Scott Bauer (President and CEO) (3)   271,831    1.4%
Edward T. Brown (Director)   325,525    1.8%
James G. Chrysson (Vice Chairman and Director)   135,117    * 
Jeff T. Clark (First Executive Vice President) (4)   88,420    * 
James O. Frye (Director)   59,642    * 
Matthew G. Gallins (Director)   102,488    * 
James Hastings (Executive Vice President and CFO) (5)   30,974    * 
Lynn L. Lane (Director)   22,735    * 
H. Lee Merritt, Jr. (Director)   20,352    * 
James C. Monroe, Jr. (Senior Vice President and Treasurer)   31,815    * 
Stephen L. Robertson (Director)   14,200    * 
W. Samuel Smoak (Director)   24,000    * 
William G. Ward, Sr., M.D. (Chairman and Director)   147,751    * 
Directors and principal officers as a group (14 persons)   1,322,155    7.6%

 

* Owns less than one percent of the outstanding common stock.

 

(1)This column includes the number of shares of common stock capable of being issued within 60 days of June 30, 2012, upon the exercise of stock options held by the named individual. For each director and principal officer listed above, the beneficial ownership includes the following number of shares of common stock that are issuable upon exercise of options that are exercisable within 60 days of June 30, 2012: Ms. Andrews – 10,000; Mr. Bauer – 24,000; Mr. Brown – 10,000; Mr. Chrysson – 10,000; Mr. Clark – 31,750; Mr. Frye – 50,000; Mr. Gallins – 10,000; Mr. Hastings – 10,000; Ms. Lane – 15,000; Mr. Merritt – 10,000; Mr. Monroe – 10,000; Mr. Robertson – 9,000; Mr. Smoak – 15,000; Dr. Ward – 10,000; and principal officers and directors as a group – 224,750. To the Company's knowledge, each person has sole voting and investment power over the securities shown as beneficially owned by such person, except for the following shares of common stock which the individual indicates that he or she shares voting and/or investment power: Mr. Bauer – 135,668; Mr. Brown – 162,209; Mr. Gallins – 33,072; Ms. Lane – 6,435; Mr. Monroe – 3,624; Dr. Ward – 40,318; and directors and principal officers as a group – 381,326. At June 30, 2012 none of the above listed stock options have exercise prices less than $3.11 per share.

 

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(2)The ownership percentage of each individual is calculated based on the total of 16,854,775 shares of common stock issued and outstanding at June 30, 2012, plus the number of shares that can be issued to that individual within 60 days of June 30, 2012 upon the exercise of stock options held by the individual. The ownership percentage of the group is based on the total shares outstanding plus the number of shares that can be issued to the entire group within 60 days of June 30, 2012 upon the exercise of all stock options held by the group for an aggregate of 17,340,725 shares then outstanding. At June 30, 2012, only 2,400 shares that can be issued upon the exercise of stock options to employees and directors have exercise prices less than $3.11 per share.

 

(3)Mr. Bauer pledged 135,668 shares as security for a loan. On July 25, 2012, the Board terminated the employment of Mr. Bauer effective September 22, 2012.

 

(4)On July 25, 2012, the Board terminated the employment of Mr. Clark effective September 22, 2012.

 

(5)On July 25, 2012, Mr. Hastings was appointed, subject to regulatory approval, interim Chief Executive Officer.

 

HISTORICAL MARKET PRICES AND DIVIDEND INFORMATION

 

Shares of Southern Community common stock are listed and trade on the Nasdaq Capital Market under the symbol “SCMF.” The following table sets forth, on a per-share basis for the periods indicated, cash dividends declared and the high and low sales price of shares of Southern Community’s common stock as reported on the Nasdaq Capital Market. As of June 30, 2012, there were approximately 7,100 holders of Southern Community common stock. In March 2009, the board of directors of Southern Community suspended the payment of cash dividends on common stock.

 

 

   Price 
   High   Low 
Fiscal Year Ended December 31, 2012:          
Third Quarter (Through July 23, 2012)  $3.23   $3.05 
Second Quarter   3.20    1.76 
First Quarter   2.27    1.03 
Fiscal Year Ended December 31, 2011:          
Fourth Quarter  $1.30   $1.00 
Third Quarter   1.87    1.15 
Second Quarter   2.14    1.02 
First Quarter   2.55    1.05 
Fiscal Year Ended December 31, 2010:          
Fourth Quarter  $1.93   $1.00 
Third Quarter   2.23    1.50 
Second Quarter   3.19    2.10 
First Quarter   2.85    2.09 

 

The information in the preceding table is historical only. The market price of Southern Community common stock will fluctuate between the date of this document and the completion of the merger.

 

The following table presents the closing sales prices of shares of Southern Community common stock as reported on the Nasdaq Capital Market on (i) March 26, 2012, the last trading day for which market information is available prior to the public announcement of Southern Community’s execution of the merger agreement, (ii) June 25, 2012, the last trading day for which market information is available prior to the public announcement of the execution of the revised merger agreement and (iii) July 23, 2012, the last practicable trading day prior to the date of this document.

 

Southern Community
Common Stock
 
March 26, 2012  $33,045,257   $1.96 
June 25, 2012  $45,010,927   $2.67 
July 23, 2012  $52,923,994   $3.14 

 

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PROPOSAL 2 — ADVISORY VOTE REGARDING CERTAIN EXECUTIVE COMPENSATION

 

Summary

 

Section 14A of the Exchange Act requires Southern Community to seek a vote, on a non-binding advisory basis, with respect to certain compensation that may be paid or become payable to Southern Community’s named executive officers that is based on or otherwise relates to the proposed transactions as set forth in this proxy statement including the tabular and narrative named executive officer compensation disclosures set forth under “Interests of Southern Community’s Directors and Executive Officers in the Merger — Golden Parachute Compensation for Southern Community’s Named Executive Officers” on page 36.

 

Accordingly, the Company is asking you to approve the adoption of the following resolution at the Special Meeting:

 

RESOLVED, that the shareholders approve, on a non-binding advisory basis, the compensation that may be paid or become payable to Southern Community’s named executive officers in connection with the merger and the agreements or understandings pursuant to which such compensation may be paid or become payable, as disclosed in the section of the proxy statement entitled ‘Interests of Southern Community’s Directors and Executive Officers in the Merger — Golden Parachute Compensation for Southern Community’s Named Executive Officers,’ including the associated narrative discussion.

 

The vote on the merger-related named executive officer compensation proposal is a vote separate and apart from the vote to approve the merger agreement and the merger. Accordingly, you may vote in favor of the merger-related named executive officer compensation proposal and not in favor of the merger agreement and the merger, or vice versa. Approval of the merger-related named executive officer compensation proposal, on a non-binding advisory basis, is not a condition to consummation of the proposed merger, and it is advisory in nature only, meaning it will not be binding on the Company or on CBF. Accordingly, because Southern Community is contractually obligated to pay the compensation, if the merger is completed, the compensation will be payable, subject only to the conditions applicable to such compensation payments, regardless of the outcome of the advisory vote.

 

The Board of Directors believes that the compensation that may be paid or become payable to Southern Community’s named executive officers pursuant to the terms of the merger agreement is fair given the current condition of Southern Community and its performance during this economic cycle.

 

Vote Required

 

The approval, on a non-binding advisory basis, of the merger-related named executive officer compensation proposal requires that the number of votes cast in favor of the proposal exceeds the number of votes cast against it.

 

For the merger-related named executive officer compensation proposal, you may vote “FOR” or “AGAINST” or “ABSTAIN”. An abstention, a failure to vote or a broker non-vote will have no effect on the outcome of this proposal.

 

If your shares are held in “street name,” you will receive instructions from your broker, bank, trustee or other nominee that you must follow in order to have your shares voted. Brokers who hold shares in “street name” for customers have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. However, brokers are precluded from exercising their voting discretion with respect to approving non-routine matters such as the approval of the merger-related named executive officer compensation proposal and, as a result, absent specific instructions from the beneficial owner of the shares, brokers are not empowered to vote those shares (we refer to this as a “broker non-vote”). A failure to vote your shares or a broker non-vote will have no effect on the merger-related named executive officer compensation proposal.

 

Board Recommendation

 

The Board of Directors of Southern Community recommends that you vote “FOR” the approval, on an advisory non-binding basis, of the compensation that may be paid or become payable to Southern Community’s named executive officers in connection with the merger, including the agreements and understandings pursuant to which such compensation may be paid or become payable.

 

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Proposal 3 — APPROVAL OF ADJOURNMENT OF THE SPECIAL MEETING

TO SOLICIT ADDITIONAL PROXIES

 

Summary

 

In the event that we do not have sufficient votes for a quorum for the Special Meeting or to approve the proposal to approve the merger agreement to be considered by our shareholders at the Special Meeting, we intend to adjourn the Special Meeting to permit further solicitation of proxies. We can only use proxies we receive at the time of the Special Meeting to vote for adjournment, if necessary, by submitting the question of adjournment to our shareholders as a separate matter for consideration. In the event that insufficient votes have been returned by the date set in this proxy statement for the time of the Special Meeting for either a quorum or approval of the merger agreement, we ask that the proxies be authorized to approve a motion to adjourn the Special Meeting to a another time or place, if necessary or appropriate, in order to solicit additional proxies in favor of approval of the merger agreement.

 

If shareholders properly execute their proxy, we will consider that those shareholders voted in favor of the adjournment proposal unless their proxy indicates otherwise. If we adjourn the Special Meeting, we will not give notice of the time and place of the adjourned meeting other than by an announcement of such time and place at the Special Meeting.

 

Vote Required

 

The approval of the adjournment proposal requires that the number of votes cast in favor of the proposal exceeds the number of votes cast against it. An abstention, a failure to vote or a broker non-vote will have no effect on the outcome of this proposal.

 

Board Recommendation

 

The Board of Directors of Southern Community recommends that you vote “FOR” the authority of the proxies to vote shares represented by appointments of proxy in favor of a motion to adjourn the Special Meeting to another time or place

 

OTHER MATTERS

 

No matters other than the matters described in this proxy statement are anticipated to be presented for action at the Special Meeting or at any adjournment or postponement of the Special Meeting. However, if any other matters should properly come before the Special Meeting or an adjournment or postponement thereof, shares represented by proxies will be voted in accordance with the judgment of the persons voting the proxies.

 

SHAREHOLDER PROPOSALS

 

If the merger is completed, we will have no public shareholders and no public participation in any of our future shareholder meetings.

 

We intend to hold an Annual Meeting of shareholders in 2012 only if the merger is not completed. Under the SEC rules, holders of Southern Community common shares who wish to make a proposal to be included in Southern Community’s proxy statement and proxy for Southern Community’s 2012 Annual Meeting of shareholders (if the Annual Meeting is held) must have caused such proposal to have been received by a reasonable time in advance of Southern Community’s mailing of its proxy statement for the 2012 Annual Meeting. Such proposals will be subject to the requirements of the proxy rules adopted under the Exchange Act, Southern Community’s articles of incorporation and bylaws and North Carolina law.

 

62
 

 

WHERE YOU CAN FIND MORE INFORMATION

 

Southern Community (File No. 000-33227) also files reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934. You may read and copy this information at the Public Reference Room of the SEC at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street, NE, Washington, D.C. 20549, at prescribed rates, or from commercial proxy statement/prospectus retrieval services.

 

The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like Southern Community, who file electronically with the SEC. The address of the site is http://www.sec.gov. The reports and other information filed by Southern Community with the SEC are available at Southern Community’s website at http://www.smallenoughtocare.com. The web addresses of the SEC and Southern Community are included as inactive textual references only. Information on those web sites is not part of this proxy statement and is not incorporated by reference herein.

 

Southern Community shareholders requesting documents must do so by August 31, 2012 to receive them before the Special Meeting. You will not be charged for any of these documents that you request. If you request any incorporated documents, they will be mailed to you by first class mail, or another equally prompt means, within one business day after receiving your request.

 

If you have any questions concerning the merger or this proxy statement, would like additional copies of this proxy statement or need help voting your shares of Southern Community common stock, please contact Investor Relations at investor.relations@smallenoughtocare.com or:

 

Investor Relations

4605 Country Club Road

Winston-Salem, North Carolina 27104

Telephone: (336) 768-8500

 

Neither Southern Community or CBF has authorized anyone to give any information or make any representation about the merger or the company that is different from, or in addition to, that contained in this proxy statement or in any of the materials that have been incorporated in this proxy statement. Therefore, if anyone does give you information of this sort, you should not rely on it. If you are in a jurisdiction where offers to exchange or sell, or solicitations of offers to exchange or purchase, the securities discussed in this proxy statement or the solicitation of proxies is unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this proxy statement does not extend to you. The information contained in this proxy statement speaks only as of the date of this proxy statement unless the information specifically indicates that another date applies.

 

  By order of the Board of Directors.
   
 
  William G. Ward, Sr., M.D.
  Chairman of the Board

 

63
 

 

Appendix A – AGREEMENT AND PLAN OF MERGER, DATED AS OF MARCH 26, 2012, AS AMENDED JUNE 25, 2012
 

 

AGREEMENT AND PLAN OF MERGER

 

by and among

 

SOUTHERN COMMUNITY FINANCIAL CORPORATION,

 

CAPITAL BANK FINANCIAL CORP,

 

and

 

WINSTON 23 CORPORATION

 

 

 

Dated as of March 26, 2012

 

 

 

  

 
 

 

TABLE OF CONTENTS

 

    Page
     
ARTICLE I DEFINITIONS 1
     
1.1 Certain Defined Terms 1
     
ARTICLE II THE MERGER; DELIVERY OF MERGER CONSIDERATION 10
     
2.1 The Merger 5
2.2 Effective Time 6
2.3 Closing 6
2.4 Articles of Incorporation and Bylaws of the Surviving Corporation 6
2.5 Directors and Officers 6
2.6 Effects of the Merger 6
2.7 Conversion of Stock 6
2.8 Proration 8
2.9 Stock Options 10
2.10 Restricted Stock Awards 10
2.11 Employee Stock Purchase Plan 11
2.12 Election Procedures 11
2.13 Merger Consideration 13
2.14 Delivery of Merger Consideration 14
     
ARTICLE III REPRESENTATIONS AND WARRANTIES OF COMPANY 15
     
3.1 Disclosure 15
3.2 Organization and Authority 15
3.3 Capitalization 17
3.4 Subsidiaries 17
3.5 Authorization 18
3.6 Consents and Approvals 19
3.7 Reports 19
3.8 Financial Statements 21
3.9 Undisclosed Liabilities 22
3.10 Absence of Certain Changes 22
3.11 Legal Proceedings 22
3.12 Taxes and Tax Returns 23
3.13 Employee Benefit Plans 24
3.14 Labor Matters 27
3.15 Compliance with Law 28
3.16 Commitments and Contracts 29
3.17 Agreements with Regulatory Agencies 30
3.18 Investment Company; Investment Adviser 31
3.19 Derivative Instruments 31
3.20 Environmental Liability 31
3.21 Insurance 32
3.22 Title to Property 32
3.23 Intellectual Property 33

 

i
 

 

TABLE OF CONTENTS

(continued)

 

    Page
     
3.24 Loans 34
3.25 Anti-takeover Provisions Not Applicable 35
3.26 Knowledge as to Conditions 35
3.27 Brokers and Finders 36
3.28 Related Party Transactions 36
3.29 Customer Relationships 36
3.30 Company Information 37
3.31 Foreign Corrupt Practices 38
     
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT 38
     
4.1 Organization and Authority 38
4.2 Authorization 38
4.3 Capitalization 39
4.4 Authorization 40
4.5 Consents and Approvals 41
4.6 Financial Wherewithal 41
4.7 Financial Statements 41
4.8 Merger Sub 42
4.9 Absence of Certain Changes 42
4.10 Legal Proceedings 42
4.11 Compliance with Applicable Law 42
4.12 Parent Information 42
4.13 Broker’s Fees 42
     
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS 43
     
5.1 Conduct of Business of Company Prior to the Effective Time 43
5.2 Forbearances of Company 43
5.3 Non-Solicitation of Alternative Transactions 46
5.4 Redemption of Securities held by U.S. Treasury 48
5.5 Indemnification and Insurance 48
     
ARTICLE VI ADDITIONAL AGREEMENTS 49
     
6.1 Regulatory Matters 49
6.2 Access to Information; Confidentiality 50
6.3 SEC Filings and Shareholder Approval 51
6.4 Restructuring Efforts 52
6.5 Public Disclosure 52
6.6 Governance Matters 52
6.7 Additional Agreements 53
6.8 Charge-Offs 53

 

ii
 

 

TABLE OF CONTENTS

(continued)

 

    Page
     
ARTICLE VII CONDITIONS PRECEDENT 53
     
7.1 Conditions to Each Party’s Obligation to Effect the Closing 53
7.2 Conditions to Obligations of Parent 54
7.3 Conditions to Obligations of Company 55
     
ARTICLE VIII TERMINATION AND AMENDMENT 55
     
8.1 Termination 55
8.2 Effect of Termination 56
8.3 Amendment 57
8.4 Extension; Waiver 58
     
ARTICLE IX GENERAL PROVISIONS 58
     
9.1 Nonsurvival of Representations, Warranties and Agreements 58
9.2 Expenses 58
9.3 Notices 58
9.4 Interpretation 59
9.5 Counterparts 60
9.6 Entire Agreement 60
9.7 Governing Law; Venue; Waiver of Jury Trial 60
9.9 Severability 61
9.10 Assignment; Third Party Beneficiaries 61

 

iii
 

 

INDEX OF DEFINED TERMS

 

  Page
   
409A Plan 31
Accrued Interest 1
Acquisition Proposal 1
Acquisition Transaction 2
Affiliate 2
Agreement 1
Articles of Incorporation 2
Articles of Merger 10
Authorizations 20
Bank 20
Bank Charter 20
BCA 10
BHCA 2
Business Day 2
Cancelled Shares 12
Capitalization Date 21
Cash Consideration 11
Cash Conversion Number 3
Cash Election 11
Cash Election Number 13
Cash Election Share 11
CERCLA 3, 36
Change in the Company Recommendation 56
Charge-Offs 3
Charter 20
Class B Parent Stock 44
Closing 10
Closing Date 10
Code 3
Company 1
Company 10-K 8
Company Benefit Plan 29
Company Board Recommendation 56
Company Common Stock 11
Company Disclosure Schedule 3
Company Insurance Policies 36
Company Material Adverse Effect 3
Company Preferred Stock 21
Company Reports 24
Company Restricted Shares 14
Company Shareholder Approval 23
Company Shareholders Meeting 56
Company Significant Agreement 33

 

iv
 

 

INDEX OF DEFINED TERMS

(continued)

 

  Page
   
Company Stock Options 14
Company Stock Plans 14
Corporate Entity 4
Covered Claim 65
CRA 4
CVRs 1
damages 4
Deposit(s) 4
Dissenting Shares 12
EESA 31
Effective Time 10
Election 15
Election Deadline 16
ERISA 29
ERISA Affiliate 29
Exchange Act 24
Exchange Agent 16
Exchange Agent Agreement 16
Exchange Fund 17
Exchange Ratio 5
Expense Reimbursement 62
FDIC 20
Federal Courts 64
Federal Reserve Board 5
Form of Election 15
Form S-1 5
Form S-1 Effectiveness 5
Form S-4 55
GAAP 5
Governmental Entity 5
Holder 15
HSR Act 5
Intellectual Property 5
Interim Final Rule 59
IPO Price 6
Knowledge 6
Leased Premises 6
Letter of Transmittal 17
Lien 6
Loan Documentation 6
Loan Tape 6
Loan(s) 38
Loans 38
Materially Burdensome Regulatory Condition 54
Merger 1

 

v
 

 

INDEX OF DEFINED TERMS

(continued)

 

  Page
   
Merger Consideration 11
Merger Sub 1
Multiemployer Plan 6
Non-Election Share 11
North Carolina Courts 64
Notice Period 52
Parent 1
Parent Capitalization Date 44
Parent Common Stock 44
Parent Disclosure Schedule 7
Parent Material Adverse Effect 7
Parent Preferred Stock 44
Parent Regulatory Approvals 45
Parent Representatives 55
Parent Share Price 7
Party 7
Pension Plan 29
Per Share Cash Consideration 7
Per Share Stock Consideration 7
Per Share TARP Discount Amount 7
Permits 32
Permits 7
Permitted Liens 37
Person 7
Personal Property 7
Personal Property Leases 8
Pool 39
Previously Disclosed 8
Proprietary Rights 38
Proxy Statement 55
Regulatory Agreement 35
Regulatory Approvals 8
Representative 50
Requisite Regulatory Approvals 23
Sarbanes-Oxley Act 25
SEC 8
Securities Act 24
Shortfall Number 13
SRO 8
Stock Consideration 11
Stock Conversion Number 8
Stock Election 11
Stock Election Share 11
Stock Purchase Plan 15
Subsidiary 20

 

vi
 

 

INDEX OF DEFINED TERMS

(continued)

 

  Page
   
Superior Proposal 9
Surviving Corporation 1
TARP Discount Amount 9
Tax or Taxes 9
Tax Return 9
Termination Fee 62
Total Parent Shares Issued 9
Treasury Warrant 22
Trust Preferred Securities 23
Voting Debt 21

 

vii
 

  

AGREEMENT AND PLAN OF MERGER

 

Agreement and Plan of Merger (“Agreement”), dated as of March 26, 2012, by and between Southern Community Financial Corporation, a North Carolina corporation (“Company”), Capital Bank Financial Corp, a Delaware corporation (“Parent”), and Winston 23 Corporation, a North Carolina corporation and a wholly owned subsidiary of Parent (“Merger Sub”). Certain capitalized terms have the meanings given to such terms in Article I.

 

RECITALS

 

A.           WHEREAS, the Boards of Directors of Company and Parent have determined that it is in the best interests of their respective companies and their shareholders to consummate the strategic business combination transaction provided for in this Agreement in which Merger Sub will, on the terms and subject to the conditions set forth in this Agreement, merge with and into the Company (the “Merger”), with the Company as the surviving corporation in the Merger (sometimes referred to in such capacity as the “Surviving Corporation”).

B.           WHEREAS, pursuant to the Merger, Parent shall issue to the holders of the Company Common Stock (excluding Parent and Merger Sub) contingent value rights (the “CVRs”) on substantially the terms set forth in Exhibit A; and

C.           WHEREAS, the parties desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe certain conditions to the Merger.

NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements set forth herein, and for other good and valuable consideration, and intending to be legally bound, the parties hereto agree as follows:

 

Article I
DEFINITIONS

 

1.1           Certain Defined Terms. Unless the context otherwise requires, the following terms, when used in this Agreement, shall have the respective meanings specified below (such meanings to be equally applicable to the singular and plural forms of the terms defined):

 

409A Plan” shall have the meaning stated in Section 3.13(i).

Accrued Interest” means, as of any date, (a) with respect to a Deposit, interest which is accrued on such Deposit to but excluding such date and not yet posted to the relevant deposit account and (b) with respect to a Loan, interest which is accrued on such Loan to but excluding such date and not yet paid.

Acquisition Proposal” means any proposal, offer, inquiry, or indication of interest (whether binding or non-binding, and whether communicated to the Company or publicly announced to the Company’s shareholders) by any Person (other than Parent or any of its Affiliates) relating to an Acquisition Transaction.

Acquisition Transaction” means any transaction or series of related transactions (other than the transactions contemplated by this Agreement) involving: (i) any acquisition (whether direct or indirect, including by way of merger, share exchange, consolidation, business combination, consolidation or similar transaction) or purchase from the Company by any Person or “Group” (other than Parent or any of its Affiliates) of 20% or more in interest of the total outstanding voting securities of the Company or any of its Subsidiaries, or any tender offer or exchange offer that if consummated would result in any Person or “Group” (other than Parent or any of its Affiliates) beneficially owning 20% or more in interest of the total outstanding voting securities of the Company or any of its Subsidiaries, or any merger, consolidation, business combination or similar transaction involving the Company pursuant to which the shareholders of the Company immediately preceding such transaction hold less than 80% of the equity interests in the surviving or resulting entity (which includes the parent corporation of any constituent corporation to any such transaction) of such transaction; (ii) any sale or lease or exchange, transfer, license, acquisition or disposition of a business, deposits or assets that constitute 20% or more of the assets, business, revenues, net income, assets or deposits of the Company; or (iii) any liquidation or dissolution of the Company.

Affiliate” of a Person shall mean any Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person.

Agreement” shall have the meaning stated in the Preamble to this Agreement.

 

A-1
 

 

Articles of Incorporation” shall mean the Articles of Incorporation of the Company, as currently in effect.

Articles of Merger” shall have the meaning stated in Section 2.2.

Authorizations” shall have the meaning stated in Section 3.2(a).

Bank” shall have the meaning stated in Section 3.2(b).

Bank Charter” shall have the meaning stated in Section 3.2(b).

“BCA” shall have the meaning stated in Section 2.1(a).

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

Business Day” shall mean any day other than a Saturday, Sunday or day on which banking institutions in New York, New York or Winston-Salem, North Carolina are authorized or obligated pursuant to legal requirements or executive order to be closed.

Cancelled Shares” shall have the meaning stated in Section 2.7(c).

Capitalization Date” shall have the meaning stated in Section 3.3.

“Cash Consideration” shall have the meaning stated in Section 2.7(b)(i).

Cash Conversion Number” shall be equal to the product of (i) the number of shares of Company Common Stock outstanding immediately prior to the Effective Time and (ii) 0.4.

Cash Election” shall have the meaning stated in Section 2.7(b)(i).

Cash Election Number” shall have the meaning stated in Section 2.8(a).

Cash Election Share” shall have the meaning stated in Section 2.7(b)(i).

CERCLA” shall have the meaning stated in Section 3.20.

Change in the Company Recommendation” shall have the meaning stated in Section 6.3(c).

Charge-Offs” shall mean the loans charged off as reflected in the Company Reports, and otherwise derived from the books and records of the Bank in a manner consistent with past practice, with the preparation of the financial statements in the Company Reports and with the Company’s or the Bank’s written policies in effect as of the date of this Agreement.

Charter” shall have the meaning stated in Section 3.2(a).

Class B Parent Stock” shall have the meaning stated in Section 4.3.

Closing” shall have the meaning stated in Section 2.3.

Closing Date” shall have the meaning stated in Section 2.3.

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

Company” shall have the meaning stated in the Preamble to this Agreement.

Company 10-K” shall have the meaning stated in the definition of Previously Disclosed.

Company Benefit Plan” shall have the meaning stated in Section 3.13(a).

“Company Board Recommendation” shall have the meaning stated in Section 6.3(b).

Company Common Stock” shall have the meaning stated in Section 2.7(b).

Company Disclosure Schedule” shall mean the disclosure schedule dated as of the date of the Agreement and delivered by Company to Parent concurrent with the execution and delivery of the Agreement.

Company Insurance Policies” shall have the meaning stated in Section 3.21.

Company Material Adverse Effect” shall mean, with respect to any Party, any fact, circumstance, event, change, effect, development or occurrence that, individually or in the aggregate together with all other facts, circumstances, events, changes, effects, developments or occurrences, directly or indirectly, has had or would reasonably be expected to result in a material adverse effect on the condition (financial or otherwise), results of operations or business of such Party and its Subsidiaries taken as a whole.

Company Preferred Stock” shall have the meaning stated in Section 3.3.

Company Reports” shall have the meaning stated in Section 3.7(a).

Company Restricted Shares” shall have the meaning stated in Section 2.10.

Company Shareholder Approval” shall have the meaning stated in Section 3.5(a).

Company Shareholders Meeting” shall have the meaning stated in Section 6.3(b).

Company Significant Agreement” shall have the meaning stated in Section 3.1(b).

Company Stock Options” shall have the meaning stated in Section 2.9.

Company Stock Plans” shall have the meaning stated in Section 2.9.

Corporate Entity” shall mean a bank, corporation, partnership, limited liability company or other organization, whether an incorporated or unincorporated organization.

Covered Claim” shall have the meaning stated in Section 9.7(b).

CRA” shall mean the Community Reinvestment Act of 1997.

CVRs” shall have the meaning stated in the second Recital.

 

A-2
 

 

damages” shall mean all costs, expenses, damages, liabilities, claims, demands, obligations, diminutions in value, fines, awards, judgments, losses, royalties, deficiencies, costs and expenses, interest, awards, judgments and penalties (including reasonable attorneys’ fees and expenses and consultants’ fees and expenses) actually suffered or incurred.

Deposit(s)” means deposit liabilities with respect to deposit accounts booked by Company or its Subsidiaries, as of the Effective Time, which constitute “deposits” for purposes of the Federal Deposit Insurance Act, 12 U.S.C. § 1813, including collected and uncollected deposits and Accrued Interest.

Dissenting Shares” shall have the meaning stated in Section 2.7(f).

EESA” shall have the meaning stated in Section 3.13(k).

Effective Time” shall have the meaning stated in Section 2.2.

Election” shall have the meaning stated in Section 2.12(a).

Election Deadline” shall have the meaning stated in Section 2.12(d).

ERISA” shall have the meaning stated in Section 3.13(a).

ERISA Affiliate” shall have the meaning stated in Section 3.13(a).

Exchange Act” shall have the meaning stated in Section 3.7(a).

Exchange Agent” shall have the meaning stated in Section 2.12(d).

Exchange Agent Agreement” shall have the meaning stated in Section 2.12(d).

Exchange Fund” shall have the meaning stated in Section 2.13.

Exchange Ratio” shall mean the Per Share Stock Consideration.

Expense Reimbursement” shall have the meaning stated in Section 8.2(c).

FDIC” shall have the meaning stated in Section 3.2(b).

Federal Courts” shall have the meaning stated in Section 9.7(b).

Federal Reserve Board” shall mean the Board of Governors of the Federal Reserve System.

Form of Election” shall have the meaning stated in Section 2.12(b).

Form S-1” shall mean the Registration Statement on Form S-1 (File No. 333-175108) filed by Parent.

Form S-1 Effectiveness” shall mean the date on which the Form S-1 shall have been declared effective by the SEC; provided that no stop orders suspending the effectiveness of the Form S-1 shall have been issued, and no action, suit, proceeding or investigation by the SEC to suspend the effectiveness thereof shall have been initiated and be continuing.

Form S-4” shall have the meaning stated in Section 6.3(a).

GAAP” means accounting principles generally accepted in the United States.

Governmental Entity” shall mean any court, administrative agency, arbitrator or commission or other governmental, prosecutorial or regulatory authority or instrumentality, or any SRO.

Holder” shall have the meaning stated in Section 2.12.

HSR Act” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

Intellectual Property” shall mean any or all of the following and all rights in, arising out of or associated with: all patents, trademarks, trade names, service marks, domain names, database rights, copyrights and any applications therefore, mask works, net lists, technology, web sites, know-how, trade secrets, inventory, ideas, algorithms, processes, computer software programs or applications (in both source code and object code form), and tangible or intangible proprietary information or material of a Person.

Interim Final Rule” shall have the meaning stated in Section 7.2(f).

IPO Price” shall mean the initial public offering price of the Parent Common Stock to the public pursuant to an initial public offering conducted pursuant to the Form S-1.

Knowledge” with respect to Company shall mean the knowledge, after reasonable inquiry, of those individuals set forth on Section 1.1 of the Company Disclosure Schedule.

Leased Premises” shall mean all parcels of real property leased to Company pursuant to the Real Property Leases.

Letter of Transmittal” shall have the meaning stated in Section 2.14(a)(i).

Lien” shall mean any lien, claim, charge, option, encumbrance, mortgage, pledge or security interest or other restriction of any kind.

Loan(s)” shall have the meaning stated in Section 3.24(a).

Loan Documentation” means all Loan files and all documents included in Company’s or any of its Subsidiaries’ file or imaging system with respect to a Loan, including loan applications, notes, security agreements, deeds of trust, collectors notes, appraisals, credit reports, disclosures, titles to collateral, verifications (including employment verification, deposit verification, etc.), mortgages, loan agreements, including building and loan agreements, guarantees, pledge agreements, financing statements, intercreditor agreements, participation agreements, sureties and insurance policies (including title insurance policies) and all modifications, waivers and consents relating to any of the foregoing.

 

A-3
 

 

Loan Tape” means a data storage disk produced by Company from its management information systems regarding the Loans.

Materially Burdensome Regulatory Condition” shall have the meaning stated in Section 6.1(a).

Merger” shall have the meaning stated in the first Recital.

Merger Consideration” shall have the meaning stated in Section 2.7(b).

Merger Sub” shall have the meaning stated in the Preamble to this Agreement.

Multiemployer Plan” shall mean a “multiemployer plan” within the meaning of Section 4001(a)(3) of ERISA.

Non-Election Share” shall have the meaning stated in Section 2.7(b)(iii).

North Carolina Courts” shall have the meaning stated in Section 9.7(b).

Notice Period” shall have the meaning stated in Section 5.3(d)(i).

Parent” shall have the meaning stated in the Preamble to this Agreement.

Parent Capitalization Date” shall have the meaning stated in Section 4.3.

“Parent Common Stock” shall have the meaning stated in Section 4.3.

Parent Disclosure Schedule” shall mean the disclosure schedule dated as of the date of the Agreement and delivered by Company to Parent concurrent with the execution and delivery of the Agreement

Parent Material Adverse Effect” shall mean, with respect to Parent, any event, development, change or effect that prevents, or would be reasonably likely to prevent, Parent from consummating the transactions contemplated hereby.

Parent Preferred Stock” shall have the meaning stated in Section 4.3.

Parent Regulatory Approvals” shall have the meaning stated in Section 4.5.

Parent Representatives” shall have the meaning stated in Section 6.2.

Parent Share Price” shall mean $22; provided, however, if the IPO Price is less than $21 per share or greater than $29 per share, the Parent Share Price shall equal the product of (i) the IPO Price and (ii) 0.9.

Party” shall mean any of Parent, the Company, or Merger Sub, and “Parties” shall mean Parent, the Company, and Merger Sub.

Pension Plan” shall have the meaning stated in Section 3.13(d).

Per Share Cash Consideration” shall mean $2.875.

Per Share Stock Consideration” shall mean the quotient obtained by dividing (i) the Total Parent Shares Issued by (ii) the Stock Conversion Number.

Per Share TARP Discount Amount” shall mean the quotient obtained by dividing (i) the TARP Discount Amount by (ii) the number of shares of Company Common Stock outstanding immediately prior to the Effective Time.

Permits” shall have the meaning stated in Section 3.15(a).

Permitted Liens” shall have the meaning stated in Section 3.22.

Person” shall mean any individual, Corporate Entity or Governmental Entity.

Personal Property” means all of the personal property of Company and its Subsidiaries consisting of the trade fixtures, shelving, furniture, on-premises ATMs, equipment, security systems, safe deposit boxes (exclusive of contents), vaults, sign structures and supplies excluding any items consumed or disposed of, but including new items acquired or obtained, in the ordinary course of the operation of the business of Company and its Subsidiaries.

Personal Property Leases” means the leases under which Company or its Subsidiaries lease Personal Property.

Pool” shall have the meaning stated in Section 3.24(f).

Previously Disclosed” with respect to (a) any party means information set forth in its Disclosure Schedule and (b) the Company means information publicly disclosed by the Company in (i) its Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed by it with the SEC on March 23, 2012 (including all exhibits included or incorporated by reference therein) (the “Company 10-K”), (ii) its Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2011, June 30, 2011, and September 30, 2011, as filed by it with the SEC on May 12, 2011, August 10, 2011, and November 14, 2011, respectively, or (iii) any Current Report on Form 8-K filed or furnished by it with the SEC since January 1, 2011 and publicly available prior to the date of this Agreement (in each case excluding any risk factor disclosures contained in such documents under the heading “Risk Factors” and any disclosure of risks included in any “forward-looking statements” disclaimer or other statements that are similarly non-specific and are predictive or forward-looking in nature).

Proprietary Rights” shall have the meaning stated in Section 3.23.

Proxy Statement” shall have the meaning stated in Section 6.3(a).

Regulatory Agreement” shall have the meaning stated in Section 3.17.

Regulatory Approvals” shall mean the Requisite Regulatory Approvals and the Parent Regulatory Approvals.

Representative” shall have the meaning stated in Section 5.3(a).

Requisite Regulatory Approvals” shall have the meaning stated in Section 3.6.

Sarbanes-Oxley Act” shall have the meaning stated in Section 3.7(b).

 

A-4
 

 

“SEC” means the United States Securities and Exchange Commission.

Securities Act” shall have the meaning stated in Section 3.7(a).

Shortfall Number” shall have the meaning stated in Section 2.8(b).

SRO” shall mean any domestic or foreign securities, broker-dealer, investment adviser and insurance industry self-regulatory organization.

Stock Consideration” shall have the meaning stated in Section 2.7(b)(ii).

Stock Conversion Number” shall be equal to the product of (i) the number of shares of Company Common Stock outstanding immediately prior to the Effective Time and (ii) 0.6.

Stock Election” shall have the meaning stated in Section 2.7(b)(ii).

Stock Election Share” shall have the meaning stated in Section 2.7(b)(ii).

Stock Purchase Plan” shall have the meaning stated in Section 2.11.

Subsidiary” and “Subsidiaries” shall have the meaning stated in Section 3.2(a).

Superior Proposal” means any bona fide written Acquisition Proposal with respect to which the board of directors of the Company determines in its good faith judgment to be more favorable from a financial point of view to the Company’s shareholders than the Merger and to be reasonably capable of being consummated on the terms proposed, after (i) receiving the advice of outside counsel and a financial advisor and (ii) taking into account all relevant factors (including the likelihood of consummation of such transaction on the terms set forth therein; any proposed changes to this Agreement that may be proposed by Parent in response to such Acquisition Proposal; and all legal (with the advice of outside counsel), financial (including the financing terms of any such proposal), regulatory and other aspects of such proposal (including any expense reimbursement provisions and conditions to closing)); provided, that for purposes of the definition of “Superior Proposal,” the references to “20%” in the definition of Acquisition Transaction shall be deemed to be references to “80%.”

Surviving Corporation” shall have the meaning stated in the first Recital.

TARP Discount Amount” shall mean the product of (i) 0.5 and (ii) the excess, if any, of (a) the stated repurchase price of the Company Preferred Stock and the Treasury Warrant over (b) the purchase price agreed between Parent and the U.S. Department of the Treasury with respect to Parent’s purchase of any or all of the Company Preferred Stock and the Treasury Warrant.

Tax” or “Taxes” shall mean all federal, state, local, and foreign income, excise, gross receipts, gross income, ad valorem, profits, gains, property, capital, sales, transfer, use, value-added, stamp, documentation, payroll, employment, severance, withholding, duties, license, intangibles, franchise, backup withholding, environmental, occupation, alternative or add-on minimum taxes, imposed by any Governmental Entity, and other taxes, charges, levies or like assessments, and including all penalties and additions to tax and interest thereon.

Tax Return” shall mean any return, declaration, report, statement, information statement and other document filed or required to be filed with respect to Taxes, including any schedule or attachment thereto, and including any amendment thereof, supplied to a Governmental Entity.

Termination Fee” shall have the meaning stated in Section 8.2(d).

Total Parent Shares Issued” shall mean the quotient obtained by dividing (i) the product of (a) the Stock Conversion Number and (b) $2.875 by (ii) the Parent Share Price.

Treasury Warrant” shall have the meaning stated in Section 3.3.

Trust Preferred Securities” shall have the meaning stated in Section 3.5(b).

Voting Debt” shall have the meaning stated in Section 3.3.

 

Article II
THE MERGER; DELIVERY OF MERGER CONSIDERATION

 

2.1           The Merger.

 

(a)          Subject to the terms and conditions of this Agreement, in accordance with the North Carolina Business Corporation Act (the “BCA”) at the Effective Time, Merger Sub shall merge with and into the Company. The Company shall be the Surviving Corporation in the Merger and shall continue its existence as a corporation under the laws of the State of North Carolina. As of the Effective Time, the separate corporate existence of Merger Sub shall cease.

 

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(b)          Parent may at any time change the method of effecting the combination if and to the extent requested by Parent, and Company and Merger Sub agree to enter into such amendments to this Agreement as Parent may reasonably request in order to give effect to such restructuring; provided, however, that no such change or amendment shall alter or change the amount or kind of the Merger Consideration provided for in this Agreement.

 

2.2           Effective Time. The Merger shall become effective as of the date set forth in the articles of merger (the “Articles of Merger”) that shall be filed with the Secretary of State of the State of North Carolina. The term “Effective Time” shall be the date and time when the Merger becomes effective as set forth in the Articles of Merger.

 

2.3           Closing. On the terms and subject to the conditions set forth in this Agreement, the closing of the Merger (the “Closing”) shall take place at 10:00 a.m., New York City time, at the offices of Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York, New York, on a date no later than five Business Days after the satisfaction or waiver (subject to applicable law) of the latest to occur of the conditions set forth in Article VII (other than those conditions that by their nature are to be satisfied or waived at the Closing), unless extended by mutual agreement of the parties (the “Closing Date”).

 

2.4           Articles of Incorporation and Bylaws of the Surviving Corporation. At the Effective Time, the articles of incorporation of the Company in effect immediately prior to the Effective Time shall be the articles of incorporation of the Surviving Corporation until thereafter amended in accordance with applicable law. The bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the bylaws of the Surviving Corporation until thereafter amended in accordance with applicable law and the terms of such bylaws.

 

2.5           Directors and Officers. Subject to applicable law, the directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation and shall hold office until their respective successors are duly elected and qualified, or their earlier death, resignation or removal. The officers of the Company immediately prior to the Closing Date shall be the initial officers of the Surviving Corporation and shall hold office until their respective successors are duly elected and qualified, or their earlier death, resignation or removal.

 

2.6           Effects of the Merger. At and after the Effective Time, the Merger shall have the effects set forth in the BCA.

 

2.7           Conversion of Stock. At the Effective Time, by virtue of the Merger and without any action on the part of Parent, Merger Sub, Company or the holder of any of the following securities:

 

(a)          No Effect on Parent Common Stock. Each share of Parent Stock outstanding immediately prior to the Effective Time shall remain issued and outstanding and shall not be affected by the Merger.

 

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(b)          Conversion of Company Common Stock. Each common share, no par value, of Company (“Company Common Stock”) issued and outstanding immediately prior to the Effective Time (other than any Cancelled Shares) shall, subject to Section 2.8, be converted into the right to receive the following consideration (the “Merger Consideration”):

 

(i)          Each share of Company Common Stock with respect to which an election to receive cash (a “Cash Election”) has been effectively made and not revoked pursuant to Section 2.12 (each, a “Cash Election Share”), or which is otherwise to receive cash consideration in accordance with the terms of this Agreement, shall be converted into the right to receive a CVR and to receive in cash from Parent an amount equal to the sum of (i) the Per Share Cash Consideration (the “Cash Consideration”) and (ii) the Per Share TARP Discount Amount.

 

(ii)         Each share of Company Common Stock with respect to which an election to receive stock consideration (a “Stock Election”) has been properly made and not revoked pursuant to Section 2.12 (each, a “Stock Election Share”), or which is otherwise to receive stock consideration in accordance with the terms of this Agreement, shall be converted into the right to receive, subject to adjustment in accordance with Section 2.7(e), (i) a number of shares of validly issued, fully paid and nonassessable shares of Parent Common Stock equal to the Per Share Stock Consideration (together with any cash in lieu of fractional shares of Parent Common Stock to be paid pursuant to Section 2.14(f), the “Stock Consideration”), (ii) the Per Share TARP Discount Amount and (iii) a CVR.

 

(iii)        Each share of Company Common Stock with respect to which neither a Cash Election or a Stock Election has been properly made and not revoked pursuant to Section 2.12 (each a “Non-Election Share”) shall be converted into the right to receive from Parent a CVR, the Per Share TARP Discount Amount and such Stock Consideration and/or Cash Consideration as is determined in accordance with Section 2.8.

 

(c)          Cancellation of Certain Shares of Company Common Stock. All shares of Company Common Stock issued and outstanding immediately prior to the Effective Time that are owned by Parent, Merger Sub, Company or any wholly owned subsidiaries of Company or Parent (other than (i) shares of Company Common Stock held in trust accounts, managed accounts and the like, or otherwise held in a fiduciary or agency capacity, that are beneficially owned by third parties and (ii) shares of Company Common Stock held, directly or indirectly, by Parent or Company in respect of a debt previously contracted) shall be cancelled and shall cease to exist and no stock of Parent or other consideration shall be delivered in exchange therefor (such cancelled shares, the “Cancelled Shares”).

 

(d)          Conversion of Merger Sub Stock. Each share of common stock of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable share of common stock of the Surviving Corporation, following which, the Surviving Corporation shall be a wholly owned Subsidiary of Parent. From and after the Effective Time, all certificates representing the common stock of Merger Sub shall be deemed for all purposes to represent the number of shares of common stock of the Surviving Corporation into which they were converted in accordance with the immediately preceding sentence.

 

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(e)          Adjustments. If, between the date of this Agreement and the Effective Time, the outstanding shares of Parent Common Stock shall have been increased, decreased, changed into or exchanged for a different number or kind of shares or securities as a result of a reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other similar change in capitalization, an appropriate and proportionate adjustment shall be made to the Merger Consideration, Exchange Ratio and other dependent items, as applicable.

 

(f)          Dissenting Shares. Notwithstanding any other provision contained in this Agreement, shares of Company Common Stock that are issued and outstanding as of the Effective Time and that are held by a shareholder who has perfected his or her right to dissent under the BCA and has not effectively withdrawn or lost such right as of the Effective Date (any such shares being referred to herein as “Dissenting Shares”) shall not be converted into the right to receive the Merger Consideration as provided in Section 2.7(b) and instead shall be entitled to such rights (but only such rights) as are granted by the BCA (unless and until such shareholder shall have failed to perfect, or shall have effectively withdrawn or lost, such shareholder’s right to dissent from the Merger under the BCA) and to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to and subject to the requirements of the BCA. If any such shareholder shall have failed to perfect or shall have effectively withdrawn or lost such right prior to the Election Deadline, each of such holder’s shares of Company Common Stock shall thereupon be deemed to be Non-Election Shares for all purposes of this Agreement, unless such shareholder shall thereafter otherwise make a timely Election under this Agreement. If any holder of Dissenting Shares shall have so failed to perfect or has effectively withdrawn or lost such shareholder’s right to dissent from the Merger after the Election Deadline, each of such holder’s shares of Company Common Stock shall thereupon be deemed to have been converted into and to have become, as of the Effective Time, the right to receive the Stock Consideration or the Cash Consideration, or a combination thereof, as determined by Parent in its sole discretion (subject to Section 2.7(g)). Company shall give Parent (i) prompt notice of any notice or demand for appraisal or payment for shares of Company Common Stock received by Company and (ii) the opportunity to participate in and direct all negotiations and proceedings with respect to any such demand or notices. Company shall not, without the prior written consent of Parent, make any payment with respect to, or settle, offer for settle or otherwise negotiate any such demands.

 

(g)          Preferred Stock; Warrant. Each share of Company Preferred Stock outstanding immediately prior to the Effective Time shall remain issued and outstanding and shall not be affected by the Merger. The Merger shall have the effects on the Treasury Warrant set forth in the Treasury Warrant.

 

2.8           Proration. Notwithstanding any other provision contained in this Agreement, the total number of shares of Company Common Stock that shall be converted into the right to receive the Cash Consideration pursuant to Section 2.7 (which, for this purpose, shall be deemed to include the Dissenting Shares determined as of the Effective Time) shall be equal to the Cash Conversion Number, and the number of shares of Company Common Stock that shall be converted into the right to receive the Stock Consideration pursuant to Section 2.7 shall be equal to the Stock Conversion Number. As soon as reasonably practicable after the Effective Time, Parent shall cause the Exchange Agent to effect the allocation among holders of Company Common Stock of rights to receive the Cash Consideration and the Stock Consideration as follows:

 

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(a)          If the aggregate number of shares of Company Common Stock with respect to which Cash Elections shall have been made (which, for this purpose, shall be deemed to include the Dissenting Shares determined as of the Effective Time) (the “Cash Election Number”) exceeds the Cash Conversion Number, then all Stock Election Shares and all Non-Election Shares shall be converted into the right to receive the Stock Consideration, and Cash Election Shares of each holder thereof will be converted into the right to receive the Cash Consideration in respect of that number of Cash Election Shares equal to the product obtained by multiplying (x) the number of Cash Election Shares held by such holder by (y) a fraction, the numerator of which is the excess, if any, of the Cash Conversion Number over the number of Dissenting Shares determined as of the Effective Time and the denominator of which is the number of Cash Election Shares (with the Exchange Agent to determine, consistent with this Section 2.8, whether fractions of Cash Election Shares shall be rounded up or down), with the remaining number of such holder’s Cash Election Shares being converted into the right to receive the Stock Consideration; and

 

(b)          If the Cash Election Number is less than the Cash Conversion Number (the amount by which the Cash Conversion Number exceeds the Cash Election Number being referred to herein as the “Shortfall Number”), then (i) all Cash Election Shares shall be converted into the right to receive the Cash Consideration and (ii) all Non-Election Shares and Stock Election Shares shall be treated in the following manner:

 

(i)          If the Shortfall Number is less than or equal to the number of Non-Election Shares, then all Stock Election Shares shall be converted into the right to receive the Stock Consideration, and the Non-Election Shares of each holder thereof shall convert into the right to receive the Cash Consideration in respect of the number of Non-Election Shares equal to the product obtained by multiplying (x) the number of Non-Election Shares held by such holder by (y) a fraction, the numerator of which is the Shortfall Number and the denominator of which is the total number of Non-Election Shares (with the Exchange Agent to determine, consistent with this Section 2.8, whether fractions of Non-Election Shares shall be rounded up or down), with the remaining number of such holder’s Non-Election Shares being converted into the right to receive the Stock Consideration; or

 

(ii)         If the Shortfall Number exceeds the number of Non-Election Shares, then all Non-Election Shares shall be converted into the right to receive the Cash Consideration, and Stock Election Shares of each holder thereof shall convert into the right to receive the Cash Consideration in respect of that number of Stock Election Shares equal to the product obtained by multiplying (x) the number of Stock Election Shares held by such holder by (y) a fraction, the numerator of which is the amount by which (1) the Shortfall Number exceeds (2) the total number of Non-Election Shares, and the denominator of which is the total number of Stock Election shares (with the Exchange Agent to determine, consistent with this Section 2.8, whether fractions of Stock Election Shares shall be rounded up or down), with the remaining number of such holder’s Stock Election Shares being converted into the right to receive the Stock Consideration.

 

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2.9           Stock Options. As soon as practicable following the date of this Agreement, the board of directors of the Company (or the appropriate committee thereof) shall take all necessary actions, including adopting any necessary resolutions and amendments, to provide that effective as of ten Business Days prior to the Election Deadline, all outstanding options to purchase shares of Company Common Stock (“Company Stock Options”) granted under the Company’s 1997 Incentive Stock Option Plan, the 1997 Nonstatutory Stock Option Plan, the 2002 Incentive Stock Option Plan, the 2002 Nonstatutory Stock Option Plan and the 2006 Nonstatutory Stock Option Plan (collectively with the Company’s Restricted Stock Plan, the “Company Stock Plans”), shall vest in full and become exercisable, such that each holder thereof may elect to exercise his or her Company Stock Options prior to the Election Deadline and have the shares of Company Common Stock received in respect thereof treated in accordance with Section 2.7 of this Agreement. At the Effective Time, by virtue of the Merger and without any action on the part of the holders thereof, each Company Stock Option that is outstanding immediately prior to the Effective Time shall automatically be cancelled at the Effective Time and converted into the right to receive, as soon as practicable following the Effective Time, a lump sum cash payment equal to the product of (i) the number of shares subject to such Company Stock Option and (ii) the excess, if any, of (A) the Per Share Cash Consideration over (B) the exercise price per share of such Company Stock Option, less applicable tax withholding. Prior to the Effective Time, the board of directors of the Company shall take all necessary actions to ensure that following the Effective Time no rights remain outstanding to acquire or receive Company Common Stock (or payments in respect thereof) under the Company Stock Plan or otherwise.

 

2.10         Restricted Stock Awards. As of immediately prior to the Effective Time, each restricted share of Company Common Stock granted to any employee or director of the Company or any of its Subsidiaries under the Company’s Restricted Stock Plan that is outstanding as of such time (collectively, the “Company Restricted Shares”) shall vest in full and the restrictions thereon shall lapse, and, as of the Effective Time, each share of Company Common Stock that was formerly a Company Restricted Share shall be entitled to receive the Merger Consideration determined in accordance with Section 2.7 of this Agreement based on the holder’s election in accordance with Section 2.12 of this Agreement; provided, however, that, upon the lapsing of restrictions with respect to each such Company Restricted Share, the Company shall be entitled to deduct and withhold such amounts as may be required to be deducted and withheld under the Code and any applicable state or local tax law with respect to the lapsing of such restrictions. Prior to the Effective Time, the board of directors of the Company shall take all necessary actions to ensure that following the Effective Time no rights remain outstanding to acquire or receive Company Common Stock (or payments in respect thereof) under the Company Stock Plan or otherwise.

 

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2.11         Employee Stock Purchase Plan. As soon as practicable following the date of this Agreement, the board of directors of the Company (or the appropriate committee thereof) shall take all necessary actions, including adopting any necessary resolutions and amendments, to (i) terminate the 2002 Employee Stock Purchase Plan (the “Stock Purchase Plan”) as of no later than immediately prior to the Effective Time, (ii) ensure that no option period under the Stock Purchase Plan shall be commenced on or after the date of this Agreement, (iii) if the Effective Time shall occur prior to the end of the option periods in existence under the Stock Purchase Plan on the date of this Agreement, cause a new exercise date to be set under the Stock Purchase Plan, which date shall be the end of the payroll period that is at least ten (10) Business Days prior to the anticipated Effective Time, (iv) prohibit participants in the Stock Purchase Plan from altering their payroll deductions from those in effect on the date of this Agreement (other than to discontinue their participation in the Stock Purchase Plan in accordance with the terms and conditions of the Stock Purchase Plan), (v) provide that the amount of the accumulated contributions of each participant under the Stock Purchase Plan as of immediately prior to the Effective Time shall, to the extent not used to purchase shares of Company Common Stock in accordance with the terms and conditions of the Stock Purchase Plan (as amended pursuant to this Section 2.11), be refunded to such participant as promptly as practicable following the Effective Time (without interest); and (vi) ensure that no current or former employees, officers, directors or other service providers of Company and its Subsidiaries or their beneficiaries have any right to receive shares of Parent Common Stock under the Stock Purchase Plan.

 

2.12         Election Procedures. Each holder of record of shares of Company Common Stock (“Holder”) shall have the right, subject to the limitations set forth in this Article II, to submit an election in accordance with the following procedures:

 

(a)          Each Holder may specify in a request made in accordance with the provisions of this Section 2.12 (herein called an “Election”) (i) the number of shares of Company Common Stock owned by such Holder with respect to which such Holder desires to make a Stock Election and (ii) the number of shares of Company Common Stock owned by such Holder with respect to which such Holder desires to make a Cash Election.

 

(b)          Parent shall prepare a form reasonably acceptable to Company (the “Form of Election”) which shall be mailed to record holders of Company Common Stock so as to permit those holders to exercise their right to make an Election prior to the Election Deadline.

 

(c)          Parent shall make the Form of Election initially available not less than twenty (20) Business Days prior to the anticipated Election Deadline and shall use commercially reasonable efforts to make available as promptly as possible a Form of Election to any shareholder of Company who requests such Form of Election following the initial mailing of the Forms of Election and prior to the Election Deadline.

 

(d)          Any Election shall have been made properly only if the person authorized to receive Elections and to act as exchange agent under this Agreement, which person shall be a bank or trust company selected by Parent and reasonably acceptable to Company (the “Exchange Agent”), pursuant to an agreement (the “Exchange Agent Agreement”) entered into prior to the mailing of the Form of Election to Company shareholders, shall have received, by the Election Deadline, a Form of Election properly completed and signed and accompanied by Certificates to which such Form of Election relates or by an appropriate customary guarantee of delivery of such certificates, as set forth in such Form of Election, from a member of any registered national securities exchange or a commercial bank or trust company in the United States; provided that such Certificates are in fact delivered to the Exchange Agent by the time required in such guarantee of delivery. Failure to deliver shares of Company Common Stock covered by such a guarantee of delivery within the time set forth on such guarantee shall be deemed to invalidate any otherwise properly made Election, unless otherwise determined by Parent, in its sole discretion. As used herein, unless otherwise agreed in advance by the parties, “Election Deadline” means 5:00 p.m. local time (in the city in which the principal office of the Exchange Agent is located) on the date that Parent and Company shall agree is as near as practicable to five (5) Business Days prior to the expected Closing Date.

 

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(e)          Any Company shareholder may, at any time prior to the Election Deadline, change or revoke his or her Election by written notice received by the Exchange Agent prior to the Election Deadline accompanied by a properly completed and signed revised Form of Election. Subject to the terms of the Exchange Agent Agreement, if Parent shall determine in its reasonable discretion that any Election is not properly made with respect to any shares of Company Common Stock (neither Parent nor Company nor the Exchange Agent being under any duty to notify any shareholder of any such defect), such Election shall be deemed to be not in effect, and the shares of Company Common Stock covered by such Election shall, for purposes hereof, be deemed to be Non-Election Shares, unless a proper Election is thereafter timely made.

 

(f)          Any Company shareholder may, at any time prior to the Election Deadline, revoke his or her Election by written notice received by the Exchange Agent prior to the Election Deadline or by withdrawal prior to the Election Deadline of his or her Certificates, or of the guarantee of delivery of such Certificates, previously deposited with the Exchange Agent. All Elections shall be automatically deemed revoked upon receipt by the Exchange Agent of written notification from Parent or Company that this Agreement has been terminated in accordance with Article VIII.

 

(g)          Subject to the terms of the Exchange Agent Agreement, Parent, in the exercise of its reasonable discretion, shall have the right to make all determinations, not inconsistent with the terms of this Agreement, governing (i) the validity of the Forms of Election and compliance by any Company shareholder with the Election procedures set forth herein, (ii) the manner and extent to which Elections are to be taken into account in making the determinations prescribed by Section 2.7, (iii) the issuance and delivery of certificates representing the whole number of shares of Parent Common Stock into which shares of Company Common Stock are converted in the Merger and (iv) the method of payment of cash for shares of Company Common Stock converted into the right to receive the Cash Consideration, of cash for the TARP Discount Amount, and cash in lieu of fractional shares of Parent Common Stock.

 

2.13         Merger Consideration. At or prior to the Effective Time, Parent shall make available to the Exchange Agent, (i) certificates representing the number of shares of Parent Common Stock sufficient to deliver, and Parent shall instruct the Exchange Agent to timely deliver, the aggregate Stock Consideration, (ii) immediately available funds equal to the aggregate Cash Consideration (together with, to the extent then determinable, any cash payable in lieu of fractional shares pursuant to Section 2.14(f)), and (iii), if the TARP Discount Amount has been determined, immediately available funds equal to the TARP Discount Amount (collectively, the “Exchange Fund”). If the TARP Discount Amount has not been determined prior to the Effective Tiime, Parent shall make available to the Exchange Agent immediately available funds equal to the TARP Discount Amount within a commercially reasonable time after Parent shall have determined the TARP Discount Amount. Parent shall instruct the Exchange Agent to timely pay the Cash Consideration, such cash in lieu of fractional shares, and the TARP Discount Amount in accordance with this Agreement.

 

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2.14         Delivery of Merger Consideration.

 

(a)          As soon as reasonably practicable after the Effective Time, the Exchange Agent shall mail to each holder of record of Certificate(s) which immediately prior to the Effective Time represented outstanding shares of Company Common Stock whose shares were converted into the right to receive the Merger Consideration pursuant to Section 2.7 and any cash in lieu of fractional shares of Parent Common Stock to be issued or paid in consideration therefor who did not properly complete and submit an Election Form, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to Certificate(s) shall pass, only upon delivery of Certificate(s) (or affidavits of loss in lieu of such Certificate(s))) (the “Letter of Transmittal”) to the Exchange Agent and shall be substantially in such form and have such other provisions as shall be prescribed by the Exchange Agent Agreement and (ii) instructions for use in surrendering Certificate(s) in exchange for the Merger Consideration and any cash in lieu of fractional shares of Parent Common Stock to be issued or paid in consideration therefor in accordance with Section 2.14(f) upon surrender of such Certificate and any dividends or distributions to which such holder is entitled pursuant to Section 2.14(c).

 

(b)          Upon surrender to the Exchange Agent of its Certificate(s), accompanied by a properly completed Form of Election or a properly completed Letter of Transmittal, a holder of Company Common Stock will be entitled to receive, promptly after the Effective Time, the Merger Consideration (elected or deemed elected by it, subject to, and in accordance with Sections 2.7 and 2.8) and any cash in lieu of fractional shares of Parent Common Stock to be issued or paid in consideration therefor in respect of the shares of Company Common Stock represented by its Certificate(s). Until so surrendered, each such Certificate shall represent after the Effective Time, for all purposes, only the right to receive, without interest, the Merger Consideration and any cash in lieu of fractional shares of Parent Common Stock to be issued or paid in consideration therefor upon surrender of such Certificate in accordance with, and any dividends or distributions to which such holder is entitled pursuant to, this Article II.

 

(c)          No dividends or other distributions with respect to Parent Common Stock shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Parent Common Stock represented thereby, in each case unless and until the surrender of such Certificate in accordance with this Article II. Subject to the effect of applicable abandoned property, escheat or similar laws, following surrender of any such Certificate in accordance with this Article II the record holder thereof shall be entitled to receive, without interest, (i) the amount of dividends or other distributions with a record date after the Effective Time theretofore payable with respect to the whole shares of Parent Common Stock represented by such Certificate and not paid and/or (ii) at the appropriate payment date, the amount of dividends or other distributions payable with respect to shares of Parent Common Stock represented by such Certificate with a record date after the Effective Time (but before such surrender date) and with a payment date subsequent to the issuance of the Parent Common Stock issuable with respect to such Certificate.

 

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(d)          In the event of a transfer of ownership of a Certificate representing Company Common Stock that is not registered in the stock transfer records of Company, the proper amount of cash and/or shares of Parent Common Stock shall be paid or issued in exchange therefor to a person other than the person in whose name the Certificate so surrendered is registered if the Certificate formerly representing such Company Common Stock shall be properly endorsed or otherwise be in proper form for transfer and the person requesting such payment or issuance shall pay any transfer or other similar Taxes required by reason of the payment or issuance to a person other than the registered holder of the Certificate or establish to the satisfaction of Parent that the Tax has been paid or is not applicable. The Exchange Agent (or, subsequent to the first anniversary of the Effective Time, Parent) shall be entitled to deduct and withhold from any cash portion of the Merger Consideration, any cash in lieu of fractional shares of Parent Common Stock, cash dividends or distributions payable pursuant to Section 2.14(c) hereof and any other cash amounts otherwise payable pursuant to this Agreement to any holder of Company Common Stock (including with respect to any Dissenting Shares) such amounts as the Exchange Agent or Parent, as the case may be, is required to deduct and withhold under the Code, or any provision of state, local or foreign Tax law, with respect to the making of such payment. To the extent the amounts are so withheld by the Exchange Agent or Parent, as the case may be, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of shares of Company Common Stock in respect of whom such deduction and withholding was made by the Exchange Agent or Parent, as the case may be.

 

(e)          After the Effective Time, there shall be no transfers on the stock transfer books of Company of any shares of Company Common Stock that were issued and outstanding immediately prior to the Effective Time other than to settle transfers of Company 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 cancelled and exchanged for the Merger Consideration and any cash in lieu of fractional shares of Parent Common Stock to be issued or paid in consideration therefor in accordance with Section 2.7 and the procedures set forth in this Article II.

 

(f)          Notwithstanding anything to the contrary contained in this Agreement, no certificates or scrip representing fractional shares of Parent Common Stock shall be issued upon the surrender of Certificates for exchange, no dividend or distribution with respect to Parent Common Stock shall be payable on or with respect to any fractional share, and such fractional share interests shall not entitle the owner thereof to vote or to any other rights of a shareholder of Parent. In lieu of the issuance of any such fractional share, Parent shall pay to each former shareholder of Company who otherwise would be entitled to receive such fractional share, an amount in cash (rounded to the nearest whole cent) determined by multiplying (i) the Parent Share Price by (ii) the fraction of a share (after taking into account all shares of Company Common Stock held by such holder at the Effective Time and rounded to the nearest one thousandth when expressed in decimal form) of Parent Common Stock to which such holder would otherwise be entitled to receive pursuant to Section 2.7. The parties acknowledge that payment of the cash consideration in lieu of issuing fractional shares was not separately bargain-for consideration but merely represents a mechanical rounding off for purposes of avoiding the expense and inconvenience to Parent that would otherwise be caused by the issuance of fractional shares.

 

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(g)          Any portion of the Exchange Fund that remains unclaimed by the shareholders of Company as of the first anniversary of the Effective Time shall be paid to Parent. Any former shareholders of Company who have not theretofore complied with this Article II shall thereafter look only to Parent with respect to the Merger Consideration, any cash in lieu of any fractional shares and any unpaid dividends and distributions on the Parent Common Stock deliverable in respect of each share of Company Common Stock such shareholder holds as determined pursuant to this Agreement, in each case, without any interest thereon. Any Merger Consideration remaining unclaimed as of a date which is immediately prior to such time as such amounts would otherwise escheat to or become property of any Governmental Entity shall, to the extent permitted by applicable law, become the property of Parent free and clear of any claims or interest of any Person previously entitled thereto. Notwithstanding the foregoing, none of Parent, Company, the Exchange Agent or any other person shall be liable to any former holder of shares of Company Common Stock for any amount delivered in good faith to a public official pursuant to applicable abandoned property, escheat or similar laws.

 

(h)          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 Parent or the Exchange Agent, the posting by such person of a bond in such amount as Parent may determine is reasonably necessary 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 pursuant to this Agreement.

 

Article III
REPRESENTATIONS AND WARRANTIES OF COMPANY

 

Company represents and warrants to Parent, as of the date of this Agreement and as of the Closing Date (except to the extent made only as of a specified date, in which case as of such date) that, except as Previously Disclosed:

 

3.1           Disclosure. On or prior to the date hereof, the Company delivered to Parent the Company Disclosure Schedule.

 

3.2           Organization and Authority.

 

(a)          The Company is, and at the Closing Date will be, a corporation duly organized, validly existing and in good standing under the laws of the State of North Carolina. The Company is a bank holding company duly registered under the BHCA. The Company has, and at the Closing Date will have, the power and authority (corporate, governmental, regulatory and otherwise) and has or will have all necessary approvals, orders, licenses, certificates, permits and other governmental authorizations (collectively, the Authorizations) to own or lease all of the assets owned or leased by it and to conduct its business in all material respects in the manner Previously Disclosed, and has the corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted except where the failure to have such power and authority or such Authorizations has not had, individually or in the aggregate, a Company Material Adverse Effect. The Company is, and at the Closing Date will be, duly licensed or qualified to do business and in good standing as a foreign corporation in all jurisdictions in which the nature of the activities conducted by the Company requires such qualification except for jurisdictions in which the failure to be so qualified or authorized has not had, individually or in the aggregate, a Company Material Adverse Effect. The Articles of Incorporation, as amended, of the Company (the “Charter”) comply in all material respects with applicable law. A complete and correct copy of the Charter and bylaws of the Company, as amended and as currently in effect, has been delivered or made available to Parent. The Company’s direct and indirect subsidiaries (other than the Bank) (each a Subsidiary and collectively the Subsidiaries) are listed on Section 3.2(a) of the Company Disclosure Schedule.

 

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(b)          Southern Community Bank and Trust (the “Bank”) is a wholly owned subsidiary of the Company and is a corporation and state chartered bank duly organized, validly existing and in good standing under the Laws of the State of North Carolina. The deposit accounts of the Bank are insured up to applicable limits by the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation (the “FDIC”); all premiums and assessments required to be paid in connection therewith have been paid when due; and no proceedings for the termination or revocation of such insurance are pending or, to the Knowledge of the Company, threatened. The Bank has the power and authority (corporate, governmental, regulatory and otherwise) and has or will have all necessary Authorizations to own or lease all of the assets owned or leased by it and to conduct its business in all material respects in the manner Previously Disclosed, except where the failure to have such power and authority or such Authorizations has not had, individually or in the aggregate, a Company Material Adverse Effect. The Bank is duly licensed or qualified to do business and in good standing in all jurisdictions in which the nature of the activities conducted by the Bank requires such qualification except for jurisdictions in which the failure to be so qualified or authorized has not had, individually or in the aggregate, a Company Material Adverse Effect. The articles of incorporation (Bank Charter) of the Bank complies in all material respects with applicable law. A complete and correct copy of the Bank Charter and the bylaws of the Bank, as amended and as currently in effect, has been delivered or made available to Parent.

 

(c)          Each of the Subsidiaries is a corporation or other legal entity duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization. Each such Subsidiary has the power and authority (corporate, governmental, regulatory and otherwise) and has or will have all necessary Authorizations to own or lease all of the assets owned or leased by it and to conduct its business in all material respects as Previously Disclosed, except where the failure to have such power and authority or such Authorizations has not had, individually or in the aggregate, a Company Material Adverse Effect. Each such Subsidiary is duly licensed or qualified to do business and in good standing as a foreign corporation or other legal entity in all jurisdictions in which the nature of the activities conducted by such Subsidiary requires such qualification except for jurisdictions in which the failure to be so qualified or authorized has not had, individually or in the aggregate, a Company Material Adverse Effect. The charter, articles or certificate of incorporation, certificate of trust or other organizational document of each Subsidiary comply in all material respects with applicable Law. A complete and correct copy of the charter, articles or certificate of incorporation or certificate of trust and bylaws of each Subsidiary (or similar governing documents), as amended and as currently in effect, has been delivered or made available to Parent.

 

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3.3           Capitalization. The authorized capital stock of the Company consists of 30,000,000 shares of Company Common Stock and 1,000,000 shares of preferred stock, no par value, of the Company (the Company Preferred Stock). As of the close of business on March 1, 2012 (the Capitalization Date), there were 16,859,825 shares of Company Common Stock outstanding (which includes 103,500 Company Restricted Shares), 541,650 shares of Company Common Stock subject to outstanding Company Stock Options and 42,750 shares of Series A Company Preferred Stock outstanding. Since the Capitalization Date and through the date of this Agreement, except in connection with this Agreement and the transactions contemplated hereby, and as set forth in Section 3.3 of the Company Disclosure Schedule, the Company has not (1) issued or authorized the issuance of any shares of Company Common Stock or Company Preferred Stock, or any securities convertible into or exchangeable or exercisable for shares of Company Common Stock or Company Preferred Stock, (2) reserved for issuance any shares of Company Common Stock or Company Preferred Stock or (3) repurchased or redeemed, or authorized the repurchase or redemption of, any shares of Company Common Stock or Company Preferred Stock. As of the close of business on the Capitalization Date, other than in respect of shares of Common Stock reserved for issuance in connection with any stock option or other equity incentive plan in respect of which an aggregate of no more than 854,111 shares of Common Stock have been reserved for issuance and an additional 799,170 shares reserved for issuance under the Stock Purchase Plan, no shares of Company Common Stock or Company Preferred Stock were reserved for issuance. All of the issued and outstanding shares of Company Common Stock or Company Preferred Stock have been duly authorized and validly issued and are fully paid and nonassessable, and have been issued in compliance with all federal and state securities laws, and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities. No bonds, debentures, notes or other indebtedness having the right to vote on any matters on which the shareholders of the Company may vote (Voting Debt) are issued and outstanding. As of the date of this Agreement, except (A) pursuant to any cashless exercise provisions of any Company stock options or pursuant to the surrender of shares to the Company or the withholding of shares by the Company to cover tax withholding obligations under the Benefit Plans, (B) the warrant to purchase up to 1,623,418 shares of Company Common Stock sold by the Company to the Treasury pursuant to that certain Letter Agreement and Securities Purchase Agreement dated as of December 5, 2008 (the “Treasury Warrant”) or (C) as set forth elsewhere in this Section 3.3 or on the Company Disclosure Schedule, the Company does not have and is not bound by any outstanding subscriptions, options, calls, commitments or agreements of any character calling for the purchase or issuance of, or securities or rights convertible into or exchangeable for, any shares of Company Common Stock or Company Preferred Stock or any other equity securities of the Company or Voting Debt or any securities representing the right to purchase or otherwise receive any shares of capital stock of the Company (including any rights plan or agreement). Section 3.3 of the Company Disclosure Schedule sets forth a table listing the outstanding series of trust preferred and subordinated debt securities of the Company and the Bank and certain information with respect thereto, including the holders of such securities as of the date of this Agreement if known to the Company, and all such information is accurate and complete to the Knowledge of the Company and the Bank.

 

3.4           Subsidiaries. With respect to the Bank and each of the Subsidiaries, (1) all the issued and outstanding shares of such entity’s capital stock have been duly authorized and validly issued, are fully paid and nonassessable, have been issued in compliance with all federal and state securities Laws, and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and (2) there are no outstanding options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into or exchangeable for, or any contracts or commitments to issue or sell, shares of such entity’s capital stock, any other equity security or any Voting Debt, or any such options, rights, convertible securities or obligations. Except as set forth in Section 3.4 of the Company Disclosure Schedule, the Company owns, directly or indirectly, all of the issued and outstanding shares of capital stock of each of the Bank and the Subsidiaries, free and clear of all Liens. Except as set forth in Section 3.4 of the Company Disclosure Schedule, the Company does not own, directly or indirectly, any capital stock or other equity securities of any person that is not a Subsidiary or the Bank.

 

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3.5           Authorization.

 

(a)          The Company has the full legal right, corporate power and authority to enter into this Agreement and the other agreements referenced herein to which it will be a party and to carry out its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement and the other agreements referenced herein to which the Company will be a party and the consummation of the transactions contemplated hereby and thereby have been duly and validly approved by the Board of Directors of the Company. The Board of Directors of the Company has determined that this Agreement is advisable and in the best interests of the Company and its shareholders and has directed that this Agreement be submitted to the Company’s shareholders for approval and adoption at a duly held meeting of such shareholders and has adopted a resolution to the foregoing effect. This Agreement has been, and the other agreements referenced herein to which the Company will be a party, when executed, will be, duly and validly executed and delivered by the Company and, assuming due authorization, execution and delivery by Parent and Merger Sub, is and will be a valid and binding obligation of the Company enforceable against the Company in accordance with its terms (except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and similar laws of general applicability relating to or affecting creditors’ rights or by general equity principles). No other corporate proceedings are necessary for the execution and delivery by the Company of this Agreement and the other agreements referenced herein to which it will be a party, the performance by it of their obligations hereunder and thereunder or the consummation by it of the transactions contemplated hereby and thereby, including the plan of merger contained in this Agreement, other than receipt of the affirmative vote of the holders of a majority of shares of Company Common Stock entitled to vote to adopt and approve the plan of merger contained in this Agreement (the “Company Shareholder Approval”).

 

(b)          Neither the execution and delivery by the Company of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by the Company with any of the provisions hereof, will (A) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event that, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or result in the loss of any benefit or creation of any right on the part of any third party under, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of any Liens upon any of the material properties or assets of the Company, the Bank or any Subsidiary under any of the terms, conditions or provisions of (i) its charter or bylaws (or similar governing documents) or the certificate of incorporation, charter, bylaws or other governing instrument of any Subsidiary or (ii) except as set forth in Section 3.5(b) of the Company Disclosure Schedule, and except for defaults that would not have nor reasonably be expected to have a Company Material Adverse Effect, any material note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company, the Bank or any Subsidiary is a party or by which it may be bound, including without limitation the trust preferred securities issued by Southern Community Capital Trust II and Southern Community Capital Trust III or the related indentures (collectively, the “Trust Preferred Securities”), or to which the Company, the Bank or any Subsidiary or any of the properties or assets of the Company, the Bank or any Subsidiary may be subject, or (B) except for violations that have not had a Company Material Adverse Effect, assuming the consents referred to in Section 3.6 are duly obtained, violate any Law applicable to the Company, the Bank or any Subsidiary or any of their respective properties or assets.

 

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3.6           Consents and Approvals. Except for (i) the approval by the Federal Reserve Board under the BHCA, (ii) the notices, consents, approvals, waivers, authorizations, filings and registrations set forth in Section 3.6 of the Company Disclosure Schedule, (iii) the filing of the Articles of Merger with the Secretary of State of the State of North Carolina pursuant to the BCA and (iv) if required, any approvals or filings required by the HSR Act (such consents or approvals, the “Requisite Regulatory Approvals”), no governmental or any other material consents, approvals, authorizations, applications, registrations and qualifications are required to be obtained in connection with or for the consummation of the transactions contemplated by this Agreement. Other than the securities or blue sky laws of the various states and the Requisite Regulatory Approvals, no material notice to, registration, declaration or filing with, exemption or review by, or authorization, order, consent or approval of, any Governmental Entity or SRO, or expiration or termination of any statutory waiting period, is necessary for the consummation by the Company of the transactions contemplated by this Agreement.

 

3.7           Reports.

 

(a)          Since December 31, 2008, the Company, the Bank and each Subsidiary has timely filed all material reports, registrations, documents, filings, statements and submissions, together with any amendments thereto, that it was required to file with any Governmental Entity or SRO having jurisdiction over the Company (the foregoing, collectively, the “Company Reports”) and has paid all material fees and assessments due and payable in connection therewith. As of their respective dates of filing, the Company Reports complied in all material respects with all statutes and applicable rules and regulations of the applicable Governmental Entities or SROs. Except as set forth in Section 3.7(a) of the Company Disclosure Schedule, to the Knowledge of the Company, as of the date of this Agreement, there are no outstanding comments from the SEC or any other Governmental Entity or any SRO with respect to any Company Report. In the case of each such Company Report filed with or furnished to the SEC, such Company Report did not, as of its date or if amended prior to the date of this Agreement, as of the date of such amendment, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made in it, in light of the circumstances under which they were made, not misleading and complied as to form in all material respects with the applicable requirements of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). With respect to all other Company Reports, to the Knowledge of the Company, the Company Reports were complete and accurate in all material respects as of their respective dates, or the dates of their respective amendments. No executive officer of the Company, the Bank or any Subsidiary has failed in any respect to make the certifications required of him or her under Section 302 or 906 of the Sarbanes-Oxley Act. Copies of all Company Reports not otherwise publicly filed have, to the extent allowed by applicable law, been made available to Parent by the Company. Except for normal examinations conducted by a Governmental Entity or SRO in the regular course of the business of the Company, the Bank and the Subsidiaries, no Governmental Entity or SRO has initiated any proceeding or, to the Knowledge of the Company, investigation into the business or operations of the Company, the Bank or any Subsidiary since December 31, 2008. Except as set forth in Section 3.7(a) of the Company Disclosure Schedule, to the Knowledge of the Company, there is no unresolved violation, criticism or exception by any Governmental Entity or SRO with respect to any report or statement relating to any examinations of the Company, the Bank or any of the Subsidiaries.

 

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(b)          The Company (i) keeps books, records and accounts that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, the Bank and the Subsidiaries, and (ii) maintains a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management’s general or specific authorization, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets, (C) access to assets is permitted only in accordance with management’s general or specific authorization and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company (A) 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 the Company, including the Bank and the Subsidiaries, is made known to the chief executive officer and the chief financial officer of the Company by others within those entities, and (B) has disclosed, based on its most recent evaluation prior to the date hereof, to the Company’s outside auditors and the audit committee of the Board of Directors (x) any significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information and (y) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting. Since December 31, 2008, (A) none of the Company, the Bank or any Subsidiary or, to the Knowledge of the Company or the Bank, any director, officer, employee, auditor, accountant or representative of the Company, the Bank or any Subsidiary 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 the Company, the Bank or any Subsidiary or their respective internal accounting controls, including any material complaint, allegation, assertion or claim that the Company, the Bank or any Subsidiary has engaged in questionable accounting or auditing practices, and (B) no attorney representing the Company, the Bank or any Subsidiary, whether or not employed by the Company, the Bank or any Subsidiary, has reported evidence of a material violation of securities laws, breach of fiduciary duty or similar violation by the Company or any of its officers, directors, employees or agents to the Company’s Board of Directors or any committee thereof or to any director or officer of the Company. The Company is otherwise in compliance in all material respects with all applicable provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as amended and the rules and regulations promulgated thereunder and as of the date of this Agreement. The Company has no Knowledge of any reason that its outside auditors and its chief executive officer and chief financial officer shall not be able to give the certifications and attestations required pursuant to the rules and regulations adopted pursuant to Section 404 of the Sarbanes-Oxley Act, without qualification, when next due.

 

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3.8           Financial Statements.

 

(a)          The Company has previously made available to Parent copies of the consolidated statements of financial condition of the Company, the Bank and the Subsidiaries as of December 31 for the fiscal years 2008, 2009, 2010 and 2011, and the related consolidated statements of operations, of comprehensive income, of changes in shareholders’ equity, and of cash flows for the fiscal years 2009 through 2011, inclusive, as reported in the Company 10-K, in each case accompanied by the audit report of Dixon Hughes Goodman LLP. The December 31, 2011 consolidated statement of financial condition of the Company (including the related notes, where applicable) fairly presents in all material respects the consolidated financial position of the Company, the Bank and the Subsidiaries as of the date thereof, and the other financial statements referred to in this Section 3.8 (including the related notes, where applicable) fairly present in all material respects, and the financial statements to be filed by the Company with the SEC after the date of this Agreement will fairly present in all material respects (subject, in the case of the unaudited statements, to recurring audit adjustments normal in nature and amount), the results of the consolidated operations, comprehensive income, changes in shareholders’ equity, cash flows and the consolidated financial position of the Company, the Bank and the Subsidiaries for the respective fiscal periods or as of the respective dates therein set forth; each of such statements (including the related notes, where applicable) in all material respects complies, and the financial statements to be filed by the Company with the SEC after the date of this Agreement will comply, with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto; and each of such statements (including the related notes, where applicable) has been, and the financial statements to be filed by the Company with the SEC after the date of this Agreement will be, prepared in accordance with GAAP consistently applied during the periods involved, except as indicated in the notes thereto or, in the case of unaudited statements, as permitted by Form 10-Q. There is no transaction, arrangement or other relationship between the Company, the Bank or any Subsidiary and an unconsolidated or other Affiliated entity that is not reflected on the financial statements specified in this Section 3.8. The books and records of the Company, the Bank and the Subsidiaries in all material respects have been, and are being, maintained in accordance with applicable law and GAAP accounting requirements and reflect only actual transactions. Dixon Hughes Goodman LLP has not resigned or been dismissed as independent public accountants of the Company as a result of or in connection with any disagreements with the Company on a matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.

 

(b)          Dixon Hughes Goodman LLP, who has expressed its opinion with respect to the consolidated financial statements contained in the Company 10-K, is as of the date of such opinion a registered independent public accountant, within the meaning of the Code of Professional Conduct of the American Institute of Certified Public Accountants, as required by the Securities Act and the rules and regulations promulgated thereunder and by the rules of the Public Accounting Oversight Board.

 

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3.9           Undisclosed Liabilities. Except as set forth in Section 3.9 of the Company Disclosure Schedule, none of the Company, the Bank or any of the Subsidiaries has any liabilities or obligations of any nature and is not an obligor under any guarantee, keepwell or other similar agreement (absolute, accrued, contingent or otherwise) except for (1) liabilities or obligations reflected in or reserved against in the Company’s consolidated balance sheet as of December 31, 2010, (2) current liabilities that have arisen since December 31, 2011 in the ordinary and usual course of business and consistent with past practice and that have either been Previously Disclosed or would not have, individually or in the aggregate, a material impact on the Company, the Bank or any Subsidiary and (3) contractual liabilities under (other than liabilities arising from any breach or violation of) agreements made in the ordinary and usual course of business and consistent with past practice and that have either been Previously Disclosed or would not have, individually or in the aggregate, a material impact on the Company, the Bank or any Subsidiary.

 

3.10         Absence of Certain Changes. Since December 31, 2010, except as Previously Disclosed, (a) the Company, the Bank and the Subsidiaries have conducted their respective businesses in all material respects in the ordinary and usual course of business and consistent with prior practice, (b) none of the Company, the Bank or any Subsidiary has issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, except borrowings in the ordinary course of business, (c) except for publicly disclosed ordinary dividends on the Common Stock and outstanding Company Preferred Stock or as contemplated by Section 3.3 of this Agreement, the Company has not made or declared any distribution in cash or in kind to its shareholders or issued or repurchased any shares of its capital stock or other equity interests, (d) no fact, event, change, condition, development, circumstance or effect has occurred that has had a Company Material Adverse Effect and (e) no material default (or event that, with notice or lapse of time, or both, would constitute a material default) exists on the part of the Company, the Bank or any Subsidiary or, to their Knowledge, on the part of any other party, in the due performance and observance of any term, covenant or condition of any Company Significant Agreement that would, individually or in the aggregate, constitute a Company Material Adverse Effect.

 

3.11         Legal Proceedings. Except as set forth in Section 3.11 of the Company Disclosure Schedule, none of the Company, the Bank or any Subsidiary is a party to any, and there are no pending or, to the Company’s Knowledge, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature (1) against the Company, the Bank or any Subsidiary (excluding those of the type contemplated by the following clause (2)) that, if adversely determined, would reasonably be expected to result in damages, costs or any other liability owed by the Company, the Bank or such Subsidiary, as applicable, in excess of $50,000 individually or $1,000,000 in the aggregate or (2) as of the date hereof, challenging the validity or propriety of the transactions contemplated by this Agreement. There is no material injunction, order, judgment, decree or regulatory restriction (other than regulatory restrictions of general application that apply to similarly situated companies) imposed upon the Company, the Bank, any Subsidiary or the assets of the Company, the Bank or any Subsidiary. There is no material unresolved violation, criticism or exception by any Governmental Entity with respect to any report or relating to any examinations or inspections of the Company, the Bank or any Subsidiary.

 

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3.12         Taxes and Tax Returns.

 

(a)          Each of the Company and its Subsidiaries has duly and timely filed (including, pursuant to applicable extensions granted without penalty) all material Tax Returns required to be filed by it and all such Tax Returns are correct and complete in all material respects. Each of the Company and its Subsidiaries have paid in full, or made adequate provision in the financial statements of the Company (in accordance with GAAP) for, all Taxes shown as due on such Tax Returns.

 

(b)          No audits or material investigations by any taxing authority relating to any Tax Returns of any of the Company or any of its Subsidiaries is in progress, nor has the Company or any of its Subsidiaries received notice from any taxing authority of the commencement of any audit not yet in progress. No material deficiencies for any Taxes have been proposed, asserted or assessed against or with respect to any Taxes due by, or Tax Returns of, the Company and its Subsidiaries which deficiencies have not since been resolved.

 

(c)          There are no material Liens for Taxes upon the assets of either the Company or its Subsidiaries except for statutory Liens for Taxes not yet due or that are being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP have been provided.

 

(d)          None of the Company or its Subsidiaries has been a “distributing corporation” or a “controlled corporation” in any distribution occurring during the last two years in which the parties to such distribution treated the distribution as one to which Section 355 of the Code is applicable.

 

(e)          None of the Company or its Subsidiary has engaged in any transaction that is the same as or substantially similar to a “listed transaction” for United States federal income tax purposes within the meaning of Treasury Regulations section 1.6011-4. None of the Company or its Subsidiaries has engaged in a transaction of which it made disclosure to any taxing authority to avoid penalties under Section 6662(d) or any comparable provision of state, foreign or local Law. None of the Company, the Bank or any of the Subsidiaries has participated in any “tax amnesty” or similar program offered by any taxing authority to avoid the assessment of penalties or other additions to Tax.

 

(f)          To the Company’s Knowledge, the Company and each of its Subsidiaries have complied in all material respects with all requirements to report information for Tax purposes to any individual or taxing authority, and have collected and maintained all requisite certifications and documentation in valid and complete form with respect to any such reporting obligation, including, without limitation, valid Internal Revenue Service Forms W-8 and W-9.

 

(g)          No claim has been made by a taxing authority in writing to the Company or any of its Subsidiaries in a jurisdiction where the Company or any of its Subsidiaries, as the case may be, does not file Tax Returns that the Company or any of such Subsidiaries, as the case may be, is or may be subject to Tax by that jurisdiction.

 

(h)          None of the Company or any of its Subsidiaries has granted any waiver, extension or comparable consent regarding the application of the statute of limitations with respect to any Taxes or Tax Return that is outstanding, nor has any request for any such waiver or consent been made.

 

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(i)          To the Company’s Knowledge, none of the Company or any of its Subsidiaries has been or is in violation (or with notice or lapse of time or both, would be in violation) of any applicable Law relating to the payment or withholding of Taxes (including, without limitation, withholding of Taxes pursuant to Sections 1441 and 1442 of the Code or any similar provisions of state, local or foreign Law). Each of the Company, the Bank and its Subsidiaries has duly and timely withheld from employee salaries, wages and other compensation and paid over to the appropriate taxing authority all amounts required to be so withheld and paid over for all periods under all applicable Laws.

 

(j)          There are no outstanding powers of attorney enabling any person or entity not a party to this Agreement to represent the Company or any Subsidiary with respect to Tax matters.

 

(k)          None of the Company or any of its Subsidiaries has applied for, been granted, or agreed to any accounting method change for which it will be required to take into account any adjustment under Code Section 481 or any similar provision.

 

(l)          None of the Company or any of its Subsidiaries has undergone an “ownership change” within the meaning of Section 382(g) of the Code, provided that the Company makes no representations as to whether the execution of this Agreement or the consummation of the transactions contemplated hereby will constitute an “ownership change” under Section 382(g) of the Code.

 

3.13         Employee Benefit Plans.

 

(a)          (A) Section 3.13(a) of the Company Disclosure Schedule sets forth a complete list of each Company Benefit Plan. With respect to each Company Benefit Plan, the Company and its Subsidiaries have complied, and are now in compliance, in all material respects, with all provisions of Employee Retirement Income Security Act of 1974, as amended (ERISA), the Code and all laws and regulations applicable to each such Company Benefit Plan; and (B) each Company Benefit Plan has been administered in all material respects in accordance with its terms. Company Benefit Plan means any employee welfare benefit plan within the meaning of Section 3(1) of ERISA, any employee pension benefit plan within the meaning of Section 3(2) of ERISA, and any bonus, incentive, deferred compensation, vacation, stock purchase, stock option, severance, employment, change of control, fringe benefit, or other compensation or employee benefit plan, program, agreement, arrangement or policy sponsored, maintained or contributed to or required to be contributed to by the Company or by any trade or business, whether or not incorporated (an “ERISA Affiliate”), that together with the Company would be deemed a “single employer” within the meaning of section 4001(b) of ERISA, or to which the Company or any of its Subsidiaries or any of their respective ERISA Affiliates is party, whether written or oral, for the benefit of any director, former director, consultant, former consultant, employee or former employee of the Company, the Bank or any Subsidiaries.

 

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(b)          With respect to each Company Benefit Plan, the Company has heretofore delivered or made available to Parent true and complete copies of each of the following documents, to the extent applicable: (i) a copy of the Company Benefit Plan and any amendments thereto (or if the Company Benefit Plan is not a written Company Benefit Plan, a description thereof); (ii) a copy of the two most recent annual reports and actuarial reports, and the most recent report prepared with respect thereto in accordance with Statement of Financial Accounting Standards No. 87; (iii) a copy of the most recent summary plan description required under ERISA with respect thereto; (iv) if the Company Benefit Plan is funded through a trust or any third party funding vehicle, a copy of the trust or other funding agreement and the latest financial statements thereof; and (v) the most recent determination letter received from the Internal Revenue Service with respect to each Company Benefit Plan intended to qualify under section 401 of the Code.

 

(c)          Except as set forth in Section 3.13(c) of the Company Disclosure Schedule, no claim has been made, or to the Knowledge of the Company threatened, against the Company, the Bank or any Subsidiary related to the employment and compensation of employees or any Company Benefit Plan, including, without limitation, any claim related to the purchase of employer securities or to expenses paid under any defined contribution pension plan other than ordinary course claims for benefits.

 

(d)          Except for matters that, individually or in the aggregate, have not had a Company Material Adverse Effect, (i) no Company Benefit Plan which is subject to Title IV of ERISA, Section 302 of ERISA, Section 412 of the Code or Section 4971 of the Code (a “Pension Plan”) had, as of the respective last annual valuation date for each such the Pension Plan, an “unfunded benefit liability” (within the meaning of Section 4001(a)(18) of ERISA), based on actuarial assumptions that have been furnished to Parent, (ii) none of the Pension Plans either (A) has an “accumulated funding deficiency” or (B) has failed to meet any “minimum funding standards”, as applicable (as such terms are defined in Section 302 of ERISA or Section 412 of the Code), whether or not waived, (iii) none of the Company, the Bank, any Subsidiary, any officer of the Company, the Bank or any Subsidiary or any of the Company Benefit Plans which are subject to ERISA, including the Pension Plans, any trust created thereunder or, to the Knowledge of the Company, any trustee or administrator thereof, has engaged in a “prohibited transaction” (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) or any other breach of fiduciary responsibility that could subject the Company, the Bank, any Subsidiary or any officer of the Company, the Bank or any Subsidiary to the Tax or penalty on prohibited transactions imposed by the Code, ERISA or other applicable law, (iv) no Company Benefit Plans and trusts have been terminated, nor is there any intention or expectation to terminate any Company Benefit Plans and trusts, (v) no Company Benefit Plans and trusts are the subject of any proceeding by any Person, including any Governmental Entity, that could be reasonably expected to result in a termination of any Company Benefit Plan or trust, (vi) there has not been any “reportable event” (as that term is defined in Section 4043 of ERISA) with respect to any the Pension Plan during the last six years as to which the 30-day advance-notice requirement has not been waived and (vii) neither the Company, the Bank nor any Subsidiary has, or within the past six years had, contributed to, been required to contribute to, or has any liability (including “withdrawal liability” within the meaning of Title IV of ERISA) with respect to, any Multiemployer Plan.

 

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(e)          Except as set forth in Section 3.13(e) of the Company Disclosure Schedule, neither the Company, the Bank nor any Subsidiary has incurred any current or projected liability in respect of post-retirement health, medical or life insurance benefits for Company Employees, except as required to avoid an excise tax under Section 4980B of the Code or comparable State benefit continuation laws.

 

(f)          Each Company Benefit Plan intended to be “qualified” within the meaning of section 401(a) of the Code is so qualified and the trusts maintained thereunder are exempt from taxation under section 501(a) of the Code, and, to the Knowledge of the Company, no condition exists that could reasonably be expected to jeopardize any such qualification or exemption.

 

(g)          None of the Company, the Bank or any Subsidiary, any Company Benefit Plan, any trust created thereunder, or any trustee or administrator thereof has engaged in a transaction in connection with which the Company, the Bank or any Subsidiary, any Company Benefit Plan, any such trust, or any trustee or administrator thereof, or any party dealing with any Company Benefit Plan or any such trust could be subject to either a civil penalty assessed pursuant to section 409 or 502(i) of ERISA or a tax imposed pursuant to section 4975 or 4976 of the Code.

 

(h)          There has been no material failure of a Company Benefit Plan that is a group health plan (as defined in section 5000(b)(1) of the Code) to meet the requirements of section 4980B(f) of the Code with respect to a qualified beneficiary (as defined in section 4980B(g) of the Code).

 

(i)          Each Company Benefit Plan that is a “non-qualified deferred compensation plan” within the meaning of section 409A(d)(1) of the Code (a “409A Plan”) complies in all material respects with the requirements of section 409A of the Code and the guidance promulgated thereunder. From January 1, 2005 through December 31, 2008, each 409A Plan and any award thereunder was maintained in good faith operational compliance with the requirements of (i) section 409A of the Code and (ii) (x) the proposed regulations issued thereunder, (y) the final regulations issued thereunder or (z) Internal Revenue Service Notice 2005-1. From and after January 1, 2009, each 409A Plan and any award thereunder has been maintained in operational compliance with the requirements of section 409A of the Code the final regulations issued thereunder. As of and since December 31, 2008, each 409A Plan and any award thereunder has been in documentary compliance with the requirements of section 409A of the Code and the final regulations issued thereunder. No payment to be made under any 409A Plan is or will be subject to the interest and additional tax payable pursuant to section 409A(a)(1)(B) of the Code. None of the Company, the Bank or any Subsidiary is party to, or otherwise obligated under, any contract, agreement, plan or arrangement that provides for the gross-up of taxes imposed by section 409A(a)(1)(B) of the Code.

 

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(j)          (i) Except as set forth in Section 3.13(j) of the Company Disclosure Schedule, the transactions contemplated by this Agreement will not, either alone or in combination with any other event or events, (A) result in any payment (including severance, unemployment compensation, “excess parachute payment” (within the meaning of Section 280G of the Code), forgiveness of indebtedness or otherwise) becoming due to any current or former employee, officer or director of the Company, the Bank or any Subsidiary from the Company, the Bank or any Subsidiary under any Company Benefit Plan or otherwise, (B) increase any benefits otherwise payable under any Company Benefit Plan, (C) result in any acceleration of the time of payment or vesting of any such benefits, (D) require the funding or increase in the funding of any such benefits or (E) result in any limitation on the right of the Company, the Bank or any Subsidiary to amend, merge, terminate or receive a reversion of assets from any Company Benefit Plan or related trust and (ii) none of the Company, the Bank or any Subsidiary has taken, or permitted to be taken, any action that required, and no circumstances exist that will require the funding, or increase in the funding, of any benefits, or will result, in any limitation on the right of the Company, the Bank or any Subsidiary to amend, merge, terminate any Company Benefit Plan or receive a reversion of assets from any Company Benefit Plan or related trust. None of the Company, the Bank or any Subsidiary is party to, or otherwise obligated under, any contract, agreement, plan or arrangement that provides for the gross-up of excise taxes imposed by Section 4999 of the Code. Section 3.13(j) of the Company Disclosure Schedule sets forth a complete schedule of the name, current annual base salary and applicable severance or change in control multiple for each current or former employee of the Company who may be entitled to payments or benefits as a result of the transactions contemplated by this Agreement, either alone or in combination with any other event or events.

 

(k)          The Company, the Bank and the Subsidiaries will be in compliance, as of the Closing Date, with Sections 111 and 302 of the Emergency Economic Stabilization Act of 2008, as amended by the U.S. American Recovery and Reinvestment Act of 2009, including all guidance issued thereunder by a Governmental Entity (collectively “EESA”). Each employee of the Company and the Bank who was an SEO within the meaning of the EESA in 2008 has executed a waiver of claims against the Company and the Bank with respect to limiting or reducing rights to compensation for so long as the EESA limitations are required to be imposed.

 

3.14         Labor Matters.

 

(a)          Employees of the Company, the Bank and the Subsidiaries are not represented by any labor union nor are any collective bargaining agreements otherwise in effect with respect to such employees. No labor organization or group of employees of the Company, the Bank or any Subsidiary has made a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or to the Company’s Knowledge threatened to be brought or filed with the National Labor Relations Board or any other labor relations tribunal or authority. There are no organizing activities, strikes, work stoppages, slowdowns, lockouts, material arbitrations or material grievances, or other material labor disputes pending or to the Company’s Knowledge threatened against or involving the Company, the Bank or any Subsidiary. The Company, the Bank and each Subsidiary believe that their relations with their employees are good. No executive officer of the Company, the Bank or any Subsidiary has notified the Company, the Bank or any Subsidiary that such officer intends to leave the Company, the Bank or any Subsidiary or otherwise terminate such officer’s employment with the Company, the Bank or any Subsidiary. No executive officer of the Company, the Bank or any Subsidiary is, or to the Company’s Knowledge is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other agreement or any restrictive covenant, and the continued employment of each such executive officer does not subject the Company, the Bank or any Subsidiary to any liability with respect to any of the foregoing matters.

 

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(b)          The Company, the Bank and the Subsidiaries are in compliance with all notice and other requirements under the Worker Adjustment and Retraining Notification Act of 1988, and any other similar applicable foreign, state, or local laws relating to facility closings and layoffs. The Company is in compliance in all material respects with all applicable laws respecting employment, employment practices, including terms and conditions of employment and wages and hours, employment discrimination, employee classification, workers’ compensation, family and medical leave, the Immigration Reform and Control Act and occupational safety and health requirements and there are no pending or, to the Knowledge of the Company, threatened controversies or other Actions with respect to any such matters.

 

3.15         Compliance with Law.

 

(a)          The Company, the Bank and each Subsidiary have all material permits, licenses, franchises, authorizations, orders and approvals of (“Permits”), and have made all filings, applications and registrations with, Governmental Entities and SROs that are required in order to permit them to own or lease their properties and assets and to carry on their business as presently conducted, and are in compliance with all of such Permits. Each of the Company, the Bank and each Subsidiary is and has been in compliance with and is not in default or violation of, and none of them is, to the Knowledge of the Company, under investigation with respect to or, to the Knowledge of the Company, has been threatened to be charged with or given notice of any material violation of, any applicable domestic (federal, state or local) or foreign Law or order, demand, writ, injunction, decree or judgment of any Governmental Entity or SRO. Except for statutory or regulatory restrictions of general application, no Governmental Entity or SRO has placed any material restriction on the business or properties of the Company, the Bank or any Subsidiary. Except as set forth in Section 3.15 of the Company Disclosure Schedule, since December 31, 2009, none of the Company, the Bank or any Subsidiary has received any notification or communication from any Governmental Entity or SRO (A) asserting that the Company, the Bank or any Subsidiary is not in material compliance with any applicable law, (B) to the Company’s Knowledge, threatening to revoke any permit, license, franchise, authorization, order or approval, or (C) to the Company’s Knowledge, threatening or contemplating revocation or limitation of, or which would have the effect of revoking or limiting, FDIC deposit insurance.

 

(b)          Except as would not be material to the Company, the Bank and the Subsidiaries, taken as a whole, the Bank and each Subsidiary have properly administered all accounts for which the Bank or any Subsidiary acts as a fiduciary, including accounts for which the Bank or any Subsidiary serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment adviser, in accordance with the terms of the governing documents, applicable state and federal law and regulation and common law in all material respects. None of the Bank or any Subsidiary, or any director, officer or employee of the Bank or any Subsidiary, has committed any breach of trust with respect to any such fiduciary account that would be material to the Bank and the Subsidiaries, taken as a whole, and the accountings for each such fiduciary account are true and correct in all material respects and accurately reflect in all material respects the assets of such fiduciary account.

 

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(c)          Company and each insured depository Subsidiary of Company is “well-capitalized” (as that term is defined at 12 C.F.R. 6.4(b)(1) or the relevant regulation of the institution’s primary federal bank regulator), and “well managed” (as that term is defined at 12 C.F.R. 225.2(s)), and the institution’s CRA rating is no less than “satisfactory.” Neither Company nor any Company Subsidiary has been informed that its status as “satisfactory” for CRA purposes will change within one year. All deposit liabilities of Company and its Subsidiaries are insured by the Federal Deposit Insurance Corporation to the fullest extent under the law. Company and its Subsidiaries have met all conditions of such insurance, including timely payment of its premiums.

 

3.16        Commitments and Contracts.

 

(a)          The Company has Previously Disclosed or made available to Parent or its representatives true, correct and complete copies of, each of the following written contracts to which the Company, the Bank or any Subsidiary is a party (each, a Company Significant Agreement):

 

(i)          any contract or agreement which is a “material contract” within the meaning of Item 601(b)(10) of Regulation S-K to be performed in whole or in part after the date of this Agreement;

 

(ii)         any contract or agreement with respect to the employment or service of any current or former directors, officers, or consultants of the Company, the Bank or any of the Subsidiaries;

 

(iii)        any contract or agreement with any director, officer, or Affiliate of the Company, the Bank or any of the Subsidiaries;

 

(iv)        any contract or agreement materially limiting the freedom of the Company, the Bank or any Subsidiary to engage in any line of business or to compete with any other person or prohibiting the Company, the Bank or any Subsidiary from soliciting customers, clients or employees, in each case whether in any specified geographic region or business or generally;

 

(v)         any contract or agreement with a labor union or guild (including any collective bargaining agreement);

 

(vi)        any contract or agreement which grants any person a right of first refusal, right of first offer or similar right with respect to any material properties, assets or businesses of the Company, the Bank or the Subsidiaries other than other real estate owned, or obligates the Company or any Subsidiary (or, after the consummation of the transactions contemplated by this Agreement, Parent or any of its affiliates) to conduct business with any third party on an exclusive or preferential basis;

 

(vii)       any trust indenture, mortgage, promissory note, loan agreement or other contract, agreement or instrument for the borrowing of money, any currency exchange, commodities or other hedging arrangement or any leasing transaction of the type required to be capitalized in accordance with GAAP, in each case, where the Company, the Bank or any Subsidiary is a lender, borrower or guarantor other than those entered into in the ordinary course of business for an amount not exceeding $1,000,000;

 

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(viii)      any contract or agreement entered into since January 1, 2005 (and any contract or agreement entered into at any time to the extent that material obligations remain as of the date hereof) relating to the acquisition or disposition of any material business or material assets (whether by merger, sale of stock or assets or otherwise), which acquisition or disposition is not yet complete or where such contract contains continuing material obligations, including continuing material indemnity obligations, of the Company, the Bank or any of the Subsidiaries;

 

(ix)         any agreement of guarantee, support or indemnification by the Company, the Bank or any Subsidiary, assumption or endorsement by the Company, the Bank or any Subsidiary of, or any similar commitment by the Company, the Bank or any Subsidiary with respect to, the obligations, liabilities (whether accrued, absolute, contingent or otherwise) or indebtedness of any other person other than those entered into in the ordinary course of business;

 

(x)          any alliance, cooperation, joint venture, stockholders’ partnership or similar agreement involving a sharing of profits or losses relating to the Company, the Bank or any Subsidiary;

 

(xi)         any agreement, option or commitment or right with, or held by, any third party to acquire, use or have access to any assets or properties, or any interest therein, of the Company, the Bank or any Subsidiary; and

 

(xii)        any material contract or agreement that would require any consent or approval of a counterparty as a result of the consummation of the transactions contemplated by this Agreement.

 

(b)          Each of the Company Significant Agreements has been duly and validly authorized, executed and delivered by the Company, the Bank or any Subsidiary and is binding on the Company, the Bank and the Subsidiaries, as applicable, and to the Company’s Knowledge, is in full force and effect. The Company, the Bank and each of the Subsidiaries, as applicable, are in all material respects in compliance with and have in all material respects performed all obligations required to be performed by them to date under each Company Significant Agreement. As of the date hereof, none of the Company, the Bank or any of the Subsidiaries has received notice of any material violation or default (or any condition that with the passage of time or the giving of notice would cause such a violation of or a default) by any party under any Company Significant Agreement. No other party to any Company Significant Agreement is, to the Knowledge of the Company, in default in any material respect thereunder.

 

3.17         Agreements with Regulatory Agencies. Except as set forth in Section 3.17 of the Company Disclosure Schedule, none of the Company, the Bank or any Subsidiary is subject to any cease-and-desist or other similar order or enforcement action issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any capital directive by, or has adopted any board resolutions at the request of, any Governmental Entity or SRO (each item in this sentence, a Regulatory Agreement), nor has the Company, the Bank or any Subsidiary been advised since December 31, 2008 by any Governmental Entity or SRO that it is considering issuing, initiating, ordering, or requesting any such Regulatory Agreement. Except as set forth in Section 3.17 of the Company Disclosure Schedule, to the Company’s Knowledge, the Company, the Bank and each Subsidiary are in compliance in all material respects with each Regulatory Agreement to which it is a party or subject, and none of the Company, the Bank or any Subsidiary has received any notice from any Governmental Entity or SRO indicating that either the Company, the Bank or any Subsidiary is not in compliance in all material respects with any such Regulatory Agreement.

 

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3.18         Investment Company; Investment Adviser. Neither the Company, the Bank nor any Subsidiary is required to be registered as, and is not an affiliate of, and immediately following the Closing will not be required to register as, an “investment company” within the meaning of the Investment Company Act of 1940, as amended. Neither the Company, the Bank nor any Subsidiary is required to be registered, licensed or qualified as an investment adviser under the Investment Advisers Act of 1940, as amended, or in another capacity thereunder with the SEC or any other Governmental Entity.

 

3.19         Derivative Instruments. All material derivative instruments, including, swaps, caps, floors and option agreements, whether entered into for the Company’s own account, or for the account of the Bank or one or more of the Subsidiaries, were entered into (1) only in the ordinary and usual course of business and consistent with past practice, (2) in accordance with commercially reasonable banking practices and in all material respects with all applicable laws, rules, regulations and regulatory policies and (3) with counterparties believed to be financially responsible at the time; and each of them constitutes the valid and legally binding obligation of the Company, the Bank or one of the Subsidiaries, enforceable in accordance with its terms. None of the Company, the Bank or the Subsidiaries, or, to the Knowledge of the Company, any other party thereto, is in breach of any of its material obligations under any such agreement or arrangement.

 

3.20         Environmental Liability. To the Company’s Knowledge, the Company, the Bank and the Subsidiaries have, and at the Closing Date will have, complied in all material respects with all laws, regulations, ordinances and orders relating to public health, safety or the environment (including without limitation all laws, regulations, ordinances and orders relating to releases, discharges, emissions or disposals to air, water, land or groundwater, to the withdrawal or use of groundwater, to the use, handling or disposal of polychlorinated biphenyls, asbestos or urea formaldehyde, to the treatment, storage, disposal or management of hazardous substances, pollutants or contaminants, or to exposure to toxic, hazardous or other controlled, prohibited or regulated substances), the violation of which would or might have a material impact on the Company, the Bank or any Subsidiary or the consummation of the transactions contemplated by this Agreement. There is no legal, administrative, arbitral or other proceeding, claim, action or notice of any nature seeking to impose, or that could result in the imposition of, on the Company, the Bank or any Subsidiary, any liability or obligation of the Company, the Bank or any Subsidiary with respect to any environmental health or safety matter or any private or governmental, environmental health or safety investigation or remediation activity of any nature arising under common law or under any local, state or federal environmental, health or safety statute, regulation or ordinance, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA), pending or, to the Company’s Knowledge, threatened against the Company, the Bank or any Subsidiary or any property in which the Company, the Bank or any Subsidiary has taken a security interest the result of which has had a Company Material Adverse Effect; to the Company’s Knowledge, there is no reasonable basis for, or circumstances that could reasonably be expected to give rise to, any such proceeding, claim, action, investigation or remediation; and to the Company’s Knowledge, none of the Company, the Bank or any Subsidiary is subject to any agreement, order, judgment, decree, letter or memorandum by or with any Governmental Entity or third party that could impose any such environmental obligation or liability.

 

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3.21         Insurance. The Company, the Bank and each of the Subsidiaries maintain, and have maintained for the two years prior to the date of this Agreement, insurance underwritten by insurers of recognized financial responsibility, of the types and in the amounts that the Company, the Bank and the Subsidiaries reasonably believe are adequate for their respective businesses and as constitute reasonably adequate coverage against all risks customarily insured against by banking institutions and their subsidiaries of comparable size and operations, including, but not limited to, insurance covering all real and personal property owned or leased by the Company, the Bank and any Subsidiary against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, with such deductibles as are customary for companies in the same or similar business. True, correct and complete copies of all policies and binders of insurance currently maintained in respect of the assets, properties, business, operations, employees, officers or directors of the Company, the Bank and the Subsidiaries, excluding such policies pursuant to which the Company, the Bank, any Subsidiary or an Affiliate of any them acts as the insurer and that are identified with respective expiration dates on Section 3.21 of the Company Disclosure Schedule (collectively, the “Company Insurance Policies”), and all correspondence relating to any material claims under the Company Insurance Policies, have been previously made available to Parent. All of the Company Insurance Policies are in full force and effect, the premiums due and payable thereon have been timely paid, and there is no breach or default (and no condition exists or event has occurred which, with the giving of notice or lapse of time or both, would constitute such a breach or default) by the Company, the Bank or any of the Subsidiaries under any of the Company Insurance Policies or, to the Knowledge of the Company, by any other party to the Company Insurance Policies, except for any such breach or default that would not reasonably be expected to have, individually or in the aggregate, a material impact on the Company, the Bank or any Subsidiary. None of the Company, the Bank or any of the Subsidiaries has received any written notice of cancellation or non-renewal of any Company Insurance Policy nor, to the Knowledge of the Company, is the termination of any such policies threatened, and, except as set forth in on Section 3.21 of the Company Disclosure Schedule, there is no claim for coverage by the Company, the Bank or any of the Subsidiaries, pending under any of such Company Policies as to which coverage has been questioned, denied or disputed by the underwriters of such Company Policies or in respect of which such underwriters have reserved their rights.

 

3.22         Title to Property. The Company, the Bank and the Subsidiaries have good and marketable title to all real properties and transferable title to all other properties and assets, tangible or intangible, owned by them (other than any assets or properties classified as other real estate owned) that are material to the operation of their businesses, in each case free from Liens (other than (i) Liens for current taxes and assessments not yet past due or being contested in good faith, (ii) inchoate Liens for construction in progress, (iii) mechanics’, materialmen’s, workmen’s, repairmen’s, warehousemen’s and carriers’ Liens arising in the ordinary course of business of the Company, the Bank or such Subsidiary consistent with past practice for sums not yet delinquent or being contested in good faith by appropriate proceedings and (iv) Liens with respect to tenant personal property, fixtures and/or leasehold improvements at the subject premises arising under state statutes and/or principles of common law (collectively, “Permitted Liens”)) that would impair in any material respect the value thereof or interfere with the use made or to be made thereof by them in any material respect. The Company, the Bank and the Subsidiaries own, lease or otherwise have valid easement rights to use all properties as are necessary to their operations as now conducted. To the Knowledge of the Company, the Company, the Bank and the Subsidiaries hold all leased real or personal property under valid and enforceable leases with no exceptions that would interfere with the use made or to be made thereof by them in any material respect. None of the Company, the Bank or any Subsidiary or, to the Knowledge of the Company, any other party thereto is in default in any material respect under any lease described in the immediately preceding sentence. There are no condemnation or eminent domain proceedings pending or, to the Knowledge of the Company, threatened in writing, with respect to any of the real properties owned, or to the Company’s Knowledge, any of the real properties leased, by the Company, the Bank or any of the Subsidiaries. None of the Company, the Bank or any of the Subsidiaries has, within the last two (2) years, made any material title claims, or has outstanding any material title claims, under any policy of title insurance respecting any parcel of real property.

 

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3.23         Intellectual Property. The Company, the Bank and the Subsidiaries own, or are licensed or otherwise possess rights to use free and clear of all Liens all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets, applications and other unpatented or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (collectively, Proprietary Rights) used in the conduct of the business of the Company, the Bank and the Subsidiaries as now conducted, except where the failure to own such Proprietary Rights would not have any material impact on the Company, the Bank or any Subsidiary. The Company, the Bank and the Subsidiaries have the right to use all Proprietary Rights used in or necessary for the conduct of their respective businesses without infringing the rights of any person or violating the terms of any licensing or other agreement to which the Company, the Bank or any Subsidiary is a party, except for such infringements or violations that have not had a Company Material Adverse Effect, and, to the Company’s Knowledge, no person is infringing upon any of the Proprietary Rights, except where the infringement of or lack of a right to use such Proprietary Rights would not have any material impact on the Company, the Bank or any Subsidiary. Except as Previously Disclosed, no charges, claims or litigation have been asserted or, to the Company’s Knowledge, threatened against the Company, the Bank or any Subsidiary contesting the right of the Company, the Bank or any Subsidiary to use, or the validity of, any of the Proprietary Rights or challenging or questioning the validity or effectiveness of any license or agreement pertaining thereto or asserting the misuse thereof, and, to the Company’s Knowledge, no valid basis exists for the assertion of any such charge, claim or litigation. All licenses and other agreements to which the Company, the Bank or any Subsidiary is a party relating to Proprietary Rights are in full force and effect and constitute valid, binding and enforceable obligations of the Company, the Bank or such Subsidiary, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar Laws of general applicability relating to or affecting creditors’ rights and to general equity principles, as the case may be, and there have not been and there currently are not any defaults (or any event that, with notice or lapse of time, or both, would constitute a default) by the Company, the Bank or any Subsidiary under any license or other agreement affecting Proprietary Rights used in or necessary for the conduct of the business of the Company, the Bank or any Subsidiary, except for defaults, if any, which would not have any material impact on the Company, the Bank or any Subsidiary. The validity, continuation and effectiveness of all licenses and other agreements relating to the Proprietary Rights and the current terms thereof will not be affected by the transactions contemplated by this Agreement.

 

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3.24        Loans.

 

(a)          Except as set forth in Section 3.24 of the Company Disclosure Schedule, as of March 1, 2012, none of the Company, the Bank or any Subsidiary is a party to (i) any written or oral loan, loan agreement, note or borrowing arrangement (including leases, credit enhancements, commitments, guarantees and interest-bearing assets) (collectively, “Loans)), other than any Loan the unpaid principal balance of which does not exceed $100,000, under the terms of which the obligor was, as of December 31, 2011, over 90 days delinquent in payment of principal or interest or in default of any other provision, or (ii) Loan in excess of $100,000 with any director, executive officer or five percent or greater shareholder of the Company, the Bank or any Subsidiary, or to the Knowledge of the Company, any person, corporation or enterprise controlling, controlled by or under common control with any of the foregoing. Section 3.24 of the Company Disclosure Schedule sets forth (x) all of the Loans in original principal amount in excess of $100,000 of the Company, the Bank or any of the Subsidiaries that as of December 31, 2011 were classified by the Company or the Bank or any regulatory examiner as “Other Loans Specially Mentioned,” “Special Mention,” “Substandard,” “Doubtful,” “Loss,” “Classified,” “Criticized,” “Credit Risk Assets,” “Concerned Loans,” “Watch List” or words of similar import, together with the principal amount of and accrued and unpaid interest on each such Loan as of December 31, 2011 and the identity of the borrower thereunder, (y) by category of Loan (i.e., commercial, consumer, etc.), all of the other Loans of the Company, the Bank and the Subsidiaries that as of December 31, 2011 were classified as such, together with the aggregate principal amount of and accrued and unpaid interest on such Loans by category as of December 31, 2011 and (z) each asset of the Company or the Bank that as of December 31, 2011 was classified as “Other Real Estate Owned” and the book value thereof.

 

(b)          Each Loan of the Company, the Bank or any of the Subsidiaries (i) is evidenced by notes, agreements or other evidences of indebtedness that are true, genuine and what they purport to be, (ii) to the extent secured, has been secured by valid Liens which have been perfected and (iii) is the legal, valid and binding obligation of the obligor named therein, enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and other laws of general applicability relating to or affecting creditors’ rights and to general equity principles.

 

(c)          Each outstanding Loan (including Loans held for resale to investors) has been solicited and originated and is administered and serviced, and the relevant Loan files are being maintained in all material respects in accordance with the relevant loan documents, the Company’s and the Bank’s underwriting standards (and, in the case of Loans held for resale to investors, the underwriting standards, if any, of the applicable investors) and to the Company’s Knowledge, in material compliance with all applicable requirements of federal, state and local Laws, regulations and rules.

 

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(d)          Except as set forth in Section 3.24(d) of the Company Disclosure Schedule, none of the agreements pursuant to which the Company, the Bank or any of the Subsidiaries has sold Loans or pools of Loans or participations in Loans or pools of Loans contains any obligation to repurchase such Loans or interests therein.

 

(e)          Each of the Company, the Bank and the Subsidiaries is in compliance in all material respects with all applicable federal, state and local Laws, rules and regulations, including the Truth-In-Lending Act and Regulation Z, the Equal Credit Opportunity Act and Regulation B, the Real Estate Settlement Procedures Act and Regulation X, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act and all investor and mortgage insurance company requirements relating to the origination, sale and servicing of mortgage and consumer Loans.

 

(f)          To the Knowledge of the Company, each Loan included in a pool of Loans originated, acquired or serviced by the Company, the Bank or any of the Subsidiaries (a Pool) meets all eligibility requirements (including all applicable requirements for obtaining mortgage insurance certificates and loan guaranty certificates) for inclusion in such Pool. All such Pools have been finally certified or, if required, recertified in accordance with all applicable laws, rules and regulations, except where the time for certification or recertification has not yet expired. To the Knowledge of the Company, no Pools have been improperly certified, and no Loan has been bought out of a Pool without all required approvals of the applicable investors.

 

(g)          The information with respect to each Loan set forth in the Loan Tape, and, to the Knowledge of the Company, any third party information set forth in the Loan Tape is true, correct and accurate as of the dates specified therein, or, if no such date is indicated therein, as of December 31, 2010.

 

3.25        Anti-takeover Provisions Not Applicable. The Company has taken all action required to be taken by it in order to exempt this Agreement and the transactions to be consummated pursuant to this Agreement from, and this Agreement and the transactions contemplated hereby are exempt from, any anti-takeover or similar provisions of the Charter, and its bylaws and the requirements of any “moratorium,” “control share,” “fair price,” “affiliate transaction,” “business combination” or other antitakeover Laws and regulations of any state, including the BCA.

 

3.26        Knowledge as to Conditions. As of the date of this Agreement, the Company knows of no reason why any regulatory approvals and, to the extent necessary, any other approvals, authorizations, filings, registrations and notices required for the consummation of the transactions contemplated by this Agreement will not be obtained or that any Required Approval will not be granted without the imposition of a Burdensome Condition, provided, however, that the Company makes no representation or warranty with respect to the management, capital or ownership structure of Parent or any of its Affiliates. 

 

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3.27        Brokers and Finders. Except as set forth in Section 3.27 of the Company Disclosure Schedule, none of the Company, the Bank or any Subsidiary or any of their respective officers, directors, employees or agents has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finder’s fees, and no broker or finder has acted directly or indirectly for the Company, the Bank or any Subsidiary, in connection with this Agreement or the transactions contemplated hereby.

 

3.28        Related Party Transactions.

 

(a)          Except as set forth in Section 3.28(a) of the Company Disclosure Schedule or as part of the normal and customary terms of an individual’s employment or service as a director, none of the Company, the Bank or any of the Subsidiaries is party to any extension of credit (as debtor, creditor, guarantor or otherwise), contract for goods or services, lease or other agreement with any (A) affiliate, (B) insider or related interest of an insider, (C) shareholder owning 5% or more of the outstanding Common Stock or related interest of such a shareholder, or (D) to the Knowledge of the Company, and other than credit and consumer banking transactions in the ordinary course of business, employee who is not an executive officer. For purposes of the preceding sentence, the term “affiliate” shall have the meaning assigned in Regulation W issued by the Federal Reserve, as amended, and the terms “insider,” “related interest,” and “executive officer” shall have the meanings assigned in the Federal Reserve’s Regulation O, as amended.

 

(b)          To the Company’s Knowledge, except as set forth in Section 3.28(b) of the Company Disclosure Schedule, the Bank is in compliance with, and has since December 31, 2008, complied with, Sections 23A and 23B of the Federal Reserve Act, its implementing regulations, and the Federal Reserve’s Regulation O.

 

3.29        Customer Relationships.

 

(a)          Each trust or wealth management customer of the Company, the Bank or any Subsidiary has been in all material respects originated and serviced (A) in conformity with the applicable policies of the Company, the Bank and the Subsidiaries, (B) in accordance with the terms of any applicable instrument or agreement governing the relationship with such customer, (C) in accordance with any instructions received from such customers, (D) consistent with each customer’s risk profile and (E) to the Company’s Knowledge, in compliance with all applicable laws and the Company’s, the Bank’s and the Subsidiaries’ constituent documents, including any policies and procedures adopted thereunder. Each instrument or agreement governing a relationship with a trust or wealth management customer of the Company, the Bank or any Subsidiary has been duly and validly executed and delivered by the Company, the Bank and each Subsidiary and, to the Knowledge of the Company, the other contracting parties, each such instrument of agreement constitutes a valid and binding obligation of the parties thereto, except as such enforceability may be limited by bankruptcy, insolvency, moratorium and other similar Laws affecting creditors’ rights generally and by general principles of equity, and the Company, the Bank and the Subsidiaries and to the Company’s Knowledge, the other parties thereto have duly performed in all material respects their obligations thereunder and the Company, the Bank and the Subsidiaries and to the Company’s Knowledge, such other person is in compliance with each of the terms thereof.

 

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(b)          No instrument or agreement governing a relationship with a trust or wealth management customer of the Company, the Bank or any Subsidiary provides for any material reduction of fees charged (or in other compensation payable to the Company, the Bank or any Subsidiary thereunder) at any time subsequent to the date of this Agreement.

 

(c)          None of the Company, the Bank or any Subsidiary or any of their respective directors or executive officers (A) is the beneficial owner of any interest in any of the accounts maintained on behalf of any trust or wealth management customer of the Company, the Bank or any Subsidiary or (B) is a party to any contract pursuant to which it is obligated to provide service to, or receive compensation or benefits from, any of the trust or wealth management customers of the Company, the Bank or any Subsidiary after the Closing Date.

 

(d)          Each account opening document, margin account agreement, investment advisory agreement and customer disclosure statement with respect to any trust or wealth management customer of the Company, the Bank or any Subsidiary conforms in all material respects to the forms provided to Parent prior to the Closing Date.

 

(e)          Except as would not have any material impact on the Company, the Bank or any Subsidiary, all other books and records primarily related to the trust and wealth management businesses of the Company, the Bank and each Subsidiary include documented risk profiles signed by each such customer.

 

3.30        Company Information. None of the information supplied or to be supplied by Company for inclusion or incorporation by reference in the Proxy Statement and/or in the Form S-4, as applicable, or in any other application, notification or other document filed with any Governmental Entity or SRO in connection with the transactions contemplated by this Agreement, in each case or in any amendment or supplement thereto will, at the time the Proxy Statement or any such supplement or amendment thereto is first mailed to the stockholders of Company or at the time the Company stockholders vote on the matters constituting the Requisite Shareholder Approval or at the time the Form S-4 or any such amendment or supplement thereto becomes effective under the Securities Act or at the Effective Time, or at the time any such other applications, notifications or other documents or any such amendments or supplements thereto are so filed, as the case may be, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. No representation or warranty is made by Company in this Section 3.30 with respect to statements made or incorporated by reference therein based on information supplied by Parent in writing expressly for inclusion or incorporation by reference in the Proxy Statement, the Form S-4 or such other applications, notifications or other documents. The Proxy Statement will comply as to form in all material respects with the requirements of the Exchange Act. If at any time prior to the Effective Time any event should be discovered by Company or any of its Subsidiaries which should be set forth in an amendment to the Form S-4 or a supplement to the Proxy Statement, or in any amendment or supplement to any such other applications, notifications or other documents, Company shall promptly so inform Parent

 

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3.31        Foreign Corrupt Practices. None of the Company, the Bank or any Subsidiary, or, to the Knowledge of the Company, any director, officer, agent, employee or other person acting on behalf of the Company, the Bank or any Subsidiary has, in the course of its actions for, or on behalf of, the Company, the Bank or any Subsidiary (A) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (B) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (C) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (D) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

 

Article IV
REPRESENTATIONS AND WARRANTIES OF PARENT

 

Parent hereby represents and warrants to the Company as of the date of this Agreement and as of the Closing Date (except to the extent made only as of a specified date, in which case as of such date), that, except as Previously Disclosed:

 

4.1          Organization and Authority. Parent is duly organized, validly existing and in good standing under the Laws of the State of Delaware. Merger Sub is duly organized, validly existing and in good standing under the Laws of the State of North Carolina. Each of Parent and Merger Sub has the power and authority and governmental authorizations to own its properties and assets and to carry on its business in all material respects as it is now being conducted, and is duly qualified to do business and is in good standing in all jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified, except where the failure to be so licensed or qualified would not, individually or in the aggregate, have a Parent Material Adverse Effect.

 

4.2          Authorization.

 

(a)          Parent has the power and authority to enter into this Agreement and the other agreements referenced herein to which it will be a party and to carry out its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement and the other agreements referenced herein to which it will be a party by Parent and the consummation of the transactions contemplated hereby and thereby have been duly authorized by Parent’s board of directors, and no further approval or authorization by any of its shareholders or other equity owners, as the case may be, is required. This Agreement has been, and the other agreements referenced herein to which it will be a party, when executed, will be, duly and validly executed and delivered by Parent and assuming due authorization, execution and delivery by both the Company and the Bank, is and will be a valid and binding obligation of Parent enforceable against Parent in accordance with its terms (except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and similar Laws of general applicability relating to or affecting creditors’ rights or by general equity principles).

 

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(b)          Neither the execution, delivery and performance by Parent of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by Parent with any of the provisions hereof, will (A) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event that, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of any Lien upon any of the properties or assets of Parent under any of the terms, conditions or provisions of (i) its certificate of incorporation or similar governing documents or (ii) any material note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Parent is a party or by which it may be bound, or to which Parent or any of the properties or assets of Parent may be subject, or (B) subject to compliance with the statutes and regulations referred to in Sections 3.6 and 4.5 and , violate any Law, statute, ordinance, rule or regulation, permit, concession, grant, franchise or any judgment, ruling, order, writ, injunction or decree applicable to Parent or any of its properties or assets except in the case of clauses (A)(ii) and (B) for such violations, conflicts and breaches as would not reasonably be expected to materially and adversely affect Parent’s ability to perform its obligations under this Agreement or consummate the transactions contemplated hereby.

 

(c)          Assuming the Company’s representations contained in Section 3.6 are true and correct and other than the securities or blue sky Laws of the various states or as set forth in Section 4.2(c) of the Parent Disclosure Schedule or Section 4.5, no material notice to, registration, declaration or filing with, exemption or review by, or authorization, order, consent or approval of, any Governmental Entity, or expiration or termination of any statutory waiting period, is necessary for the consummation by Parent of the transactions contemplated by this Agreement

 

4.3          Capitalization. The authorized capital stock of Parent consists of 200,000,000 shares of Class A common stock, par value $0.01 par value per share (the “Parent Common Stock”), 200,000 shares of Class B non-voting common stock, par value $0.01 par value per share (the “Class B Parent Stock”) and 50,000,000 shares of preferred stock, par value $0.01 par value per share, of the Parent (the Parent Preferred Stock). As of the close of business on March 23, 2012 (the Parent Capitalization Date), there were 20,334,441 shares of Parent Common Stock outstanding (which includes restricted shares), 26,122,120 shares of Class B Parent Stock outstanding, and no shares of Parent Preferred Stock outstanding. Since the Parent Capitalization Date and through the date of this Agreement, except in connection with this Agreement and the transactions contemplated hereby, and as set forth in Section 4.3 of the Parent Disclosure Schedule, Parent has not (1) issued or authorized the issuance of any shares of Parent Common Stock, Class B Parent Stock or Parent Preferred Stock, or any securities convertible into or exchangeable or exercisable for shares of Parent Common Stock, Class B Parent Stock or Parent Preferred Stock, (2) reserved for issuance any shares of Parent Common Stock, Class B Parent Stock or Parent Preferred Stock or (3) repurchased or redeemed, or authorized the repurchase or redemption of, any shares of Parent Common Stock, Class B Parent Stock or Parent Preferred Stock. As of the close of business on the Parent Capitalization Date, other than in respect of shares of Parent Common Stock reserved for issuance in connection with any stock option or other equity incentive plan in respect of which an aggregate of no more than 5,750,000 shares of Parent Common Stock have been reserved for issuance, no shares of Parent Common Stock, Class B Parent Stock or Parent Preferred Stock were reserved for issuance. All of the issued and outstanding shares of Parent Common Stock have been duly authorized and validly issued and are fully paid and nonassessable, and have been issued in compliance with all federal and state securities laws, and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities. As of the date of this Agreement, except (A) pursuant to any cashless exercise provisions of any Parent stock options or pursuant to the surrender of shares to Parent or the withholding of shares by Parent to cover tax withholding obligations under equity compensation plans or (B) as set forth elsewhere in this Section 4.3 or on the Parent Disclosure Schedule, Parent does not have and is not bound by any outstanding subscriptions, options, calls, commitments or agreements of any character calling for the purchase or issuance of, or securities or rights convertible into or exchangeable for, any shares of Parent Common Stock, Class B Parent Stock or Parent Preferred Stock or any other equity securities of Parent or any securities representing the right to purchase or otherwise receive any shares of capital stock of Parent (including any rights plan or agreement).

 

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4.4          Authorization.

 

(a)          Parent has the full legal right, corporate power and authority to enter into this Agreement and the other agreements referenced herein to which it will be a party and to carry out its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement and the other agreements referenced herein to which Parent will be a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors of Parent. This Agreement has been, and the other agreements referenced herein to which it will be a party, when executed, will be, duly and validly executed and delivered by Parent and, assuming due authorization, execution and delivery by the Company, is and will be a valid and binding obligation of Parent enforceable against Parent in accordance with its terms (except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and similar laws of general applicability relating to or affecting creditors’ rights or by general equity principles). No other corporate proceedings are necessary for the execution and delivery by Parent of this Agreement and the other agreements referenced herein to which it will be a party, the performance by them of their obligations hereunder and thereunder or the consummation by them of the transactions contemplated hereby.

 

(b)          Neither the execution and delivery by Parent of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by Parent with any of the provisions hereof, will (A) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event that, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or result in the loss of any benefit or creation of any right on the part of any third party under, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of any Liens upon any of the material properties or assets of Parent under any of the terms, conditions or provisions of (i) its charter or bylaws (or similar governing documents) or (ii) except as set forth in Section 4.4(b) of the Parent Disclosure Schedule, and except for defaults that would not have a Parent Material Adverse Effect, any material note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Parent is a party or by which it may be bound, or to which Parent or any of the properties or assets of Parent may be subject, or (B) except for violations that have not had a Parent Material Adverse Effect, assuming the consents referred to in Section 4.5 are duly obtained, violate any Law applicable to Parent or any of its properties or assets.

 

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4.5          Consents and Approvals. Except for (i) the Requisite Regulatory Approvals, (ii) the notices, consents, approvals, waivers, authorizations, filings and registrations set forth in Section 4.5 of the Parent Disclosure Schedule (the “Parent Regulatory Approvals”) and (iii) such additional notices, consents, approvals, waivers, authorizations, filings or registrations the failure of which to make or obtain would not be material, no consents, approvals or authorizations of or filings or registrations with any Governmental Entity, or of or with any third party, are necessary in connection with (A) the execution and delivery by Parent of this Agreement and (B) the consummation by Parent of the transactions contemplated hereby.

 

4.6          Financial Wherewithal. Parent has or will have as of the Closing sufficient cash or cash equivalents available, directly or through one or more affiliates, to pay the aggregate Cash Consideration and TARP Discount Amount to the Exchange Agent on the terms and conditions contained herein, and there is no restriction on the use of such cash or cash equivalents for such purpose.

 

4.7          Financial Statements.

 

(a)          The audited consolidated financial statements and unaudited consolidated interim financial statements of Parent and its Subsidiaries included in Parent’s Registration Statement on Form S-1 (i) have been prepared from and in accordance with the books and records of Parent and its Subsidiaries, (ii) fairly present in all material respects the consolidated results of operations, cash flows, changes in stockholders’ equity and consolidated financial position of Parent and its Subsidiaries for the respective fiscal periods or as of the respective dates set forth therein (subject in the case of unaudited statements to recurring year-end audit adjustments), and (iii) have been prepared in accordance with GAAP consistently applied during the periods involved (except in the case of unaudited statements for the absence of footnotes and other presentation items), except, in each case, as indicated in such statements or in the notes thereto and in the case of unaudited statements, as permitted by applicable financial reporting requirements. Since January 1, 2009, the books and records of Parent and its Subsidiaries have been, and are being, maintained in a manner necessary to permit preparation of Parent’s financial statements in all material respects in accordance with GAAP and in accordance, in all material respects, with applicable legal requirements. As of the date of this Agreement, PricewaterhouseCoopers LLP has not resigned or been dismissed as independent public accountants of Parent on a matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.

 

(b)          Neither Parent nor any of its Subsidiaries has any material liability or obligation of any nature whatsoever (whether absolute, accrued, contingent, determined, determinable or otherwise and whether due or to become due) of the type required to be recorded on a balance sheet prepared in accordance with GAAP, or would be disclosed in the related notes, except for (i) those liabilities and obligations that are reflected or reserved against on the consolidated balance sheet of Parent included in its Registration Statement on Form S-1 as filed with the SEC prior to the date of this Agreement; (ii) liabilities and obligations incurred in the ordinary course of business since December 31, 2010 or as a result of this Agreement and the transactions contemplated hereby; or (iii) liabilities and obligations disclosed in the Parent Disclosure Schedule. Neither Parent nor any of its Subsidiaries is a party to any “off-balance sheet arrangements” as defined in Item 303(a)(4) of Regulation S-K.

 

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4.8          Merger Sub. Parent is the sole stockholder of Merger Sub. Since its date of organization, Merger Sub has not carried on any business nor conducted any operations other than the execution of this Agreement, the performance of its obligations hereunder and matters ancillary thereto.

 

4.9          Absence of Certain Changes.

 

(a)          Since December 31, 2011, through and including the date of this Agreement, no event or events have occurred that have had, individually or in the aggregate, a Parent Material Adverse Effect.

 

(b)          Since December 31, 2011, through and including the date of this Agreement, Parent and its Subsidiaries have carried on their respective businesses in all material respects in the ordinary course of business consistent with past practice.

 

4.10        Legal Proceedings.

 

(a)          There are no material pending actions, suits or proceedings (or, to Parent’s knowledge, threatened) against Parent or any of its Subsidiaries, or any of their respective properties, at law or in equity or before any Governmental Entity or arbitration panel.

 

(b)          Neither Parent nor any of its Subsidiaries nor any of their respective assets is subject to any material outstanding order, writ, judgment, settlement agreement, injunction or decree, in each case, entered, issued or made by or with any Governmental Entity.