EX-10.1 NON-RECOURSE INDEMNITY AND SECURITY AGREEMENT DATED SEPTEMBER 14, 2007
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EX-10.1 NON-RECOURSE INDEMNITY AND SECURITY AGREEMENT DATED SEPTEMBER 14, 2007
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NON-RECOURSE INDEMNITY AND SECURITY AGREEMENT
This Non-Recourse Indemnity and Security Agreement (this “Agreement”) is made and entered into as of September 14, 2007, by and between CAPITALSOUTH BANK, an Alabama banking corporation (the “Bank”), and JAMES C. BOWEN, a resident of Duval County, Florida (“Indemnitor” or “Bowen”), and is joined in by CAPITALSOUTH BANCORP, a Delaware corporation and a registered bank holding company (“CapitalSouth”), with respect to Section 32 and Exhibit A of this Agreement.
R E C I T A L S :
A. The Bank is a wholly-owned subsidiary of CapitalSouth Bancorp, a Delaware corporation and a registered bank holding company (“CapitalSouth”).
B. CapitalSouth and Monticello Bancshares, Inc., a Florida corporation and a savings and loan association holding company (“Monticello”), have heretofore entered into that certain Agreement and Plan of Merger dated February 28, 2007 (the “Merger Agreement”), which is joined in by Indemnitor.
C. Mortgage Lion, Inc. (“Mortgage Lion”) is a wholly-owned subsidiary of Monticello Bank, a federal savings bank (“Monticello Bank”), which in turn is a wholly-owned subsidiary of Monticello.
D. In connection with the consummation of the Merger Agreement, it is also contemplated that Monticello Bank will be contemporaneously merged with and into the Bank.
E. Indemnitor is the principal shareholder of Monticello and is desirous of the transactions contemplated by the Merger Agreement being consummated.
F. Monticello Bank and/or Mortgage Lion are parties to various agreements pursuant to which loans are sold by them to investors (“Loan Purchasers”).
G. In connection with consummation of the Merger Agreement, Indemnitor is to be issued a promissory note by CapitalSouth in the original principal amount of Eight Million Dollars ($8,000,000) (the “Original Promissory Note”). CapitalSouth and Indemnitor hereby agree that CapitalSouth shall bifurcate the Original Promissory Note and issue to Indemnitor one promissory note in the original principal amount of One Million Five Hundred Thousand Dollars ($1,500,000) (the “Pledged Note”) in order to fund any indemnification obligations of Indemnitor under this Agreement. CapitalSouth shall issue to Indemnitor a second promissory note in the amount of Six Million Five Hundred Thousand Dollars ($6,500,000) (the “Non-Pledged Note”), which the parties hereto agree shall not fund any indemnification obligations of Indemnitor under this Agreement. The amortization schedule for each of the Pledged Note and the Non-Pledged Note will be contained therein, and CapitalSouth and Indemnitor hereby agree that the Pledged Note will not begin to amortize until the final
payment to Indemnitor of all principal and interest owed to Indemnitor under the Non-Pledged Note is made by CapitalSouth.
H. As further consideration hereunder, CapitalSouth is willing, to the extent provided herein, to permit Indemnitor to convert a portion of the Non-Pledged Note to CapitalSouth common stock, and to grant to Indemnitor certain registration rights with respect to the shares of CapitalSouth common stock that Indemnitor receives pursuant to his conversion of the Non-Pledged Note.
I. CapitalSouth and the Bank seek tangible assurance that Monticello Bank and Mortgage Lion’s estimated liability with respect to repurchase obligations, indemnities and damages to Loan Purchasers is not inconsistent with CapitalSouth assumptions.
NOW, THEREFORE, in consideration of the premises, the mutual covenants contained herein, and for Ten Dollars ($10.00) and other good and valuable consideration paid in hand by the Bank to Indemnitor, the receipt and sufficiency of which are hereby acknowledged by Indemnitor, the parties hereto, intending to be legally bound, do hereby agree as follows:
1. Indemnitor hereby assumes all liability for, and undertakes without condition, limitation or reservation of any kind, except as expressly provided herein, to pay, protect, defend, indemnify and save Bank and CapitalSouth harmless from and against any and all claims, damages, losses, liabilities, obligations, settlement payments, penalties, assessments, citations, directives, litigation, demands, judgments, suits, proceedings, costs, disbursements and expenses of any kind or of any nature whatsoever, including attorney’s fees and expenses (collectively, “Claims”) which may at any time, subject to the limits set forth in Sections 3, 4 and 5, be imposed upon, incurred by or asserted or awarded against any of the Bank, Mortgage Lion, Monticello Bank, Monticello, CapitalSouth, or any of their respective officers, directors or employees, and arising, directly or indirectly, from or out of or in any way related to (i) any breach or alleged breach or violation of any obligation, or an obligation to repurchase a loan or indemnify the original purchaser thereof, existing under or pursuant to any agreement, understanding, instrument, representation, assignment, endorsement or conveyance, of any type or nature, affecting or relating to the sale or transfer of any loan of any type or nature, including mortgage loans, construction loans, home equity loans, home equity lines of credit, letters of credit or installment loans by Monticello Bank or Mortgage Lion to a Loan Purchaser, occurring on or prior to the “Effective Time of the Merger” under the Merger Agreement (each a “Covered Loan”), whether or not caused by or within the control of Indemnitor, Mortgage Lion, Monticello Bank, Monticello or CapitalSouth, and (ii) any claim, suit, demand, including the settlement thereof and any expenses, including attorney’s fees, disbursements, costs of investigation, expert fees, court fees, mediator fees and arbitrator fees, relating to any Covered Loan sold, transferred or hypothecated to a third party by any of Mortgage Lion, Monticello or Monticello Bank prior to the Effective Time of the Merger, whether sounding in contract, tort, statutory claim or otherwise, and whether such claim, suit or demand is brought, known or knowable prior to or after the Effective Time of the Merger.
2. For purposes of this Agreement, amounts subject to indemnification under Section 1 (“Indemnified Costs”) which are of the following nature shall be determined as specified below:
a. Indemnified Costs which are out-of-pocket expenses, such as indemnification payments by the Bank, settlements, attorney’s fees, consultant fees and the like, shall be the actual amount paid by the Bank. Any subsequent recoveries, reductions, reimbursements or discounts with respect thereto, such as damages or indemnity payments from third parties, shall be deducted from Indemnified Costs which are incurred or, to the extent such was paid by the Indemnitor, reimbursed thereto.
b. The Indemnified Costs with respect to a repurchased loan shall be equal to (i) the gross sum paid to repurchase such loan, including principal, return of any premiums originally paid by the purchaser with respect thereto, accrued interest, and any other amounts asserted by the purchaser, and reasonably accepted by the Bank, less (ii) the fair market value of such loan, which, in the Bank’s full and absolute discretion, may be the amount for which such loan could be reasonably expected to be sold to another purchaser on a non-recourse basis subject only to representations with respect to title to such loan, or, in the case of a defaulted Covered Loan, the fair market value of the collateral therefor, as determined by a third-party appraisal.
c. The Indemnified Costs shall not include internal costs of the Bank and/or Mortgage Lion incurred in connection with responding to any claims with respect to Covered Loans except with respect to personnel, if any, whose primary responsibility relates to working with or managing Claims, and in any event such internal costs shall exclude allocations of overhead, costs associated with any compensation payable to Indemnitor, and any allocation of executive management compensation with respect to the Bank.
d. All amounts shall be computed in accordance with generally accepted accounting principles, consistently applied, but shall include appropriate reductions or credits for any federal and state income tax savings with respect thereto.
3. Notwithstanding anything else to the contrary contained in Section 1, Indemnitor shall have no liability or obligation with respect to otherwise Indemnified Costs, until the Indemnified Costs incurred or accrued reach Two Million Five Hundred Thousand Dollars ($2,500,000) (the “Threshold Amount”), commencing as of August 31, 2007.
4. Notwithstanding anything else to the contrary contained in Section 1, Indemnitor shall have no obligation under this Agreement with respect to any Indemnified Cost which both (i) first occurs or is accruable after the fourth anniversary of the Effective Time of the Merger and (ii) the basis of which was not known or reasonably expected as of
such fourth anniversary date; that is , Indemnitor shall continue to be responsible with respect to any Indemnified Cost even if incurred after such fourth anniversary date if any similar or related Indemnified Cost with respect to a given Covered Loan had begun to be incurred or accrued prior to such fourth anniversary date or if on or prior to such fourth anniversary date a reasonable person would expect Indemnified Costs to be incurred with respect to one or more specifically identified Covered Loans. The parties agree to negotiate in good faith to determine an appropriate reserve amount for any Indemnified Cost which is expected to be incurred or accrued after such fourth anniversary date. Indemnitor’s liability under this Agreement shall not exceed such reserved amount. If the parties cannot agree on such reserve amount, any differences between their estimated future amounts may be withheld by the Bank as a reserve but shall be released to Indemnitor at such time in the future that the parties agree or such Indemnified Costs are otherwise finally determined. At such time, the remaining balance, if any, of such reserve shall be released to Indemnitor, together with interest which, in addition to any other amounts of interest already payable upon such reserve ( i.e. , if it continues to be held in the form of the Pledged Note or a portion thereof) will equal a rate on such amount due to be released to Indemnitor of not less than ten percent (10%) per annum from the fourth anniversary date.
5. Notwithstanding anything else to the contrary contained in Section 1, Indemnitor shall be responsible for payment of only fifty percent (50%) of all Indemnified Costs (the “Indemnified Obligation Share”) above the Threshold Amount and shall be absolutely limited to a maximum amount of One Million Five Hundred Thousand Dollars ($1,500,000) (the “Maximum Amount”). Amounts which are due by Indemnitor shall be deducted immediately from the principal balance which is due and owing under the Pledged Note or otherwise, or at the election of Indemnitor (or in the event that the Pledged Note has been converted, in whole or in part, to another form of Collateral), paid in cash or its equivalent by the Indemnitor to the Bank not later than thirty (30) days after the presentation to the Indemnitor of an invoice with respect thereto. Upon request of the Bank, Indemnitor shall promptly execute an acknowledgement with respect to the reduction of any principal amount from the Pledged Note or other obligation held as Collateral. Notwithstanding anything else to the contrary contained in Section 1, if and when the principal balance of the Pledged Note has been reduced to zero, all obligations of Indemnitor under this agreement shall cease, and Indemnitor shall not owe any further amounts for any Indemnified Costs.
6. The Bank and Indemnitor contemplate mutual cooperation with respect to minimizing the amount of any Indemnified Costs. In that regard, the Bank contemplates permitting Indemnitor an active role, so long as he diligently and effectively pursues such, in the administration of Claims. In that regard, Indemnitor shall not be deemed an employee or agent of the Bank but shall regularly consult with the Bank. Notwithstanding the foregoing, the Bank and Mortgage Lion shall have full and absolute discretion in dealing with any Covered Loan and incurring any Indemnified Cost, whether before or after the Threshold Amount is reached. Indemnitor shall have no right to assume defense or consent or not consent, reasonably or otherwise, to any action or settlement which may be brought or effected by the Bank and/or Mortgage Lion in good faith. Nothing in this Agreement shall limit the full and absolute discretion of the Bank or Mortgage Lion (after the Effective Time of the Merger), and their respective officers, directors and employees, to take or omit to take such actions, compromise or refuse to compromise such claims, incur or decline to incur such
costs and expenses, to employ or engage, or not employ or engage, such persons as the Bank deems appropriate, and no such action or failure to act by the Bank or Mortgage Lion shall in any way impair, reduce or diminish the obligations of Indemnitor under this Agreement. Any consultation, practice or course of dealing by the Bank with respect to Indemnitor shall not constitute a waiver of any provision with respect to this Agreement or any obligation on the part of the Bank to continue to do so. There is no obligation under this Agreement for the Bank to provide Indemnitor with any contemporaneous or periodic reports or updates with respect to the Covered Loans or any Indemnified Costs or expectations of Indemnified Costs, other than at such times that invoices are submitted by the Bank to Indemnitor. Indemnitor may request, in writing, copies of invoices, settlements, accounting ledgers and canceled checks with respect to the Indemnified Costs which have been incurred or have been accrued. Except upon written authorization of the CEO, President or CFO of the Bank, Indemnitor shall not act in an manner which either binds the Bank or Mortgage Lion with respect to a Covered Loan or an Indemnified Cost or which purports to be action on behalf of the Bank under this Agreement.
7. In furtherance of Indemnitor’s collaborative role hereunder, Indemnitor agrees to use his commercially reasonable efforts to assist the Bank, and to cause other persons knowledgeable in matters relating to Covered Loans to assist the Bank, in connection with the resolution of any Claims relating thereto. The foregoing shall not be construed to require the full business time and efforts of Indemnitor or for Indemnitor to incur any out-of-pocket costs with respect thereto. In the event that it is necessary for Indemnitor to provide any testimony or respond to any subpoenas, no fees or compensation shall be payable to Indemnitor in connection therewith. To the extent that Indemnitor is entitled, under the terms of the Merger Agreement or the bylaws of any of Mortgage Lion, Monticello Bank, CapitalSouth Bank or CapitalSouth to any indemnification with respect to any matter relating to the Covered Loans, such costs of indemnification shall be considered an Indemnified Cost hereunder.
8. Indemnitor represents and warrants that Indemnitor has provided the Bank with full and accurate information with respect to the Covered Loans and all pending or threatened claims with respect thereto, and shall continue to do so through the Effective Time of the Merger, and thereafter for so long as Indemnitor is in a position as an officer or director of any of Mortgage Lion, the Bank or CapitalSouth to do so, and that such information does not omit to state any fact necessary, in light of the statements made, to not be misleading.
9. As security for the prompt payment and performance of each of the covenants and obligations of Indemnitor under this Agreement, including payment of the Indemnified Obligation Share (time being of the essence with respect thereto), and payment of any enforcement costs hereunder (collectively all of the liabilities and obligations of Indemnitor under this Agreement being referred to as the “Obligations”), Indemnitor hereby assigns to the Bank and grants to the Bank a security interest in the principle balance Pledged Note, excluding all interest due or to become due on the Pledged Note, and any extensions, renewals, substitutions or novations of the Pledged Note (collectively, the “Collateral”), and hereby deposits and pledges to the Bank the Pledged Note and grants to the Bank a lien thereon and a security interest therein. The Pledged Note will contain a restriction, using
such language as reasonably agreed to by CapitalSouth, alerting any potential transferee of this Agreement and voiding any such transfer in violation of this Agreement.
10. Notwithstanding anything to the contrary contained herein, but without in any manner releasing, impairing or otherwise affectin