Exhibit 10.1

Subordinated Loan Agreement
 
This Subordinated Loan Agreement (this “Agreement”) is dated as of September 30,
2015 (the “Agreement Date”), and is made by and between FS Bancorp, Inc., a
Washington corporation (“Borrower”), and Community Funding CLO, Ltd., a Cayman
Islands exempted company incorporated with limited liability (“Initial Lender”).
 
Recitals
 
A.           Borrower is the holding company for its wholly-owned subsidiary
bank, 1st Security Bank of Washington, a savings bank organized under the laws
of the State of Washington (the “Bank”).
 
B.           Borrower has requested that Initial Lender provide it with a term
loan (the “Term Loan”) in the principal amount of $10,000,000 pursuant to the
terms of this Agreement, evidenced by a term note due [2025], substantially in
the form attached hereto as Exhibit A (the “Note”).
 
C.           Borrower and Initial Lender intend that, for so long as Borrower is
subject to the consolidated capital requirements of the Federal Reserve, the
Term Loan will qualify as Tier 2 capital under the applicable capital adequacy
rules and regulations promulgated by the Federal Reserve.
 
D.           This obligation is not a deposit and is not insured by the federal
deposit insurance corporation or any other government agency. This obligation is
subordinated to the claims of general creditors, is unsecured, and is ineligible
as collateral for a loan by borrower.
 
Now, Therefore, in consideration of the foregoing recitals, which are
incorporated herein by this reference, and the mutual representations, covenants
and agreements of the parties herein contained, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
 
Agreements
 
Section 1. THE TERM LOAN.
 
Section 1.1   Aggregate Principal Loan Amount.  The Initial Lender agrees to
extend the Term Loan to Borrower in an aggregate principal amount of
$10,000,000, in accordance with the terms of, and subject to the conditions set
forth in this Agreement, as stated in Schedule C, attached hereto.  The unpaid
principal balance plus all accrued but unpaid interest on the Term Loan shall be
due and payable on October 1, 2025 (the “Maturity Date”), or such earlier date
on which such amount shall become due and payable on account of acceleration by
the Lenders in accordance with the terms of this Agreement.  The obligations of
Borrower to the Lenders under the Term Loan shall be unsecured.
 
Section 1.2   Maturity Date.  On the Maturity Date, all sums due and owing under
this Agreement with respect to the Term Loan shall be repaid in full.  Borrower
acknowledges and agrees that the Initial Lender has not made any commitments,
either express or implied, to extend the terms of the Term Loan past the
Maturity Date, and the Term Loan shall not be extended unless Borrower and the
Initial Lender hereafter specifically otherwise agree in writing.
 
Section 1.3   Closing.
 
(a)   Closing.  Subject to the terms of this Agreement, the completion of the
funding of the Term Loan (the “Closing”) shall be held on a date that is no
later than October 30, 2015 and, provided that all of the conditions in ‎Section
4.1 and ‎Section 4.2 have been satisfied (disregarding for this purpose those
conditions that are to be satisfied at the Closing), (i) determined by the
Initial Lender in a written notice to the Borrower indicating the date that is
the closing date for a CLO Transaction, as defined herein, for which Initial
Lender is the issuer; or (ii)
 
 
 
 

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such other time as may be mutually agreed upon by the parties to this Agreement
(the “Closing Date”), at such location or by such other method (including
exchange of signed documents) as may be mutually agreed upon by the parties to
this Agreement.
 
(b)   Closing Fee.  There shall be no closing fee.
 
Section 1.4   Interest Rate.
 
(a)   Applicable Rate. The Term Loan shall bear interest at a fixed rate of
6.500% per annum, as provided in Schedule C, attached to this Agreement.
 
(b)   Interest Payments.  Interest accrued on the Term Loan shall be payable by
Borrower quarterly in arrears on January 1, April 1, July 1 and October 1 of
each year, commencing on the first such date following the Closing Date, and on
the Maturity Date.
 
(c)   Computation of Interest.  Interest shall be computed on the basis of the
actual number of days elapsed in the period during which interest accrues and a
year of 360 days.  In computing interest, the date of funding shall be included
and, subject to ‎Section 1.7(a), the date of payment shall be excluded;
provided, however, that if any funding is repaid on the same day on which it is
made, one day’s interest shall be paid thereon.
 
Section 1.5   Optional Prepayment.
 
(a)   Prepayment Prior to Fifth Anniversary.  The Term Loan shall not be prepaid
by Borrower prior to the fifth anniversary of its date of borrowing, which shall
be the Closing Date, except that in the event (i) of a Tier 2 Capital Event (as
defined below); provided that, as of the Closing Date, or for at least 24
consecutive months immediately prior to the occurrence of such Tier 2 Capital
Event, (x) the Term Loan qualified as Tier 2 Capital, and (y) the Borrower was
and is subject to consolidated financial reporting and risk-based capital
requirements and ratios as promulgated under BASEL III or any successor policy;
(ii) of a Tax Event (as defined below), or (iii) the Borrower is required to
register as an investment company pursuant to the Investment Company Act of 1940
(each of the foregoing, a “Qualified Prepayment Event”), Borrower may prepay the
Term Loan, subject to the Lenders’ amendment right pursuant to Section 6.2(c),
on any interest payment date upon giving not less than 45 days’ notice to
Lenders and Servicer, in whole but not in part, by paying the Prepayment Price
(as defined below), together with unpaid accrued interest thereon to but
excluding the date of prepayment.  Any such prepayment notice shall be
accompanied by an explanation or description of the applicable Qualified
Prepayment Event and (x) if such Qualified Prepayment Event is a Tier 2 Capital
Event, by delivery to Lenders or Servicer of a copy of the opinion of
independent bank regulatory counsel received by Borrower in connection with such
Tier 2 Capital Event, or (y) if such Qualified Prepayment Event is a Tax Event,
by delivery to Lenders or Servicer of a copy of any opinion of counsel of
Borrower received by Borrower in connection with such Tax Event.  Any prepayment
made in connection with a Tier 2 Capital Event or a Tax Event will be subject to
the Borrower obtaining the prior approval of the Federal Reserve and any
additional requirements that the Federal Reserve (or any successor regulatory
authority with jurisdiction over bank holding companies) may impose with respect
to prepayment of the Term Loan.  “Tax Event” means the receipt by Borrower of an
opinion of counsel to Borrower that as a result of any amendment to, or change
(including any final and adopted (or enacted) prospective change) in, the laws
(or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, there exists a material risk that interest
payable by Borrower on the Term Loan is no longer deductible by Borrower, in
whole or in part, for United States federal income tax purposes.  “Tier 2
Capital Event” shall mean receipt by the Borrower of an opinion of independent
bank regulatory counsel experienced in such matters to the effect that, as a
result of (x) any event (including any amendment to, or change (including any
final and adopted (or enacted) prospective change) in, the laws or any
regulations thereunder of the United States or any rules, guidelines or policies
of an applicable regulatory authority for the Borrower or (y) any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or which
pronouncement or decision is announced on or after the Closing Date, the Term
Loan does not constitute, or within 90 days of the issuance of such opinion will
not constitute, or no longer constitutes, for the Borrower, Tier 2 Capital (or
its then-equivalent if the Borrower were subject to such capital requirement)
for purposes of capital
 
 
 
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adequacy guidelines of the Federal Reserve (or any successor regulatory
authority with jurisdiction over bank holding companies), as then in effect and
applicable to the Borrower.
 
(b)   Prepayment on or After Fifth Anniversary.  At any time on an interest
payment date on or after the fifth anniversary of the Closing Date, Borrower
may, upon at least 45 days’ notice to Lenders, prepay all or a portion of the
principal amount outstanding under the Term Loan, in a minimum aggregate amount
of $100,000 or any larger integral multiple of $100,000 (unless the Borrower is
prepaying the Term Loan in full), by paying the Prepayment Price, together with
unpaid accrued interest thereon but excluding the date of prepayment.
 
Section 1.6   Receipt of Regulatory Approval.  Borrower shall obtain any
requisite approval of the Federal Reserve or other regulatory approval, and
Lenders shall have no responsibility to verify whether Borrower has obtained any
requisite approval of the Federal Reserve or other regulatory approval, for the
payment of principal (including payment at maturity or prepayment prior to
maturity).  Borrower shall use commercially reasonable efforts to seek and
maintain any and all regulatory or other approvals necessary to allow Borrower
to make each scheduled interest payment on the Term Loan.
 
Section 1.7   Payments.
 
(a)   Manner and Time of Payment.  All payments of principal and interest
hereunder payable to Lenders shall be made, without condition or reservation of
right and free of set-off or counterclaim, in U.S. dollars and by wire transfer
(pursuant to Lenders’ or Servicer’s written wire transfer instructions) of
immediately available funds delivered to Lenders not later than 11:00 a.m. (New
York, New York time) on the date due.  Funds received by Lenders after that time
and date shall be deemed to have been paid on the next succeeding Business Day.
 
(b)   Payments on Non-Business Days.  Whenever any payment to be made by
Borrower hereunder shall be stated to be due on a day which is not a Business
Day, payments shall be made on the next succeeding Business Day without change
in any computation of interest with respect to such payment (or any succeeding
payment).
 
(c)   Application of Payments.  All payments, excluding any amounts paid
pursuant to ‎Section 3.9, or to the extent any amounts are paid to reimburse the
holders for any costs incurred in conjunction with enforcing the Agreement or
the obligations of Borrower under this Agreement or the Note, received by
Lenders or Servicer from or on behalf of this or with respect to this Agreement
or the Note shall be applied first to amounts due to Lenders or Servicer for any
unpaid fees and expenses incurred, second to accrued interest under the Term
Loan, and third to principal amounts outstanding under the Term Loan; provided,
however, subject to the provisions of ‎Section 5 of this Agreement, that after
the date on which the final payment of principal with respect to the Term Loan
is due or following and during any Event of Default, all payments received on
account of Borrower’s liabilities shall be applied in whatever order,
combination and amounts as each Lender, in its sole and absolute discretion,
decides, to all costs, expenses and other indebtedness owing to such Lender.  No
amount paid or prepaid on the Term Loan may be reborrowed.
 
Section 1.8   Subordination.  The rights of the Lenders to the principal sum and
to any accrued interest shall remain subject and subordinate in right of payment
(in accordance with 12 C.F.R. § 217.20(d), as supplemented by the Federal
Reserve’s subordinated debt policy statement, 12 C.F.R. 250.166, and Federal
Reserve Supervisory Letter SR 92-37 (October 15, 1992)) to the claims of:
(a) creditors of Borrower holding senior indebtedness, which shall include, at a
minimum, the following: (i) all borrowed and purchased money (except such
borrowed or purchased money that by its terms expressly ranks pari passu with,
or junior to, the Term Loan); (ii) similar obligations arising from off-balance
sheet guarantees and direct credit substitutes; and (iii) obligations associated
with derivative products such as interest and foreign exchange rate contracts,
commodity contracts, and similar arrangements; and (b) general creditors
(collectively, “Senior Claims”).  Upon dissolution or liquidation of Borrower,
no payment of principal, interest or premium (including post-default interest)
shall be due and payable under the terms of the Term Loan until all Senior
Claims shall have been paid in full.  The Term Loan ranks equally with all of
Borrower’s other present or future Unsecured Subordinated Debt whenever issued,
except any of its Unsecured Subordinated Debt which may be expressly stated to
be subordinated to the Term Loan.  The Term Loan ranks senior to all current and
future junior subordinated debt obligations, preferred stock and common stock of
 
 
 
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Borrower.  “Unsecured Subordinated Debt” means unsecured subordinated debt of
Borrower whether or not such debt is intended to qualify as Tier 2 capital under
the applicable capital adequacy rules and regulations promulgated by the Federal
Reserve.
 
Section 1.9   Closing Deliveries.
 
(a)   At least five (5) Business Days prior to the Closing (except as noted
below), Borrower shall issue, deliver or cause to be delivered to Initial Lender
the following:
 
(i)   the Note, free and clear of all restrictive and other legends (except as
provided in the form of Note attached hereto as Exhibit A), duly executed by
Borrower, to be held in escrow and released upon the Closing;
 
(ii)   a notice of borrowing, substantially in the form attached hereto as
Exhibit B, delivered by 10:00 a.m. (New York, New York time) (the “Notice of
Borrowing”).1
 
(iii)   a legal opinion of Borrower’s counsel, dated as of the Closing Date and
substantially in the form attached hereto as Exhibit C, executed by such counsel
and addressed to Lenders, to be released upon the Closing;
 
(iv)   a certificate of the Secretary of Borrower, in the form attached hereto
as Exhibit D, dated as of the Closing Date, to be held in escrow and released
upon the Closing, certifying:  (A) the resolutions adopted by the board of
directors of Borrower (the “Board”) or a duly authorized committee thereof
approving the borrowing of the Term Loan and approving the other transactions
contemplated by this Agreement; (B) the current versions of the organizational
documents and bylaws of Borrower; and (C) as to the signatures and authority of
persons signing this Agreement and related documents on behalf of Borrower;
 
(v)   a certificate of the Chief Executive Officer, President or Chief Financial
Officer of Borrower, in the form attached hereto as Exhibit E, dated as of the
Closing Date, to be held in escrow and released upon the Closing, certifying to
the fulfillment of the conditions specified in ‎Section 4.1‎(a), ‎Section
4.1‎(b) and ‎Section 4.1‎(d);
 
(vi)   a certificate of existence or good standing for Borrower from each of the
jurisdictions of Borrower’s incorporation and Borrower’s principal place of
business, each as of a recent date;
 
(vii)          a certificate of existence or good standing for the Bank from the
jurisdiction of the Bank’s formation as of a recent date; and
 
(viii)        [Reserved]
 
(b)   On or prior to the Closing, Initial Lender shall transfer to Borrower, in
immediately available funds, an amount equal to the principal value of the Term
Loan extended (at the option of Initial Lender, net of any amounts due to
Initial Lender pursuant to ‎Section 1.9(a)), in accordance with written wire
transfer instructions indicated in the Notice of Borrowing delivered by Borrower
to Initial Lender at least five Business Days prior to the Closing.
 
 
 
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Section 2.   REPRESENTATIONS AND WARRANTIES OF BORROWER.  Borrower acknowledges
that the representations and warranties of Borrower contained herein are a
material inducement for Lenders to enter into this Agreement.  Except as set
forth on Schedule B to this Agreement, Borrower hereby covenants, represents and
warrants to Lenders as of the date hereof and as of the Closing Date (except for
the representations and warranties that speak as of a specific date, which are
made as of such date) as follows:
 
Section 2.1   Organization.  Borrower:  (a) is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation; (b) is in good standing in each other jurisdiction in which the
nature of business conducted or the properties or assets owned or leased by it
makes such qualification necessary, except where the failure to be so qualified
would not reasonably be expected to have a Material Adverse Effect; (c) is duly
registered as a bank holding company under the Bank Holding Company Act of 1956,
as amended; and (d) has full power and authority, corporate and otherwise, to
own, operate and lease its properties as presently owned, operated and leased,
and to carry on its business as it is now being conducted.
 
Section 2.2   Subsidiary Organization.  The Bank is the sole banking subsidiary
of Borrower and is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization and is also in good standing in
each other jurisdiction in which the nature of business conducted or the
properties or assets owned or leased by it makes such qualification necessary,
except where the failure to be so qualified would not reasonably be expected to
have a Material Adverse Effect.  All of the issued and outstanding shares of
capital stock of or other equity interests in each Subsidiary have been duly
authorized and validly issued, are fully paid and non-assessable and are
directly owned by Borrower, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity, except as otherwise disclosed in
Schedule B.  Each Subsidiary has full power and authority, corporate and
otherwise, to own, operate and lease its properties as presently owned, operated
and leased, and to carry on its business as it is now being conducted.  The
deposit accounts offered by the Bank are insured by the FDIC to the fullest
extent permitted under applicable law.  No event attributable to Borrower or the
Bank has occurred which would reasonably be expected to adversely affect the
status of the Bank as an FDIC-insured institution.
 
Section 2.3   Authorization; Enforceability.  Borrower has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement.  The execution, delivery and performance of this Agreement by
Borrower have been authorized by all necessary corporate action, and no further
corporate action is required by Borrower.  This Agreement constitutes a legal,
valid and binding obligation of Borrower enforceable in accordance with its
terms, except as such enforcement may be limited by bankruptcy, insolvency,
reorganization or other laws (including laws and regulations specifically
applicable to bank holding companies registered with the Federal Reserve) and
subject to general principles of equity.
 
Section 2.4   No Conflicts.  Neither the execution nor delivery of this
Agreement nor the consummation or performance of any of the Contemplated
Transactions will, directly or indirectly (with or without notice or lapse of
time):  (a) contravene, conflict with or result in a violation of any provision
of the organizational documents or bylaws of Borrower or the organizational
documents or bylaws of any Subsidiary, as each is in effect on the Agreement
Date, or any currently effective resolution adopted by the boards of directors
or shareholders of Borrower or any Subsidiary; (b) contravene, conflict with or
result in a violation of, or give any Governmental Agency or other Person the
valid and enforceable right to exercise any remedy or obtain any relief under,
any Legal Requirement to which Borrower or any Subsidiary, or any of their
respective assets that are owned or used by them, is subject; (c) contravene,
conflict with or result in a violation or breach of any provision of, or give
any Person the right to declare a default or exercise any remedy under, or to
accelerate the maturity or performance of, or to cancel, terminate or modify any
contract or other binding agreement, verbal or written, to which Borrower or any
Subsidiary is a party or by which any of their respective assets is bound; or
(d) result in the creation of any lien, charge or encumbrance upon or with
respect to any of the assets owned or used by Borrower or any Subsidiary.
 
Section 2.5   Filings, Consents and Approvals.  Borrower is not required to
obtain any consent, waiver, authorization or order of, give any notice to, or
make any filing or registration with, any Governmental Agency or other Person in
connection with the execution, delivery and performance by Borrower of this
Agreement (including, without limitation, the issuance of the Note), other than
regulatory approvals required by the Federal Reserve or any other regulatory
agency or body having jurisdiction over the Borrower and obtained pursuant to
‎Section 1.6, (which consents have been obtained if required).
 
 
 
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Section 2.6   Capitalization.  The authorized capital stock of Borrower consists
of 45,000,000shares of common stock, of which 3,240,620 are issued and
outstanding as of June 30, 2015, and 5,000,000 shares of preferred stock,
none  of which are issued or outstanding.  All outstanding shares of capital
stock have been validly issued and are fully paid and nonassessable.  None of
Borrower’s currently outstanding shares of capital stock have been issued in
violation of any federal or state securities laws or any other Legal
Requirement, or in violation of the preemptive or other similar rights of any
shareholder of Borrower or any other entity.  None of Borrower’s shares of
capital stock are subject to preemptive or other similar rights of any
shareholder of Borrower or any other entity.
 
Section 2.7   Financial Statements.  True and complete copies of the following
financial disclosure materials (collectively, the “Financial Statements”) have
been delivered to Lenders: (a) FR Y-9SP Parent Company Only Financial Statements
for Small Bank Holding Companies of Borrower for period ended June 30, 2015,
(b) Borrower’s audited financial statements for periods ended December 31, 2013
and 2014; and (c) Consolidated Report of Condition and Income for A Bank With
Domestic Offices Only – FFIEC 041 of the Bank for period ended June 30,
2015.  The Financial Statements present fairly the financial position of
Borrower and its consolidated Subsidiaries including the Bank, as applicable, at
the dates and for the periods of such statements.  The Financial Statements have
been prepared in conformity with the requirements of the applicable Governmental
Agency and with GAAP applied on a consistent basis throughout the periods
involved.
 
Section 2.8   Books and Records.  The financial statements, books of account,
minute books, stock record books and other records of Borrower and its
Subsidiaries are complete and correct in all material respects and have been
maintained in accordance with Borrower’s and each Subsidiary’s respective
business practices and all applicable Legal Requirements, including the
maintenance of an adequate system of internal controls required by applicable
Legal Requirements.  The minute books of Borrower and its Subsidiaries contain
accurate and complete records in all material respects of all meetings held of,
and all material corporate action taken by, their respective shareholders, board
of directors and committees of the board of directors.
 
Section 2.9   Title to Properties.  Borrower and each Subsidiary have good and
marketable title to all material assets and properties, whether real or
personal, tangible or intangible, that they purport to own, including all real
property carried by the Bank as well as other real estate owned, subject to
exceptions that, individually and in the aggregate, would not reasonably be
expected to have a Material Adverse Effect.
 
Section 2.10   Loan Portfolio.
 
(a)   Other than as would not be reasonably expected to have a Material Adverse
Effect, to the Knowledge of Borrower, Borrower and each Subsidiary have complied
in all material respects with, and all documentation in connection with the
origination, processing, servicing, underwriting and credit approval of any
loan, lease or other extension of credit or commitment to extend credit
(“Loans”) originated, purchased or serviced by Borrower or any of its
Subsidiaries and have satisfied in all material respects: (i) all applicable
laws with respect to the origination, insuring, purchase, sale, pooling,
servicing, subservicing or filing of claims in connection with Loans, including
all laws relating to real estate settlement procedures, consumer credit
protection, truth in lending laws, usury limitations, fair housing, transfers of
servicing, collection practices, equal credit opportunity and adjustable rate
mortgages; (ii) the responsibilities and obligations relating to Loans set forth
in any contract or agreement between Borrower or any of its Subsidiaries and any
Agency, Loan Investor or Insurer (each as defined below); (iii) the applicable
rules, regulations, guidelines, handbooks and other requirements of any Agency,
Loan Investor or Insurer; (iv) the terms and provisions of any mortgage or other
collateral documents and other Loan documents with respect to each Loan; and (v)
the underwriting guidelines and other loan policies and procedures of Borrower
or its applicable Subsidiary.
 
(b)   During the past five (5) years, no Agency, Loan Investor or Insurer has:
(i) claimed in writing that Borrower or any Subsidiary has violated or has not
complied with the applicable underwriting standards with respect to Loans sold
by Borrower or any of its Subsidiaries to a Loan Investor or Agency, or with
respect to any sale of Loan servicing rights to a Loan Investor; (ii) imposed in
writing restrictions on the activities (including commitment authority) of
Borrower or any of its Subsidiaries; or (iii) indicated in writing to Borrower
or any of its Subsidiaries that it has terminated or intends to terminate its
relationship with Borrower or any of its Subsidiaries for poor performance, poor
Loan quality or concern with respect to Borrower’s or any Subsidiary’s
compliance with laws.
 
 
 
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(c)   The characteristics of the loan portfolio of the Bank have not materially
changed from the characteristics of the loan portfolio of the Bank as of June
30, 2015.
 
(d)   For purposes of this ‎Section 2.10: (i) “Agency” means the Small Business
Administration, the Federal Housing Administration, the Federal Home Loan
Mortgage Corporation, the Farmers Home Administration (now known as Rural
Housing and Community Development Services), the Federal National Mortgage
Association, the United States Department of Veterans’ Affairs, the Government
National Mortgage Association, the Rural Housing Service of the United States
Department of Agriculture or any other federal or state agency with authority to
(A) determine any investment, origination, lending or servicing requirements
with regard to Loans originated, purchased or serviced by Borrower or any
Subsidiary or (B) originate, purchase, or service Loans, or otherwise promote
lending, including state and local housing finance authorities; (ii) “Loan
Investor” means any person (including an Agency) having a beneficial interest in
any Loan originated, purchased or serviced by Borrower or any Subsidiary or a
security backed by or representing an interest in any such Loan; and (iii)
“Insurer” means a person who insures or guarantees for the benefit of the Loan
holder all or any portion of the risk of loss upon borrower default on any of
the Loans originated, purchased or serviced by Borrower or any Subsidiary,
including the Federal Housing Administration, the United States Department of
Veterans’ Affairs, the Rural Housing Service of the United States, the United
States Department of Agriculture and any private mortgage insurer, and providers
of hazard, title or other insurance with respect to such Loans or the related
collateral.
 
Section 2.11   Allowance for Loan and Lease Losses. The Bank’s allowance for
loan and lease losses, as reflected in its most recent Call Report, was
determined on the basis of the Bank’s continuing review and evaluation of the
portfolio of the loans owned by the Bank under the requirements of GAAP
consistently applied and Legal Requirements, was established in a manner
consistent with the Bank’s internal policies, and, in the reasonable judgment of
the Bank, was adequate in all material respects as of such date under the
requirements of GAAP and all Legal Requirements to provide for (i) estimated
credit losses for specifically identified loans that are determined to be
impaired and (ii) estimated probable credit losses inherent in the remainder of
the Bank’s loan portfolio.
 
Section 2.12   Undisclosed Liabilities; Adverse Changes.  Neither Borrower nor
any Subsidiary has any material liabilities or obligations of any nature
(whether absolute, accrued, contingent or otherwise), except for liabilities or
obligations reflected or reserved against in its respective most recent
quarterly financial statements and current liabilities incurred in the ordinary
course of business since the respective dates thereof.  Since the date of the
latest consolidated quarterly financial statements of Borrower and its
Subsidiaries, there has not been any material change in the business,
operations, properties, prospects, assets or condition of Borrower or any
Subsidiary, and, no event has occurred or circumstance exists, that has had or
would reasonably be expected to have a Material Adverse Effect.
 
Section 2.13   Taxes.
 
(a)      Borrower and each Subsidiary have duly and timely filed, or will duly
and timely file, each return (including any informational return), report,
statement, schedule, notice, form or other document or information filed with or
submitted to, or required to be filed with or submitted to, any Governmental
Agency (collectively, “Tax Returns”) in connection with the determination,
assessment, collection or payment of any tax, levy, assessment, tariff, duty
(including any customs duty), deficiency or other fee, and any related charge or
amount (including any fine, penalty, interest or addition to tax), imposed,
assessed or collected by or under the authority of any Governmental Agency
(a “Tax”) that is required to be filed by it on or before the Closing Date for
all taxable or reporting periods ending on or before the Closing Date, and each
such Tax Return is true, correct and complete in all material respects.  In all
material respects, Borrower and each Subsidiary have paid, or made adequate
provision for the payment of, all Taxes (whether or not reflected in Tax Returns
as filed or to be filed) due and payable by Borrower and/or any Subsidiary, or
claimed to be due and payable by any Governmental Agency, and are not delinquent
in the payment of any Tax.
 
(b)      There is no claim or assessment pending or, to the Knowledge of
Borrower, threatened against Borrower or any Subsidiary for any Taxes that it
owes.  No audit, examination or investigation related to Taxes paid or payable
by Borrower or any Subsidiary is presently being conducted or, to the Knowledge
of Borrower, threatened by any Governmental Agency.  Neither Borrower nor any
Subsidiary is the beneficiary of any
 
 
 
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extension of time within which to file any Tax Return, and there are no liens
for Taxes (other than Taxes not yet due and payable) upon any of Borrower’s or
any Subsidiary’s assets.
 
Section 2.14   Compliance with Legal Requirements.  Borrower and each Subsidiary
holds all licenses, certificates, permits, franchises and rights from all
appropriate Governmental Agencies necessary and material for the conduct of its
respective business.  Borrower and each Subsidiary is in compliance with each
Legal Requirement that is or was applicable to it or to the conduct or operation
of its respective businesses or the ownership or use of any of its respective
assets, except where the failure to comply would not reasonably be expected to
have a Material Adverse Effect.  No event has occurred or circumstance exists
that (with or without notice or lapse of time):  (a) may constitute or result in
a violation by Borrower or any Subsidiary of, or a failure on the part of
Borrower or any Subsidiary to comply with, any Legal Requirement; or (b) may
give rise to any obligation on the part of Borrower or any Subsidiary to
undertake, or to bear all or any portion of the cost of, any remedial action of
any nature in connection with a failure to comply with any Legal Requirement;
except, in either case, where, in the case of either clause (a) or (b), the
failure to comply or the violation would not reasonably be expected to have a
Material Adverse Effect.
 
Section 2.15   Regulatory Matters.  Neither Borrower nor any Subsidiary is
subject or is party to, or has received any notice or advice from any
Governmental Agency, including any domestic and any foreign government entities,
that any of them may become subject or party to any investigation with respect
to, any corrective, suspension or cease-and-desist order, agreement, consent
agreement, memorandum of understanding or other regulatory enforcement action,
proceeding or order with or by, or is a party to any commitment letter or
similar undertaking to, or is subject to any directive by, or has been a
recipient of any supervisory letter from, or has adopted any board resolutions
at the request of, any Governmental Agency that currently relates to or
restricts the conduct of their business or that in any manner relates to their
capital adequacy, credit policies, interest payments, dividend distributions,
management or business (each, a “Regulatory Agreement”), nor has Borrower or any
Subsidiary been advised by any Governmental Agency that it is considering
issuing or requesting any Regulatory Agreement.  To the knowledge of Borrower,
there is no unresolved violation, criticism or exception by any Governmental
Agency with respect to any report or statement relating to any examinations of
Borrower or any Subsidiary.  Borrower and its Subsidiaries are in material
compliance with all laws administered by the Governmental Agencies.
 
Section 2.16   Pending Litigation.  There are no actions, suits, proceedings or
arbitrations pending, or, to the Knowledge of Borrower, threatened against
Borrower or any Subsidiary at law or in equity or before or by any Governmental
Agency, domestic or foreign, that if adversely determined would reasonably be
expected to have a Material Adverse Effect. Neither Borrower nor any Subsidiary
is in default with respect to any material order, writ, injunction, or decree
of, or any Regulatory Agreement with, any Governmental Agency, domestic or
foreign.
 
Section 2.17   No Defaults.  Each Material Contract to which Borrower or a
Subsidiary is a party is in full force and effect and is valid and enforceable
in accordance with its terms, except as such enforcement may be limited by
bankruptcy, insolvency, reorganization or other laws affecting creditors’ rights
generally and subject to general principles of equity.  The execution and
delivery by Borrower of this Agreement and the consummation and performance of
the Contemplated Transactions do not and will not, and no other event has
occurred or to the Borrower’s knowledge circumstance exists that may (with or
without notice or lapse of time) contravene, conflict with or result in a
material violation or breach of, or give any counterparty to any Material
Contract the right to declare a default or exercise any remedy under, or to
accelerate the maturity or performance of, or to cancel, terminate or modify,
such Material Contract.  Other than in the ordinary course of business in
connection with workouts and restructured loans, there are no renegotiations of,
attempts to renegotiate, or outstanding rights to renegotiate, any material
amounts paid or payable to Borrower or a Subsidiary under current or completed
Material Contracts with any Person and no such Person has made written demand
for such renegotiation.
 
Section 2.18   Insurance.  Borrower and each Subsidiary have such insurance in
place as Borrower’s management deems reasonable with respect to their respective
businesses (including bankers’ blanket bond and insurance providing benefits for
employees).  Set forth in ‎Section 2.18 of Schedule B is a complete and correct
list of insurance policies maintained by Borrower and each Subsidiary (each, a
“Policy”).  Each Policy is in full force and effect (except for any expiring
policy which is replaced by coverage at least as extensive).  All premiums due
on each Policy have been paid in full.
 
 
 
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Section 2.19   Regulatory Filings.   During the past five (5) years, Borrower
and each Subsidiary have filed in a timely manner all required filings with all
Governmental Agencies.  All such filings were accurate and complete in all
material respects as of the dates of the filings, and no such filing made any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading.  In the event Borrower or any
Subsidiary has restated any filings with any Governmental Agency during such
period, Borrower has disclosed the nature of such restatement to Initial Lender
in writing.
 
Section 2.20   Indemnification Claims.  No action or failure to take action by
any director or executive officer, or, to the Knowledge of Borrower, any
employee or agent of Borrower or any Subsidiary has occurred that has given
rise, or may be expected to give rise, to a claim or a potential claim by any
such Person for indemnification against Borrower or any Subsidiary under any
contract with, or the corporate indemnification provisions of, Borrower or any
Subsidiary, or under any Legal Requirements.
 
Section 2.21   Registration Rights.  No Person has any right to cause Borrower
or any Subsidiary to effect the registration under the Securities Act of any
securities of Borrower or any Subsidiary.
 
Section 2.22   Prohibition on Dividends or Interest.  Except as otherwise
disclosed in Schedule B neither Borrower nor any Subsidiary is currently
prohibited, directly or indirectly, under any order of any Governmental Agency
(other than orders applicable to bank or savings and loan holding companies and
their subsidiaries generally), under any applicable law, under any adopted
policy or under any agreement or other instrument to which it is a party or is
subject, from paying any dividends on any of its capital stock (including any
dividends to Borrower in the case of the Bank) or any interest on any of its
debt instruments in the case of Borrower, from making any other distribution on
Borrower’s or any Subsidiary’s capital stock, or in the case of the Bank, from
repaying to Borrower or any other Subsidiary any loans or advances to such Bank
or from transferring any of the Bank’s properties, assets or operations to
Borrower or any other Subsidiary.  As of the date of this Agreement, Borrower
would not be prohibited from paying the amount of a regularly scheduled interest
payment on the Term Loan.
 
Section 2.23   Investment Company.  Neither Borrower nor any of its Subsidiaries
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,
and neither Borrower nor any Subsidiary sponsors any Person that is required to
be registered as an investment company.
 
Section 2.24   Use of Proceeds.  Borrower shall use the proceeds of the Term
Loan for general corporate purposes.  Borrower does not own any “margin
security” as such term is defined in Regulation G of the Federal Reserve
Board.  Borrower will not use any part of the proceeds (a) directly or
indirectly to purchase or carry any margin security or reduce or retire any
indebtedness originally incurred to purchase any such margin security within the
meaning of Regulation U of the Federal Reserve Board or (b) so as to involve
Borrower or any Lender in a violation of Regulation U of the Federal Reserve
Board.  Borrower agrees to execute, or cause to be executed, all instruments
necessary to comply with all of the requirements of Regulation U of the Federal
Reserve Board.  The amount to be received by Lenders as interest under the Term
Loan is not usurious or illegal under applicable law.
 
Section 2.25   Accuracy of Information Furnished.  The following information
furnished to Initial Lender by Borrower in connection with  Initial Lender’s
examination of Borrower is correct in all material respects, and does not
contain any untrue statement of a material fact, or omit to state a material
fact necessary to make the statements contained therein not misleading: loan
tape and reports, securities tape, deposit tape, responses to Due Diligence
Questionnaire and all other items provided in the virtual data room in which
Initial Lender received access on August 28, 2015.
 
Section 2.26   Source of Funds.  The proceeds of the Term Loan have not been
provided, directly or indirectly (including through any CLO Transaction), by the
Bank, the Borrower or any affiliate of the Bank or Borrower.
 
 
 
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Section 3.   OTHER COVENANTS AND AGREEMENTS OF THE PARTIES.
 
Section 3.1   Corporate Existence.  Borrower shall at all times preserve and
maintain, and cause each Subsidiary to preserve and maintain, its corporate
existence, rights, franchises and privileges as necessary to conduct its
business and own and control its Subsidiaries.
 
Section 3.2   Conduct of Business; Notifications.
 
(a)   Prior to the Closing Date, and for the duration of this Agreement,
Borrower shall, and shall cause each of its Subsidiaries to, use commercially
reasonable efforts to carry on its business in the ordinary course of business
and use reasonable best efforts to maintain and preserve its and each
Subsidiary’s business (including its organization, assets, properties, goodwill
and insurance coverage) and preserve its business relationships with customers,
strategic partners, suppliers, distributors and others having business dealings
with it; provided, that nothing in this sentence shall limit or require any
actions that the Board may, in good faith, determine to be inconsistent with
their duties or Borrower’s obligations under applicable Legal Requirements.
 
(b)   Borrower shall immediately notify the Lenders in writing when Borrower
obtains knowledge of (i) the occurrence of any default under 5.1, (ii) any event
that would reasonably be expected to have a Material Adverse Effect, and (iii)
the occurrence of any event described under 5.1(a), (b), (c) or (d) with respect
to any Subsidiary of Borrower that is not a Major Bank Subsidiary.
 
Section 3.3   Financial Statements; Shareholder Information.  Borrower shall,
and cause its Subsidiaries to, at all times maintain a system of accounting, on
the accrual basis of accounting and in accordance with the requirements of the
applicable Governmental Agency and with GAAP, and shall simultaneously provide
to Lenders or their Representatives any notices, financial statements and other
financial information related to Borrower or any Subsidiary that are provided to
the holders of Borrower’s common stock.
 
Section 3.4   Inspection Rights.
 
(a)   From the date hereof until the Maturity Date, Borrower will furnish to
Servicer (and its financial and professional advisors and Representatives), and
permit Servicer and its Representatives access during Borrower’s or the Bank’s
normal business hours and upon reasonable advance notice, to such information
and materials relating to the financial, business and legal condition of
Borrower and the Bank as may be reasonably necessary or advisable to allow
Servicer and its Representatives to remain familiar with Borrower and the Bank
and confirm compliance by Borrower with the terms of this Agreement.  Any
investigation pursuant to this ‎Section 3.4(a) shall be conducted during normal
business hours and in such manner as not to interfere unreasonably with the
conduct of the business of Borrower, and nothing herein shall require Borrower
or any Subsidiary to disclose any information to the extent (i) prohibited by
applicable Legal Requirement, (ii) that Borrower reasonably believes such
information to be competitively sensitive proprietary information, or (iii) that
such disclosure would reasonably be expected to cause a violation of any
agreement to which Borrower or any Subsidiary is a party or would cause a risk
of a loss of privilege to Borrower or any Subsidiary; provided, that the types
of information disclosed to Servicer pursuant to its investment made hereby
shall not be withheld pursuant to clause (ii)2; provided further, that Borrower
shall use commercially reasonable efforts to make appropriate substitute
disclosure arrangements under circumstances where the restrictions in this
clause (iii) apply.  Under no circumstances shall Confidential Customer
Information be disclosed to any Lender or its Representatives.
 
(b)   In consideration of the rights granted under ‎Section 3.4(a), the Servicer
and each Lender each agrees that it will hold, will cause its Affiliates and
Representatives (collectively with the Lenders and Servicer, the “Lender
Entities”) to hold, in confidence, unless disclosure to a Governmental Agency is
necessary or appropriate in connection with any necessary regulatory approval,
or request for information or similar process, or unless compelled to disclose
by judicial or administrative process or, in the written opinion of its counsel,
by other
 
 
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requirement of law or the applicable requirements of any Governmental Agency (in
which case, such Lender or Servicer, as the case may be, shall, to the extent
legally permissible and reasonably practicable, provide Borrower with prior
written notice of such permitted disclosure, except to the extent such
disclosure is in connection with a routine audit by a Governmental Agency that
does not expressly reference Borrower or this Agreement), all nonpublic records,
books, contracts, instruments, computer data and other data and information
(collectively, “Confidential Information”) concerning Borrower or the Bank
furnished to the Lender Entities pursuant to this Agreement or in connection
with the rights granted hereunder (except to the extent that such information
can be shown to have been: (i) previously known by such party on a
non-confidential basis; (ii) in the public domain through no fault of such
party; or (iii) later lawfully acquired from other sources by the party to which
it was furnished), and the Lender Entities shall not release or disclose such
Confidential Information to any other person, except to potential third-party
buyers of the Term Loan (subject to execution of a non-disclosure agreement
between such buyer and Borrower in a form substantially similar to the
Confidentiality Agreement entered into August 12, 2015 by and between Borrower
and StoneCastle Advisors, LLC (“SCA”) ), with the express understanding that
such parties will maintain the confidentiality of the Confidential Information
pursuant to the terms herein. In no event may any Confidential Information
furnished by Borrower be used otherwise than in connection with the transactions
contemplated by this Agreement.
 
Section 3.5   [Reserved]
 
Section 3.6   Assignments and Participations of Term Loan.
 
(a)   Subject to compliance with applicable laws, each Lender shall be
permitted, at any time without the consent of the Borrower, to transfer, sell,
assign or otherwise dispose of (“Assign” or “Assignment”, as applicable) all or
a portion of the Term Loan in a minimum amount of $100,000 of the principal
amount of the Term Loan for each assignment, at any time, and Borrower shall
take all steps as may be reasonably requested by each Lender to facilitate the
Assignment of the Term Loan.  Each Lender shall also be permitted, at any time
without the consent of the Borrower, to sell participations in all or a portion
of the Term Loan in a minimum amount of $100,000 of the principal amount of the
Term Loan for each participation, at any time; provided, that (in the case of
participations only) the Borrower shall continue to deal solely and directly
with such Lender in connection with such Lender’s rights and obligations under
this Agreement.   In furtherance of the foregoing, Borrower shall provide
reasonable cooperation to facilitate any Assignments or participations of the
Term Loan, including, as is reasonable under the circumstances, by (i) amending
this Agreement as reasonably necessary to incorporate an administrative agent
and other provisions relevant to a syndicated loan facility, or to facilitate a
CLO Transaction, (ii) furnishing such information concerning Borrower and its
business as a proposed assignee or participant may reasonably request and (iii)
in the event Confidential Information is being provided to a third-party, making
management of Borrower reasonably available to respond to questions of a
proposed assignee in accordance with customary practice, subject in all cases in
which Confidential Information is provided to the proposed assignee agreeing to
a customary non-disclosure agreement between such assignee and Borrower in a
form substantially similar to the Confidentiality Agreement entered into on
August 12, 2015 by and between Borrower and SCA.
 
(b)   The Servicer (or in the event the Initial Lender shall no longer hold any
principal amount of the Term Loan, the Agent), acting solely for this purpose as
an agent of the Borrower, shall maintain at  Servicer’s or Agent’s (as
applicable) place of business, a copy of each agreement evidencing an
Assignment, and a register for the recordation of the names and addresses of
each of the assignee lenders, and the principal amounts (and related interest
amounts) of the Term Loan owing to each assignee lender from time to time (the
“Register”).  The entries in the Register shall be conclusive, absent manifest
error, and the Borrower and Servicer or Agent, as the case may be, shall treat
each Person whose name is recorded in the Register pursuant to the terms hereof
as a applicable Lender hereunder for all purposes of this Agreement.  The
Register shall be available for inspection by the Borrower, and with respect to
its own Term Loan, any assignee lender, at any reasonable time and from time to
time upon reasonable prior notice.  Each Lender shall maintain at its place of
business, a copy of each agreement evidencing a participation interest, and a
register for the recordation of the names and addresses of each of participants
holding a portion of the Term Loan, and the principal amounts (and related
interest amounts) of the Term Loan owing to each participant from time to time
(the “Participant Register”).  Each Lender shall provide a copy of its
Participant Register to the Servicer and the Agent, upon request from Servicer
or the Agent.
 
 
 
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Section 3.7   CLO Transactions.  Any Lender shall have the right at any time and
from time to time to securitize the portion of the Term Loan that such Lender
holds or any portion thereof in a single asset securitization or one or more
pooled loan securitizations of rated single or multi-class securities secured by
or evidencing ownership interests in the Term Loan (each such securitization is
referred to herein as a “CLO Transaction”).  Borrower acknowledges that this
Term Loan may be, at the Closing Date or sometime in the future, pooled with
other term loans held by Initial Lender or by an assignee of Initial Lender as
part of a CLO Transaction issued by the Initial Lender or such assignee, and
managed and serviced by the Servicer, as an agent of the Initial Lender or
assignee.  In connection with this CLO Transaction and any other CLO
Transaction, if any, that may occur in the future, Borrower shall use all
reasonable efforts and cooperate fully and in good faith with the applicable
Lender and otherwise assist such Lender in satisfying the market standards to
which such Lender customarily adheres or which may be reasonably required in the
marketplace or by applicable rating agencies in connection with any such CLO
Transactions.  Subject to Section 3.4(b), all information regarding Borrower may
be furnished, without liability to any Lender furnishing such information, to
any Person deemed necessary by the applicable Lender in connection with such CLO
Transaction.  All documents, financial statements, appraisals and other data
relevant to Borrower or the Term Loan may be exhibited to and retained by any
such Person.
 
Section 3.8   Transfer Taxes.  On the Closing Date, any transfer or other
similar Taxes which are required to be paid in connection with the borrowing of
the Term Loan by the Borrower from the Initial Lender hereunder will be, or will
have been, fully paid or provided for by Borrower, and all Legal Requirements
imposing such taxes will be or will have been complied with.
 
Section 3.9   Indemnification.
 
(a)   Indemnification of Lenders.  Borrower will indemnify and hold the Lenders,
the Servicer, the Lender Advisors and their respective advisors, directors,
officers, shareholders, members, partners, employees, agents and Affiliates (and
any other Persons with a functionally equivalent role of a Person holding such
titles notwithstanding a lack of such title or any other title), each Person who
controls a Lender (within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act), and the directors, officers, shareholders,
agents, members, partners, employees or Affiliates (and any other Persons with a
functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling person (each,
a “Borrower Indemnified Person”) harmless from and against any and all losses,
liabilities, obligations, claims, damages, costs and expenses actually and
reasonably incurred by such Borrower Indemnified Person, including all
judgments, amounts paid in settlements, court costs and reasonable attorneys’
fees and costs of investigation (collectively, “Losses”) that any such Borrower
Indemnified Person may suffer or incur as a result of: (i) any breach of any of
the representations, warranties, covenants or agreements made by Borrower in
this Agreement, or (ii) any action instituted against a Borrower Indemnified
Person in any capacity, or any of them or their respective Affiliates, by any
shareholder of Borrower or other third party who is not a Lender, an Affiliate
of a Lender, Servicer, a Lender Advisor or an Affiliate of such Borrower
Indemnified Person, with respect to any of the transactions (other than a CLO
Transaction) contemplated by this Agreement.  Borrower will not be liable to any
Borrower Indemnified Person under this Agreement to the extent, but only to the
extent that a loss, claim, damage or liability is attributable to any Borrower
Indemnified Person’s material breach of any of the representations, warranties,
covenants or agreements made by such Borrower Indemnified Person in this
Agreement or attributable to the material actions or material inactions of such
Borrower Indemnified Person.
 
(b)   Conduct of Indemnification Proceedings for Borrower Indemnified
Persons.  Promptly after receipt by any Borrower Indemnified Person of notice of
any demand, claim or circumstances which would or might give rise to a claim or
the commencement of any action, proceeding or investigation in respect of which
indemnity may be sought pursuant to ‎Section 3.9(a), such Borrower Indemnified
Person shall promptly notify Borrower in writing and Borrower shall assume the
defense thereof, including the employment of counsel reasonably satisfactory to
such Borrower Indemnified Person, and shall assume the payment of all fees and
expenses; provided, however, that the failure of any Borrower Indemnified Person
to so notify Borrower shall not relieve Borrower of its obligations hereunder
except to the extent that Borrower is actually and materially and adversely
prejudiced by such failure to notify (as determined by a court of competent
jurisdiction, which determination is not subject to appeal or further
review).  In any such proceeding, any Borrower Indemnified Person shall have the
right to retain its own counsel, and the reasonable fees and expenses of such
counsel shall be at the expense of Borrower; provided, that Borrower shall not
be liable for the fees and expenses of more than one separate
 
 
 
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firm of attorneys at any time for all Borrower Indemnified Persons.  Borrower
shall not be liable for any settlement of any proceeding effected without its
written consent, which consent shall not be unreasonably withheld, delayed or
conditioned.  Without the prior written consent of the Borrower Indemnified
Person, which shall not be unreasonably withheld, delayed or conditioned,
Borrower shall not effect any settlement of any pending or threatened proceeding
in respect of which any Borrower Indemnified Person is or could have been a
party and indemnity could have been sought hereunder by such Borrower
Indemnified Person, unless such settlement includes an unconditional release of
such Borrower Indemnified Person from all liability arising out of such
proceeding.
 
(c)           For purposes of the indemnity contained in ‎Section 3.9(a)(i), all
qualifications and limitations set forth in the parties’ representations and
warranties as to “materiality,” “material adverse effect” and words of similar
import shall be disregarded in determining whether there shall have been any
inaccuracy in or breach of any representations and warranties in this Agreement
and the Losses arising therefrom.
 
(d)            Indemnification of Servicer.  The Lenders will indemnify and hold
the Servicer and its respective advisors, directors, officers, shareholders,
members, partners, employees, agents and Affiliates (and any other Persons with
a functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) (each, a “Lender Indemnified Person”)
harmless from and against any and all losses, liabilities, obligations, claims,
damages, costs and expenses actually and reasonably incurred by such Lender
Indemnified Person, including all judgments, amounts paid in settlements, court
costs and reasonable attorneys’ fees and costs of investigation (collectively,
“Losses”) that any such Lender Indemnified Person may suffer or incur as a
result of: (i) any breach of any of the representations, warranties, covenants
or agreements made by Lenders in this Agreement, or (ii) any action instituted
against a Lender Indemnified Person in any capacity, or any of them or their
respective Affiliates, by any shareholder of Lender or other third party who is
not an Affiliate of such Lender Indemnified Person, with respect to any of the
transactions contemplated by this Agreement.  The Lenders will not be liable to
any Lender Indemnified Person under this Agreement to the extent, but only to
the extent that a loss, claim, damage or liability is attributable to any Lender
Indemnified Person’s material breach of any of the representations, warranties,
covenants or agreements made by such Lender Indemnified Person in this Agreement
or attributable to the material actions or material inactions of such Lender
Indemnified Person.
 
(e)             Conduct of Indemnification Proceedings for Lender Indemnified
Persons.  Promptly after receipt by any Lender Indemnified Person of notice of
any demand, claim or circumstances which would or might give rise to a claim or
the commencement of any action, proceeding or investigation in respect of which
indemnity may be sought pursuant to ‎Section 3.9(a), such Lender Indemnified
Person shall promptly notify the applicable Lenders in writing and such Lenders
shall assume the defense thereof, including the employment of counsel reasonably
satisfactory to such Lender Indemnified Person, and shall assume the payment of
all fees and expenses; provided, however, that the failure of any Lender
Indemnified Person to so notify the Lenders shall not relieve any Lender of its
obligations hereunder except to the extent that such Lender is actually and
materially and adversely prejudiced by such failure to notify (as determined by
a court of competent jurisdiction, which determination is not subject to appeal
or further review).  In any such proceeding, any Lender Indemnified Person shall
have the right to retain its own counsel, and  the fees and expenses of such
counsel shall be at the expense of the applicable Lenders; provided, that the
Lenders shall not be liable for the fees and expenses of more than one separate
firm of attorneys at any time for all Lender Indemnified Persons.  No Lender
shall be liable for any settlement of any proceeding effected without its
written consent, which consent shall not be unreasonably withheld, delayed or
conditioned.  Without the prior written consent of the Lender Indemnified
Person, which shall not be unreasonably withheld, delayed or conditioned, no
shall effect any settlement of any pending or threatened proceeding in respect
of which any Lender Indemnified Person is or could have been a party and
indemnity could have been sought hereunder by such Lender Indemnified Person,
unless such settlement includes an unconditional release of such Lender
Indemnified Person from all liability arising out of such proceeding.
 
Section 3.10   Reasonable Best Efforts.  Borrower and Initial Lender agree to
use reasonable best efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, and to assist and cooperate with the other parties to
this Agreement in doing, all things necessary, proper or advisable to consummate
and make effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement, including using reasonable best efforts to
accomplish the following: (a) the taking of all reasonable acts necessary to
cause the conditions to Closing to be satisfied; (b) the obtaining of all
necessary actions or nonactions, waivers, consents and approvals from
Governmental Agencies and the making of all necessary registrations and filings
and the taking of
 
 
 
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all reasonable steps necessary to obtain an approval or waiver from, or to avoid
an action or proceeding by, any Governmental Agency; (c) the obtaining of all
necessary consents, approvals or waivers from third parties; and (d) the
execution and delivery of any additional instruments necessary to consummate the
transactions contemplated by, and to fully carry out the purposes of, this
Agreement.
 
Section 3.11         Merger, Consolidation and Sale of Assets.
 
(a)   Borrower shall not consolidate with or merge with any Person, or effect a
Change in Bank Ownership, unless: (i) the successor entity which results from
such consolidation or merger, if not Borrower, or the Person which acquires the
assets of Borrower or the stock of the Banks from such Change in Bank Ownership
(the “Surviving Entity”), (A) shall be organized and existing under the laws of
the United States or any State thereof or the District of Columbia, and
(B) shall have either (x) executed and delivered to the Lenders its assumption
of the due and punctual payment of the principal of and premium, if any, and
interest on the Term Loan, and the due and punctual performance and observation
of all of the covenants in the Term Loan, and this Agreement and shall furnish
to such Lenders an opinion of counsel to the effect that the instrument of
assumption has been duly authorized, executed and delivered and constitutes the
legal, valid and binding contract and agreement of the Surviving Entity
enforceable in accordance with its terms, except as enforcement of such terms
may be limited by bankruptcy, insolvency, reorganization, moratorium and similar
laws affecting the enforcement of creditors’ rights generally (including laws
and regulations specifically applicable to bank holding companies registered
with the Federal Reserve) and by general equitable principles, or (y) exchanged
the Term Loan for a subordinated term loan of the Surviving Entity or the parent
of the Surviving Entity, and such subordinated term loan shall have the same
economic terms as the Term Loan, including but not limited to, principal amount,
interest rate, maturity and any other term that would require the consent of
each Lender to amend under ‎Section 6.2(a) hereunder, and such other rights,
preferences, privileges and covenants that are not materially less favorable
than the rights, preferences, privileges and covenants of the Term Loan; and
(ii) immediately after giving effect to such transaction and treating any
indebtedness that becomes an obligation of Borrower as a result of such
transaction as having been incurred by Borrower at the time of such transaction,
no Event of Default or potential Event of Default would exist.
 
(b)   “Change in Bank Ownership” means the sale, transfer, lease or conveyance
by Borrower of its assets, or an issuance of stock by the Bank, resulting in
ownership by Borrower of less than 80% of such Bank (or such Bank’s assets prior
to giving effect to such transaction).
 
(c)   No such consolidation, merger or Change in Bank Ownership shall have the
effect of releasing Borrower or any Surviving Entity that shall theretofore have
become such in the manner prescribed in this ‎Section 3.11 from its liability
under this Agreement and the Term Loan.  Borrower agrees to provide written
notice to Lenders of its intention to consolidate with or merge with, or sell,
lease or otherwise transfer all or substantially all of its assets to, or the
Bank’s intention to issue stock to, any Person, no later than five (5) Business
Days after the earlier of: (i) Borrower’s receipt of a binding letter of intent
with respect to such transaction; or (ii) the execution of an agreement by and
between Borrower and any Person with respect to such transaction.
 
Section 4.   CONDITIONS PRECEDENT TO CLOSING.
 
Section 4.1   Conditions Precedent to Initial Lender’s Obligations.  The
obligation of Initial Lender to make the Term Loan at the Closing is subject to
the fulfillment, on or prior to the Closing Date, of each of the following
conditions, any of which may be waived by Initial Lender:
 
(a)   Representations and Warranties.  The representations and warranties of
Borrower contained herein shall be true and correct in all material respects as
of the date hereof and as of the Closing Date, except for such representations
and warranties that speak as of a specific date (which representations and
warranties are so true and correct as of such date); provided, however, that for
each of the representations and warranties in this Agreement that contains an
express materiality qualification shall have been true and accurate in all
respects as of the date of this Agreement, and shall be true and accurate in all
respects on the Closing Date (or such other date as specified) as if then made.
 
 
 
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(b)   Performance.  Borrower shall have performed, satisfied and complied in all
material respects with all covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by it at or prior to the
Closing.
 
(c)   No Injunction.  No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or Governmental Agency of competent jurisdiction that prohibits the
consummation of any of the transactions contemplated by this Agreement.
 
(d)   Consents.  Borrower shall have obtained in a timely fashion any and all
consents, permits, approvals, registrations and waivers necessary for
consummation of the borrowing of the Term Loan, including but not limited to,
any and all approvals or indications of non-objection from the applicable
Governmental Agencies, all of which shall be and remain so long as necessary in
full force and effect.
 
(e)   Borrower Deliverables.  Borrower shall have delivered the items set forth
in ‎Section 1.9(a).
 
(f)   Due Diligence.  Initial Lender shall have performed its due diligence
examination of Borrower to Initial Lender’s satisfaction.  Any making of the
Term Loan at the Closing is subject to the due diligence of Initial Lender and
at the sole discretion of Initial Lender.  Initial Lender may decline to make
the Term Loan for any reason or no reason.
 
(g)   A CLO Transaction shall have closed, or shall be closing concurrently with
the making of the Term Loan on the Closing.
 
Section 4.2          Conditions Precedent to Borrower’s Obligations.  Borrower’s
obligation to borrow the Term Loan from Initial Lender at the Closing is subject
to the fulfillment, on or prior to the Closing Date of the following conditions,
any of which may be waived by the Borrower:
 
(a)   Performance. Initial Lender shall have performed, satisfied and complied
in all material respects with all covenants, agreements and conditions required
by this Agreement to be performed, satisfied or complied with by Initial Lender
at or prior to the Closing Date.
 
(b)   No Injunction.  No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or Governmental Agency of competent jurisdiction that prohibits the
consummation of any of the transactions contemplated by this Agreement.
 
(c)   Lender Deliverables.  Initial Lender shall have delivered the items set
forth in ‎Section 1.9(b).
 
Section 5.   BORROWER’S DEFAULTS AND LENDERS’ REMEDIES.
 
Section 5.1   Event of Default.  Notwithstanding any cure periods described
below, Borrower shall immediately notify Lenders in writing when Borrower
obtains knowledge of the occurrence of any default specified below.  Regardless
of whether Borrower has given the required notice, the occurrence of one or more
of the following will constitute an “Event of Default” under the Term Loan:
 
(a)   Borrower or any Major Bank Subsidiary applies for, consents to or
acquiesces in the appointment of a receiver for itself, or in the absence of
such application, consent or acquiescence, a receiver is appointed for Borrower;
 
(b)   Any proceedings are commenced by or against Borrower or any Major Bank
Subsidiary under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation law or statute of the federal
government or any state government, if such proceedings are instituted, Borrower
or Bank by any action or failure to act indicates its approval of, consent to or
acquiescence therein, or an order shall be
 
 
 
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entered approving the petition in such proceedings and within ninety (90) days
after the entry thereof such order is not vacated or stayed on appeal or
otherwise, or shall not otherwise have ceased to continue in effect;
 
(c)   Borrower or any Major Bank Subsidiary applies for, consents to or
acquiesces in the appointment of a trustee, receiver or liquidator for itself
under Chapter 7 or Chapter 11 of the United States Bankruptcy Code (the “Code
Provisions”), or in the absence of such application, consent or acquiescence, a
trustee, receiver or liquidator is appointed for Borrower under the Code
Provisions, and is not discharged within ninety (90) days, or any bankruptcy,
reorganization, debt arrangement or other proceeding or any dissolution or
liquidation proceeding is instituted by or against Borrower under the Code
Provisions, and if instituted, is consented or acquiesced in by it or remains
for ninety (90) days undismissed, or if Borrower or Bank is enjoined, restrained
or in any way prevented from conducting all or any material part of its business
under the Code Provisions.
 
(d)   Borrower or any Major Bank Subsidiary becomes insolvent or is unable to
pay its debts as they mature; or makes an assignment for the benefit of
creditors or admits in writing its inability to pay its debts as they mature; or
suspends transaction of its usual business; or if a trustee of any substantial
part of the assets of Borrower or Bank is applied for or appointed, and if
appointed, Borrower or Bank by any action or failure to act indicates its
approval of, consent to, or acquiescence in such appointment, or within ninety
(90) days after such appointment, such appointment is not vacated or stayed on
appeal or otherwise, or shall not otherwise have ceased to continue in effect;
 
(e)   Borrower fails to pay any principal or interest due on the Term Loan when
due;
 
(f)            Borrower fails to pay any other fees, charges, costs or expenses
under this Agreement and in each case such failure shall continue for a period
of thirty (30) days after notice thereof is given by any Lender to Borrower; or
 
(g)            Borrower fails to perform or observe in any material respect any
agreement, term, provision, condition, or covenant (other than any such failure
that results in an Event of Default as expressly provided in any other clause of
‎Section 5.1) required to be performed or observed by Borrower hereunder or
other agreement with or in favor of Lenders and in each case such failure shall
continue for a period of thirty (30) days after notice thereof is given by any
Lender to Borrower.
 
Section 5.2   Effect of Event of Default; Remedies of Lenders.
 
(a)   Upon the occurrence of any Event of Default, and upon the vote of Majority
Lenders, any Lender shall have the right, if such Event of Default shall then be
continuing, in addition to all the remedies conferred upon Lenders by the terms
of this Agreement or the Term Loan, to do any or all of the following,
concurrently or successively, without notice to Borrower:
 
(i)   Solely pursuant to Sections 5.1‎(a), ‎(b), ‎(c) and ‎(d), declare the Term
Loan to be, and it shall thereupon become, immediately due and payable, subject
to approval by applicable regulatory authorities, without presentation, demand,
protest or notice of any kind, all of which are hereby expressly waived,
anything contained herein or in the Term Loan to the contrary.
 
(ii)   [Reserved]
 
(iii)   Following the occurrence of any Event of Default and until such Event of
Default is cured by Borrower or waived by the holders of the Term Loan pursuant
to ‎Section 5.2(c), Borrower shall not: (w) make any payments on any
indebtedness that ranks junior to the Term Loan; (x) declare or pay any
dividends on its equity securities; (y) redeem or otherwise acquire any of its
equity securities; or (z) make any other distributions with respect to its
equity securities or set aside any monies or properties for such purposes.
 
(iv)   Upon the occurrence of any Event of Default, it is specifically
understood and agreed that notwithstanding the curing of any such Event of
Default, Borrower shall not be released from any of its covenants hereunder
unless and until the Term Loan is paid in full.
 
 
 
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(v)      Nothing in this ‎Section 5.2 is intended to restrict any Lender’s
rights under the Term Loan, other related documents, or at law or in equity, and
any Lender may exercise such rights and remedies as and when they are available.
 
(b)   In case of any Event of Default hereunder, Borrower shall pay Lenders’
reasonable fees and expenses including attorneys’ fees and expenses, in
connection with the enforcement of this Agreement or other related documents.
 
(c)   In each case of an Event of Default,, the Majority Lenders may elect to
waive all or an individual remedy, including but not limited to ‎Section
5.2(a)(iii).
 
Section 5.3   Reserved.
 
Section 6.   MISCELLANEOUS.
 
Section 6.1   Successors and Assigns.  The provisions of this Agreement will
inure to the benefit of and be binding upon the parties and their successors and
permitted assigns.  Neither this Agreement, nor any rights or obligations
hereunder, may be assigned by the Borrower without the prior written consent of
the Initial Lender, or, at any such time the Initial Lender shall hold less than
66 2/3% of the then-outstanding aggregate principal amount of the Term Loan,
without the prior written consent of the Majority Lenders.  Subject to ‎‎Section
3.6, this Agreement, the Term Loan and any rights or obligations hereunder, may
be assigned by any Lender without the prior written consent of Borrower.
 
Section 6.2   Amendments.
 
(a)   Subject to any necessary regulatory approval, this Agreement, the Note and
any related transaction documents may, with the consent of the Borrower and the
Majority Lenders, be amended or any provision, past default, or non-compliance
thereof waived; provided, however, that, without the consent of each Lender, no
such amendment or waiver may:
 
(i)   reduce the principal amount of the Term Loan;
 
(ii)   reduce the rate of or change the time for payment of interest on the Term
Loan;
 
(iii)      extend the maturity of the Term Loan;
 
(iv)   make any change in this ‎Section 6.2 or in ‎Section 1.8; ‎Section 3.11;
or ‎Section 5; or
 
(v)   make any change in ‎Section 1.5 that adversely affects the rights of any
Lender.
 
(b)   Effectiveness of Amendments.  An amendment or waiver becomes effective in
accordance with its terms and thereafter binds every Lender, unless otherwise
provided by ‎(a).  After an amendment or waiver becomes effective, the Borrower
may require the  Initial Lender (or any subsequent Lender) to surrender the
Note, so that an appropriate notation concerning the amendment or waiver may be
placed thereon or a new Note, reflecting the amendment or waiver, exchanged
therefor.  Even if such a notation is not made or such a new Note is not issued,
such amendment or waiver and any consent given thereto by a Lender shall be
binding according to its terms on any subsequent holder of the Note.
 
(c)   Corrective Amendments upon a Tier 2 Capital Event.    In the event of a
Tier 2 Capital Event, the Initial Lender, or the Majority Lenders, as the case
may be, shall have the right, at their sole discretion, within 45 days of
receipt of a written notice from Borrower of such Tier 2 Capital Event, to make
such amendments to this Agreement solely to the extent necessary such that the
Term Loan qualifies or continues to qualify as Tier 2 capital under the
then-applicable capital adequacy rules and regulations promulgated by the
Federal Reserve.  The
 
 
 
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Borrower shall agree to such amendments so long as such amendments are not
reasonably expected to have a Material Adverse Effect.
 
Section 6.3   Time of the Essence.  Time is of the essence of this Agreement.
 
Section 6.4   No Waiver.  No waiver of any term, provision, condition, covenant
or agreement herein contained shall be effective unless set forth in writing
signed by Majority Lenders or Borrower (as the case may be), and any such waiver
shall be effective only to the extent set forth in such writing.  No failure to
exercise or delay in exercising, by any party, of any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege preclude any other or further exercise
thereof, or the exercise of any other right or remedy provided by law.  The
rights and remedies provided in this Agreement are cumulative and not exclusive
of any right or remedy provided by law or equity.  No notice or demand on
Borrower in any case shall, in itself, entitle Borrower to any other or further
notice or demand in similar or other circumstances or constitute a waiver of the
rights of Lenders to any other or further action in any circumstances without
notice or demand.  No consent or waiver, expressed or implied, by Lenders to or
of any breach or default by Borrower in the performance of its obligations
hereunder shall be deemed or construed to be a consent or waiver to or of any
other breach or default in the performance of the same or any other obligations
of Borrower hereunder.
 
Section 6.5   Notices.  All notices or communications in respect to this
Agreement or the Note shall be provided in writing and will be deemed given upon
the earlier of: (a) actual receipt; and (b) five (5) Business Days after being
sent by certified or registered mail, postage prepaid, return receipt requested,
in each case as follows:
 

  if to Borrower:   
FS Bancorp, Inc.
6920 220th Street SW
Suite 300
Mountlake Terrace, WA 98043
Attention:        Matthew Mullet
                         Chief Financial Officer
Telephone:      425-697-8026
E-mail:            mattm@fsbwa.com
         
with a copy to:
Breyer & Associates, P.C.
8180 Greensboro Drive
Attention:        John F. Breyer, Jr.                                           
Telephone: 703-883-1100 (extension 333)
E-mail:             jbreyer@b-a.net
          if to Agent or Servicer: 
Community Funding CLO, Ltd.
c/o StoneCastle Investment Management, LLC
152 West 57th Street, 35th Floor
New York, New York 10019
Attention:          Rachel Schatten
                           General Counsel
Telephone:        (212) 354-6500
E-mail:               rschatten@stonecastle.com
          with a copy to:   
Cleary, Gottlieb, Steen & Hamilton, LLP
One Liberty Plaza
New York, NY
10006
Attention:            Duane McLaughlin
Telephone:          212-225-2106
E-mail:                dmclaughlin@cgsh.com
       

 
 
 
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       Any party may change or update its notice address above by written notice
to each other party hereto, at the addresses indicated above.
 
Section 6.6   Survival.  Subject to applicable statute of limitations, the
representations, warranties, agreements and covenants contained herein shall
survive the Closing and the extension of the Term Loan.  Such representations
and warranties shall continue in full force and effect so long as any Term Loan
or any other obligation hereunder shall remain unpaid or unsatisfied (or until
final resolution of any claim or action arising from the breach of any such
representation and warranty).
 
Section 6.7   Confidential Customer Information. None of Lenders, Servicer or
any Lender Advisor shall be liable for any loss, claim, damage or liability
attributable to the disclosure of Confidential Customer Information to any
Lender, Servicer or any Lender Advisor, provided that such loss, claim, damage
or liability does not arise from any prohibited use or disclosure of such
information by any Lender, Servicer or any Lender Advisor.  To the extent any
Confidential Customer Information is received by any Lender, Servicer or any
Lender Advisor, it will use its reasonable best efforts to destroy or return
such information to Borrower.  Notwithstanding the foregoing, the Lenders,
Servicer or any Lender Advisor may retain such received Confidential Customer
Information to comply with applicable law or regulation or professional standard
or bona fide internal compliance policy requirements.
 
Section 6.8   No Joint Venture.  Nothing contained herein or in any document
executed pursuant hereto and no action or inaction whatsoever on the part of any
Lender, shall be deemed to make such Lender a partner or joint venturer with
Borrower.
 
Section 6.9   Publicity.  Borrower shall not publicize this Agreement or the
issuance of the Note, without the prior written consent of Majority Lenders,
except that Borrower may make any filings required by law; provided, however,
that nothing contained herein shall be construed to prohibit Borrower from
providing information regarding this Agreement or the Contemplated Transaction
to Borrower’s employees, attorneys, accountants or other advisors in order to
evaluate the Contemplated Transaction or in the ordinary course of Borrower’s
business, or to third-parties to the extent necessary for Borrower to obtain any
consents from such third-parties to this Agreement or Contemplated Transaction.
 
Section 6.10         Documentation.  All documents and other instruments
required by any of the provisions of this Agreement to be submitted to Initial
Lender shall be in the form and substance satisfactory to Initial Lender.
 
Section 6.11        Additional Assurances.  Each party agrees that, at any time
or from time to time, upon the written request of the other party, it will
execute all such further documents and do all such other acts and things as the
other party may reasonably request to effectuate the Contemplated Transactions.
 
Section 6.12         Entire Agreement.  This Agreement and the schedules and
exhibits hereto constitute the entire agreement between the parties hereto with
respect to the subject matter hereof and may not be modified or amended in any
manner other than by supplemental written agreement executed by the parties
hereto.  In entering into this Agreement neither party has relied upon any
representation, warranty, covenant, obligation or other agreement that is not
set forth herein.
 
Section 6.13         Choice of Law.  This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New
York.  Nothing herein shall be deemed to limit any rights, powers or privileges
which Lenders may have pursuant to any law of the United States or any rule,
regulation or order of any department or agency thereof and nothing herein shall
be deemed to make unlawful any transaction or conduct by Lenders, Servicer or
Lender Advisors which is lawful pursuant to, or which is permitted by, any of
the foregoing.
 
Section 6.14         Forum; Venue.  Borrower irrevocably agrees that all actions
or proceedings in any way, manner, or respect, arising out of or from or related
to this Agreement shall be litigated only in courts within New York, New
York.  The parties hereto hereby consent and submit to the jurisdiction of any
local, state, or federal court located within said city.  The parties hereto
hereby waive any right they may have to transfer or change the venue of any such
litigation brought against Borrower or any Lender.
 
 
 
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Section 6.15         No Third Party Beneficiary.  This Agreement is made for the
sole benefit of Borrower, the Lenders, and Servicer, and no other Person shall
be deemed to have any privity of contract hereunder nor any right to rely hereon
to any extent or for any purpose whatsoever, nor shall any other Person have any
right of action of any kind hereon or be deemed to be a third party beneficiary
hereunder.  For the avoidance of doubt, this ‎Section 6.15 does not affect a
Person’s rights to indemnification pursuant to ‎Section 3.9.
 
Section 6.16         Construction.  In this Agreement, unless otherwise stated
or the context otherwise requires, the following uses apply:  (a) actions
permitted under this Agreement may be taken at any time and from time to time in
the actor’s reasonable discretion; (b) references to a statute shall refer to
the statute and any successor statute, and to all regulations promulgated under
or implementing the statute or its successor, as in effect at the relevant time;
(c) in computing periods from a specified date to a later specified date, the
words “from” and “commencing on” (and the like) mean “from and including,” and
the words “to,” “until” and “ending on” (and the like) mean “to, but excluding”;
(d) “including” means “including, but not limited to”; (e) all references to
articles, sections, paragraphs, clauses, schedules and exhibits are to articles,
sections, paragraphs, clauses, schedules and exhibits in, of or to this
Agreement unless otherwise specified; (f) all words used in this Agreement will
be construed to be of such gender or number as the circumstances and context
require; (g) the captions and headings of articles, sections, schedules and
exhibits appearing in or attached to this Agreement have been inserted solely
for convenience of reference and shall not be considered a part of this
Agreement nor shall any of them affect the meaning or interpretation of this
Agreement or any of its provisions; and (h) any reference to a document or set
of documents in this Agreement, and the rights and obligations of the parties
under any such documents, shall mean such document or documents as amended from
time to time, and any and all modifications, extensions, renewals, substitutions
or replacements thereof.  Borrower and Lenders further agree that this Agreement
shall be construed without regard to any presumption or rule requiring
construction or interpretation against the party drafting an instrument or
causing any instrument to be drafted.
 
Section 6.17          Certain Accounting Terms.  Any accounting terms used in
this Agreement which are not specifically defined herein shall have the meaning
customarily given to them in accordance with GAAP unless otherwise described
differently.
 
Section 6.18   Discretion.  Unless specified to the contrary herein, all
references herein to an exercise of discretion or judgment by a party, to the
making of a determination or designation by a party, to the application of a
party’s discretion or opinion, to the granting or withholding of a party’s
consent or approval, to the consideration of whether a matter or thing is
satisfactory or acceptable to a party, or otherwise involving the decision
making of a party, shall be deemed to mean that such party shall decide
unilaterally using its sole and absolute discretion or judgment.
 
Section 6.19   WAIVER OF RIGHT TO JURY TRIAL.  THE PARTIES HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT THAT ANY OF THEM MAY HAVE TO A
TRIAL BY JURY IN ANY LITIGATION ARISING IN ANY WAY IN CONNECTION WITH THIS
AGREEMENT OR THE NOTE, OR ANY OTHER STATEMENTS OR ACTIONS OF BORROWER OR
LENDER.  EACH PARTY ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED BY OR HAS HAD
ACCESS TO INDEPENDENT LEGAL COUNSEL SELECTED OF ITS OWN FREE WILL IN THE SIGNING
OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY, AND THAT IT HAS DISCUSSED
THIS WAIVER WITH, SUCH LEGAL COUNSEL.  BORROWER AND LENDER EACH FURTHER
ACKNOWLEDGE THAT (a) IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS
OF THIS WAIVER AND (b) THIS WAIVER HAS BEEN REVIEWED BY THE PARTIES AND IS A
MATERIAL INDUCEMENT FOR THE PARTIES TO ENTER INTO THE AGREEMENT.
 
Section 6.20   Execution.  This Agreement may be executed in any number of
counterparts, each of which will be an original and all, when taken together,
will be considered one and the same agreement.  This Agreement will become
effective with respect to Initial Lender when the Borrower receives a
counterpart hereof executed by Initial Lender.  In the event that any signature
is delivered by facsimile transmission, or by e-mail delivery of a PDF format
data file, such signature will create a valid and binding obligation of the
party executing (or on whose behalf such signature is executed) with the same
force and effect as if such facsimile or PDF signature page were an original
thereof.
 
 
 
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Section 7.   DEFINITIONS.  The following capitalized terms generally used in
this Agreement shall have the meanings defined or referenced below.  Certain
other capitalized terms used only in specific sections of this Agreement may be
defined in such sections.
 
"Administrator" means Maples FS Limited or its successor from time to time as
administrator for the Initial Lender.
 
“Agent” means, initially, the Initial Lender, or in the event the Initial Lender
shall no longer hold any principal amount of the Term Loan, an agent designated
by the Majority Lenders.
 
“Affiliate(s)” means, with respect to any Person, such Person’s immediate family
members, partners, members or parent and subsidiary corporations, and any other
Person directly or indirectly controlling, controlled by, or under common
control with, said Person, and their respective Affiliates, members,
shareholders, directors, officers, employees, agents and representatives;
provided that neither the Administrator nor any special purpose entity for which
the Administrator acts as administrator and/or share trustee shall be deemed to
be an Affiliate of the Initial Lender solely because such Person or its
Affiliate serves as administrator for the Initial Lender.
 
“Business Day” means a day of the week other than a Saturday, Sunday or a legal
holiday under the laws of the State of New York or any other day on which
banking institutions located in the State of New York are authorized or required
by law or other governmental action to close.
 
“Call Report” means the Consolidated Reports of Condition and Income that the
Bank files with the FDIC on Federal Financial Institutions Examination Council
Form 031.
 
“Commission” means the United States Securities and Exchange Commission.
 
“Confidential Customer Information” means all non-public or confidential
information that relates to personal financial information and identities of
clients and customers, including, but not limited to names, social security
numbers, employer identification numbers, tax identification numbers or other
identifying information, which may be disclosed, directly or indirectly, whether
or not by mistake, by or from the Borrower’s controlling persons, directors,
officers, employees, Affiliates, associates, agents or advisors, to Lenders
either in writing, orally or in any other form or medium, including but not
limited to, loan tapes, deposit tapes, securities tapes, documents and records.
 
“Contemplated Transactions” means the transactions contemplated by this
Agreement.
 
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
 
“FDIC” means the Federal Deposit Insurance Corporation.
 
“Federal Reserve” means the Board of Governors of the Federal Reserve System.
 
“GAAP” means United States generally accepted accounting principles.
 
“Governmental Agency(ies)” means, individually or collectively, any governmental
or regulatory authorities, agencies, arbitrators, courts, commissions or other
entities, whether federal, state, local or foreign, or applicable
self-regulatory organizations, including any federal or state agency charged
with the supervision or regulation of depositary institutions or holding
companies of depositary institutions, or engaged in the insurance of depositary
institution deposits, or any court, administrative agency or commission or other
authority, body or agency having supervisory or regulatory authority with
respect to Borrower or any of its subsidiaries, and shall include, without
limitation, (i) the Small Business Administration, (ii) the Federal Housing
Administration, (iii) the Federal Home Loan Mortgage Corporation, (iv) the
Farmers Home Administration (now known as Rural Housing and Community
Development Services), (v) the Federal National Mortgage Association, (vi) the
United States Department of Veterans’ Affairs, (vii) the Government National
Mortgage Association, (viii) the Rural Housing Service of the United States
Department of Agriculture, and (ix) the United States Department of Agriculture.
 
 
 
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“Knowledge” means to the best knowledge of Borrower based on commercially
reasonable inquiry.
 
“Legal Requirement” means any federal, state, local, municipal, foreign,
international, multinational or other order, constitution, law, ordinance,
regulation, rule, policy statement, directive, statute or treaty.
 
“Lender” means (i) the Initial Lender, (ii) any Person to whom Initial Lender
has assigned any portion of the Term Loan pursuant to Section 3.6, and (iii) any
successors or permitted assigns of the foregoing under (i) and (ii); so long as,
in each case and at such time of determination, such party holds a portion of
the Term Loan (other than a participation interest).
 
“Lender Advisors” means StoneCastle Partners, LLC; StoneCastle Asset Management,
LLC; StoneCastle Advisors, LLC; StoneCastle Securities, LLC; StoneCastle Loan
Management, LLC; StoneCastle Cash Management, LLC; and StoneCastle Investment
Management, LLC.
 
“Major Bank Subsidiary” means any subsidiary of the Borrower that is a “major
bank subsidiary” as that term is used in SR 92-37 (FIS) promulgated by the
Division of Banking Supervision and Regulation of the Federal Reserve, and as
such term may subsequently be defined or interpreted in any rule, regulation,
written interpretation or other public issuance of the Federal Reserve.
 
“Majority Lenders” means Lenders holding at least 66 2/3% of the aggregate
outstanding principal amount of the Term Loan then outstanding
 
“Material Adverse Effect” means a material adverse effect: (a) in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of Borrower and its Subsidiaries considered as one enterprise, whether
or not arising in the ordinary course of business; or (b) on the ability of
Borrower to enter into and perform its obligations under, or consummate the
transactions contemplated in, this Agreement.
 
“Material Contract” means any of the following agreements of Borrower or any of
its Subsidiaries:
 
(a)   other than with respect to Loans, any contract providing for, or
reasonably likely to result in, the receipt or expenditure of more than $150,000
on an annual basis, including the payment or receipt of royalties or other
amounts calculated based upon revenues or income;
 
(b)   any real property lease and any other lease with annual rental payments
aggregating $100,000 or more;
 
(c)   any contract that by its terms limits the payment of dividends or other
distributions by Borrower or any Subsidiary; and
 
(d)   any contract that would reasonably be expected to prevent, materially
delay, or materially impede Borrower’s ability to consummate the Contemplated
Transactions; and
 
(e)   any joint venture, partnership, strategic alliance, or other similar
contract (including any franchising agreement, but in any event excluding
introducing broker agreements), and any contract 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 or
contains continuing indemnity obligations of Borrower or any of the
Subsidiaries.
 
“Person” means an individual, a corporation (whether or not for profit), a
partnership, a limited liability company, a joint venture, an association, a
trust, an unincorporated organization, a government or any department or agency
thereof (including a Governmental Agency) or any other entity or organization.
 
“Prepayment Price” means a price equal to 100% of the principal balance of the
Term Loan as of the date of any prepayment (to the extent that Borrower is
prepaying the Term Loan in full) or to the extent that Borrower is prepaying a
portion of the principal amount outstanding, the amount of such principal
prepayment.
 
 
 
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“Representative” means (i) the Servicer, (ii) the Lender Advisors, and (iii) any
Lender’s directors, officers, employees and professional advisors engaged to
advise such Lender with respect to this Agreement, the Note, and the
Contemplated Transactions who have a reasonable need to know information about
Borrower and who agree in writing, in form and substance satisfactory to
Borrower, not to use such information for their own benefit and to maintain the
confidentiality of the information in question except as required otherwise by
law or regulation.
 
“Securities Act” means the Securities Act of 1933, as amended.
 
“Servicer” means StoneCastle Investment Management, LLC, as the servicer of the
assets held by the Initial Lender, or any successor servicer or agent designated
by the Majority Lenders.
 
“Subsidiary(ies)”  means individually or collectively, any “significant
subsidiary” of Borrower (as such term is defined in Rule 1-02 of Regulation S-X
of the Commission) and listed on Schedule A.
 
“United States” means the United States of America.
 
 
 
 
 
[This Space Left Intentionally Blank]
 
[Signature Page Follows]
 
 
 
 
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In Witness Whereof, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives as of the date first above written.
 
 

       
FS Bancorp, inc.
          By: /s/Matthew Mullet                              
       Name:  Matthew Mullet
 
       Title:    Chief Financial Officer
     
 
     
Community Funding CLO, Ltd.
          By:  /s/Jariadth Travers                               
        Name:  Jariadth Travers
 
        Title:    Director
         
Acknowledged and Agreed:
     
StoneCastle Investment Management, LLC
          By:   /s/George Shilowitz                          
         Name:  George Shilowitz
 
         Title:    Managing Partner
 

 
[Signature Page to Subordinated Term Loan Agreement]
 
 

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