Document:

exv10w1

EXHIBIT 10.1

FEDERAL DEPOSIT INSURANCE CORPORATION

WASHINGTON, D.C.

AND

STATE OF MICHIGAN

OFFICE OF FINANCIAL AND INSURANCE REGULATION

LANSING, MICHIGAN

	 	 	 	 	 	 	 

	 

	 	 	 	 	 	 
	 

	 	 	)	 	 	 
	In the Matter of:

	 	 	)	 	 	 
	 

	 	 	)	 	 	STIPULATION AND CONSENT
	MONARCH COMMUNITY BANK

	 	 	)	 	 	TO THE ISSUANCE OF A CONSENT
	COLDWATER, MICHIGAN

	 	 	)	 	 	ORDER
	 

	 	 	)	 	 	 
	(STATE CHARTERED)

	 	 	)	 	 	FDIC-10-190b
	INSURED NONMEMBER BANK

	 	 	)	 	 	 
	 

	 	 	)	 	 	 
	 

	 	 	 	 	 	 

     Subject to the acceptance of this STIPULATION AND CONSENT TO THE ISSUANCE OF A CONSENT ORDER
(“STIPULATION”) by the Federal Deposit Insurance Corporation (“FDIC”) and the State of Michigan,
Office of Financial and Insurance Regulation (“OFIR”), it is hereby stipulated and agreed by and
among representatives of the FDIC, OFIR, and Monarch Community Bank, Coldwater, Michigan (“Bank”)
as follows:

     1. The Bank has been advised of its right to receive a NOTICE OF CHARGES AND OF HEARING
(“NOTICE”) detailing the violations of laws and regulations and unsafe or unsound practices alleged
to have been committed by the Bank and of its right to a hearing on the charges under section 8(b)
of the Federal Deposit Insurance Act (“Act”), 12 U.S.C. § 1818(b), and under section 2304 of the
Banking Code of 1999, Mich. Comp. Laws § 487.12304, and has knowingly waived that right.

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     2. The Bank, solely for the purpose of this proceeding and without admitting or denying any of
the charges of violations of laws or regulations and unsafe or unsound practices, hereby consents
and agrees to the issuance of a CONSENT ORER (“ORDER”) by the FDIC and OFIR.

     3. The Bank further stipulates and agrees that such ORDER shall be deemed to be a consent
order which has become final and unappealable, and that the ORDER shall become effective 10
calendar days after its issuance by the FDIC and OFIR and fully enforceable by the FDIC and OFIR
pursuant to the provisions of section 8(i) of the Act, 12 U.S.C. § 1818(i), and section 2311 of the
Banking Code of 1999, Mich. Comp. Laws § 487.12311, respectively, subject only to the conditions
set forth in paragraph 4 of this STIPULATION.

     4. In the event the FDIC and OFIR accept this STIPULATION and issue the ORDER, it is agreed
that no action to enforce the ORDER will be taken by the FDIC in the United States District Court
or the appropriate Federal Circuit Court or by OFIR in the appropriate State Circuit Court unless
the Bank, any Bank institution-affiliated party, as that term is defined in section 3(u) of the
Act, 12 U.S.C. § 1813(u), or any of its successors or assigns, has violated or is about to violate
any provision of the ORDER.

     5. The Bank hereby waives:

	 	a.	 	The receipt of a NOTICE;
	 
	 	b.	 	All defenses and counterclaims of any kind to this proceeding;
	 
	 	c.	 	A hearing for the purpose of taking evidence on the allegations
in the NOTICE;
	 
	 	d.	 	The filing of proposed findings of fact and conclusions of law;
	 
	 	e.	 	A recommended decision of an Administrative Law Judge; and

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	 	f.	 	Exceptions and briefs with respect to each recommended
decision.

     Dated this 27th day of April, 2010.

	 	 	 	 	 	 	 	 	 

	FEDERAL DEPOSIT INSURANCE	 	MONARCH COMMUNITY BANK	 	 
	CORPORATION, LEGAL DIVISION	 	COLDWATER, MICHIGAN	 	 
	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	By:
	 	/s/ Richard C. Rowley
 

Richard C. Rowley
	 	By:
	 	/s/ Harold A. Adamson
 

Harold A. Adamson
	 	 
	 	 	Its: Senior Regional Attorney
	 	 
	 	Its: Director	 	 
	 
	 	 	 	 	 	 	 	 
	OFFICE OF FINANCIAL AND 
	 	By:	 	 /s/ Craig W. Dally	 	 
	INSURANCE REGULATION

	 	 	 	 

Craig W. Dally
	 	 
	 
	 	 	 	 
	 	Its: Director	 	 
	 	 	 	 	 	 	 	 	 
	By:
	 	/s/ Stephen R. Hilker
 

Stephen R. Hilker
	 	By:
	 	/s/ Donald L. Denney
 

Donald L. Denney
	 	 
	 
	 	Its: Chief Deputy Commissioner,

Office of Financial and
Insurance Services
	 	 
	 	Its: Director	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Richard T. Dobbins
 

Richard T. Dobbins
	 	 
	 

	 	 	 	 
	 	Its: Director	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ James W. Gordon
 

James W. Gordon
	 	 
	 

	 	 	 	 
	 	Its: Director	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Karl F. Loomis
 

Karl F. Loomis
	 	 
	 

	 	 	 	 
	 	Its: Director	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Martin J. Mitchell
 

Martin J. Mitchell
	 	 
	 

	 	 	 	 
	 	Its: Director	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Stephen M. Ross
 

Stephen M. Ross
	 	 
	 

	 	 	 	 
	 	Its: Chairman	 	 

8

 

	 	 	 	 	 
	 	 	 
	 	By:  	                                                  /s/ Gordon L. Welch
 	 
	 	 	Gordon L. Welch 	 
	 	 	Its: Director

	 	 	 	 
	 	

Comprising the Board of Directors of

MONARCH COMMUNITY BANK,

COLDWATER, MICHIGAN 	 

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FEDERAL DEPOSIT INSURANCE CORPORATION

WASHINGTON, D.C.

AND

STATE OF MICHIGAN

OFFICE OF FINANCIAL AND INSURANCE REGULATION

LANSING, MICHIGAN

	 	 	 	 	 	 	 

	 

	 	 	 	 	 	 
	 

	 	 	)	 	 	 
	In the Matter of:

	 	 	)	 	 	 
	 

	 	 	)	 	 	CONSENT ORDER
	MONARCH COMMUNITY BANK

	 	 	)	 	 	 
	COLDWATER, MICHIGAN

	 	 	)	 	 	 
	 

	 	 	)	 	 	 
	(STATE CHARTERED)

	 	 	)	 	 	FDIC-10-190b
	INSURED NONMEMBER BANK

	 	 	)	 	 	 
	 

	 	 	)	 	 	 
	 

	 	 	 	 	 	 

     Monarch Community Bank, Coldwater, Michigan (“Bank”), having been advised of its right to a
NOTICE OF CHARGES AND OF HEARING detailing the unsafe or unsound banking practices alleged to have
been committed by the Bank, and of its right to a hearing on the charges under section 8(b) of the
Federal Deposit Insurance Act (“Act”), 12 U.S.C. § 1818(b), and under § 2304 of the Banking Code of
1999, Mich. Comp. Laws § 487.12304, regarding hearings before the Office of Financial and Insurance
Regulation for the State of Michigan (OFIR”), and having waived those rights, entered into a
STIPULATION AND CONSENT TO THE ISSUANCE OF A CONSENT ORDER (“STIPULATION”) with representatives of
the Federal Deposit Insurance Corporation (“FDIC”) and the OFIR dated April 27, 2010, whereby,
solely for the purpose of this proceeding and without admitting or denying the charges of unsafe or
unsound banking practices relating to capital, asset quality, management, and earnings, the Bank
consented to the issuance of a CONSENT ORDER (“ORDER”) by the FDIC and the OFIR.

 

 

     The FDIC and the OFIR considered the matter and decided to accept the STIPULATION.

     Having determined that the requirements for issuance of an order under 12 U.S.C. § 1818(b) and
Mich. Comp. Laws § 487.12304 have been satisfied, the FDIC and the OFIR HEREBY ORDER, that the
Bank, its institution-affiliated parties as that term is defined in section 3(u) of the Act, 12
U.S.C. § 1813(u), and its successors and assigns, take affirmative action as follows:

MANAGEMENT

     1. (a) Within ninety (90) days from the effective date of this ORDER, the bank shall have and
retain qualified management. At a minimum, such management shall include a chief lending officer
with an appropriate level of lending, collection, and loan supervision experience for the type and
quality of the Bank’s loan portfolio. Management shall be provided the necessary written authority
to implement the provisions of this ORDER. The qualifications of management shall be assessed on
its ability to:

	 	(i)	 	Comply with the requirements of this ORDER;
	 
	 	(ii)	 	Operate the Bank in a safe and sound manner;
	 
	 	(iii)	 	Comply with applicable laws, rules, and regulations; and
	 
	 	(iv)	 	Restore all aspects of the Bank to a safe and sound condition,
including capital adequacy, asset quality, management effectiveness, earnings,
liquidity, and sensitivity to interest rate risk.

          (b) During the life of this ORDER, prior to the addition of any individual to the board of
directors or the employment of any individual as a senior executive officer, the Bank shall request
and obtain the written approval of OFIR’s Chief Deputy Commissioner (“Chief Deputy Commissioner”).
For purposes of this ORDER, “senior executive officer” is

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defined as in section 32 of the Act (section 32”), 12 U.S.C. § 1831(1), and section 303.101(b)
of the FDIC Rules and Regulations, 12 C.F.R. § 303.101(b).

MANAGEMENT PLAN

     2. (a) Within thirty (30) days from the effective date of this ORDER, the Bank shall retain an
independent, third party acceptable to the Regional Director of the FDIC’s Chicago Regional Office
(“Regional Director”) and Chief Deputy Commissioner, who will develop a written analysis and
assessment of the Bank’s management needs (“Management Study”) for the purpose of providing
qualified management for the Bank.

          (b) The Bank shall provide the Regional Director and Chief Deputy Commissioner with a copy of
the proposed engagement letter or contract with the independent third party for review.

          (c) The Management Study shall be developed within ninety (90) days from the effective date of
this ORDER. The Management Study shall include, at a minimum:

	 	(i)	 	Identification of both the type and number of officers
positions needed to properly manage and supervise the affairs of the Bank;
	 
	 	(ii)	 	Identification and establishment of such Bank committees as are
needed to provide guidance and oversight to active management;
	 
	 	(iii)	 	Evaluation of all senior executive management and all officers
in the lending area to determine whether these individuals possess the ability,
experience and other qualifications required to perform present and anticipated
duties, including adherence to the Bank’s established policies and practices,
and restoration and maintenance of the Bank in a safe and sound condition;

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	 	(iv)	 	Evaluation of all senior executive officers’ compensation,
including salaries, director fees, and other benefits;
	 
	 	(v)	 	A plan to recruit and hire any additional or replacement
personnel with the requisite ability, experience and other qualifications to
fill those officers or staff member positions identified by this paragraph of
this ORDER;

          (d) The plan required by this paragraph shall be submitted to the Regional Director and Chief
Deputy Commissioner for review and comment. Within thirty (30) days of receipt of any comments
from the Regional Director or Chief Deputy Commissioner the Bank shall incorporate any changes
required by the Regional Director or Chief Deputy Commissioner and thereafter adopt, implement, and
adhere to the plan.

BOARD PARTICIPATION

     3. (a) As of the effective date of this ORDER, the board of directors shall increase its
participation in the affairs of the Bank, assuming full responsibility for the approval of sound
policies and objectives and for the supervision of all of the Bank’s activities, consistent with
the role and expertise commonly expected for directors of Banks of comparable size. This
participation shall include meetings to be held no less frequently than monthly at which, at a
minimum, the following areas shall be reviewed and approved: reports of income and expenses; new,
overdue, renewal, charged off, and recovered loans; adoption or modification of operating policies;
individual committee reports; audit reports; internal control reviews including management
responses, and compliance with this ORDER. Board minutes shall document these reviews and
approvals, including the names of any dissenting directors.

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          (b) Within fifteen (15) days from the effective date of this ORDER, the Bank’s board of
directors shall have in place a program that will provide for monitoring of the Bank’s compliance
with this ORDER.

          (c) Following the required date of compliance with subparagraph (a) above, the Bank’s board of
directors shall review the Bank’s compliance with this ORDER and record its review in the minutes
of each regularly scheduled monthly board of directors’ meeting.

CAPITAL

     4. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall have and
maintain its level of Tier 1 capital as a percentage of its total assets (“capital ration”) at a
minimum of nine (9.0%) percent and its level of qualifying total capital as a percentage of
risk-weighted assets (“total risk based capital ratio”) at a minimum of eleven (11.0%) percent.
For purposes of this ORDER, Tier 1 capital, qualifying total capital, total assets, and
risk-weighted assets shall be calculated in accordance with Part 325 of the FDIC Rules and
Regulations (“Part 325”), 12 C.F.R. Part 325.

          (b) If, while this ORDER is in effect, the Bank increases capital by the sale of new
securities, the board of directors of the Bank shall adopt and implement a plan for the sale of
such additional securities, including the voting of any shares owned or proxies held by or
controlled by them in favor of said plan. Should the implementation of the plan involve public
distribution of Bank securities, including a distribution limited only to the Bank’s existing
shareholders, the Bank shall prepare detailed offering materials fully describing the securities
being offered, including an accurate description of the financial condition of the Bank and the
circumstances giving rise to the offering, and other material disclosures necessary to comply with
Federal securities laws. Prior to the implementation of the plan and, in any event, not less

14

 

than twenty (20) days prior to the dissemination of such materials, the materials used in the
sale of the securities shall be submitted to the FDIC Registration and Disclosure Section, 550 17th
Street, N.W., Washington, D.C. 20429 and to the Commissioner, Office of Financial and Insurance
Regulation for the State of Michigan, 611 Ottawa Street, Lansing, Michigan 48933, for their review.
Any changes requested to be made in the materials by the FDIC or the OFIR shall be made prior to
their dissemination.

          (c) In complying with the provisions of this paragraph, the Bank shall provide to any
subscriber and/or purchaser of Bank securities written notice of any planned or existing
development or other changes which are materially different from the information reflected in any
offering materials used in connection with the sale of Bank securities. The written notice
required by this paragraph shall be furnished within ten (10) calendar days of the date any
material development or change was planned or occurred, whichever is earlier, and shall be
furnished to every purchaser and/or subscriber of the Bank’s original offering materials.

LOSS CHARGE-OFF

     5. As of the effective date of this Order the Bank shall charge off from its books and records
any loan classified “Loss” in the Report of Examination dated January 4, 2010 (“ROE”) that has not
been previously collected or charged off, and shall further charge off any loan classified “Loss”
at subsequent examinations or visitations during the life of this ORDER within ten (10) days of
receipt of the report.

PROHIBITION OF ADDITIONAL LOANS TO CLASSIFIED BORROWERS

     6. (a) As of the effective date of this ORDER, the Bank shall not extend, directly or
indirectly, any additional credit to, or for the benefit of, any borrower who is already obligated
in any manner to the Bank on any extensions of credit (including any portion thereof) that has

15

 

been charged off the books of the Bank or classified “Loss” in the ROE, so long as such credit
remains uncollected.

          (b) As of the effective date of this ORDER, the Bank shall not extend, directly or indirectly,
any additional credit to, or for the benefit of, any borrower whose loan or other credit has been
classified “Substandard”, “Doubtful”, or is listed for Special Mention in the ROE, and is
uncollected unless the Bank’s board of directors has adopted, prior to such extension of credit, a
detailed written statement giving the reasons why such extension of credit is in the best interest
of the Bank. A copy of the statement shall be signed by each Director, and incorporated in the
minutes of the applicable board of directors’ meeting. A copy of the statement shall be placed in
the appropriate loan file.

REDUCTION OF DELINQUENCIES AND CLASSIFIED ASSETS

     7. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall adopt,
implement, and adhere to, a written plan to reduce the Bank’s risk position in each asset in excess
of $250,000 which is more than sixty (60) days delinquent or classified “Substandard” or “Doubtful”
in the ROE The plan shall include, but not be limited to, provisions which:

	 	(i)	 	Prohibit an extension of credit for the payment of interest,
unless the Board provides, in writing, a detailed explanation of why the
extension is in the best interest of the Bank;
	 
	 	(ii)	 	Provide for review of the current financial condition of each
delinquent or classified borrower, including a review of borrower cash flow and
collateral value;
	 
	 	(iii)	 	Delineate areas of responsibility for loan officers;

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	 	(iv)	 	Establish dollar levels to which the Bank shall reduce
delinquencies and classified assets within six and 12 months from the effective
date of this ORDER; and
	 
	 	(v)	 	Provide for the submission of monthly written progress reports
to the Bank’s board of directors for review and notation in minutes of the
meetings of the board of directors.

          (b) As used in this paragraph, “reduce” means to: (i) collect; (2) charge off; (3) sell, or
(4) improve the quality of such assets so as to warrant removal of any adverse classification by
the FDIC and the OFIR.

          (c) A copy of the plan required by this paragraph shall be submitted to the Regional Director
and Chief Deputy Commissioner.

          (d) While this ORDER remains in effect, the plan shall be revised to include assets which
become more than sixty (60) days delinquent after the effective date of this ORDER or are adversely
classified at any subsequent examinations.

LENDING AND COLLECTION POLICIES

     8. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall revise,
adopt, and implement written lending and collection policies to provide effective guidance and
control over the Bank’s lending function, which policies shall include specific guidelines for
preparing cash flow analyses and debt service coverage ratios, and implementing procedures to
ensure adequate real estate valuations are prepared. In addition, the Bank shall obtain adequate
and current documentation for all loans in the Bank’s loan portfolio.

17

 

          (b) The revisions to the Bank’s loan policy and practices, required by this paragraph, at a
minimum, shall address the lending and collection concerns discussed in the ROE.

          (c) Copies of the policies and revisions thereto required by this paragraph shall be submitted
to the Regional Director and Chief Deputy Commissioner.

LOAN REVIEW AND GRADING SYSTEM

     9. Within sixty (60) days from the date of this ORDER, the Bank shall implement revised
comprehensive loan grading and review procedures. The procedures shall require such loan grading
and review will be performed by a qualified individual who is not a member of the lending staff.
The loan review shall at a minimum:

          (a) Require periodic confirmation of the accuracy and completeness of the watch list and all
risk grades assigned by the Bank’s loan officers;

          (b) Identify loans or relationships that warrant special attention of management;

          (c) Identify violations of law, rules, or regulations and credit and collateral documentation
exceptions and track corrective measures;

          (d) Identify and review of the Bank’s methodology for calculating the ALLL and its adequacy
based upon the assigned factor values and impaired credits as outlined under Financial Accounting
Standards Board Accounting Standards Codification (“FASB ASC”) Subtopic 450-10 and FASB ASC
Subtopic 310-10 (which now supersedes prior FAS 5 and 114 guidelines); and

          (e) Identify loans not in conformance with the Bank’s loan policy.

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DIVIDEND RESTRICTION

     10. As of the effective date of this ORDER, the Bank shall not declare or pay any dividend
without the prior written consent of the Regional Director and Chief Deputy Commissioner.

ALLOWANCE FOR LOANS AND LEASE LOSSES

     11. (a) After the effective date of this ORDER, and prior to the submission of all Reports of
Condition and Income required by the FDIC, the board of directors of the Bank shall review the
adequacy of the Bank’s ALLL, provide for an adequate ALLL, and accurately report the same. The
minutes of the board meeting at which such review is undertaken shall indicate the findings of the
review, the amount of increase in the ALLL recommended, if any, and the basis for determination of
the amount of ALLL provided. In making these determinations, the board of directors shall consider
the FFIEC Instructions for the Reports of Condition and Income and any analysis of the Bank’s ALLL
provided by the FDIC or OFIR.

          (b) ALLL entries required by this paragraph shall be made prior to any capital determinations
required by this ORDER.

PROFIT PLAN AND BUDGET

     12. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall adopt,
implement, and adhere to a written profit plan and a realistic, comprehensive budget for all
categories of income and expense for calendar year 2010. The plans required by this paragraph
shall contain formal goals and strategies, consistent with sound banking practices, to reduce
discretionary expenses and to improve the Bank’s overall earnings, and shall contain a description
of the operating assumptions that form the basis for major projected income and

19

 

expense components, and identify the major areas in, and means by which, earnings will be
improved.

          (b) At each monthly board meeting following completion of the profit plans and budgets
required by this paragraph, the Bank’s board of directors shall evaluate the Bank’s actual
performance in relation to the plan and budget, record the results of the evaluation, and note any
actions taken by the Bank in the minutes of the board of directors’ meeting at which such
evaluation is undertaken.

          (c) A written profit plan and budget shall be prepared for each calendar year for which this
ORDER is in effect.

          (d) Copies of the plans and budgets required by this paragraph shall be submitted to the
Regional Director and Chief Deputy Commissioner.

CONCENTRATION OF CREDIT

     13. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall
formulate, adopt and implement a written plan to manage concentrations of credit in a safe and
sound manner. At a minimum the plan must provide for written procedures for the ongoing
measurement and monitoring of concentrations of credit, and a limit on concentrations commensurate
with the Bank’s capital position, safe and sound banking practices, and the overall risk profile of
the Bank.

          (b) A copy of the plan required by this paragraph shall be submitted to the Regional Director
and Chief Deputy Commissioner.

REDUCTION OF BROKERED DEPOSITS

     14. (a) Within sixty (60) days, the Bank will formulate and submit to the Regional Director
and Chief Deputy Commissioner for review a written plan to reduce the

20

 

Bank’s reliance on brokered deposits as defined in Part 337 of the FDIC Rules and Regulations.
Such plan shall detail the volume and maturities of the Bank’s existing brokered deposits. The
plan shall include, but not be limited to:

	 	(i)	 	Target dollar levels for each quarter over the next eight (8)
quarters;
	 
	 	(ii)	 	Specific strategies for funding the existing brokered deposits
as they mature; and
	 
	 	(iii)	 	Provision for the submission of monthly written progress
reports to the Bank’s board of directors for review and notation in the minutes
of the board of directors’ meetings.

NOTIFICATION TO SHAREHOLDER

     15. Following The effective date of this ORDER, the Bank shall send to its shareholder a copy
of this ORDER: (1) in conjunction with the Bank’s next shareholder communication; or (2) in
conjunction with its notice or proxy statement preceding the Bank’s next shareholder meeting.

PROGRESS REPORTS

     16. Within thirty (30) days from the end of each calendar quarter following the effective date
of this ORDER, the Bank shall furnish to the Regional Director and Chief Deputy Commissioner
written progress reports signed by each member o the Bank’s board of directors, detailing the
actions taken to secure the compliance with the ORDER and the results thereof.

     The effective date of this ORDER shall be the date of issuance by the FDIC and the OFIR.

     The provisions of this ORDER shall be binding upon the Bank, its institution-affiliated
parties, and any successors and assigns thereof.

21

 

     The provisions of this ORDER shall remain effective and enforceable except to the extent that,
and until such time as, any provision has been modified, terminated, suspended, or set aside by the
FDIC and the OFIR.

     Pursuant to delegated authority.

     Dated: May 6, 2010

	 	 	 	 

	/s/ M. Anthony Lowe

	 	/s/ Stephen R. Hilker	 
	 

	 	 	 
	M. Anthony Lowe

	 	Stephen R. Hilker	 
	Regional Director

	 	Chief Deputy Commissioner	 
	Chicago Regional Office

	 	Office of Financial and Insurance Regulation	 
	Federal Deposit Insurance Corporation

	 	
State of Michigan	 

22exv10w2

Exhibit 10.2

CONFIDENTIAL TREATMENT REQUESTED

TEAMING AGREEMENT

between

IRVINE SENSORS CORPORATION

and

OPTICS 1, INC.

     THIS TEAMING AGREEMENT (the “Agreement”) is entered into this 10th day of March
2010, (the “Effective Date”) by and between Irvine Sensors Corporation, a corporation organized and
existing under the laws of the State of Delaware with offices located at 3001 Red Hill Avenue,
Bldg. 4/108, Costa Mesa, CA 92626 (hereinafter “ISC”), and Optics 1, Inc., Defense Systems
Division, a corporation organized and existing under the laws of the State of Delaware, with
offices located at, 1050 Holt Avenue, Suite 12, Manchester, NH 03109 (hereinafter “OPTICS 1”).

     ISC and OPTICS 1 may be individually referenced as “Party” and collectively referenced as
“Parties” below.

RECITALS

     WHEREAS, ISC and OPTICS 1 each have expertise in marketing, proposal, engineering and
technical matters in the field of clip-on thermal imaging technology (the “Technology”) as defined
herein, and,

     WHEREAS, ISC and OPTICS 1 desire to team to combine their individual capabilities with respect
to the pursuit of business opportunities relative to the Technology, and,

     WHEREAS, the Parties agree that the objective of the Agreement shall be to pursue
opportunities in the clip-on thermal imaging market irrespective of the customer or marketplace.

     NOW, THEREFORE, the Parties agree as follows:

1. DEFINITIONS

     For purposes of this Agreement, the following terms shall have the following definitions:

     Technology — “Technology” herein shall be defined as technology relating to the field of
clip-on thermal imaging, (COTI), [******************************].

 

			
	*	 	Confidential treatment requested
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. In accordance
with Rule 24b-2, these confidential portions have been omitted from this
exhibit and filed separately with the Securities and Exchange Commission.

 

 

     Scope — “Scope” herein shall be defined as the design, development, marketing, sale,
manufacturing, testing, production, delivery and distribution of clip-on thermal imaging products
and related intellectual property, trade secrets, design and manufacturing data relative to same.

     Order — “Order” herein shall be defined to include any solicitation to quote for products or
tasks falling within the Scope of this Agreement.

     Intellectual Property — “Intellectual Property” herein shall be defined as intellectual
property reasonably relating or referring to the Technology, including without limitation, patents,
patent applications, whether filed or not, and improvements; inventions of any kind, whether
patentable or not, including inventions conceived or reduced to practice; copyrights; copyrighted
or copyrightable materials; ideas expressed in any tangible or electronic medium of expression;
trademarks; service marks; trade secrets; technical data; computer software; technical know-how, or
any other recognized form of intellectual property.

     Proprietary Data — “Proprietary Data” herein shall be defined with respect to the subject
matter of this Agreement all Intellectual Property (as defined herein) and technical development
work as well as all commercial data relating to the Parties and their customers, as well as to
agreements and understandings, bids, quotations, purchase orders, sales and the like made in the
context of this Agreement.

2. THE TEAM

     This Agreement creates a purely contractual teaming relationship in which ISC and OPTICS 1
(the “Team”) shall have cooperative roles in the performance of all efforts falling within the
Scope of the Agreement; such roles to be negotiated and agreed upon in good faith by the Parties.

     Under this Agreement, [**************] shall be referred to as the prime contractor
[***********] (“Prime Contractor”). The other Party shall be referred to as the subcontractor
(i.e., supplier) herein (“Supplier”) [************].

3. GENERAL TERMS

     The technology and COTI product [*******] shall be agreed between the Parties [**********].

     The Parties shall negotiate in good faith and agree upon all terms relating to
[******************]. Standard pricing shall be reviewed and established [****************].

     As a matter of principle, [***********] for any order falling within the Scope of and arising
out of this Agreement shall be [**********] between the Parties on an order-by-order basis. The
Prime

 

			
	*	 	Confidential treatment requested pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934. In accordance with Rule
24b-2, these confidential portions have been omitted from this exhibit and
filed separately with the Securities and Exchange Commission.

 

 

Contractor shall be entitled to [************] for the marketing and logistics efforts
associated with its role as the Party responsible for marketing and sales of the COTI products
[******************].

     The Prime Contractor shall be the first point of contact for all returns of the products.
After that, each Party shall be responsible for its part of the COTI product. The Parties will
closely cooperate to streamline the procedure to be put in place for dealing with returns.

     Terms and conditions between the Parties [************] with respect to post-order efforts
(e.g., spares, replacements, parts, service) shall be negotiated in good faith and agreed upon
between the Parties. [********************************]

     [**********************************************]

     The Parties shall reasonably support each other during any efforts hereunder. The Prime
Contractor shall afford Supplier the opportunity to review the form and content of any proposal
prior to being submitted to ensure that all inputs are adequately considered. Further, the Prime
Contractor shall afford the Supplier the opportunity to review any purchase order received that
falls within the Scope of the Agreement prior to issuing an order confirmation.

4. DISCLAIMERS

     No rights or obligations other than those expressly recited herein are intended or are to be
implied from this Agreement. In particular, no license is hereby offered or granted, express or
implied, under any present or future patent, trademark, copyright, mask work or other form of
intellectual property right incorporating Proprietary Data disclosed hereunder other than as
expressly stated herein.

5. NO WARRANTY/LIMITATION ON DAMAGES

     A PARTY DISCLOSING DATA HEREUNDER MAKES NO WARRANTY, GUARANTEE OR REPRESENTATION, EXPRESS OR
IMPLIED, AS TO THE ADEQUACY, ACCURACY, SUFFICIENCY OR FREEDOM FROM DEFECT OR INFRINGEMENT OF ANY
THIRD PARTY’S INTELLECTUAL PROPERTY RIGHTS THAT MAY RESULT FROM THE USE THEREOF. IN NO EVENT SHALL
EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANYTHING OTHER THAN DIRECT DAMAGES, AND NEITHER PARTY
SHALL BE LIABLE TO THE OTHER FOR CONSEQUENTIAL, INCIDENTAL, SPECIAL (INCLUDING MULTIPLE OR
PUNITIVE) OR ANY OTHER INDIRECT DAMAGES (INCLUDING LOST PROFITS OR REVENUES) THAT ARE CLAIMED TO BE INCURRED BY THE
OTHER PARTY ARISING OUT OF THIS AGREEMENT

 

			
	*	 	Confidential treatment requested pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934. In accordance with Rule
24b-2, these confidential portions have been omitted from this exhibit and
filed separately with the Securities and Exchange Commission.

 

 

WHETHER SUCH CLAIM ARISES UNDER CONTRACT, TORT (INCLUDING
STRICT LIABILITY), INDEMNITY OR OTHER THEORY OR LAW. NO LIMITATION OF LIABILITY UNDER THIS
AGREEMENT WILL BE APPLICABLE WITH RESPECT TO A CLAIM THAT IS THE RESULT OF A PARTY’S GROSS
NEGLIGENCE OR INTENTIONAL MISCONDUCT.

     The Parties shall mutually agree in good faith on the terms and conditions of the product
warranty to be provided to the customers of the COTI products, whereby each of the Parties shall be
responsible to the extent commercially reasonable and customary for the parts of the COTI product
that it has contributed. Each of the Parties shall keep the other Party harmless from any claim,
action, demand and the like from any third party with respect to the part of the COTI product that
it has contributed.

6. DESIGNATION OF AUTHORIZED RECIPIENTS

     The initial recipients for the receipt of notices or Proprietary Data hereunder are:

For OPTICS 1: [************]

For ISC:            [***********]

7. INVENTIONS AND PATENTS

     Intellectual Property. In the event Intellectual Property has previously been developed or is
subsequently developed by one Party (the “Developing Party”) that reasonably relates to the
Technology, such Intellectual Property shall be [*********************]. Further, in the event
Intellectual Property is jointly conceived or developed by the Parties during the performance of
this Agreement, such Intellectual Property shall be [*********************].

     Any inventions, invention disclosures, patent applications or patents arising out of this
Agreement and throughout the term thereof shall be identified and disclosed by the inventing Party
to the non-inventing Party on at least an annual basis. All Intellectual Property including,
without limitation, inventions, invention disclosures, patent applications or patents shall be
labeled, cataloged and archived with a commercially reasonable third party storage facility having
appropriate security measures and facilities for the storage of such information (e.g., Iron
Mountain, Inc.) and shall remain accessible at any time to either Party in the event that, without
limitation, the other Party entered proceedings for a discharge of its debts over its assets or a
claim for such proceedings has been filed, or generally fails to honor its obligations to pay or is
unable or otherwise prevented to honor its obligations to pay, or
declares itself insolvent, or introduces a procedure for the administration of its estate, or goes
into liquidation, or transfers and assigns all or substantially all of the its business, or gives
up its business.

 

			
	*	 	Confidential treatment requested pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934. In accordance with Rule
24b-2, these confidential portions have been omitted from this exhibit and
filed separately with the Securities and Exchange Commission.

 

 

     The parties shall negotiate in good faith and agree prior to bringing any form of legal claim
or action regarding any potential infringement by a third party of jointly beneficially owned
intellectual property.

8. NON-PUBLICITY

     Except as may be required by relevant federal, state, or local laws and regulations or courts
of competent jurisdiction, or as required to meet credit and financing arrangements or as required
or appropriate in the reasonable judgment of any Party to satisfy the disclosure requirement of any
federal or state securities laws or regulations, no publicity or advertising shall be released by
either Party in connection with this Agreement or any proposal contemplated hereunder, absent prior
written agreement between the Parties. In the event of any contract award of the type contemplated
by this Agreement, neither Party shall make any release for publication in media intended for
public circulation, absent prior written agreement between the Parties.

9. NATURE OF THE RELATIONSHIP BETWEEN THE PARTIES

     Each Party shall act as and is an independent contractor and this Agreement shall not and does
not constitute, create, give effect to or otherwise recognize a joint venture, agency, employment,
pooling arrangement, partnership, or formal business contractor of any kind. No relationship,
other than the teaming arrangement created by and set forth in this Agreement, shall be intended or
established by any reference to the Parties operating as a “Team” or as “Team Members.” Nothing in
this Agreement shall grant to either Party the right to make commitments of any kind for or on
behalf of the other Party.

10. EXCLUSIVITY

     The Parties further agree that no Party shall, during the term of this Agreement, associate or
team with nor shall provide any Technology-related proposal support or services, nor provide any
Technology-related proprietary information or hardware to any third party for the purpose of
proposal submission or competing for contract awards relating to the Technology, except with the
prior written consent of the other Party or as may be required by the any government.

11. EXPORT CONTROL

     The Parties recognize their obligation to adhere to and shall take all necessary steps to
comply with the requirements of all relevant state and federal law, including, without limitation,
the Export Administration Act, the Arms Export Control Act, and the National Industrial Security
Program Operating Manual (NISPOM) with respect to any matter arising hereunder.

12. TERMINATION

     This Agreement and all rights and duties hereunder, except those relating to the handling of
Proprietary Data, shall terminate upon the occurrence of the earliest of any of the following:

     (1) By mutual agreement in writing of the Parties hereto; or,

 

 

     (2) the occurrence of any event that may reasonably be deemed to constitute or be construed as
a repudiation or default of a material obligation of a Party and a material breach of this
Agreement, or,

     (3) inactivity relative to contract or proposal efforts with respect to the Technology for a
period of at least two years.

     If there is an assertion of a material default by a Party in the performance of the other
Party’s duties, obligations or undertakings contained herein, the asserting Party shall have the
right to give written notice to the defaulting Party setting forth detailed facts constituting such
default and the intention of the non-defaulting Party to terminate this Agreement and, if the
default has not been remedied within ninety (90) days after receipt of notice of default, the
non-defaulting Party shall have the right to terminate this Agreement upon thirty (30) days’
written notice to the defaulting Party.

13. ASSIGNMENT

     No Party may assign or transfer to any third party any interest hereunder, in whole or in
part, without the prior written consent of the other Party; provided, however, that each Party
hereto shall have the right to assign this Agreement to any third party or entity which, by way of
merger, or consolidation, or the acquisition of a substantial portion of the business or assets of
the assigning Party relating to the subject matter of this Agreement, succeeds to the interests in
the Scope of this Agreement of the assigning Party. Either Party may transfer its rights and
obligations under this Agreement to the other Party in writing with mutually agreed terms and
conditions in a separate written agreement.

     Such consent shall not be unreasonably withheld, so long as such assignment does not
materially affect the nature and the scope of the rights and benefits due the non-assigning Party
under the terms of this Agreement. The assigning Party shall expressly require its assignee to
assume all of the assigning Party’s obligations and liabilities under this Agreement.

14. PRECEDENCE

     Any inconsistency between this Agreement and any subcontract between the Parties relative to
the Technology shall be resolved by giving precedence to the subcontract. Further the terms of the
Non-Disclosure Agreement between the Parties dated June 11, 2007 are fully incorporated herein by
reference, which terms shall survive the expiration or termination of this Agreement.

15. DISPUTES

     All disputes which arise under or are related to this Agreement, or the performance or breach
thereof, shall be referred by each Party to [**************] If not resolved by them within thirty
(30)

 

			
	*	 	Confidential treatment requested pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934. In accordance with Rule
24b-2, these confidential portions have been omitted from this exhibit and
filed separately with the Securities and Exchange Commission.

 

 

days, the Parties agree to enter into mediation of the unresolved dispute. If the Parties are
unable to resolve the dispute through mediation, either of the Parties may elect to seek relief in
a court of competent jurisdiction. This Agreement and the interpretation thereof shall be governed
by the laws of the State of Delaware, excluding its conflict of law rules.

16. ENTIRE AGREEMENT, MODIFICATION, WAIVER, CONSTRUCTION

     This Agreement is negotiated and shall be deemed to have been drafted jointly by all of the
Parties, and no rule of construction or interpretation shall apply against any Party based on a
contention that the Agreement was drafted by one of the Parties.

     This Agreement may not be supplemented, amended, modified or rescinded, except by written
Agreement signed by the Parties.

     This Agreement constitute the final, complete, and exclusive statement of the terms of the
agreement between the Parties pertaining to the subject matter of this Agreement and supersedes all
prior and contemporaneous understandings or agreements of the Parties with respect to the subject
matter thereof. No party has been induced to enter into this Agreement by, nor is any Party
relying on, any representation or warranty outside those expressly set forth in this Agreement.

     No delay or omission on the part of any Party in exercising any right under this Agreement
shall constitute a waiver of that right or any other right. If any term, provision, covenant, or
condition of this Agreement is held by a court of competent jurisdiction to be invalid or
unenforceable, the rest of the Agreement shall remain in force and effect and shall in no way be
affected or invalidated.

     IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed effective as
of the day and year above provided.

	 	 	 	 	 	 	 

	IRVINE SENSORS CORP.	 	OPTICS 1, INC.
	 
	 	 	 	 	 	 
	By:

	 	/s/ John C. Carson
	 	By:
	 	/s/ Dane Hileman
	 

	 	 
	 	 	 	 
	 

	 	Name: John Carson
	 	 	 	Name: Dane Hileman
	 

	 	Title: President & CEO
	 	 	 	Title: President & CEO
	 

	 	Date: March 10, 2010
	 	 	 	Date: March 10, 2010

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