Document:

Exhibit 10.3

 

DUTY OF LOYALTY AGREEMENT

 

THIS DUTY OF LOYALTY AGREEMENT (this “Agreement”) is entered into as of the Effective Date (as defined below), between Affinity Gaming, LLC, a Nevada limited liability company (the “Company”), and Ferenc B. Szony, an individual (the “Executive”).

 

Recitals

 

A.                                   The Company and its Affiliates are engaged in a highly competitive business involving the ownership and operation of casinos and slot route operations. Their success depends on their goodwill and sound reputation in the marketplace.

 

B.                                     The Executive’s employment by Company creates a relationship of confidence and trust between the Executive and the Company.  The purpose of the restrictions contained in this Agreement is to protect the goodwill, sound reputation and other legitimate business interests of the Company and its Affiliates.

 

C.                                     The Company would not have entered into the Executive Severance Agreement (as defined below) in the absence of such restrictions.

 

Agreement

 

1.                                       Definitions.

 

(a)          “Affiliate” means the Company and any person, corporation, limited liability company or other entity directly or indirectly under the common control of, or controlling, the Company.  For the purposes of this definition, “control” when used with respect to any person, corporation, limited liability company or other entity means the power to direct the management and policies of such person or entity, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

 

(b)         “Confidential Information” means any and all non-public, secret or proprietary information and trade secrets, in whatever form, including, without limitation, information that is written, electronically stored, orally transmitted, or memorized, that is, in the Company’s opinion, of commercial value to the Company or its Affiliates and that is created, discovered, developed, or otherwise becomes known to the Company, or in which property rights are held, assigned to, or otherwise acquired by or conveyed to the Company or Affiliate, including, without limitation, any idea, knowledge, know-how, process, system, method, technique, research and development, technology, software, technical information, trade secret, trademark, copyrighted material, reports, records, documentation, data, customer or supplier lists, pricing lists or techniques, tax or financial information, and business or marketing plans, strategies, or forecasts.  Confidential Information does not include information that is or becomes generally known within the gaming and slot route industry through

 

 

no act or omission by the Executive or any other person that owes a duty of confidentiality to the Company; provided, however,  that the compilation, manipulation or other exploitation of generally known information may constitute Confidential Information.

 

(c)          “Effective Date” means the Effective Date of the Letter Agreement to which this Agreement is attached.

 

(d)         “Intellectual Property” means all tangible and intangible information, materials and intellectual property, including, without limitation, ideas, concepts, designs, products, methods, computer programs and models (whether in source code or object code), financial models, valuation models, software manuals, compositions, prototypes, reports, inventions, drawings and/or specifications developed, conceived, created or prepared by the Executive in the course of his employment with the Company, which may pertain to the business, products, or processes of the Company or its Affiliates, regardless of whether developed, conceived, created or prepared by the Executive (i) at the request or suggestion of the Company or otherwise, (ii) alone or in conjunction with others or by others under the Executive’s supervision, and/or (iii) during regular hours of work or otherwise, and regardless of whether or not patentable or copyrightable, and all related papers, drawings, models, data and documents.

 

(e)          “Restricted Area” shall mean any area within a one hundred fifty (150) mile radius of any location in which the Company or any of its Affiliates are directly or indirectly engaged in the development, ownership, operation or management of casinos or slot route operations or are actively pursuing any such activities

 

(f)            “Restricted Period” means the Term, as defined in the Letter Agreement, plus any period during which the Company is providing the compensation set forth in the Severance Package under Section 4 of the Executive Severance Agreement.

 

2.                                       Executive Severance Agreement.  Simultaneous with the execution of this Agreement, and as a condition of the Executive’s willingness to agree to the restrictions described herein, the Company and the Executive are executing an Executive Severance Agreement that provides certain protections to the Executive.

 

3.                                       Confidential Information and Other Company Property.  The Executive shall not, during the course of his employment with the Company or anytime thereafter, without prior written consent of the Company, divulge, publish or otherwise disclose to any other person or entity any Confidential Information regarding the Company or any of its Affiliates, except in the course of carrying out the Executive’s responsibilities on behalf of the Company (e.g., providing information to the Company’s attorneys, accountants, bankers, etc.) or if required to do so pursuant to the order of a court of competent jurisdiction or a summons, subpoena or order of any governmental or administrative or regulatory agency or legislative body (including any committee thereof).  The Executive agrees that upon termination of his employment for any reason, or at such earlier time as

 

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the Company may request, the Executive shall forthwith return to the Company all documents and other property in his possession belonging to the Company or any of its Affiliates without retaining any copies of same.

 

4.                                       Intellectual Property.  All Intellectual Property which the Executive makes, conceives, reduces to practice or develops during his employment (in whole or in part, either alone or jointly with others) shall be deemed “work made for hire” under all applicable laws, which means that it shall be the sole property of the Company. If for any reason any Intellectual Property is not considered “work made for hire,” the Executive hereby assigns, conveys and transfers to the Company his entire right, title and interest worldwide in and to the Intellectual Property, including all contract and licensing rights and all claims with respect thereto.

 

5.                                       Non-Interference with Business Relationships.  During the Restricted Period and for the period of twelve (12) months immediately thereafter, the Executive will not directly or indirectly, as a director, officer, employee, manager, owner, consultant, independent contractor, advisor or otherwise, individually or in concert with others:

 

(a)          make any statements or perform any acts intended to interfere with, reasonably likely to interfere with or having the effect of interfering with (i) any interest of the Company or any of its Affiliates in their relationships and dealings with existing or potential customers or clients, and (ii) any other business interests, prospects or opportunities the Company or any of its Affiliates may have;

 

(b)         make any statements or do any acts intended to cause, reasonably likely to cause or having the effect of causing, any customers or clients of the Company or any of its Affiliates to make use of the services of any business in which the Executive has or expects to acquire any interest, is or expects to become an employee, officer or director, or has received or expects to receive any remuneration, if such statements or acts also would result or would likely result in such customers or clients ceasing to do business, or reducing their business, with the Company or any of its Affiliates;

 

(c)          engage in competition with, own any interest in, perform any services for, participate in or be connected with any business or organization which engages in competition with the Company or any of its Affiliates in the Restricted Area; provided, however, that the provisions of this Section 5(c) shall not prohibit the Executive’s ownership of not more than five percent (5%) of the total shares of all classes of stock outstanding of any publicly held company;

 

(d)         solicit any business from, or engage in any business with, any customers or clients of the Company or any of its Affiliates with whom the Executive had contact during, or of which the Executive had knowledge solely as a result of, his employment with the Company; or

 

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(e)          request, induce, encourage or advise any customer or client of the Company with whom the Executive had contact during the course of his employment to withdraw, curtail or cancel its business with the Company or any of its Affiliates.

 

Without limiting any of the foregoing, but for the avoidance of doubt and consistent with this Section 5, the Executive shall not, without prior written consent of the Company, individually or in concert with others, conceive of, invest in, or consult or advise with respect to, any acquisition or potential acquisition by any third parties of any assets of the Company.

 

6.                                       Non-Solicitation. During the Restricted Period and for a period of twelve (12) months immediately thereafter, the Executive shall not, directly or indirectly, as a director, officer, employee, manager, owner, consultant, independent contractor, advisor or otherwise, individually or in concert with others, engage in any of the following:

 

(a)          engage, employ, solicit for employment, or advise or recommend to any other person that they engage, employ or solicit for employment, or carry on any business with, any employee of the Company or any of its Affiliates;

 

(b)         retain or attempt to retain the services of any independent contractor of the Company or any of its Affiliates if doing so also would materially diminish the services being provided to the Company or Affiliate; or

 

(c)          solicit or encourage any employee of the Company or any of its Affiliates to leave the employ of the Company or Affiliate, to do any act that is disloyal to the Company or any of its Affiliates, is inconsistent with the interests of the Company or any of its Affiliates or violates any provision of this Agreement or any agreement such employee has with the Company or any Affiliate, or to do any of the foregoing with respect to any independent contractors of the Company or any of its Affiliates.

 

For purposes of the foregoing, an “employee of the Company or any of its Affiliates” and an “independent contractor of the Company or any of its Affiliate” shall include any person who was an employee or independent contractor of or for the Company or any Affiliate at any time (i) within six (6) months prior to the prohibited conduct, or (ii) during the six (6) month period prior to the cessation of the Executive’s employment.

 

7.                                       Non-Disparagement.  During the course of the Executive’s employment with the Company and thereafter, the Executive shall not, directly or indirectly, individually or in concert with others, engage in any conduct or make any statement that has, or is likely to have, the effect of undermining or disparaging the Company or any  its Affiliates, or their goodwill, products or business opportunities, or that has or is likely to have the effect of undermining or disparaging the reputation of any officer, director, agent, representative or employee, past or present, of the Company or any Affiliate.

 

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8.                                       Remedies.

 

(a)          The Executive acknowledges and agrees that immediate and irreparable harm, for which damages would be an inadequate remedy, would occur in the event any of the provisions of this Agreement were violated.  Accordingly, the Executive agrees that the Company shall be entitled to an injunction to prevent breach of any such provisions and to enforce specifically the terms and provisions thereof without the necessity of proving actual damages or securing or posting any bond or providing prior notice, in addition to any other remedy to which it may be entitled at law or equity.

 

(b)         Nothing in this Agreement is intended to waive or diminish any rights the Company may have at law or in equity at any time to protect and defend its legitimate property interests (including its business relationships with third parties), the foregoing provisions being intended to be in addition to and not in derogation or limitation of any other rights the Company may have at law or equity.

 

(c)          Each party hereby irrevocably consents to the exclusive jurisdiction and venue of the state courts of Clark County, Nevada, and the United States district courts with jurisdiction in Nevada with respect to any matter arising out of or relating to this Agreement.

 

9.                                       Reasonableness of Restrictions.  THE EXECUTIVE REPRESENTS THAT HIS EXPERIENCE, CAPABILITIES AND CIRCUMSTANCES ARE SUCH THAT THE RESTRICTIONS CONTAINED HEREIN WILL NOT PREVENT HIM FROM EARNING A LIVELIHOOD.  THE EXECUTIVE FURTHER AGREES THAT THE LIMITATIONS SET FORTH IN THIS AGREEMENT ARE REASONABLE IN DURATION, GEOGRAPHIC AREA (WHICH FOR PURPOSES OF THIS AGREEMENT SHALL MEAN THE RESTRICTED AREA) AND SCOPE, AND ARE PROPERLY REQUIRED FOR THE ADEQUATE PROTECTION OF THE BUSINESS OF THE COMPANY AND ITS AFFILIATES.

 

10.                                 Miscellaneous.

 

(a)          Notices.  Any notice given to either party shall be in writing and shall be deemed to have been given when delivered personally or sent by a nationally recognized overnight carrier, duly addressed to the party concerned at the address indicated below the signature lines of this Agreement or to such address as a party may subsequently give notice.

 

(b)         Entire Agreement.  This Agreement contains the entire agreement between the parties and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the parties relating to the subject matter set forth herein.

 

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(c)          Amendment or Waiver.  This Agreement cannot be changed, modified or amended, nor may any of its provisions be waived, without the consent in writing of both parties.  No waiver by either party at any time of any breach by the other party of any condition or provision of this Agreement shall be deemed a waiver of a similar or dissimilar condition or provision at the same or at any prior or subsequent time.

 

(d)         Severability.  The provisions of this Agreement shall be construed as a series of separate covenants, one for each city, county and state in the Restricted Area.  The provisions of this Agreement shall be severable, and the invalidity, illegality or unenforceability of any provision of this Agreement shall not affect, impair or render unenforceable this Agreement or any other provision hereof, all of which shall remain in full force and effect.  If any provision of this Agreement is adjudicated by a court of competent jurisdiction to be invalid, illegal or otherwise unenforceable, but such provision may be made valid, legal and enforceable by a limitation or reduction of its scope, the parties agree to abide by such limitation or reduction as may be necessary so that said provision shall be enforceable to the fullest extent permitted by law.

 

(e)          Survival.  The respective rights and obligations of the parties shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.

 

(f)            Governing Law.  This Agreement shall be governed by and construed under the laws of the State of Nevada, disregarding any conflict of laws principles that would otherwise provide for the application of the substantive law of another jurisdiction.  BOTH PARTIES WAIVE THE RIGHT TO A TRIAL BY JURY, EXCEPT AS SUCH WAIVER IS PROHIBITED BY THE LAWS APPLICABLE TO THE SPECIFIC ACTION OR PROCEEDING.

 

(g)         Counterparts.  This Agreement may be executed in counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same instrument.

 

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(h)         Acknowledgment.  The Executive acknowledges that he has been given a reasonable period of time to review this Agreement before signing it and has had an opportunity to secure counsel of his own choosing. By executing this Agreement, the Executive certifies that he has fully read and completely understands the terms, nature and effect of this Agreement.  The Executive further acknowledges that he is executing this Agreement freely, knowingly and voluntarily and that the Executive’s execution of this Agreement is not the result of any fraud, duress, mistake, or undue influence whatsoever. In executing this Agreement, the Executive has not relied on any inducements, promises, or representations by the Company other than as stated in this Agreement.

 

IN WITNESS WHEREOF, the undersigned have executed this Agreement to be effective as of the Effective Date.

 

	
THE “COMPANY”
    	
 
    	
THE   “EXECUTIVE”
    
	
Affinity Gaming, LLC
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
By:
    	
/s/ David D. Ross
    	
 
    	
/s/   Ferenc B. Szony
    
	
 
    	
David D. Ross, Chief Executive Officer
    	
 
    	
Ferenc   B. Szony
    

 

7Exhibit 10.1

 

BEFORE THE COMMISSIONER OF THE DEPARTMENT OF FINANCIAL

 

INSTITUTIONS

 

STATE OF TENNESSEE

 

	
In   the Matter of 
    	
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Board   of Directors 
    	
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Tennessee   Commerce Bank 
    	
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WRITTEN AGREEMENT
    
	
Franklin,   Tennessee 
    	
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WRITTEN AGREEMENT

 

WHEREAS, Tennessee Commerce Bank, Franklin, Tennessee ( “Bank”), a state chartered Bank has mutually agreed to enter into this Written Agreement (“Agreement”) with the Tennessee Department of Financial Institutions (“Department”); and

 

WHEREAS, on                     , 2011, the Board of Directors of the Bank (“Board”) enter into this Agreement on behalf of the Bank, and consenting to compliance with each and every applicable provision of this Agreement by the Bank and the Bank’s institution affiliated parties, as defined in Sections 3(u) and 8(b)(3) of the Federal Deposit Insurance Act (“FDI Act”) (12 U.S.C. § 1813(u) and 12 U.S.C. § 1818(b)(3))

 

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NOW, THEREFORE, the Bank and the Department agree as follows:

 

COMPLIANCE COMMITTEE

 

1.                                       Within 30 days after the effective date of this Agreement, the Bank’s Board shall establish a committee of the board of directors of the Bank charged with the responsibility of ensuring that the Bank complies with the provisions of this Agreement.  At least a majority of the members of such committee shall be directors not employed in any capacity by the Bank other than as a director.  The committee shall report monthly to the full Bank’s Board, and a copy of the report and any discussion relating to the report or the Agreement shall be noted in the minutes of the Bank’s Board meetings.  The establishment of this subcommittee shall not diminish the responsibility or liability of the entire Bank’s Board to ensure compliance with the provisions of this Agreement.

 

RESTRICTION ON ADVANCES TO CLASSIFIED BORROWERS

 

2.                                       (a)                                  While this Agreement is in effect, the Bank shall not, directly or indirectly, extend or renew any credit to or for the benefit of any borrower, including any related interest of the borrower, who is obligated to the Bank in any manner on any extension of credit or portion thereof that has been charged off by the Bank or classified, in whole or in part, “loss” in the Report of Examination or in any subsequent report of examination, as long as such credit remains uncollected unless the extension or renewal is associated with a workout administered in accordance and compliance with the Policy Statement on Prudent Commercial Real Estate Loan Workouts released October 30, 2009.

 

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(b)                                 While this Agreement is in effect, the Bank shall not, directly or indirectly, extend or renew any credit to or for the benefit of any borrower, including any related interest of the borrower, whose extension of credit has been classified “substandard” or “doubtful” in the Report of Examination or in any subsequent report of examination, without the prior approval of the Board.  The Board shall document in writing the reasons for the extension of credit or renewal, specifically certifying that: (i) the extension of credit is necessary to protect the Bank’s interest in the ultimate collection of the credit already granted, or (ii) the extension of credit is in full compliance with the Bank’s written loan policy, is adequately secured, and a thorough credit analysis has been performed indicating that the extension or renewal is reasonable and justified, all necessary loan documentation has been properly and accurately prepared and filed, the extension of credit will not impair the Bank’s interest in obtaining repayment of the already outstanding credit, and the Board reasonably believes that the extension of credit or renewal will be repaid according to its terms.  The written certification shall be made a part of the minutes of the Board meeting, and a copy of the signed certification, together with the credit analysis and related information that was used in the determination, shall be retained by the Bank in the borrower’s credit file for subsequent supervisory review.

 

CLASSIFIED ASSETS - CHARGE-OFF AND PLAN FOR REDUCTION

 

3.                                       (a)                                  Within 30 days after the effective date of this Agreement, the Bank shall, to the extent that it has not previously done so, eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss within the Report of

 

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Examination dated August 2, 2010.  Elimination or reduction of these assets through proceeds of loans made by the Bank shall not be considered “collection” for the purpose of this paragraph.

 

(b)                                 Within 60 days after the effective date of this Agreement, the Bank shall submit an acceptable, written plan to the Commissioner of the Tennessee Department of Financial Institutions (“Commissioner”) to reduce the remaining assets classified Doubtful and Substandard as of August 2, 2010, and subsequent examinations.  The plan shall address each asset so classified with a balance of $2 million or greater and provide the following:

 

(1)                                  The name under which the asset is carried on the books of the Bank;

 

(2)                                  Type of asset;

 

(3)                                  Actions to be taken in order to reduce the classified asset; and

 

(4)                                  Time frames for accomplishing the proposed actions.

 

The plan shall also include, at a minimum, provisions which provide for the:

 

(1)                                  Review of the financial position of each such borrower, including the source of repayment, repayment ability, and alternate repayment sources; and

 

(2)                                  Evaluation of the available collateral for each such credit, including possible actions to improve the Bank’s collateral position.

 

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In addition, the Bank’s plan shall contain a schedule detailing the projected reduction of total classified assets on a quarterly basis.  Further, the plan shall contain a provision requiring the submission of monthly progress reports to the Bank’s Board and a provision mandating a review by the Bank’s Board.

 

(c)                                  For purposes of the plan, the reduction of adversely classified assets as of August 2, 2010, shall be detailed using quarterly targets expressed as a percentage of the Bank’s Tier 1 Capital plus the Bank’s Allowance for Loan and Lease Losses (“ALLL”) and may be accomplished by:

 

(1)                                  Charge-off;

 

(2)                                  Collection;

 

(3)                                  Sufficient improvement in the quality of adversely classified assets so as to warrant removing any adverse classification, as determined by the FDIC or the Department; or

 

(4)                                  Increase in the Bank’s Tier 1 Capital.

 

(d)                                 Within 60 days of the date of this Agreement, the Bank shall conduct a review of the remaining Other Real Estate portfolio including loans in process of foreclosure.  The review should address current marketing efforts; ensure Other Real Estate parcels have received updated appraisals; ensure carrying balances are updated to reflect fair market value less associated holding, maintenance, and disposal costs; and include an analysis of carrying versus disposal cost.  A copy of this analysis shall be sent to the Department for review with the next progress report required by this Agreement.

 

(e)                                  Within 60 days of the date of this Agreement, the Bank shall

 

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conduct a review of the portfolio of repossessed assets including loans secured by transportation equipment, which are in excess of 300 days past due.  The review should address collection efforts; current marketing efforts; ensure repossession have received updated appraisals; ensure carrying balances are updated to reflect fair market value less associated holding, maintenance, and disposal costs; and include an analysis of carrying versus disposal cost.  A copy of this analysis shall be sent to the Department for review with the next progress report required by this Agreement.

 

(f)                                    While this Agreement is in effect, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss as determined at any future examination conducted by the FDIC or the Department.

 

REDUCTION OF DELINQUENCIES

 

4.                                       (a)                                  Within 90 days after the effective date of this Agreement, the Bank shall formulate and submit to the Commissioner an acceptable, written plan for the reduction and collection of delinquent loans.  Such plan shall include, but not be limited to, provisions which:

 

(1)                                  Prohibit the extension of credit for the payment of interest;

 

(2)                                  Delineate areas of responsibility for implementing and monitoring the Bank’s collection policies;

 

(3)                                  Establish specific collection procedures to be instituted at various stages of a borrower’s delinquency;

 

(4)                                  Establish dollar levels to which the Bank shall reduce delinquencies; and

 

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(5)                                  Provide for the submission of monthly written progress reports to the Bank’s Board for review and notation in the minutes of the Bank’s Board meetings.

 

(b)                                 For purposes of the plan, “reduce” means to:

 

(1)                                  Charge-off; or

 

(2)                                  Collect.

 

CREDIT ADMINISTRATION

 

5.                                       Within 60 days after the effective date of this Agreement, the Bank shall modify its Loan Policy to address the credit administration and underwriting concerns noted in the August 02, 2010, Report of Examination.

 

SPECIAL MENTION LOANS

 

6.                                       Within 60 days after the effective date of this Agreement, the Bank shall correct all deficiencies in the loans listed for Special Mention in the Report of Examination as of August 02, 2010.  To the extent any such deficiencies are not correctable; the Bank will address policies and procedures to prevent future exceptions.

 

ALLOWANCE FOR LOAN AND LEASE LOSSES

 

7.                                       Within 60 days after the effective date of this Agreement, the Bank shall contract with an independent third party to conduct an acceptable review of the loan portfolio and assess adequacy of reserves held for the risk within the portfolio.  Within 30

 

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days of the receipt of the final report prepared by the independent third party, the Bank shall make recommended provisions to its Allowance for Loan and Lease Losses (“ALLL”) if necessary.  The allowance should be funded by charges to current operating income, and should be calculated in accordance with generally accepted accounting standards and ALLL supervisory guidance.  After provision is made, the Bank shall thereafter maintain a reasonable ALLL.  Prior to the end of each calendar quarter, the Bank’s board of directors shall review the adequacy of the Bank’s ALLL.  Such reviews shall include, at a minimum, the Bank’s loan loss experience, an estimate of potential loss exposure in the portfolio, trends of delinquent and nonaccrual loans and prevailing and prospective economic conditions.  The minutes of the Bank’s board of directors’ meetings at which such reviews are undertaken shall include complete details of the reviews and the resulting recommended increases in the ALLL.

 

BUDGET AND PROFIT PLAN

 

8.                                       (a)                                  Within 60 days after the effective date of this Agreement, the Bank shall formulate and submit to the Commissioner an acceptable, written profit plan and a comprehensive budget for all categories of income and expense for the final six months of calendar year 2011 and a written profit plan, including projections for major categories of income and expense for calendar years 2012 and 2013.  The plan required by this paragraph shall contain formal goals and strategies, be consistent with sound banking practices, reduce discretionary expenses, improve the Bank’s overall earnings and net interest income, and shall contain a description of the operating assumptions that form the basis for major projected income and expense components.

 

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(b)                                 The written profit plan shall address, at a minimum:

 

(1)                                  An analysis of the Bank’s pricing structure; and

 

(2)                                  A recommendation for reducing the Bank’s cost of funds.

 

(c)                                  Within 30 days after the end of each calendar quarter following completion of the profit plan and budget required by this paragraph, the Bank’s Board shall evaluate the Bank’s actual performance in relation to the written profit plan and budget, record the results of the evaluation, and note any actions taken by the Bank in the minutes of the Board meeting when such evaluation is undertaken.

 

(d)                                 An acceptable, written profit plan and budget shall be prepared for each calendar year for which this Agreement is in effect and shall be submitted to the Commissioner within 30 days after the end of each year.

 

(e)                                  The Bank shall approve the written profit plan and budget, which approval shall be recorded in the minutes of the Board meeting.  Thereafter, the Bank shall implement and follow the plan.

 

CAPITAL MAINTENANCE

 

9.                                       (a)                                  By December 31, 2011, the Bank, after establishing an adequate ALLL, shall maintain its Tier 1 Leverage Capital ratio equal to or greater than 8.5 percent of the Bank’s Average Total Assets; shall maintain its Tier 1 Risk-Based Capital ratio equal to or greater than 10 percent of the Bank’s Total Risk-Weighted Assets; and shall maintain its Total Risk-Based Capital ratio equal to or greater than 11.5 percent of the Bank’s Total Risk Weighted Assets.

 

(b)                                 For purposes of this Agreement, all terms relating to capital shall

 

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be calculated according to the methodology set forth in Part 325 of the FDIC’s Rules and Regulations, 12 C.F.R. Part 325.

 

CAPITAL PLAN

 

10.                                 Within 30 days after the effective date of this Agreement, the Bank shall submit an acceptable, written capital plan to the Commissioner to increase its capital to the levels required by Provision 9 of this Agreement.

 

DIVIDEND RESTRICTION

 

11.                                 As of the effective date of this Agreement, the Bank shall not declare or pay any cash dividend without the prior written consent of the Commissioner.

 

LIQUIDITY/ASSET/LIABILITY MANAGEMENT

 

12.                                 (a)                                  Within 30 days after the effective date of this Agreement, the Bank shall develop and submit to the Commissioner an acceptable, written plan addressing liquidity, the Bank’s relationship of volatile liabilities to temporary investments, and asset/liability management.  Annually thereafter, while this Agreement is in effect, the Bank shall review this plan for adequacy and, based upon such review, shall make necessary revisions to the plan to strengthen funds management procedures and maintain adequate provisions to meet the Bank’s liquidity needs.  The initial plan shall include, at a minimum, provisions:

 

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(1)                                  Establishing the Bank’s ratios to total loans to total assets and total loans to deposits.  The requirements of this paragraph shall not be construed as standards for future operations, and the Bank’s total loans to total assets and total loans to total deposits ratio shall be monitored on a monthly basis and maintained at a level consistent with safe and sound banking practices;

 

(2)                                  Establishing a reasonable range for its net non-core funding ratio as computed in the Uniform Bank Performance Report;

 

(3)                                  Identifying the source and use of borrowed and/or volatile funds;

 

(4)                                  Establishing lines of credit at correspondent banks, including the Federal Reserve Bank of Atlanta, that would allow the Bank to borrow funds to meet depositor demands if the Bank’s other provisions for liquidity proved to be inadequate;

 

(5)                                  Requiring the retention of securities and/or other identified categories of investments that can be liquidated within one day in amounts sufficient (as a percentage of the Bank’s total assets) to ensure the maintenance of the Bank’s liquidity posture at a level consistent with short- and long-term liquidity objectives;

 

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(6)                                  Establishing a minimum liquidity ratio and defining how the ratio is to be calculated;

 

(7)                                  Establishing contingency plans by identifying alternative courses of action designed to meet the Bank’s liquidity needs;

 

(8)                                  Addressing the use of borrowings (i.e., seasonal credit needs, match funding mortgage loans, etc.) and providing for reasonable maturities commensurate with the use of the borrowed funds; addressing concentration of funding sources; and addressing pricing and collateral requirements with specific allowable funding channels (i.e., brokered deposits, internet deposits, Fed funds purchased and other correspondent borrowings); and,

 

(9)                                  Establishing procedures for managing the Bank’s sensitivity to interest rate risk which comply with the Joint Agency Statement of Policy on Interest Rate Risk (June 26, 1996), and the Supervisory Policy Statement on Investment Securities and End-user Derivative Activities (April 23, 1998).

 

(b)                                 The Bank shall adopt the plan, which adoption shall be recorded in the minutes of a Bank Board meeting.  Thereafter, the Bank shall implement the plan.

 

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MANAGEMENT — EVALUATION

 

13.                                 (a)                                  Within 30 days after the effective date of this Agreement, the Bank shall retain a bank consultant acceptable to the Commissioner.  The consultant shall develop a written analysis and assessment of the Bank’s management and staffing needs (“Management Plan”).

 

(b)                                 The Bank shall provide the Commissioner with a copy of the proposed engagement letter or contract with the consultant for review before it is executed.  The contract or engagement letter, at a minimum, should include:

 

(1)                                  A description of the work to be performed under the contract or engagement letter;

 

(2)                                  The responsibilities of the consultant;

 

(3)                                  An identification of the professional standards covering the work to be performed;

 

(4)                                  Identification of the specific procedures to be used when carrying out the work to be performed;

 

(5)                                  The qualifications of the employee(s) who are to perform the work;

 

(6)                                  The time frame for completion of the work;

 

(7)                                  Any restrictions on the use of the reported findings; and

 

(8)                                  A provision for unrestricted examiner access to work papers.

 

(c)                                  The Management Plan shall be developed within 60 days after the effective date of this Agreement.  The Management Plan shall include, at a minimum:

 

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(1)                                  Identification of both the type and number of officer positions needed to properly manage and supervise the affairs of the Bank;

 

(2)                                  Identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management;

 

(3)                                  Evaluation of all Bank officers and staff members 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; and

 

(4)                                  A plan to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications to fill those officer [or staff member] positions identified in the Management Plan.

 

(d)                                 The Management Plan shall be submitted to the Commissioner for review upon its completion.

 

(e)                                  The Bank shall adopt the plan, which adoption shall be recorded in the minutes of a Bank Board meeting.  Thereafter, the Bank shall implement the plan.

 

14

 

NEW BUSINESS LINES

 

14.                                 As of the effective date of this Agreement, the Bank shall not enter into any new line of business without the prior written consent of the Commissioner.

 

CORRECTION OF VIOLATIONS

 

15.                                 (a)                                  Within 30 days after the effective date of this Agreement, the Bank shall eliminate and/or correct all violations of law and regulation noted in the Report of Examination to the extent it is possible to eliminate or correct such violations.

 

(b)                                 Within 30 days after the effective date of this Agreement, the Bank shall eliminate and/or correct all contraventions of Statements of Policy noted in the Report of Examination to the extent it is possible to eliminate or correct such contraventions.

 

(c)                                  Within 30 days after the effective date of this Agreement, the Bank shall implement procedures to ensure future compliance with all applicable laws and regulations.

 

PROGRESS REPORTS

 

16.                                 Within 30 days after the end of each calendar quarter following the effective date of this Agreement, the Bank shall furnish to the Commissioner progress reports detailing the actions taken to secure compliance with the Agreement and the results thereof.  Such reports may be discontinued when the corrections required by this Agreement have been accomplished and the Commissioner has released, in writing, the Bank from making further reports.

 

15

 

MISCELLANEOUS

 

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

 

18.                                 Each provision of this Agreement shall remain effective and enforceable until such time as any provision has been stayed, modified, terminated, suspended, or set aside in writing by the Department.

 

19.                                 The provisions of this Agreement shall not bar, estop or otherwise prevent the Department, or any other state or federal agency from taking any other action affecting the Bank, and its successors and assigns.

 

20.                                 The Bank understands that, by entering into this Agreement, it is waiving its right, under Tennessee Code Annotated Section 45-1-107(c), to a formal notice detailing allegations of the unsafe and unsound banking practices giving rise to this Agreement and to a hearing on these allegations.

 

21.                                 The Bank understands and agrees that this Agreement shall be enforceable by the Commissioner of the Tennessee Department of Financial Institutions pursuant to Tennessee Code Annotated Sections 45-1-107 and 45-1-108.

 

This AGREEMENT shall become effective upon its issuance.  Executed and issued this 27th day of October, 2011.

 

	
 
    	
/s/ Greg Gonzales
    
	
 
    	
Greg Gonzales, Commissioner
    

 

16

 

Tennessee Commerce Bank Board of Directors

 

 

	
/s/ H. Lamar Cox 
    	
 
    	
/s/ Thomas R. Miller 
    
	
H. Lamar Cox
    	
 
    	
Thomas   R. Miller
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
/s/ Paul W. Dierksen 
    	
 
    	
/s/ Darrel Reifschneider 
    
	
Paul   W. Dierksen
    	
 
    	
Darrel   Reifschneider
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
/s/ Dennis L. Grimaud 
    	
 
    	
/s/ Michael R. Sapp 
    
	
Dennis   L. Grimaud
    	
 
    	
Michael   R. Sapp
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
/s/ Arthur F. Helf 
    	
 
    	
 
    
	
Arthur   F. Helf
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
/s/ William W. McInnes 
    	
 
    	
 
    
	
William   W. McInnes
    	
 
    	
 
    

 

17

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