Document:

Ex-10.1

 

Exhibit 10.1

NON-RECOURSE INDEMNITY AND SECURITY AGREEMENT

     This Non-Recourse Indemnity and Security Agreement (this “Agreement”) is made and entered into
as of September 14, 2007, by and between CAPITALSOUTH BANK, an Alabama banking corporation (the
“Bank”), and JAMES C. BOWEN, a resident of Duval County, Florida (“Indemnitor” or “Bowen”), and is
joined in by CAPITALSOUTH BANCORP, a Delaware corporation and a registered bank holding company
(“CapitalSouth”), with respect to Section 32 and Exhibit A of this Agreement.

R E C I T A L S :

     A. The Bank is a wholly-owned subsidiary of CapitalSouth Bancorp, a Delaware corporation and a
registered bank holding company (“CapitalSouth”).

     B. CapitalSouth and Monticello Bancshares, Inc., a Florida corporation and a savings and loan
association holding company (“Monticello”), have heretofore entered into that certain Agreement and
Plan of Merger dated February 28, 2007 (the “Merger Agreement”), which is joined in by Indemnitor.

     C. Mortgage Lion, Inc. (“Mortgage Lion”) is a wholly-owned subsidiary of Monticello Bank, a
federal savings bank (“Monticello Bank”), which in turn is a wholly-owned subsidiary of Monticello.

     D. In connection with the consummation of the Merger Agreement, it is also contemplated that
Monticello Bank will be contemporaneously merged with and into the Bank.

     E. Indemnitor is the principal shareholder of Monticello and is desirous of the transactions
contemplated by the Merger Agreement being consummated.

     F. Monticello Bank and/or Mortgage Lion are parties to various agreements pursuant to which
loans are sold by them to investors (“Loan Purchasers”).

     G. In connection with consummation of the Merger Agreement, Indemnitor is to be issued a
promissory note by CapitalSouth in the original principal amount of Eight Million Dollars
($8,000,000) (the “Original Promissory Note”). CapitalSouth and Indemnitor hereby agree that
CapitalSouth shall bifurcate the Original Promissory Note and issue to Indemnitor one promissory
note in the original principal amount of One Million Five Hundred Thousand Dollars ($1,500,000)
(the “Pledged Note”) in order to fund any indemnification obligations of Indemnitor under this
Agreement. CapitalSouth shall issue to Indemnitor a second promissory note in the amount of Six
Million Five Hundred Thousand Dollars ($6,500,000) (the “Non-Pledged Note”), which the parties
hereto agree shall not fund any indemnification obligations of Indemnitor under this Agreement.
The amortization schedule for each of the Pledged Note and the Non-Pledged Note will be contained
therein, and CapitalSouth and Indemnitor hereby agree that the Pledged Note will not begin to
amortize until the final

 

 

payment to Indemnitor of all principal and interest owed to Indemnitor
under the Non-Pledged Note is made by CapitalSouth.

     H. As further consideration hereunder, CapitalSouth is willing, to the extent provided herein,
to permit Indemnitor to convert a portion of the Non-Pledged Note to CapitalSouth common stock, and
to grant to Indemnitor certain registration rights with respect to the shares of CapitalSouth
common stock that Indemnitor receives pursuant to his conversion of the Non-Pledged Note.

     I. CapitalSouth and the Bank seek tangible assurance that Monticello Bank and Mortgage Lion’s
estimated liability with respect to repurchase obligations, indemnities and damages to Loan
Purchasers is not inconsistent with CapitalSouth assumptions.

     NOW, THEREFORE, in consideration of the premises, the mutual covenants contained herein, and
for Ten Dollars ($10.00) and other good and valuable consideration paid in hand by the Bank to
Indemnitor, the receipt and sufficiency of which are hereby acknowledged by Indemnitor, the parties
hereto, intending to be legally bound, do hereby agree as follows:

     1. Indemnitor hereby assumes all liability for, and undertakes without condition, limitation
or reservation of any kind, except as expressly provided herein, to pay, protect, defend, indemnify
and save Bank and CapitalSouth harmless from and against any and all claims, damages, losses,
liabilities, obligations, settlement payments, penalties, assessments, citations, directives,
litigation, demands, judgments, suits, proceedings, costs, disbursements and expenses of any kind
or of any nature whatsoever, including attorney’s fees and expenses (collectively, “Claims”) which
may at any time, subject to the limits set forth in Sections 3, 4 and 5, be imposed upon, incurred
by or asserted or awarded against any of the Bank, Mortgage Lion, Monticello Bank, Monticello,
CapitalSouth, or any of their respective officers, directors or employees, and arising, directly or
indirectly, from or out of or in any way related to (i) any breach or alleged breach or violation
of any obligation, or an obligation to repurchase a loan or indemnify the original purchaser
thereof, existing under or pursuant to any agreement, understanding, instrument, representation,
assignment, endorsement or conveyance, of any type or nature, affecting or relating to the sale or
transfer of any loan of any type or nature, including mortgage loans, construction loans, home
equity loans, home equity lines of credit, letters of credit or installment loans by Monticello
Bank or Mortgage Lion to a Loan Purchaser, occurring on or prior to the “Effective Time of the
Merger” under the Merger Agreement (each a “Covered Loan”), whether or not caused by or within the
control of Indemnitor, Mortgage Lion, Monticello Bank, Monticello or CapitalSouth, and (ii) any
claim, suit, demand, including the settlement thereof and any expenses, including attorney’s fees,
disbursements, costs of investigation, expert fees, court fees, mediator fees and arbitrator fees,
relating to any Covered Loan sold, transferred or hypothecated to a third party by any of Mortgage
Lion, Monticello or Monticello Bank prior to the Effective Time of the Merger, whether sounding in
contract, tort, statutory claim or otherwise, and whether such claim, suit or demand is brought,
known or knowable prior to or after the Effective Time of the Merger.

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     2. For purposes of this Agreement, amounts subject to indemnification under Section 1
(“Indemnified Costs”) which are of the following nature shall be determined as specified below:

     a. Indemnified Costs which are out-of-pocket expenses, such as
indemnification payments by the Bank, settlements, attorney’s fees, consultant
fees and the like, shall be the actual amount paid by the Bank. Any subsequent
recoveries, reductions, reimbursements or discounts with respect thereto, such
as damages or indemnity payments from third parties, shall be deducted from
Indemnified Costs which are incurred or, to the extent such was paid by the
Indemnitor, reimbursed thereto.

     b. The Indemnified Costs with respect to a repurchased loan shall be equal
to (i) the gross sum paid to repurchase such loan, including principal, return
of any premiums originally paid by the purchaser with respect thereto, accrued
interest, and any other amounts asserted by the purchaser, and reasonably
accepted by the Bank, less (ii) the fair market value of such loan, which, in
the Bank’s full and absolute discretion, may be the amount for which such loan
could be reasonably expected to be sold to another purchaser on a non-recourse
basis subject only to representations with respect to title to such loan, or,
in the case of a defaulted Covered Loan, the fair market value of the
collateral therefor, as determined by a third-party appraisal.

     c. The Indemnified Costs shall not include internal costs of the Bank
and/or Mortgage Lion incurred in connection with responding to any claims with
respect to Covered Loans except with respect to personnel, if any, whose
primary responsibility relates to working with or managing Claims, and in any
event such internal costs shall exclude allocations of overhead, costs
associated with any compensation payable to Indemnitor, and any allocation of
executive management compensation with respect to the Bank.

     d. All amounts shall be computed in accordance with generally accepted
accounting principles, consistently applied, but shall include appropriate
reductions or credits for any federal and state income tax savings with respect
thereto.

     3. Notwithstanding anything else to the contrary contained in Section 1, Indemnitor shall have
no liability or obligation with respect to otherwise Indemnified Costs, until the Indemnified Costs
incurred or accrued reach Two Million Five Hundred Thousand Dollars ($2,500,000) (the “Threshold
Amount”), commencing as of August 31, 2007.

     4. Notwithstanding anything else to the contrary contained in Section 1, Indemnitor shall have
no obligation under this Agreement with respect to any Indemnified Cost which both (i) first occurs
or is accruable after the fourth anniversary of the Effective Time of the Merger and (ii) the basis
of which was not known or reasonably expected as of

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such fourth anniversary date; that
is, Indemnitor shall continue to be responsible with respect to any Indemnified Cost even
if incurred after such fourth anniversary date if any similar or related Indemnified Cost with
respect to a given Covered Loan had begun to be incurred or accrued prior to such fourth
anniversary date or if on or prior to such fourth anniversary date a reasonable person would expect
Indemnified Costs to be incurred with respect to one or more specifically identified Covered Loans.
The parties agree to negotiate in good faith to determine an appropriate reserve amount for any
Indemnified Cost which is expected to be incurred or accrued after such fourth anniversary date.
Indemnitor’s liability under this Agreement shall not exceed such reserved amount. If the parties
cannot agree on such reserve amount, any differences between their estimated future amounts may be
withheld by the Bank as a reserve but shall be released to Indemnitor at such time in the future
that the parties agree or such Indemnified Costs are otherwise finally determined. At such time,
the remaining balance, if any, of such reserve shall be released to Indemnitor, together with
interest which, in addition to any other amounts of interest already payable upon such reserve
(i.e., if it continues to be held in the form of the Pledged Note or a portion thereof) will equal
a rate on such amount due to be released to Indemnitor of not less than ten percent (10%) per annum
from the fourth anniversary date.

     5. Notwithstanding anything else to the contrary contained in Section 1, Indemnitor shall be
responsible for payment of only fifty percent (50%) of all Indemnified Costs (the “Indemnified
Obligation Share”) above the Threshold Amount and shall be absolutely limited to a maximum amount
of One Million Five Hundred Thousand Dollars ($1,500,000) (the “Maximum Amount”). Amounts which
are due by Indemnitor shall be deducted immediately from the principal balance which is due and
owing under the Pledged Note or otherwise, or at the election of Indemnitor (or in the event that
the Pledged Note has been converted, in whole or in part, to another form of Collateral), paid in
cash or its equivalent by the Indemnitor to the Bank not later than thirty (30) days after the
presentation to the Indemnitor of an invoice with respect thereto. Upon request of the Bank,
Indemnitor shall promptly execute an acknowledgement with respect to the reduction of any principal
amount from the Pledged Note or other obligation held as Collateral. Notwithstanding anything else
to the contrary contained in Section 1, if and when the principal balance of the Pledged Note has
been reduced to zero, all obligations of Indemnitor under this agreement shall cease, and
Indemnitor shall not owe any further amounts for any Indemnified Costs.

     6. The Bank and Indemnitor contemplate mutual cooperation with respect to minimizing the
amount of any Indemnified Costs. In that regard, the Bank contemplates permitting Indemnitor an
active role, so long as he diligently and effectively pursues such, in the administration of
Claims. In that regard, Indemnitor shall not be deemed an employee or agent of the Bank but shall
regularly consult with the Bank. Notwithstanding the foregoing, the Bank and Mortgage Lion shall
have full and absolute discretion in dealing with any Covered Loan and incurring any Indemnified
Cost, whether before or after the Threshold Amount is reached. Indemnitor shall have no right to
assume defense or consent or not consent, reasonably or otherwise, to any action or settlement
which may be brought or effected by the Bank and/or Mortgage Lion in good faith. Nothing in this
Agreement shall limit the full and absolute discretion of the Bank or Mortgage Lion (after the
Effective Time of the Merger), and their respective officers, directors and employees, to take or
omit to take such actions, compromise or refuse to compromise such claims, incur or decline to
incur such

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costs and expenses, to employ or engage, or not employ or engage, such persons as the
Bank deems appropriate, and no such action or failure to act by the Bank or Mortgage Lion shall in
any way impair, reduce or diminish the obligations of Indemnitor under this Agreement. Any
consultation, practice or course of dealing by the Bank with respect to Indemnitor shall not
constitute a waiver of any provision with respect to this Agreement or any obligation on the part
of the Bank to continue to do so. There is no obligation under this Agreement for the Bank to
provide Indemnitor with any contemporaneous or periodic reports or updates with respect to the
Covered Loans or any Indemnified Costs or expectations of Indemnified Costs, other than at such
times that invoices are submitted by the Bank to Indemnitor. Indemnitor may request, in writing,
copies of invoices, settlements, accounting ledgers and canceled checks with respect to the
Indemnified Costs which have been incurred or have been accrued. Except upon written authorization
of the CEO, President or CFO of the Bank, Indemnitor shall not act in an manner which either binds
the Bank or Mortgage Lion with respect to a Covered Loan or an Indemnified Cost or which purports
to be action on behalf of the Bank under this Agreement.

     7. In furtherance of Indemnitor’s collaborative role hereunder, Indemnitor agrees to use his
commercially reasonable efforts to assist the Bank, and to cause other persons knowledgeable in
matters relating to Covered Loans to assist the Bank, in connection with the resolution of any
Claims relating thereto. The foregoing shall not be construed to require the full business time
and efforts of Indemnitor or for Indemnitor to incur any out-of-pocket costs with respect thereto.
In the event that it is necessary for Indemnitor to provide any testimony or respond to any
subpoenas, no fees or compensation shall be payable to Indemnitor in connection therewith. To the
extent that Indemnitor is entitled, under the terms of the Merger Agreement or the bylaws of any of
Mortgage Lion, Monticello Bank, CapitalSouth Bank or CapitalSouth to any indemnification with
respect to any matter relating to the Covered Loans, such costs of indemnification shall be
considered an Indemnified Cost hereunder.

     8. Indemnitor represents and warrants that Indemnitor has provided the Bank with full and
accurate information with respect to the Covered Loans and all pending or threatened claims with
respect thereto, and shall continue to do so through the Effective Time of the Merger, and
thereafter for so long as Indemnitor is in a position as an officer or director of any of Mortgage
Lion, the Bank or CapitalSouth to do so, and that such information does not omit to state any fact
necessary, in light of the statements made, to not be misleading.

     9. As security for the prompt payment and performance of each of the covenants and obligations
of Indemnitor under this Agreement, including payment of the Indemnified Obligation Share (time
being of the essence with respect thereto), and payment of any enforcement costs hereunder
(collectively all of the liabilities and obligations of Indemnitor under this Agreement being
referred to as the “Obligations”), Indemnitor hereby assigns to the Bank and grants to the Bank a
security interest in the principle balance Pledged Note, excluding all interest due or to become
due on the Pledged Note, and any extensions, renewals, substitutions or novations of the Pledged
Note (collectively, the “Collateral”), and hereby deposits and pledges to the Bank the Pledged Note
and grants to the Bank a lien thereon and a security interest therein. The Pledged Note will
contain a restriction, using

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such language as reasonably agreed to by CapitalSouth, alerting any
potential transferee of this Agreement and voiding any such transfer in violation of this
Agreement.

     10. Notwithstanding anything to the contrary contained herein, but without in any manner
releasing, impairing or otherwise affecting this Agreement or the validity hereof, or the lien
hereof, in the event of any default under the terms of this Agreement, so long as Indemnitor has
not transferred the Pledged Note or any interest therein in violation of this Agreement, then the
Bank will not hold Indemnitor personally liable for payment of the obligations under this
Agreement; provided that nothing in this section shall be deemed to prejudice the
rights of the Bank to proceed against any entity or person whatsoever, including Indemnitor, and
Indemnitor shall be personally liable, to the extent of any loss, expense or liability incurred by
the Bank for (i) damages arising from any fraud or material misrepresentation by Indemnitor or any
authorized representative of Indemnitor with respect to matters presented by Indemnitor and relied
upon by the Bank in entering into this Agreement or the performance by Indemnitor of his
obligations hereunder; and (ii) the willful or grossly negligent violation by Indemnitor of any
law, ordinance, rule, regulation, permit, license, or other legal requirements applicable to
Indemnitor.

     11. Indemnitor agrees that the Bank is hereby authorized to file financing statements in such
jurisdiction or jurisdictions as the Bank deems necessary or convenient in order to further perfect
its security interest in the Collateral hereunder.

     12. Indemnitor hereby expressly authorizes the Bank and CapitalSouth to enter into such
arrangements as they may deem necessary or appropriate in order to permit, and Indemnitor hereby
expressly authorizes, the Bank to set off any amounts due and owing hereunder to the Bank against
sums owing by CapitalSouth under the Pledged Note to Indemnitor at the par amounts thereof.

     13. Indemnitor hereby covenants and agrees that, until all of the Obligations have been paid
and performed in full, (i) without the prior written consent of the Bank, Indemnitor will not sell,
convey, or otherwise dispose of any of the Collateral, including the Pledged Note, or any interest
therein or create, incur, or permit to exist any pledge, mortgage, lien, charge, encumbrance or
security interest whatsoever in or with respect to any of the Collateral, including the Pledged
Note, or the proceeds thereof, other than that created hereby; and (ii) Indemnitor shall, at
Indemnitor’s own expense, defend the Bank’s right, title, special property and security interest in
and to the Collateral, including the Pledged Note, against the claims of any person, firm,
corporation or other entity.

     14. Indemnitor shall at any time, and from time to time, upon the written request of the Bank,
execute and deliver such further documents, including, but not limited to, financing statements,
and do such further acts and things as the Bank may reasonably request to effect the purposes of
this Agreement.

     15. Upon the payment and performance in full of all Obligations, this Agreement shall
terminate and the Bank shall deliver to Indemnitor the Pledged Note, as such may have been reduced
pursuant hereto.

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     16. Beyond the exercise of reasonable care to assure the safe custody of the Pledged Note
while held hereunder, the Bank shall have no duty or liability to preserve rights pertaining
thereto and shall be relieved of all responsibility for the Pledged Note upon it tendering
surrender of it to Indemnitor.

     17. Indemnitor hereby agrees that nothing in this Agreement shall be construed as requiring
CapitalSouth, the Bank or Mortgage Lion to continue to operate in any mortgage loan origination
line of business or to do or not do business with any third party, such as a purchaser of Covered
Loans, or to retain or discharge any employee, independent contractor or other agent or attorney.

     18. No course of dealing between Indemnitor and the Bank, nor any failure to exercise, nor any
delay in exercising, any right, power or privilege of the Bank hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power or privilege hereunder or
thereunder preclude any other or further exercise thereof or the exercise of any other right, power
or privilege. No waiver by the Bank shall be effective unless it is made in writing and by a duly
authorized officer or agent of the Bank, and no waiver by the Bank of any right or remedy shall
constitute a waiver of any other or future right or remedy.

     19. The rights and remedies provided herein are cumulative and are in addition to and not
exclusive of any rights or remedies provided by law, including, but without limitation, the rights
and remedies of the Bank as a secured party under the Uniform Commercial Code.

     20. The provisions of this Agreement are severable, and if any clause or provision shall be
held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect only such clause or provision or part thereof in such jurisdiction
and shall not in any manner affect such clause or provision in any other jurisdiction or any other
clause or provision in this Agreement in any jurisdiction.

     21. This Agreement shall not confer any rights or remedies upon any person other than the
parties hereto and their respective successors and permitted assigns. Nothing herein shall be
construed as creating any obligation or constituting any admission of liability with respect to any
claims with respect to a Covered Loan.

     22. This Agreement may be executed in one or more counterparts, each of which shall be deemed
an original but all of which together will constitute one and the same instrument. This Agreement
may be executed and delivered by fax or email of a manually signed copy hereof.

     23. All notices, requests, demands, claims, and other communications hereunder shall be in
writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly
given (i) upon hand delivery, (ii) one (1) business day following the date sent when sent by
overnight delivery and (iii) three (3) business days following the date mailed when mailed by first
class, registered or certified mail and postage prepaid at the following address:

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If to CapitalSouth or the Bank:

CapitalSouth Bancorp

2340 Woodcrest Place, Suite 200

Birmingham, AL 35209

With a copy to:

Bradley Arant Rose & White LLP

1819 Fifth Avenue North

Birmingham, Alabama 35203

Attention: J. Paul Compton, Jr.

If to the Indemnitor:

James C. Bowen

1500 Campbell Avenue

Jacksonville, Florida 32207

With a copy to:

Miller, Hamilton, Snider & Odom, LLC

100 Colonial Bank Boulevard

Suite B101

Montgomery, Alabama 36117

Attention: Hugh C. Nickson, III

     Any party may send any notice, request, demand, claim, or other communication hereunder to the
intended recipient at the address set forth above using any other means (including personal
delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic
mail), but no such notice, request, demand, claim, or other communication shall be deemed to have
been duly given unless and until it actually is received by the intended recipient. Any party may
change the address to which notices, requests, demands, claims, and other communications hereunder
are to be delivered by giving the other party notice in the manner herein set forth.

     24. This Agreement shall be governed by and construed in accordance with the internal laws of
the State of Delaware without giving effect to any conflict of law provision.

     25. No amendment of any provision of this Agreement shall be valid unless the same shall be in
writing and signed by each of the parties. No waiver by any party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall
be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent
such occurrence.

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     26. The parties have participated jointly in the negotiation and drafting of this Agreement.
In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be
construed as if drafted jointly by the parties and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the provisions of this
Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed
also to refer to all rules and regulations promulgated thereunder at the time at which it speaks,
unless the context requires otherwise. The word “including” shall mean including without
limitation. The parties intend that each representation, warranty, and covenant contained herein
shall have independent significance. If any party has breached any representation, warranty, or
covenant contained herein in any respect, the fact that there exists another representation,
warranty, or covenant relating to the same subject matter (regardless of the relative levels of
specificity) which the party has not breached shall not detract from or mitigate the fact that the
party is in breach of the first representation, warranty, or covenant. The Bank shall be entitled
to rely on the representations, warranties and covenants of the Seller contained in this Agreement
notwithstanding any examination or investigation of any related matters performed by the Bank.

     27. Whenever used in this Agreement, the singular number shall include the plural and the
plural the singular. Pronouns of one gender shall include all genders. Accounting terms used and
not otherwise defined in this Agreement shall have the meanings determined by, and all calculations
with respect to accounting and financial matters unless otherwise provided for herein, shall be
computed in accordance with generally accepted accounting principles, consistently applied.
References herein to articles, sections, paragraphs, subparagraphs or the like shall refer to the
corresponding articles, sections, paragraphs, subparagraphs or the like of this Agreement. The
words “hereof,” “herein,” and terms of similar import shall refer to this Agreement. Unless the
context clearly requires otherwise, the use of the terms “including,” “included,” “such as,” or
terms of similar meaning, shall not be construed to imply the exclusion of any other particular
elements.

     28. The parties hereto, by executing this Agreement, WAIVE THEIR RIGHT TO TRIAL BY JURY of
disputes, claims or controversies between themselves or any of their respective officers,
directors, partners, employees, shareholders, affiliates or agents (such non-signatories being the
intended third party beneficiaries of this Agreement with respect solely to this Section 28) and
instead agree that ANY AND ALL CONTROVERSIES AND CLAIMS ARISING OUT OF OR RELATING TO THIS
AGREEMENT, OR THE BREACH THEREOF, SHALL BE SETTLED BY FINAL AND BINDING ARBITRATION IN ACCORDANCE
WITH THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION THEN IN EFFECT. Any
such arbitration proceedings shall be and remain confidential. The panel of arbitrators for any
such arbitration shall consist of three members of the American Arbitration Association, one of
whom shall be selected by CapitalSouth, one of whom shall be selected by Indemnitor, and the third
who will be selected by the other two. Judgment upon the decision rendered by the arbitrators may
be entered in any court having jurisdiction thereof. The parties specifically acknowledge that
this Agreement evidences a transaction involving, affecting, affected by, and a part of, interstate
commerce and that this

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Agreement to arbitrate is governed by and enforceable under 9 U.S.C. §§ 1 et
seq. The place of arbitration shall be Birmingham, Alabama.

     29. This Agreement is a continuing agreement until all Obligations hereunder have been
satisfied.

     30. Indemnitor acknowledges that the statute of limitations applicable to this Agreement shall
begin to run only upon Indemnitor’s failure or refusal to pay any of the Obligations hereunder;
provided that, if subsequent to such default if the Bank reaches any agreement with respect to such
Obligations or agrees to forebear the enforcement of its claims against Indemnitor, the statute of
limitations shall be reinstated for its full duration until Indemnitor again defaults.

     31. This Agreement shall inure to the benefit of the Bank, its successors and assigns, and
shall be binding upon Indemnitor and his respective heirs, executors, administrator, successors and
assigns.

     32. Indemnitor and CapitalSouth hereby agree that the Non-Pledged Note shall be structured to
contain terms that allow a portion of the Non-Pledged Note to be converted from time to time and at
such time as mutually reasonably agreed upon by Indemnitor and CapitalSouth, and consistent with
applicable securities laws, to the extent that such conversion will allow Indemnitor to own in the
aggregate, immediately following the conversion, the number of shares of common stock up to that
Indemnitor would have received upon the closing of the transactions contemplated by the Merger
Agreement assuming that the price per share of CapitalSouth common stock was the closing price as
of February 28, 2007. The conversion price per share of common stock of CapitalSouth shall be the
average of the high and low prices as of the date immediately prior to such conversion. The shares
issued upon conversion of the Non-Pledged Note shall be unregistered and, in addition, such
unregistered shares received by Indemnitor shall be subject to customary transfer restrictions and
any others which are applicable to other shares of CapitalSouth common stock owned by Indemnitor as
of the conversion date. CapitalSouth hereby agrees to grant to Indemnitor certain registration
rights with respect to the shares of CapitalSouth common stock that Indemnitor receives pursuant to
his conversion of the Non-Pledged Note, and that such rights are contained in Exhibit A
attached hereto.

     33. This Agreement (including the documents referred to herein) constitutes the entire
agreement between the parties with respect to the Obligations and supersedes any prior
understandings, agreements, or representations by or between the parties, written or oral, to the
extent they related in any way to the subject matter hereof.

[Signature Page Follows]

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     IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to be executed
and delivered as of the date first above written.

	 	 	 	 	 
	 	CAPITALSOUTH BANCORP 

 	 
	 	By:  	/s/ W. Dan Puckett
 	 
	 	 	Its:  Chairman and Chief Executive Officer     	 
	 	 	 	 
	 

	 	 	 	 	 
	 	CAPITALSOUTH BANK 

 	 
	 	By:  	/s/ W. Dan Puckett
 	 
	 	 	Its: Chairman and Chief Executive Officer              	 
	 	 	 	 
	 

	 	 	 	 	 
	 	 	 
	 	                                        /s/ James C. Bowen                       [L.S.]
 	 
	 	James C. Bowen 	 
	 	 	 

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	STATE OF ALABAMA

	 	)
	 

	 	:
	JEFFERSON COUNTY

	 	)

     I, the undersigned, a notary public in and for said county in said state, hereby certify that
W. Dan Puckett, whose name as Chairman and Chief Executive Officer of CAPITALSOUTH BANCORP, a
Delaware corporation and a registered bank holding company, is signed to the foregoing instrument,
and who is known to me, acknowledged before me on this day that, being informed of the contents of
said instrument, he, as such officer and with full authority, executed the same voluntarily for and
as the act of said corporation.

     Given
under my hand and official seal this 14th day of September, 2007.

	 	 	 	 	 
	 	 	 
	 	
/s/ Christi P. Maske
 	 
	 	Notary Public 	 
	 	 	 
	 

	 	 	 	 	 
	[NOTARIAL SEAL]

	 	My commission expires:	 	July 2, 2011
	 

	 	 	 	 

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	STATE OF ALABAMA

	 	)
	 

	 	:
	JEFFERSON COUNTY

	 	)

     I, the undersigned, a notary public in and for said county in said state, hereby certify that
W. Dan Puckett, whose name as Chairman and Chief Executive Officer of CAPITALSOUTH BANK, an Alabama
banking corporation, is signed to the foregoing instrument, and who is known to me, acknowledged
before me on this day that, being informed of the contents of said instrument, he, as such officer
and with full authority, executed the same voluntarily for and as the act of said corporation.

     Given
under my hand and official seal this 14th day of September, 2007.

	 	 	 	 	 
	 	 	 
	 	
/s/ Christi P. Maske	 
	 	Notary Public 	 
	 	 	 
	 

	 	 	 	 	 
	[NOTARIAL SEAL]

	 	My commission expires:	 	July 2, 2011
	 

	 	 	 	 

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	STATE
OF GEORGIA

	 	)
	 

	 	:
	BEN
HILL COUNTY

	 	)

     I, the undersigned, a notary public in and for said county in said state, hereby certify that
James C. Bowen, whose name is signed to the foregoing instrument, and who is known to me,
acknowledged before me on this day that, being informed of the contents of said instrument, he
executed the same voluntarily on the day the same bears date.

     Given
under my hand and official seal this 14th day of September, 2007.

	 	 	 	 	 
	 	 	 
	 	
/s/ Penny Henderson	 
	 	Notary Public 	 
	 	 	 
	 

	 	 	 	 	 
	[NOTARIAL SEAL]

	 	My commission expires:	 	March 4, 2008
	 

	 	 	 	 

14

 

Exhibit A

Registration Rights

     1. Registration Rights. CapitalSouth covenants and agrees as follows:

          1.1 Definitions. For purposes of this Section 1:

               (a) The term “register”, “registered,” and “registration” refer to a
registration effected by preparing and filing a registration statement or similar document in
compliance with the Securities Act of 1933, as amended (the “Act”), and the declaration or
ordering of effectiveness of such registration statement or document; and

               (b) The term “Registrable Securities” means (A) any shares of CapitalSouth’s common
stock, $1.00 par value per share (the “Common Stock”), issuable or issued to Bowen upon
conversion of the Non-Pledged Note, (B) shares of any class of capital stock or other securities
into which or for which any such shares of Common Stock shall have been converted or exchanged
pursuant to any recapitalization, reorganization, merger or consolidation of CapitalSouth or sale
of all or substantially all of the assets of CapitalSouth, and (C) any other shares of Common Stock
issued in respect of such shares described in clauses (A) and (B) of this definition (because of
stock splits, stock dividends, reclassifications, recapitalizations, or similar events), excluding
in all cases, however, (x) any Registrable Securities sold by a person in a transaction in which
such person’s rights under this Section 1 are not assigned, or (y) any Registrable Securities sold
to or through a broker or dealer or underwriter in a public distribution or a public securities
transaction.

          1.2 Piggyback Registration. If (but without any obligation to do so) CapitalSouth
proposes to register any of its securities under the Act in connection with the public offering of
such securities solely for cash within three (3) years of the date hereof (other than (i) a
registration relating solely to the sale of securities to participants in a CapitalSouth stock
plan, or (ii) a registration on any form which does not include substantially the same information
as would be required to be included in a registration statement covering the sale of the
Registrable Securities), CapitalSouth shall, at such time, promptly give Bowen written notice of
such registration. Upon the written request of Bowen given to CapitalSouth within fifteen (15) days
after mailing of written notice by CapitalSouth, CapitalSouth shall, subject to the provisions of
Section 1.6 hereof, use its reasonable efforts to cause to be registered under the Act all of the
Registrable Securities that Bowen has requested to be registered.

          1.3 Obligations of CapitalSouth. Whenever required under this Section 1 to effect the
registration of any Registrable Securities, CapitalSouth shall, in a commercially prompt manner:

               (a) Prepare and file with the Securities and Exchange Commission (the “SEC”) a registration
statement with respect to such Registrable Securities and use its reasonable efforts to cause such
registration statement to become effective, and, upon the request of Bowen, keep such registration
statement effective for the earlier of 120 days or until the distribution described in the
registration statement has been completed;

15

 

               (b) Prepare and file with the SEC such amendments and supplements to such registration
statement and the prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Act with respect to the disposition of all
securities covered by such registration statement;

               (c) Furnish to Bowen, within a reasonable time, such numbers of copies of the registration
statement, each amendment and supplement thereto, the prospectus, including a preliminary
prospectus, in conformity with the requirements of the Act, and such other documents as he may
reasonably request in order to facilitate the disposition of Registrable Securities owned by him;

               (d) Use its reasonable efforts to register and qualify the securities covered by such
registration statement under such other securities or blue sky laws of such jurisdictions as shall
otherwise be applicable to securities registered by CapitalSouth;

               (e) In the event of any underwritten public offering, enter into and perform its obligations
under an underwriting agreement and any other customary agreements, in usual and customary form,
with the underwriters of such offering and take all such actions requested to expedite or
facilitate the disposition of shares. Bowen, as a participant in such underwriting, shall also
enter into and perform his obligations under any such agreements;

               (f) Notify Bowen at any time when a prospectus relating thereto is required to be delivered
under the Act of the happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing;

               (g) Cause all such Registrable Securities to be listed, prior to the date of the first sale of
such Registrable Securities pursuant to such registration, on each securities exchange on which
similar securities issued by CapitalSouth are then listed and, if not so listed, to be listed with
the National Association of Securities Dealers automated quotation system (NASDAQ); and

               (h) In the event of the issuance of any stop order suspending the effectiveness of a
registration statement, or of any order suspending or preventing the use of any related prospectus
or suspending the qualification of any Registrable Securities included in such registration
statement for sale in any jurisdiction, CapitalSouth will use its commercially reasonable efforts
promptly to obtain the withdrawal of such order.

          1.4 Furnish Information. It shall be a condition precedent to the obligations of
CapitalSouth to take any action pursuant to this Section 1 with respect to the Registrable
Securities of Bowen that Bowen shall furnish to CapitalSouth such information regarding himself,
the Registrable Securities held by him, and the intended method of disposition of such securities
as shall be required to effect the registration of Bowen’s Registrable Securities.

16

 

          1.5 Expenses of CapitalSouth Registration. CapitalSouth shall bear and pay all
expenses incurred in connection with any registration, filing or qualification of Registrable
Securities with respect to the registrations pursuant to Section 1.2 hereof, including (without
limitation) all registration, filing, and qualification fees, printers’ and accounting fees
relating or apportionable thereto, but excluding underwriting discounts and commissions relating to
Registrable Securities and the fees and disbursements of counsel for Bowen.

          1.6 Underwriting Requirements. In connection with any offering involving an
underwriting of securities being issued by CapitalSouth, CapitalSouth shall not be required under
Section 1.2 hereof to include any of Bowen’s securities in such underwriting unless he accepts the
terms of the underwriting as agreed upon between CapitalSouth and the underwriters selected by it
(or by other persons entitled to select the underwriters), and then only in such quantity as the
underwriters determine in their sole discretion will not jeopardize the success of the offering by
CapitalSouth. If the total amount of securities, including Registrable Securities requested by
Bowen to be included in such offering, exceeds the amount of securities sold that the underwriters
determine in their sole discretion is compatible with the success of the offering, then
CapitalSouth shall be required to include in the offering only that number of such securities,
including Registrable Securities, which the underwriters determine in their sole discretion will
not jeopardize the success of the offering.

          1.7 Delay of Registration. Bowen shall not have any right to obtain or seek an
injunction restraining or otherwise delaying any such registration as the result of any controversy
that might arise with respect to the interpretation or implementation of this Section 1.

          1.8 Assignment of Registration Rights. The rights to cause CapitalSouth to register
Registrable Securities pursuant to this Section 1 may not be assigned by Bowen to a transferee or
assignee without the prior written consent of CapitalSouth, which may be withheld in CapitalSouth’s
sole discretion.

     2. Miscellaneous Provisions.

          2.1 Descriptive Headings. The descriptive headings in this Exhibit A have been
inserted for convenience only and shall not be deemed to limit or otherwise affect the construction
of any provisions hereof.

          2.2 Expenses. If any action at law or in equity is necessary to enforce or interpret
the terms of this Exhibit A, the prevailing party shall be entitled to reasonable attorney
fees, costs and necessary disbursements in addition to any other relief to which such party may be
entitled.

          2.3 Stock Splits. All references to numbers of shares in this Exhibit A shall
be appropriately adjusted to reflect any stock dividend, split, combination or other
recapitalization of shares by CapitalSouth occurring after the date of this Exhibit A.

17Ex-10.2

 

Exhibit 10.2

INCENTIVE COMPENSATION AGREEMENT

     THIS INCENTIVE COMPENSATION AGREEMENT (this “Agreement”), is made and entered into as
of September 14, 2007, between CapitalSouth Bank, an Alabama banking corporation (the
“Employer” and also referred to herein as “CapitalSouth Bank”), and Mr. James C.
Bowen (the “Executive”).

W I T N E S S E T H:

     WHEREAS, CapitalSouth Bancorp, a Delaware corporation and a registered bank holding company
(“CapitalSouth”), and Monticello Bancshares, Inc., a Florida corporation
(“Monticello”), have executed an Agreement and Plan of Merger (the “Merger
Agreement”), joined in by Mr. James C. Bowen (a/k/a Jake Bowen), a resident of Duval County,
Florida, pursuant to which Monticello will be merged into CapitalSouth (the “Merger”), and
it is contemplated that in connection with the consummation of the Merger Agreement and pursuant to
the terms of a certain Bank Merger Agreement (the “Bank Merger Agreement”), Monticello
Bank, a federal savings bank (“Monticello Bank”), will be merged with and into CapitalSouth
Bank;

     WHEREAS, the Executive is currently employed by Monticello and Monticello Bank as Chief
Executive Officer;

     WHEREAS, the Executive has skill and experience in the management and operation of a
residential mortgage loan origination business, including specifically the Mortgage Lion operation
heretofore conducted by Monticello Bank (the “Mortgage Division”);

     WHEREAS, following the consummation of the Bank Merger Agreement, CapitalSouth Bank desires to
continue the operation of the Mortgage Division;

     WHEREAS, CapitalSouth Bank desires for the Executive to manage the Mortgage Division following
consummation of the Merger in accordance with the terms and provisions of this Agreement,
applicable law and good business practice;

     WHEREAS, the Executive and CapitalSouth heretofore entered into that certain Non-Competition
Agreement, dated February 28, 2007 (the “Non-Competition Agreement”), which is an
obligation independent of this Agreement, but which is modified hereby; and

     WHEREAS, the parties intend and desire that this Agreement supersede and replace in all
respects existing agreements or understandings between Monticello Bank, Mortgage Lion, Inc., or any
of their affiliates, on the one hand, and the Executive.

     NOW, THEREFORE, in consideration of the promises, mutual covenants set forth in this
Agreement, and other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows:

 

 

SECTION 1: EMPLOYMENT OF EXECUTIVE; DUTIES AND RESPONSIBILITIES

     1.1 Employment of Executive. Employer shall employ the Executive, and the Executive
shall provide services to Employer as an employee, on an at will basis and as further provided
under the terms and conditions of this Agreement.

     1.2 Term of Agreement. The term of this Agreement and the commencement of employment
of the Executive by Employer shall begin on the Closing Date, as that term is defined in the Merger
Agreement (the “Closing Date”), and shall continue for an indefinite length of time until
either the Executive or the Employer gives at least fourteen (14) calendar days notice to the other
party of its intention to cancel this Agreement or upon the occurrence of one of the termination
provisions set forth in Section 3 hereto (the “Agreement Term”). Nothing in this Agreement
shall be construed as requiring the Employer to employ the Executive for any particular period of
time or for life and for all purposes the Executive shall be considered an AT WILL employee.

     1.3 Offices and Positions of Executive. During the Agreement Term, except as
otherwise mutually agreed by Employer and the Executive and subject to Section 3 hereof, the
Executive shall serve as President of the Mortgage Division.

     1.4 Duties and Responsibilities. During the Agreement Term, the Executive shall
perform such duties and responsibilities as the management of Employer shall assign to the
Executive from time to time and which can reasonably be expected to be performed by a person
serving in a similar position. Subject to the foregoing, it is generally contemplated that the
Executive shall be responsible for the overall management of the line of business of the Mortgage
Division, including management of loan repurchase demands and the recommendation to Employer of
legal counsel for same, and as such shall be responsible for assembling and retaining the officers
and staff thereof, subject to the ordinary employment and compensation policies of the Employer;
provided that with respect to key officers of the Mortgage Division, including,
without limitation, Mr. Byron McDaniel, it is expressly contemplated that any compensation of such
persons shall be determined by the Executive, shall not be inconsistent with the compensation
provided to the Executive under this Agreement, and shall reduce, on a dollar-for-dollar basis
(before taxes), the compensation otherwise due to the Executive under this Agreement. The
Executive agrees to devote such of his full business time and energy to the business of Employer as
is needed and shall perform his duties in a trustworthy and business-like manner, all for the
purposes of advancing the interests of the Mortgage Division and the Employer. The Executive shall
report to the President of CapitalSouth or such other person designated by the Chief Executive
Officer of Employer. Executive shall perform his services hereunder in a manner consistent with
customary practices of professional managers of residential mortgage origination businesses,
applicable policies of CapitalSouth Bank (except as otherwise may be expressly modified with
respect to the business of the Mortgage Division), applicable law and safe and sound banking
practices, all in a trustworthy and businesslike manner of the purposes of advancing the interests
of CapitalSouth and CapitalSouth Bank.

     1.5 Annual Budget. The Executive, on behalf of the Mortgage Division, shall prepare
annually a detailed budget for the Mortgage Division. It is expected that such budget shall
reflect an annual pre-tax profit of not less than Three Hundred Sixty Thousand Dollars

2

 

($360,000.00). An initial draft of such budget shall be completed and submitted to executive
management of the Employer for review not later than November 30th of each year with
respect to the following fiscal year. Executive shall provide such further information and
supporting details as may be requested by Employer with respect to such budget and shall, based on
discussions with executive management of the Employer, revise such budget into a final form to
reflect the policies and outlook of the Employer with respect to the Mortgage Division (such
budget, as approved by the Employer, the “Final Budget”). The Executive shall use his
reasonable and good faith efforts to effectively implement the Final Budget, subject to such
changes which are approved from time to time by the Employer. All salary levels for persons other
than key officers who participate in the Incentive Compensation Payment shall not exceed the
prevailing market and any related party transactions shall be subject to approval by executive
management of the Employer.

     1.6 Scope of Mortgage Division. All product offerings of the Mortgage Division,
including construction/permanent loans and builder loans, will be subject to the prior approval of
the executive management of the Employer, with the general expectation that they shall be based
upon standards determined solely by CapitalSouth Bank. It is understood that all construction
loans will be subject to review and oversight by CapitalSouth Bank personnel.

SECTION 2: COMPENSATION; REIMBURSEMENT; AND BENEFITS

     2.1 Compensation. Executive will be compensated for services hereunder during the
Agreement Term in an amount equal to forty percent (40%) of the annual pre-tax profits of the
Mortgage Division (the “Incentive Compensation Payment”), based upon a deemed March 31
fiscal year-end. Such profits shall be computed in accordance with generally accepted accounting
principles and as further set forth on Appendix A hereto. Incentive Compensation Payments
during the Agreement term will be made on the last business day of the month immediately following
the close of each calendar quarter; provided that fifty percent (50%) of the
Incentive Compensation Payment otherwise due at such time shall be retained and thereafter
distributed within five (5) business days following the date on which CapitalSouth files its
quarterly report with the Securities and Exchange Commission on Form 10-Q after the close of
CapitalSouth’s first fiscal quarter of each year. At such time any “truing up” with respect to
annual pre-tax profits shall occur. Executive will receive no compensation for Executive’s
personal mortgage loan production or any base salary. Executive will receive a draw of $2,500.00
per month that will be offset against the amount of the Incentive Compensation Payment.
Notwithstanding the foregoing, any profits attributable to Reserve Related Profits (as defined in
Appendix A) shall be calculated solely as of the fourth anniversary of the Closing Date and
to the extent that as of such fourth anniversary date there is a reasonable expectation of future
unaccrued Loan Repurchase Costs (as defined in Appendix A), such amount shall be subject to
the mutual agreement of the parties or if the parties cannot agree, any differences between their
estimated future amounts may be withheld by Employer but shall be paid at such time in the future
that the parties agree or such Loan Repurchase Costs are otherwise finally determined and at such
time, the remaining balance, if any, of profits attributable to Favorable Reserve Adjustments shall
be paid to Executive, together with interest on such withheld amount at a rate of 10% per annum
from the fourth anniversary date.

3

 

     2.2 Allocation of Incentive Compensation Payments. As contemplated in Section 1.4
hereof, Executive is authorized and expected to reach arrangements with other key officers of the
Mortgage Division pursuant to which the Employer shall compensate such key officers by remitting to
them a portion of the compensation otherwise payable to the Executive under Section 2.1 hereof.
Such arrangements shall be evidenced by written agreements executed by each such key officer,
Executive and the Employer but shall not, in any event, be inconsistent with the obligations of the
Employer to the Executive under this Agreement and the method and timing of compensation paid
hereunder unless otherwise expressly agreed in writing.

     2.3 Other Benefits. The Executive shall not participate in any other incentive and
benefit programs or arrangements, such as cash bonus and stock programs, made available by
CapitalSouth and its affiliates and subsidiaries to employees; provided that it is
understood that the foregoing does not apply with respect to compensation payable to directors, as
such, of CapitalSouth. Executive shall be permitted to participate in the health, disability and
life insurance programs of the Employer and the 401(k) or similar defined contribution plan of the
Employer in the same manner which employees generally of the Employer are entitled to participate.

     2.4 Business Expenses. Employer shall reimburse the Executive for all reasonable
expenses incurred by Executive in accordance with the standard policies and procedures of Employer,
in the course of rendering his services pursuant to this Agreement; provided that
such expenses shall be consistent with the requirements of the Final Budget; and
provided further that the Executive shall promptly submit such reasonable
documentation as may be requested by Employer to verify such expenditures.

     2.5 Vacation. The Executive shall be afforded vacation in accordance with and under
the same terms and conditions as are applicable to similarly situated personnel of Employer and its
affiliates. The Executive shall take into consideration the needs of Employer and management
responsibilities for the Mortgage Division in setting his vacation schedule.

     2.6 Withholding Taxes. The Executive acknowledges and agrees that Executive shall be
subject to customary income, FICA, FUTA, state unemployment and similar payroll withholding taxes
applicable to employees generally. Executive further acknowledges that payments made to Executive
under this Agreement shall be reported to Executive on Form W-2.

SECTION 3: TERMINATION OF EMPLOYMENT

     3.1 Termination of Agreement Term. The Agreement Term may be terminated by notice as
provided in Section 1.2 hereof or otherwise in the following manner:

          (a) Termination on Death or Disability. The Agreement Term shall automatically
terminate upon the death or Disability of the Executive. The term “Disability” shall mean
the Executive’s physical or mental incapacity, as certified by a physician, that renders him
incapable of performing the essential functions of the duties required of him by this Agreement for
six (6) months, even with reasonable accommodation.

          (b) Termination For Cause. This Agreement, the employment of the Executive, and the
unaccrued obligations hereunder may be terminated by Employer for “Cause”

4

 

at any time
during the Agreement Term upon written notice to the Executive, which notice shall state the facts
constituting such “Cause”. For the purpose of this Section 3.1(b), the term “Cause” shall mean (i)
willful misconduct or gross malfeasance, or an act or acts of gross negligence in the course of
employment; (ii) the Executive’s commission, conviction, admission or confession of any felony or
crime of moral turpitude; (iii) willful violation of any law, rule, regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, (iv) if the Executive is removed
and/or permanently prohibited from participating in the conduct of the Employer’s affairs by an
order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
Section 1818(e)(4) or (g)(1)); or (v) the existence of a substantial and objective act of
misfeasance or nonfeasance by the Executive which is plainly sufficient, under sound banking
principles (as recognized by the Alabama State Banking Department, the Federal Deposit Insurance
Corporation, or any other appropriate bank regulatory authority to the extent said agencies would
no longer approve the Executive to hold a comparable executive position), to conclude that the
Executive is unfit to continue in the capacities stated in this Agreement. Employer shall have the
power to temporarily suspend Executive, with pay, from duty if there is reasonable evidence of the
possibility of Cause until Cause is either proved or disproved; provided that, if
disproved, full reinstatement will immediately be effected; provided further
that before, during or after such suspension the Employer or the Executive may otherwise
terminate this Agreement as provided in Section 1.2 hereof.

     3.2 Consequences of Termination.

          (a) For Cause; Death or Disability; Without Good Reason. In the event Executive’s
employment and this Agreement are terminated, Employer shall be under no further obligation to make
payments or provide benefits to the Executive, except for (i) Incentive Compensation Payments
accrued through the effective time of such termination, and reimbursable expenses incurred by but
not yet reimbursed to the Executive at the time of such termination and (ii) with respect to
profits comprising Reserve Related Profits, shall be paid an amount equal to the full amount of
Reserve Related Profits, as otherwise determined hereunder (i.e., Executive is fully vested
therein).

          (b) Time of Payment. Any amounts due to be paid under Section 3.2(a) hereof shall be
paid at the times such payment would have been due if this Agreement had not been terminated (e.g.,
in the case of Reserve Related Profits, promptly after the fourth anniversary of the Closing Date);
provided that with respect to the computation of profits for the quarter in which
this Agreement and employment are terminated, such payment shall be allocated on a daily pro rata
basis based on the number of calendar days of such calendar quarter which were elapsed up to the
effective time of termination of this Agreement.

          (c) Obligation of Employer to Make the Payments Under Section 3.2(a) Hereof.
Compliance by the Executive with the Non-Competition Agreement is a condition precedent to
Employer’s obligation to make, or to continue to make, the payments referred to in Sections 2.1 and
3.2 hereof.

          (d) Employee Benefits. Following termination of this Agreement, the Executive shall
not be entitled to receive, and Employer shall not be required to provide, any employee benefits
other than (i) payments made pursuant to Section 3.2(a) hereof, if applicable,

5

 

(ii) group health
and any other benefits coverage that is required to be continued by applicable law; and (iii)
vested accrued retirement benefits, if any.

          (e) Extension of Non-Competition Agreement. The parties hereto hereby agree to extend
the “Non-Competition Period”, as defined in the Non-Competition Agreement, by amending the first
sentence of Section 1.1(a) of the Non-Competition Agreement by adding the following at the end
thereof: “; provided that the Non-Competition Period shall be extended for a period of one
additional calendar year from the date of termination of the Incentive Compensation Agreement
entered into by and between CapitalSouth Bank and Mr. Bowen if the Non-Competition Period otherwise
applicable under this Agreement would conclude prior to the expiration of such one-year extension.”

SECTION 4: CONFIDENTIALITY

     4.1 Confidentiality.

          (a) The Executive hereby acknowledges that during his employment by Employer he will have
contacts with and develop and serve the customers of Employer and that in all of his activities,
and through the nature of complying with his obligations pursuant to this Agreement, he will have
access to and will acquire confidential information relating to the business, assets, operations,
customers, suppliers, contractual parties and other persons with whom Employer, CapitalSouth and
their respective affiliates and subsidiaries do business. The Executive hereby acknowledges and
confirms that such information constitutes the exclusive property of Employer, CapitalSouth or
their respective affiliates and subsidiaries, as the case may be, and that such information is
proprietary in nature. Such information does not include information already in the public realm
or information received by Executive from third parties.

          (b) The Executive agrees in perpetuity that he shall not disclose to others (except as
permitted and as directed by Employer or only as to the extent required pursuant to a subpoena or
order of a court of competent jurisdiction) any such information referred to in Section 4.1(a)
hereof.

     4.2 Remedies.

          (a) If the Executive breaches, or threatens to commit a breach, of any of the provisions of
Section 4 hereof, Employer shall have the following rights and remedies, each of which rights and
remedies shall be independent of the others and severally enforceable, and each of which is in
addition to, and not in lieu of, any other rights and remedies available to Employer at law or in
equity (including the right to recover damages):

               (i) the right and remedy to have Section 4 hereof specifically enforced by any court of
competent jurisdiction, it being agreed that any breach or threatened breach of Section 4 would
cause irreparable harm to Employer and that money damages would not provide an adequate remedy to
Employer;

               (ii) the right and remedy to require the Executive to account for and pay over to Employer all
compensation, profits or other benefits derived or received by the Executive as the result of any
actions constituting a breach of Section 4 hereof; and

6

 

               (iii) the right to recover all costs, fees and expenses incurred in connection with enforcing
the terms of this Agreement, including, but not limited to, all court arbitration fees, costs,
attorneys’ fees, court reporter fees and expert witness costs.

     4.3 Blue Penciling. If for any reason any court of competent jurisdiction shall find
that the provisions of Section 4.1 hereof are unreasonable in duration or in geographic scope, the
prohibitions contained herein shall be restricted to such time and/or geographic areas as such
court determines to be reasonable.

SECTION 5: GENERAL PROVISIONS

     5.1 Defined Terms. Unless defined herein, capitalized terms used herein shall have
the meanings ascribed to them in the Merger Agreement unless the context clearly requires
otherwise.

     5.2 Nonassignability; Persons Bound. Neither this Agreement nor any of the rights,
obligations or interests arising hereunder may be assigned by the Executive without the prior
written consent of Employer; provided, however, that nothing in this Section 5.2
shall preclude the Executive from designating, in writing, a beneficiary to receive any
compensation payable to him or any other benefit receivable by him under this Agreement upon the
death or incapacity of the Executive, nor shall it preclude the executors, administrators or any
other legal representatives of the Executive or his estate from assigning any rights hereunder to
the person or persons entitled thereto; provided further that the foregoing shall not be deemed to
restrict or impair the ability of the Executive to engage other key officers in the manner
contemplated by Sections 1.4 and 2.2 hereof. Neither this Agreement nor any of the rights,
obligations or interests arising hereunder may be assigned by Employer without the prior written
consent of the Executive to a person other than (i) an affiliate or subsidiary of Employer, or (ii)
any party with whom Employer merges or consolidates, or to whomever Employer may sell all or
substantially all of its assets; provided, however that any such affiliate,
subsidiary or successor shall expressly assume all of Employer’s obligations and liabilities to the
Executive under this Agreement. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and permitted assigns.
Notwithstanding anything to contrary herein, there shall be no third-party beneficiaries of this
Agreement except as provided in Section 5.6 hereof.

     5.3 Severability. This Agreement shall be deemed severable and any part hereof which
may be held invalid by a court or other entity of competent jurisdiction shall be deemed
automatically excluded from this Agreement and the remaining parts shall remain in full force and
effect.

     5.4 Entire Understanding. This Agreement contains the entire understanding of the
parties hereto and constitutes the only agreement between Employer and the Executive regarding the
employment of the Executive by Employer. This Agreement supersedes all prior agreements, either
express or implied, between the parties hereto regarding the employment of the Executive by
Employer but is not in derogation of the Non-Competition Agreement.

     5.5 Amendment. None of the terms and conditions of this Agreement shall be amended or
modified unless expressly consented to in writing and signed by each of the parties

7

 

hereto. The
parties hereto agree to amend this Agreement from time to time in such a manner that: (a) is
agreeable to CapitalSouth; and (b) prevents the payment of any excise tax resulting from Section
409A of the Internal Revenue Code of 1986, as amended.

     5.6 Arbitration. Other than as set forth in Section 4.2 hereof, the parties hereto,
by executing this Agreement, WAIVE THEIR RIGHT TO TRIAL BY JURY of disputes, claims or
controversies between themselves or any of their respective officers, directors, partners,
employees, shareholders, affiliates or agents (such non-signatories being the intended third party
beneficiaries of this Agreement with respect solely to this Section 5.6) and instead agree that ANY
AND ALL CONTROVERSIES AND CLAIMS ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE BREACH
THEREOF, SHALL BE SETTLED BY FINAL AND BINDING ARBITRATION IN ACCORDANCE WITH THE COMMERCIAL
ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION THEN IN EFFECT. Any such arbitration
proceedings shall be and remain confidential. The panel of arbitrators for any such arbitration
shall consist of three members of the American Arbitration Association, one of whom shall be
selected by CapitalSouth, one of whom shall be selected by the Executive, and the third who will be
selected by the other two. Judgment upon the decision rendered by the arbitrators may be entered
in any court having jurisdiction thereof. The parties specifically acknowledge that this Agreement
evidences a transaction involving, affecting, affected by, and a part of, interstate commerce and
that this Agreement to arbitrate is governed by and enforceable under 9 U.S.C. §§ 1 et seq.
The place of arbitration shall be Birmingham, Alabama.

     5.7 Notices. All notices or other communications to be given by the parties among
themselves pursuant to this Agreement shall be in writing and shall be deemed to have been duly
made to the party to whom it is directed at 1500 Campbell Avenue, Jacksonville, Florida 32207, if
to the Executive and at 2340 Woodcrest Place, Suite 200, Birmingham, Alabama 35209, Attention:
Chairman, if to Employer, (a) upon the earlier of five (5) days after mailing or the date of actual
delivery, if mailed by first class or certified mail with postage prepaid; or (b) upon delivery, if
either by hand delivery or by reputable overnight courier. Any of the parties hereto may change
their respective addresses upon written notice to the other given in the manner provided in this
section.

     5.8 Waiver. No waiver by any of the parties to this Agreement of any condition, term
or provision of this Agreement shall be deemed to be a waiver of any preceding or subsequent breach
of the same or any other condition, term or provision hereof.

     5.9 Survival. Notwithstanding anything in this Agreement to the contrary, and
notwithstanding any termination of the Agreement Term, the provisions of this Agreement intended to
govern the obligations of the parties hereto upon the termination of the Executive’s employment
with Employer for any reason, including, but not limited to, Section 3 hereof (inclusive of each of
the subsections thereof) and Section 4.1 hereof shall continue in full force and effect, if so
provided herein.

     5.10 Effective Date. This Agreement shall be effective as of the Effective Time. In
the event the Merger is not consummated by the parties, this Agreement shall be void and of no
further effect.

8

 

     5.11 Governing Law. This Agreement shall be governed by and construed under the laws
of the State of Alabama without regard to provisions thereof governing conflicts of law.

     5.12 Construction. This Agreement was prepared by the parties jointly. The
language used in this Agreement shall be deemed to be the language chosen by the parties to express
their mutual intent, and no rule of strict construction shall be applied against either party.
Whenever used in this Agreement, the singular number shall include the plural and the plural the
singular. Pronouns of one gender shall include all genders. Accounting terms used and not
otherwise defined in this Agreement have the meanings determined by, and all calculations with
respect to accounting or financial matters unless otherwise provided for herein, shall be computed
in accordance with generally accepted accounting principles, consistently applied. References
herein to articles, sections, paragraphs, subparagraphs or the like shall refer to the
corresponding articles, sections, paragraphs, subparagraphs or the like of this Agreement. The
words “hereof”, “herein”, and terms of similar import shall refer to this entire Agreement. Unless
the context clearly requires otherwise, the use of the terms “including”, “included”, “such as”, or
terms of similar meaning, shall not be construed to imply the exclusion of any other particular
elements.

     5.13 Captions. The captions as to contents of particular articles, sections or paragraphs
contained in this Agreement and the table of contents hereto are inserted only for convenience and
are in no way to be construed as part of this Agreement or as a limitation on the scope of the
particular articles, sections or paragraphs to which they refer.

     5.14 Counterparts. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, but all of which together shall constitute one and the same
document with the same force and effect as though all parties had executed the same document. This
Agreement may be executed and delivered by facsimile transmission.

     5.15 Regulatory Provisions. Notwithstanding anything to the contrary contained in
this Agreement, any payments to be made to the Executive pursuant to this Agreement or otherwise,
are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and FDIC
Regulation 12 CFR Part 359, Golden Parachute and Indemnification Payments. Employer’s obligations
under this Agreement shall be suspended commencing on the date the Executive is suspended and/or
temporarily prohibited from participating in the conduct of Employer’s affairs by notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818(e)(3)
and (g)(1)); provided that if the charges in the notice are dismissed, Employer
shall (i) pay the Executive all of the compensation withheld while Employer’s obligations under
this Agreement were suspended, and (ii) reinstate all of its obligations under this Agreement;
provided further that the foregoing provisions shall not affect or impair
any other rights of Employer to terminate the Executive for “just cause” or terminate this
Agreement as provided in Section 1.2 hereof. All obligations of Employer hereunder shall be
terminated, except to the extent it is determined that the continuation of this Agreement is
necessary for the continued operation of Employer by the appropriate regulatory authorities, (i) at
the time the Federal Deposit Insurance Corporation enters into an agreement to provide assistance
to or on behalf of Employer under the authority contained in Section 13(c) of the Federal Deposit
Insurance Act; or (ii) at the time appropriate regulatory authorities approve a supervisory merger
to resolve problems related to the operation of Employer or when Employer is determined by
appropriate regulatory authorities to be in an unsafe or unsound condition. If

9

 

Employer reasonably
determines that any provision of this Agreement fails to comply with the rules, regulations or
orders of any governmental authority possessing regulatory authority over Employer and its
operations, Employer and Executive, jointly and severally, agree to amend, modify and/or appeal any
such provision or provisions in order to make such provision or provisions comply with such rules,
regulations or orders.

[The remainder of this page is intentionally left blank.]

10

 

     IN WITNESS WHEREOF, the parties hereto have duly, or caused to be executed this Agreement as
at the date and year first above written.

	 	 	 	 	 
	 	CAPITALSOUTH BANK

 	 
	 	By:  	/s/ W. Dan Puckett
 	 
	 	 	Name:  	W. Dan Puckett  	 
	 	 	Its: Chairman and Chief Executive Officer 	 
	 

	 	 	 	 	 
	 	EXECUTIVE:

 	 
	 	/s/ James C. Bowen
 	 
	 	Name:  	James C. Bowen 	 
	 	 	 

11

 

	 	 	 	 	 

	 	 	 
	STATE OF ALABAMA

	 	)
	 

	 	:
	JEFFERSON COUNTY

	 	)

     I, the undersigned, a notary public in and for said county in said state, hereby certify that
W. Dan Puckett, whose name as Chairman and CEO of CapitalSouth Bank, an Alabama banking
corporation, is signed to the foregoing instrument, and who is known to me, acknowledged before me
on this day that, being informed of the contents of said instrument, he, as such officer and with
full authority, executed the same voluntarily for and as the act of said banking corporation.

     Given
under my hand and official seal this 14th day of September, 2007.

	 	 	 	 	 
	 	 	 
	 	
/s/ Christi P. Maske	 
	 	Notary Public 	 
	 	 	 
	 

	 	 	 	 	 
	[NOTARIAL SEAL]

	 	My commission expires:	 	July 2, 2011
	 

	 	 	 	 

12

 

	 	 	 
	STATE
OF GEORGIA

	 	)
	 

	 	:
	BEN
HILL COUNTY

	 	)

     I, the undersigned, a notary public in and for said county in said state, hereby certify that
James C. Bowen, whose name is signed to the foregoing instrument, and who is known to me,
acknowledged before me on this day that, being informed of the contents of said instrument, he
executed the same voluntarily.

     Given
under my hand and official seal this 14th day of September, 2007.

	 	 	 	 	 
	 	 	 
	 	
/s/ Penny Henderson	 
	 	Notary Public 	 
	 	 	 
	 

	 	 	 	 	 
	[NOTARIAL SEAL]

	 	My commission expires:	 	March 4, 2008
	 

	 	 	 	 

13

 

APPENDIX A

Accounting Conventions

     Identified below are the major criteria used to determine the profit for the Mortgage Lion
division of CapitalSouth Bank (the “Mortgage Division”) for purposes of the Incentive
Compensation Agreement between James C. Bowen and CapitalSouth Bank (the “Agreement”).

     1. In general, profits will be determined based on Generally Accepted Accounting Principles
(GAAP) consistently applied to the mortgage origination and sale activities directly managed by Mr.
Bowen. Revenue and expense associated with these activities shall include: Fee income from the
origination of 1-4 family permanent mortgage loans, 1-4 family construction/permanent loans where
they are originated and managed by the Mortgage Division; interest spread from mortgage loans held
for sale; gains and losses from the sale of mortgage loans; the direct expenses involved in the
operations of the Mortgage Division; the costs of systems to support the activities of the Mortgage
Division; allocations of other costs necessary to support the activities of the Mortgage Division.
Profit for purposes of this determination will be calculated prior to any deduction for income
taxes or Incentive Compensation Payment as determined under the Agreement. Profits shall be deemed
to include, at the relevant time, the amount of Reserve Related Profits.

     2. Any mortgage loans held for sale by the Mortgage Division will be funded by CapitalSouth
Bank or through other facilities based on a funding cost which is equal to the greater of (i) the
applicable federal funds rate from time to time, plus 50 basis points, or (ii) the actual cost of
funding under such third-party funding arrangement on an “all-in” basis.

     3. The Mortgage Division shall be responsible for payment of any extraordinary costs incurred
in, or arising out of, its business, including legal, compliance and consulting charges and shall
utilize vendors acceptable to CapitalSouth Bank.

     4. Fee income shall be recognized in accordance with GAAP with proper deferral of fees and
related cost in accordance with the policies of CapitalSouth.

     5. Mortgage loans held for sale will be marked to market as of the end of each month based on
independent valuations. The Mortgage Division operations will be based on the assumption that all
loans will be originated for sale, including construction/permanent loans. CapitalSouth Bank may
from time to time provide commitments to purchase mortgage loans under specified programs similar
to other investors. In such cases gains or losses will be included in the profit of the Mortgage
Division as for any other investor (purchasers). For loans on the books over 60 days, the funding
cost will be equal to the applicable benchmark plus an additional 100 basis points (e.g., federal
funds plus 150 basis points).

     6. Interest spread on construction/permanent loans will be based on the above except that the
funding cost will be the applicable benchmark plus an additional 100 basis points (e.g., federal
funds plus 150 basis points) for all such loans. Loans extended beyond their original maturity
date will be marked to market with appropriate lower of cost or market reserves

14

 

established out of profit.

     7. Solely with respect to any loan sold or transferred by the Mortgage Division after the
Closing Date, all costs associated with the repurchases of loans and any damages or indemnity
payable in lieu thereof will be charged against the Mortgage Division profit. Such costs will
include legal costs, any losses on disposition of the loans, market value adjustments, carrying
costs, all expenses associated with obtaining clear title to the loans or related collateral, etc.
Any loan repurchases from investors will be marked to market based on resale into the secondary
markets with any losses charged against the profit of the Mortgage Division. Interim funding will
be based on federal funds plus 200 basis points.

     8. Profits shall include any favorable reserve adjustments to the extent that they constitute
“Reserve Related Profits”. Reserve Related Profits shall be deemed equal to the difference between
(i) $2,500,000 and (ii) the amount of any and all claims, damages, losses, liabilities,
obligations, settlement payments, penalties, assessments, citations, directives, litigation,
demands, judgments, suits, proceedings, costs, disbursements and expenses of any kind or of any
nature whatsoever, including attorney’s fees and expenses (collectively, “Claims”) which at any
time may be imposed upon, incurred by or asserted or awarded against any of the CapitalSouth Bank,
Mortgage Lion, Inc., Monticello Bank, Monticello, CapitalSouth or any of their respective officers,
directors or employees, and arising, directly or indirectly, from or out of or in any way related
to (a) any breach or alleged breach or violation of any obligation, or an obligation to repurchase
a loan or indemnify the original purchaser thereof, existing under or pursuant to any agreement,
understanding, instrument, representation, assignment, endorsement or conveyance, of any type or
nature, affecting or relating to the sale or transfer of any loan of any type or nature, including
mortgage loans, construction loans, home equity loans, home equity lines of credit, letters of
credit or installment loans by Monticello Bank or Mortgage Lion to a Loan Purchaser, occurring on
or prior to the Closing Date (each a “Covered Loan”), whether or not caused by or within the
control of Executive , Mortgage Lion, Monticello Bank, Monticello or CapitalSouth, and (b) any
claim, suit, demand, including the settlement thereof and any expenses, including attorney’s fees,
disbursements, costs of investigation, expert fees, court fees, mediator fees and arbitrator fees,
relating to any Covered Loan sold, transferred or hypothecated to a third party by any of Mortgage
Lion, Monticello or Monticello Bank prior to the Closing Date, whether sounding in contract, tort,
statutory claim or otherwise, and whether such claim, suit or demand is brought, known or knowable
prior to or after the Closing Date (the sum of item (i) being referred to as “Loan Repurchase
Costs”); provided that in no event shall Reserve Related Profits be deemed to exceed $450,000.

     9. Employee salaries, benefits and human resource policies will comply with CapitalSouth
policies and guidelines. This includes, but is not limited to, salary grades, exempt — nonexempt
determinations, benefit plan participation and all other human resource policies.

     10. The profit calculation for the Mortgage Division will take into account charges for
services provided by CapitalSouth based on the concept of incremental cost; i.e., what is the cost
that CapitalSouth would not incur if the Mortgage Division operations ceased. These include the
full cost of the operations of any systems used exclusively by the Mortgage Division as well as
charges for the cost of the following:

15

 

Accounting and financial reporting

Human Resources and Payroll

Loan systems and Loan operations

Audit

Loan Review

Compliance

Information Technology

To the extent possible charges for the above services will be based on their direct actual cost.
Any allocations of cost will be based on a schedule to be provided as part of the budget process.
The above allocations are based on the current planned method of operations and may be changed to
reflect the level of assistance provided by other operating areas of CapitalSouth to the Mortgage
Division. Management costs (the compensation and other benefits paid to the executives of
CapitalSouth or CapitalSouth Bank) will not be charged against profit for these purposes. Allocated
costs for the above functions will initially (period from the Closing Date through December 31,
2007) be equal to 50% of the cost reductions (salary and benefits) resulting from the Merger. This
amount is estimated to be $10,525 per month.

     11. All policies of CapitalSouth Bank will be applied to the operations of the Mortgage
Division and the direct cost of applying those policies will be included in the profit of the
Mortgage Division.

     12. The profitability measures as noted above from time to time may be changed to properly
reflect the incremental profit of the Mortgage Division resulting from changed business plans and
operating procedures.

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16

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