BEFORE

THE

BOARD

UNITED STATES OF AMERICA OF GOVERNORS OF THE FEDERAL WASHINGTON, D.C.

RESERVE

SYSTEM

OHIO

DIVISION

INSTITUTIONS OF FINANCIAL COLUMBUS, OHIO

Written

Agreement

by and between
)

SHOREBANK, Cleveland,

CLEVELAND Ohio BANK OF CLEVELAND

Docket

No.

98-022-WA/RB-SM

FEDERAL RESERVE Cleveland, Ohio and

OHIO DIVISION OF FINANCIAL INSTITUTIONS Columbus, Ohio

WHEREAS, and maintain Cleveland, member Reserve Division agreed

in recognition

of their

common

goal

to restore Cleveland,

the financial Ohio

soundness a state System,

of the ShoreBank, chartered the Bank, Bank"), bank

(the "Bank"), Reserve

which

is a

of the Federal Bank

the Federal and the Ohio have mutually

of Cleveland

(the "Reserve

of Financial to enter into

Institutions this Written

(the "Division") Agreement

(the "Agreement");

WHEREAS, with the Rules

this Agreement Delegation

is being

executed

in accordance of

Regarding

of Authority

of the Board

2 Governors of the Federal specifically has received Reserve System (the "Board of the of

Governors"), Reserve Bank

12 C.F.R. the prior Supervision Counsel

265.11(a) approval

(151, and

of the Director (the of Governors

the Division "Director") enter into

of Banking

and Regulation of the Board

and the General this Agreement

to

with

the Bank;

WHEREAS, with Chapter
1121

this Agreement of the Ohio

is being Code,

executed

in accordance

Revised

and the Deputy and on this

Superintendent behalf

for Banks

is acting and

under

his own authority in entering

of the Superintendent and

the Division

Agreement;

WHEREAS, directors resolution to enter

on

&qoSt 4 at a duly

oz\

,

1998,

the board

of a

of the Bank, authorizing into

constituted e6Vqe

meeting,
-P-r ‘

adopted
cm

and directing on behalf

3fqE!tyuL,

this Agreement with each

of the Bank of this

and

consented by in

to compliance the Bank section and 3(u)

and every

provision

Agreement

its institution-affiliated of the Federal
(12 U.S.C.

parties, Insurance

as defined as amended

Deposit
1813(u)).

Act,

(the "FDI Act")

3 NOW, adjudication without made THEREFORE, before on any the taking of any testimony or and

of or finding

issue

of fact or law herein,

this Agreement

constituting

an admission

of any allegation Bank, or

or implied

by the Board solely

of Governors,

the Reserve of settling

the Division, without Division

and

for the purposes the Bank,

this matter and the

further hereby

proceedings, agree

the Reserve

Bank

as follows:

1.

(a) of the

Within Bank

40 days

of this

Agreement,

the board of

of directors the Bank's

shall

conduct

a complete operating

review

implementation and and

of its current

policies personnel the Division The a

and procedures (the "Review") written Review report shall

of the performance forward

of the Bank's Bank and

to the Reserve and the

detailing

its findings

recommendations.

include,

at a minimum,

following:

(i) number affairs of officer

The

identification needed to manage

of the type and

and the

positions

supervise

of the Bank

adequately;

4 (ii) the Bank's provide board the identification committees to Bank and that establishment are needed to of

of directors' and oversight

guidance

management;

(iii) Bank's scope, board management frequency of directors or eliminate

an assessment board

of the supervision of directors,

of the the

by the Bank's and sufficiency

including

of information and that

provided

to the to

by Bank

management,

recommendations are found;

correct

any deficiencies

(iv) well as each staff for member

an evaluation with area lending

of each authority

Bank or

officer,

as

responsibility determine experience and

a major these

of the Bank's possess required adherence

operations, the ability, to perform

to

whether and

individuals

other

qualifications including

present

anticipated

duties,

to the Bank's in a safe and

policies sound

and procedures and

and maintenance

of the Bank

condition;

(v) additional experience or replacement and other

a plan

to recruit with that

and the are

hire

any ability, to fill

personnel

requisite necessary

qualifications

5 Bank officer and staff Review. member positions consistent with the

findings

of the

(b) aid

The

primary

purpose

of the Review structure

shall

be to

in the development needs that

of a management staffed

suitable and

to the trained shall all

Bank's

is adequately

by qualified

personnel. be determined aspects adequacy,

At a minimum,

the qualifications to: (i) restore quality and

of management and maintain and capital

by its ability including and sound

of the Bank, to a safe of this

asset

condition, and all

(ii) comply laws

with

the

requirements regulations.

Agreement

applicable

and

(c) written submit Reserve report a written Bank and

Within

20 days

after l(a)

the

completion

of the shall

required

by paragraph plan

hereof,

the Bank Plan") actions

management the Division

(the "Management specific in order

to the that

describing to take the board

the board Bank

of directors and

proposes

to strengthen

management over

to improve

of directors' Management Plan shall

supervision fully written address

the Bank's findings

officers. and

The

the

recommendations

contained

in the

report.

6 2. submit achieve The plan Within 30 days Bank and of this the Agreement, the Bank plan shall to

to the Reserve and,

Division an adequate and

a written capital

thereafter,

maintain

position.

shall,

at a minimum,

address

consider:

(a) requirements, Guidelines Risk Part Based 208,

The Bank's

current with

and

future

capital Adequacy Banks:

including

compliance of Governors

the Capital

of the Board Measures App.

for State Measure

Member

and Tier

1 Leverage

(12 C.F.R.

A and B);

(b) assets;

the volume

of the Bank's

adversely

classified

(cl relationship

the growth

in the Bank's ratios;

assets

and

its

to the Bank's

capital

(d) earnings;

the Bank's

anticipated

levels

of retained

7 (e) fulfill the Bank's and the source and timing and the of additional loan loss funds to

future

capital

reserve

requirements;

(f) Bank any and

procedures

for the

Bank

to notify

the Reserve of

the Division, month that

in writing, the Bank's

within Tier

5 days 1 leverage

of the end ratio and

calendar

falls

below

10 percent a written

and

to submit that

to the Reserve the steps

Bank

the will take

Division

plan

details ratio

the Bank than

to increase within

its Tier

1 leverage

to no less

10 percent

60 days.

3. without Director, received prior

The

Bank written

shall

not

declare

or pay

any dividends Bank, shall the be

the prior and

approval

of the Reserve for approval Division

the Division. Bank dividend

Requests and the

by the Reserve

at least and

30 days

to the proposed but not cash

declaration

date

shall information of the

contain,

be limited flow,

to, current levels

and projected and asset

on earnings, Bank.

capital

quality

8 4. the (a) The Bank's board of directors with shall maintain

responsibility loan

for monitoring

compliance and

the Bank's on a of 90 days

written monthly $20,000 or more meeting, mention

policies the

and procedures status

shall loans

review,

basis, that

current due

of all

in excess for

are past

as to principal status as of the classified

or interest date of the

or on nonaccrual or that are

directors'

adversely

or listed

for special latest shall was made in report

by federal

or state

examiners

in the Bank's of directors of credit

of examination specifically accordance the

or visitation. address whether

The board the extension

with

the Bank's actions due

written

loan

policies

and procedures, to reduce were as set in

collection

undertaken loans,

by Bank

management such actions

the volume full forth

of past

and whether collection

compliance

with

the Bank's loan

procedures

in its written

policies

and procedures.

(b) accurate which written

The

board

of directors

shall

maintain and meetings, review.

minutes

of its loan

discussions

shall

be available

for subsequent

supervisory

5. shall submit

(a)

Within

60 days Bank

of this the

Agreement,

the Bank plan

to the Reserve

and

Division

a written

9

designed $50,000

to improve that was

the Bank's due

position

on each

loan

in excess in excess

of

past

as to principal status

or interest

of 90 days Agreement real

or on nonaccrual and on each that was asset

as of the date of $50,000,

of this including other

in excess

estate,

adversely and

classified

or listed

as special recent

mention report

by Reserve

Bank

Division Bank,

examiners dated May

in the most 11, 1998 (the

of examination Report"),

of the cited

"Examination Bank's

as a problem

loan

by any of the problem loan

consultants, through

or included amortization, or other shall

on the Bank's repayment, means,

watchlist, additional appropriate. the prior except

liquidation, may be without

collateral This

whichever

plan

not be amended

or rescinded and

written

approval shall

of the Reserve be amended of $50,000

Bank

the Division, to cover adversely report loans

that

the plan

periodically that have in any been

or other classified

assets

in excess

or listed

for special

mention

subsequent that

of examination due

or visitation

of the Bank for more of each

or loans than

are past or on

as to principal status

or interest as of the date amendment

90 days

nonaccrual

subsequent shall

examination to

or visitation. the Reserve receipt Bank

Each and new

to the plan within

be submitted after

the Division report

30 days

the Bank's Amended

of each

of examination

or visitation.

10

plans listed

based

on loans

or other

assets

that

are classified

or

for special

mention

or overdue

in subsequent

examinations and the 13

or visitations Division hereof, with

shall

be submitted progress subsequent

to the Reserve report, required

Bank

the next each

by paragraph

following

examination

or visitation.

(b) past due assets shall

Quarterly

progress

reports required

on classified by paragraph values

and 13 of

in excess include,

of $50,000,

hereof, such

at a minimum:

(i) the carrying

assets

(book and nonbook) and value reduction,

as of the date

of the plan; (iii) plans asset; assets; and

(ii) the nature for improvement,

of supporting

collateral; of the of the

or elimination in status timetables current

(iv) source (v) specific (vi) a copy

of funds target

for changes levels and most

for achievement; watch list.

of the Bank's

internal

6. Reserve from the Bank

(a) and

Unless

otherwise the

approved Bank shall,

in writing within

by the

the Division, of any federal

10 days or

receipt

or state of all

report assets

of examination classified that have

visitation, "LOSS" been

charge-off report

100 percent of examination in full

in such

or visitation

not

previously

collected

or charged-off.

11

(b) shall achieve and,

Within

30 days

of this

Agreement,

the Bank through

thereafter, operating

continue income, adequacy

to maintain,

charges reserve

to current for loan

an adequate

valuation shall be

losses.

The

of the reserve

determined the current evaluation portfolio, contained

in light level

of the volume

of weighted loans, past

classified loss

loans,

of nonperforming for

experience,

of the potential current in the economic Bank's of the and most

loan

losses

in the Bank's criticisms and

conditions, recent

other

report Policy dated

of examination, Statement December record on the 21, shall

the requirements Allowance

Interagency Lease Losses, .

for Loan Policy

1993 be the

(the

"Interagency maintained amount

Statementu)

A written used record

indicating reserve and

the methodology needed. This

in determining shall

of the

be submitted of this at a minimum,

to

the Reserve Agreement. quarterly

Bank

the Division the Bank

within shall loss

60 days conduct,

Thereafter, assessment loans

a

of its loan and shall

reserve

and

its of each within

nonperforming quarterly 30 days

submit

documentation Bank and

assessment of the end

to the Reserve of each quarter.

the Division

12 7. submit Within 60 days Bank and of this Agreement, the Bank loan shall review
to

to the Reserve The loan

the Division

written

procedures. identify quality and

review

procedures credits

shall and These

be designed

categorize Bank's the

problem loan

to assess procedures

the overall shall, at

of the

portfolio.

a minimum,

include

following:

(a) assigned to each

A description

of the

risk

grades

to be

loan;

(b) be responsible

the designation loan

of the grades;

individuals

who

will

for determining

(c)

a description

of when

loans

will

be graded;

(d)

a description

of what

loans

will

be graded;

(e)
the Interagency

the

requirements Statement

outlined

in Attachment the minimum and "Credit

I of

Policy

addressing Review

requirements Grading

relating

to

"Loan

Systems"

Systems";

13 (f) risk grades assigned (9) loan, file, a written of the procedures to confirm loan the accuracy of all

by the Bank's for each loan

officers; as a watch appropriate special list credit

identified in the merits

statement, why

maintained such loan

reason(s)

attention;

(h) review grading

the

development and

of an adequate

internal

loan

report;

(i) Bank's board

a mechanism the

for reporting status of the

periodically loan reviews

to the and the on

of directors

action(s) each loan

taken

by management graded.

to improve

the Bank's

position

adversely

8. submit 1998 the not

Within

60 days Bank and

of this

Agreement,

the Bank plan

shall for

to the Reserve 1999

the Division and

a written for

and

consisting of the Bank.

of goals

strategies plan shall

improving but

earnings

The written to, the

include,

necessarily

be limited

following:

14 (a) means Bank's by which operating Identification of the major will seek areas in and the

the board

of directors

to improve

performance;

(b) a minimum, income and provide expense the

realistic for: items;

and

comprehensive estimates

budgets

that,

at

(i) monthly

of all material of a review flow a process of the

(ii) establishment expenses

to monitor Bank

actual

income,

and net cash

in comparison basis;

to budgetary and (iii)

projections

on at least

quarterly financial flow

semiannual

revision

of projected budgets and cash

statements,

including

projected sheet

annual and

statements

and year-end

balance

income

statements

for the Bank;

(c) that form and the bases

a description for, and

of the operating support,

assumptions major projected level Bank's and

adequately including officers

income

expense

components, of senior and loss

the compensation and directors, the

and bonuses deferred maintain

(if any)

tax position, adequate loan

provisions reserves;

needed and

to establish

15 (d) expenses reduce with overhead a complete analysis of the Bank's overhead to

a complete expenses

description to peer

of the steps or below.

to be taken

levels

9.

(a)

Within

30 days Bank

of this

Agreement,

the Bank funds of

shall

submit

to the Reserve

and

the Division

a written

management an adequate

plan

and procedures position. and

to provide The plan

for the maintenance and procedures

liquidity address

shall,

at a minimum,

consider:

(i) potential erosion sources

A contingency if the

funding Bank were

plan

to identify an

of liquidity base;

to experience

of its deposit

(ii) meeting minimum credit large, (A) the with unexpected sale

establishment withdrawals, and

of contingency which shall

plans

for at a of funds

include, lines advance

of assets,

(B) establishing which will

other

financial and

institutions

on short

notice;

(iii) directors to determine

a monthly how best

review

by the Bank's the Bank's

board

of

to allocate

available

16

funding

sources

among

various

asset

categories

after

reviewing:

(A) the Bank's such as loan

liquidity

position, and letters

(B) outstanding of credit, interest and

commitments (C) the

commitments

Bank's

rate-sensitivity

position

and net

margin.

(b) coordinated budget with the

The

funds

management

plans

shall

be and

Bank's

loan,

investment,

operating,

and profit

planning

policies.

10.

The

Bank

shall

immediately

take

all

necessary

steps and/or Report

consistent correct and any

with all

sound

banking

practices, forth

to eliminate in the Examination or visitation.

violations

of law set

subsequent

report

of examination

11.

(a)

The

Bank

shall

not,

directly manner

or indirectly, engage in any

enter

into,

participate, with ShoreBanc

or in any other Cleveland

transaction Ohio,

Corporation, Illinois,

Cleveland, or any nonbank without the

or ShoreBank thereof

Corporation, (collectively,

Chicago, the

subsidiary prior

"Corporation"), Bank and

written

approval

of the Reserve

the Division.

17 (b) (i) "transaction" transfer, direct sale For shall the purposes include, but of this Agreement, the terms

not be limited including

to, the cash, or the of

or purchase payment

of any asset, of any expense

or indirect

or obligation or service

Corporation, nature, (ii)

the payment extension of credit"

of a management of credit, shall

fee of any and in

or any

including

overdrafts; as set forth

"extension 215.3

be defined

section

of Regulation and section

0 of the Board 1301:1-3-04

of Governors of the Ohio

(12 C.F.R.

215.3)

Administrative

Code.

12. paragraphs Reserve

The plans, 7, and

policies, 9(a)

and procedures shall and

required

by to the

2, 5(a), and

hereof

be submitted approval.

Bank

the Division policies, and

for review and procedures within

Acceptable the Reserve periods approved receipt fully set

plans, Bank forth

shall the

be submitted time adopt of and the

to

the Division

required shall

in this

Agreement. and

The Bank within and

plans,

policies,

procedures Bank

10 days

of approval comply with

by the Reserve them. During

the Division

then the or

the term

of this shall

Agreement, be amended

approved

plans,

policies,

and procedures

not

18 rescinded and the without Division. the prior written approval of the Reserve Bank

13. quarter following .the Reserve detailing compliance updated paragraph corrections the Reserve Bank from

Within

30 days

after

the end of each 31, and

calendar 30) to

(September the date

30, December of this

31, March

June

Agreement,

the Bank

shall

furnish

Bank the

and

the Division

written

progress taken

reports to secure including by when the and the

form

and manner Agreement

of all and

actions results

with

this

the

thereof, required

reports

on all asset Such

improvement may

plans

5 hereof. required Bank making and

reports

be discontinued have been

by this

Agreement have,

accomplished released

the Division reports.

in writing,

further

14. be sent to:

All

communications

regarding

this

Agreement

shall

(a)

R. Chris Moore Senior Vice President Federal Reserve Bank of Cleveland 1455 East Sixth Street Cleveland, Ohio 44114

19

(b)

Richard L. Hardgrove Deputy Superintendent for Banks Ohio Division of Financial Institutions 77 South High Street, 21st Floor Columbus, Ohio 43266-0121

(c)

George P. Surgeon Chief Executive Officer ShoreBank, Cleveland 540 E. 105th Street Cleveland, Ohio 44108

15. upon the Bank

The and

provisions its

of this

Agreement

shall

be binding in their

institution-affiliated their successors

parties, and assigns.

capacities

as such,

and

16. effective suspended and

Each

provision

of this

Agreement modified,

shall

remain or

enforceable Board

until

stayed, and

terminated

by the

of Governors

the Division.

17. the contrary, discretion, comply with

Notwithstanding the grant Reserve written Bank

any provision and Division of time

of this may,

Agreement sole to

to

in their

extensions of this

to the Bank

any provision

Agreement.

20

18. the any Bank reasonable requirements shall

If the judgment

Bank

and

its board

of directors

fail,

in

of the Division, Agreement, to consent and desist the

to substantially of directors of,

fulfill of the and

of this the Bank

the board to the order

cause with,

issuance

compliance addressing Agreement

a cease

by the Division of this

all matters were not

for which

requirements

substantially

fulfilled.

19.

The

provisions prevent or any

of this

Agreement

shall

not bar,

estop Bank, from

or otherwise the Division taking any

the Board federal

of Governors, agency Bank

the Reserve or department

or state the

other

action

affecting

or any of its

current

or former

institution-affiliated

parties.

21 20. purposes This Agreement is a "written agreement" 1818). for the

of section

8 of the FDI Act

(12 U.S.C.

IN WITNESS Agreement
1998.

HEREOF,

the parties

have day of

caused

this
I

to be executed

as of the2lst

August

Ohio Division of anancial Institutions

Federal Reserve of Cleveland

Bank

Deputy for Banks

Vice

President

ShoreBank,

Cleveland

The undersigned having read the foregoing there&o by the Bank.

directors Agreement

of the Bank each acknowledges and approves of the consent

James
c

Fletcher i
,’ ;_‘ ._:,. )/i -‘ IL/ /’

/

Brian

E. Hall

,

Stuart

Kohl

John

Shields

21 20. purposes This Agreement is a "written agreement" 1818). for the

of section

8 of the FDI Act

(12 U.S.C.

IN WITNESS Agreement 1998.

HEREOF,

the parties

have day of

caused

this I

to be executed

as of the21st

August

Ohio

Division

of

Federal Reserve of Cleveland

Bank

Vice for Banks

President

ShoreBank, Cleveland, By:

Cleveland Ohio

The undersigned having read the foregoing thereto by the Bank.

directors Agreement

of the Bank each acknowledges and approves of the consent

James

Fletcher

?

Stuart

Kohl