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UNITED STATES OF AMERICA BEFORE THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D.C. OHIO DIVISION OF FINANCIAL INSTITUTIONS COLUMBUS, OHIO 1 Written Agreement by and among ; Docket No. OO-006-WA/RB-SM SECURITY DOLLAR BANK Niles, Ohio FEDERAL RESERVE BANK OF CLEVELAND Cleveland, Ohio ; ) ) ; and ; OHIO DIVISION OF FINANCIAL INSTITUTIONS Columbus, Ohio WHEREAS, in recognition ; ) of their common goal to restore and maintain the financial soundness of the Security Dollar Bank, Niles, Ohio (the “Bank”), a state chartered bank that is a member of the Federal Reserve System, the Bank, the Federal Reserve Bank of Cleveland (the “Reserve Bank”), and the Ohio Division of Financial Institutions agreed to enter into this Written Agreement WHEREAS, this Agreement (the “Division”) have mutually (the “Agreement”); is being executed in accordance with the Rules Regarding Delegation of Authority of the Board of Governors of the Federal Reserve System (the “Board of Governors”), specifically 12 C.F.R. 265.11 (a)( 15), and the Reserve Bank has received the prior approval of the Director of the Division of Banking Supervision and Regulation (the “Director”) and the General Counsel of the Board of Governors to enter into this Agreement with the Bank; WHEREAS, this Agreement is being executed in accordance with Chapter 1121 of the Ohio Revised Code, and the Deputy Superintendent and on behalf of the Superintendent WHEREAS, on hd duly constituted ?c;k for Banks is acting under his own authority and the Division in entering this Agreement; 1 ‘7, ,2000, and the board of directors of the Bank, at a meeting, adopted a resolution authorizing and directing L to enter into this Agreement on behalf of the Bank and ~!+l&kKL%lk& consented to compliance institution-affiliated with each and every provision of this Agreement by the Bank and its parties, as defined in section 3(u) of the Federal Deposit Insurance Act, as amended (the “FDI Act”) (12 U.S.C. 1813(u)). NOW, THEREFORE, before the taking of any testimony or adjudication any issue of fact or law herein, and without this Agreement constituting of, or finding on an admission of any allegation made or implied by the Board of Governors, the Reserve Bank, or the Division, and solely for the purposes of settling this matter without further proceedings, Bank, and the Division hereby agree as follows: 2 the Bank, the Reserve 1. (4 Within 20 days of this Agreement, engage an outside consultant to conduct an independent the Bank’s board of directors shall review of the Bank’s internal controls, such consultant and scope of review to be acceptable to the Reserve Bank and the Division. The consultant shall prepare and submit to the Bank’s board of directors a written report of findings and recommendations to strengthen the Bank’s internal controls. minimum, address, consider, and include the following: employee duties; (ii) account reconcilements monitoring (i) dual controls and segregation of for the Bank’s general ledger accounts; (iii) and tracking systems to ensure that employees controls and procedures; The review shall, at a (iv) the accurate preparation, are following established internal including supporting schedules, of the Bank’s Report of Condition and Income; (v) restrictions on access to the Bank’s computer systems; and, (vi) procedures for timely reporting suspected criminal activity. @I The engagement letter shall provide that the consultant’s written report required by paragraph l(a) hereof will be provided to the Bank’s board of directors within 45 days of the engagement. Within 30 days of receipt of the consultant’s written report, the Bank’s board of directors shall submit an acceptable written plan to the Reserve Bank and the Division describing specific actions that the board of directors proposes to take in order to strengthen the Bank’s internal controls. recommendations. The plan shall fully address the consultant’s findings and A copy of the consultant’s written report shall also be forwarded to the Reserve Bank and the Division. 3 2. Within 60 days of this Agreement, the Banks board of directors shall submit to the Reserve Bank and the Division a written plan to implement programs. adequate board oversight The plan shall include the programs that the board of directors intends to implement in order to establish and maintain effective control over and supervision of the Banks senior management, address, consider, and major operations, and activities, and, shall, at a minimum, include the following: (4 The operating and lending functions; (b) liquidity and interest rate risk positions; (cl internal controls and recordkeeping Cd) an independent (e) an effective risk management Ul an assessment duties and responsibilities k) procedures; and effective internal audit function; function; of the management for all management structure and development positions; capital levels and operating performance; and of written @I the form and content of periodic reports to the board of directors to provide the board of directors with sufftcient information management 3. to assess compliance by the Banks with the Banks written plans, policies, procedures, Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank and the Division acceptable written loan policies and procedures. at a minimum, and programs. The policies and procedures shall, address, consider, and include the following: (4 Underwriting standards that emphasize analysis of the borrower rather than collateral-based the importance of cash flow lending and ensure that comprehensive financial statements, tax returns, and other financial data indicating the borrower’s capacity to repay the loan are current at the time that the loan is extended, and are regularly updated during the period that the loan remains outstanding; @I including requirements the nature and extent of the credit analysis to be performed on all loans, for complete credit and cash flow analysis to permit full assessment of the borrower’s financial capacity to meet the terms of the credit extended; (cl written documentation the loan policy and appropriate assessment evaluation process; and reporting of loans that constitute exceptions to of the exceptions by the Banks internal risk (d) procedures on disbursement such disbursements; (e) relationships exceeding 4. of loan proceeds and the documentation of and written workout plans for all commercial and commercial real estate credit $100,000 in the aggregate. Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank and the Division acceptable written loan review procedures. The loan review procedures shall be designed to identify and categorize problem credits and to assess the overall quality of the Banks loan portfolio. These procedures shall, at a minimum, address, consider, and include the following: (4 The requirements outlined in Attachment I of the Interagency Policy Statement on the Allowance of Loans and Lease Losses, issued December 2 1, 1993, addressing the minimum requirements (b) relating to “Loan Review Systems” and “Credit Grading Systems”; the designation of the individuals who will be responsible loan grades, including a detailed description Cc) of their responsibilities for determining and reporting structure; a description of the risk grades to be assigned to each loan; (4 a description (e) procedures to confirm the accuracy of all assigned risk grades; of the type of loans to be graded and the frequency of loan grading; the development of an adequate internal loan review grading report; (8) criteria for placing loans on the Bank’s watch list; (h) for each loan identified as a watch list loan, a written statement, maintained in the appropriate credit tile, of the reason(s) why such loan merits special attention; and (9 periodic reports to the Banks board of directors of the risk rating of loans and the action(s) taken by management to improve the Banks position on each loan adversely graded and/or on the watch list. 5. (4 Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank and the Division acceptable revised written asset/liability improve management management of the Bank’s liquidity and sensitivity to market risk. 7 policies designed to @I minimum, The revised policy regarding sensitivity address, consider, and include the following: individuals for measuring, monitoring (ii) maintenance of documentation and controlling (i) identification to support the validity and accuracy of assumptions interest rate risk based on capital results fall outside approved limits. The revised policy regarding liquidity shall, at a minimum, address, consider, and include the following: (i) appropriate Bank’s loans, investments, standards for volume, mix and maturity of the deposits, and alternative funding sources; deposit activity by type of deposit; (iii) monitoring the volume of loan commitments periods; (v) documenting causes for deposit fluctuation; The Banks Asset/Liability monthly basis, all asset/liability management (ii) tracking fluctuations in the level of time deposits over specific time periods; (iv) monitoring (4 used in and the risk tolerance of the Bank; and (iv) action plans to reduce potential interest rate risk in the event that rate sensitivity Cc) of responsible interest rate sensitivity; measuring interest rate risk; (iii) parameters for controlling levels, earnings performance, to market risk shall, at a to be funded over specific time and (vi) a contingency Committee funding plan. (the “ALCO”) shall review, on a decisions made by the Banks management, paying particular attention to whether each decision was made in accordance with the approved policies. All exceptions to the policies shall be documented exceptions and the continuance and strategies. of the exceptions, by the ALCO as to the reason for the taking into account the Banks overall goals The ALCO shall maintain full and complete minutes of its actions and shall provide monthly written reports to the board of directors to enable the board to make informed decisions regarding the Bank’s management 6. of market risk and liquidity. Within 90 days of this Agreement, the Bank shall submit to the Reserve Bank and the Division an acceptable written conflicts of interest policy that shall apply to all employees of the Bank, including officers and directors, and that is fully consistent with applicable federal and state law. The policy, at a minimum, shall address: (i) the employees’ responsibilities for conducting their business affairs so as to avoid conflicts of interest with the Bank; and (ii) the permissibility and reporting of loans, investments, or other business relationships between employees and Bank customers. 7. (a) Within 30 days of this Agreement, the Bank shall submit to the Reserve Bank and the Division a written annual budget for the Bank for the remainder of fiscal year 2000. The budget shall, at a minimum, provide for: (i) monthly estimates of all material income and expense items; (ii) the establishment of a review process to monitor the actual income, expenses and net cash flow of the Bank in comparison the projected financial statements, to budgetary projections; and (iii) the revision of to be submitted to the Reserve Bank and the Division by July 30, 2000. (b) A written budget for each calendar year subsequent to 2000 shall be submitted to the Reserve Bank and the Division at least one month prior to the beginning of that calendar year. The budget shall, at a minimum, provide for: (i) monthly estimates of all 9 significant income and expense items; and (ii) projected financial statements, including projected cash flow statements and year-end balance sheet and income statements for the Bank. (cl The board of directors shall review the Ban!& actual performance comparison to each monthly budgetary projection, in as well as the revised forecasts, at a meeting within 30 days after the end of each month. The Bank shall not declare or pay any dividends without the prior written 8. approval of the Reserve Bank, the Director, and the Division. Requests for approval shall be received by the Reserve Bank and the Division at least 30 days prior to the proposed dividend declaration date and shall contain, but not be limited to, current and projected information on earnings, cash flow, capital levels and asset quality of the Bank. The Bank shall immediately 9. take all necessary steps consistent with sound banking practices to eliminate and /or correct all violations of laws and regulations Report of Examination 10. l(a), 3,4,5, approval. noted in the of the Bank, dated November 8, 1999. The plans, policies, procedures, and scope of review required by paragraphs and 6 hereof shall be submitted to the Reserve Bank and the Division for review and Acceptable plans, policies, procedures, and an acceptable scope of review shall be submitted to the Reserve Bank and the Division within the time periods set forth in this Agreement. The Bank shall adopt all approved plans, policies, and procedures 10 and the approved scope of review within 10 days of approval by the Reserve Bank and the Division and then shall fully comply with them. During the term of this Agreement, the Bank shall not amend or rescind the approved plans, policies, and procedures and the approved scope of review without the prior written approval of the Reserve Bank and the Division, 11. Within 30 days after the end of each calendar quarter (June 30, September 30, December 3 1 and March 3 1) following the date of this Agreement, the Bank shall furnish to the Reserve Bank and the Division written progress reports detailing the form and manner of all actions taken to secure compliance may be discontinued with this Agreement when the corrections and the results thereof. Such reports required by this Agreement have been accomplished and the Reserve Bank and the Division have, in writing, released the Bank from making further reports. 12. All communications regarding this Agreement shall be sent to: (a) R. Chris Moore Senior Vice President Federal Reserve Bank of Cleveland East 6” & Superior P.O. Box 6387 Cleveland, Ohio 44101-1387 (b) David A. Arnold Deputy Superintendent for Banks Ohio Division of Financial Institutions 77 South High Street, 21’ Floor Columbus, Ohio 43266-0121 11 (cl 13. The provisions institution-affiliated 14. of this Agreement shall be binding upon the Bank and its parties, in their capacities as such, and their successors and assigns. Each provision of this Agreement shall remain effective and enforceable until stayed, modified, terminated 15. James Bess President and Chief Executive Officer Security Dollar Bank 1 South Main Street Niles, Ohio 44446 Notwithstanding or suspended by the Reserve Bank and the Division. any provision of this Agreement to the contrary, the Reserve Bank and Division may, in their sole discretion, grant written extensions of time to the Bank to comply with any provision of this Agreement. 16. The provisions of this Agreement shall not bar, estop or otherwise prevent the Board of Governors, the Reserve Bank, the Division or any other federal or state agency or department from taking any other action affecting the Bank or any of its current or former institution-affiliated parties. 12 17. This Agreement is a “written agreement” for the purposes of section 8 of the FDI Act (12 U.S.C. 1818). IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the dday of ,200o. Federal Reserve Bank of Cleveland Security Dollar Bank Senior Vice President Ohio Division of Financial Institutions Deputy Superin$ndent for Banks 13 The undersigned directors of the Bank each acknowledges reement and approves of the consent the Glenn E. GrifCths 14 having read the foregoing