Exhibit 10.7
TERRITORIAL SAVINGS
BANK
AMENDED AND
RESTATED
SUPPLEMENTAL EMPLOYEE RETIREMENT
AGREEMENT
FOR ALLAN S.
KITAGAWA
THIS AGREEMENT is adopted as of
October 29, 2008, by and between TERRITORIAL SAVINGS BANK (the
“Bank”), and Allan S. Kitagawa, Chairman, President and
Chief Executive Officer of the Bank (the
“Executive”).
RECITALS
The Bank and the Executive entered
into the Supplemental Employee Retirement Agreement on May 24,
2002 (the “Predecessor Agreement”) in order to provide
the Executive with a supplemental retirement benefit.
Section 409A of the Internal Revenue Code of 1986, as amended
(the “Code”) provides that certain nonqualified
deferred compensation arrangements such as the Predecessor
Agreement must comply with its terms and the Treasury Regulations
issued thereunder or the recipient of such compensation shall be
subject to additional taxes and penalties. The Bank and the
Executive desire to revise the Predecessor Agreement in the manner
set forth herein in order to conform such agreement to Code
Section 409A.
This Agreement is intended to be an
unfunded nonqualified deferred compensation arrangement for
purposes of the Code, and the Employee Retirement Income Security
Act of 1974, as amended (“ERISA”). This Agreement is
intended to constitute a “top hat” arrangement
described in ERISA and, therefore, exempt from the coverage,
funding, and fiduciary requirements of ERISA. All benefits payable
under this Agreement shall be paid out of the general assets of the
Bank.
AGREEMENT
That in consideration of the
following agreements hereinafter contained the Bank and the
Executive agree as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, the
following words and phrases shall have the meanings
specified:
1.1 “ Accrual Balance
” means the liability that should be accrued by the Bank,
under Generally Accepted Accounting Principles
(“GAAP”), for the Bank’s obligation to the
Executive under this Agreement, by applying Accounting Principles
Board Opinion Number 12 (“APB 12”) as amended by
Statement of Financial Accounting Standards Number 106 (“FAS
106”) and the Discount Rate. Any one of a variety of
amortization methods may be used to determine the Accrued Balance.
However, once chosen, the method must be consistently
applied.
1.2 “ Beneficiary
” means such term as described in Article 4.
1.3 “ Change of Control
” shall mean any of the following:
(a) There occurs a “change in
control” of the Bank within the meaning of the Home Owners
Loan Act of 1933 or 12 C.F.R. Part 574 as applied to the Bank as if
it were a federally chartered institution.
(b) As a result of, or in connection
with, any merger or other business combination, sale of assets or
contested election, wherein the people who were non-employee
directors of the Bank before such transaction or event cease to
constitute a majority of the Board of Directors of the Bank or any
successor to the Bank.
(c) The Bank transfers substantially
all of its assets to another corporation or entity which is not an
affiliate of the Bank.
(d) The Bank is merged or
consolidated with another corporation or entity and, as a result of
such merger or consolidation, less than 60% of the equity interest
in the surviving or resulting corporation is owned by the former
shareholders or depositors of the Bank.
A Change of Control shall not occur
solely as a result of a conversion of the Bank from the mutual
stock form of organization (“Conversion”) or
reorganization of the Bank into the mutual holding company form of
ownership (“Reorganization”). Upon any Conversion or
Reorganization, the resulting bank and holding company (if one is
formed in the transaction) shall be subject to this Agreement and
the obligations of the Bank set forth herein and further shall
enter into agreements or amendments hereto with the Executive
providing for at least the same benefits provided under this
Agreement.
1.4 “ Code ”
means the Internal Revenue Code of 1986, as amended.
1.5 “ Disability” or
“Disabled ” means that the Executive: (a) is
unable to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment which can
be expected to result in death or can be expected to last for a
continuous period of not less than 12 months; or (b) is, by
reason of any medically determinable physical or mental impairment
which can be expected to result in death or can be expected to last
for a continuous period of not less than 12 months, receiving
income replacement benefits for a period of not less than three
months under an accident and health plan covering employees of the
Executive’s employer; or (c) is determined to be
disabled by the Social Security Administration.
1.6 “ Discount Rate
” means the rate used by the Bank for determining the Accrual
Balance. Effective January 1, 2008, the Discount Rate shall be
five percent (5.0%).
1.7 “ Early Termination
Date ” means the date on which the Executive incurs a
Termination of Employment which is prior to the Executive’s
Normal Retirement Date and which is for reasons other than death,
Disability, Termination for Cause, or following a Change of
Control.
1.8 “ Effective Date
” means January 1, 2005.
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1.9 “ Normal Retirement
Date ” means the Executive’s 66th
birthday.
1.10 “ Specified
Employee ” means an employee who at the time of
Termination of Employment is a key employee of the Bank, if any
stock of the Bank is publicly traded on an established securities
market or otherwise. For purposes of this Agreement, an employee is
a key employee if the employee meets the requirements of Code
Section 416(i)(1)(A)(i), (ii), or (iii) (applied in
accordance with the regulations thereunder and disregarding section
416(i)(5)) at any time during the 12-month period ending on
December 31 (the “identification period”). If the
employee is a key employee during an identification period, the
employee is treated as a key employee for purposes of this
Agreement during the twelve (12) month period that begins on
the first day of April following the close of the identification
period.
1.11 “ Termination for
Cause ” means termination due to the Executive’s
personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provision
of this Agreement. Any Termination for Cause shall be determined by
a majority vote of the entire membership of the Board of Directors
of the Bank at a meeting of such board called and held for the
purpose (after reasonable notice to Executive and an opportunity
for Executive to be heard before the Board of Directors with
counsel) of finding that, in the good faith opinion of the Board of
Directors of the Bank, that Executive committed the conduct
described above.
1.12 “ Termination of
Employment ” means a Separation from Service with the
Bank. Separation from Service shall mean the Executive’s
retirement or other termination of employment with the Bank within
the meaning of Code Section 409A. No Separation from Service
shall be deemed to occur due to military leave, sick leave or other
bona fide leave of absence if the period of such leave does not
exceed six months or, if longer, so long as the Executive’s
right to reemployment is provided by law or contract. If the leave
time exceeds six months and the Executive’s right to
reemployment is not provided by law or by contract, then the
Executive shall have a Separation from Service on the first date
immediately following such six-month period. Whether a Separation
from Service has occurred is determined based on whether the facts
and circumstances indicate that the Bank and the Executive
reasonably anticipated that no further services would be performed
after a certain date or that the level of bona fide services the
Executive would perform after such date (whether as an employee or
as an independent contractor) would permanently decrease to no more
than 49% of the average level of bona fide services performed over
the immediately preceding 36 months (or such lesser period of time
in which the Executive performed services for the Bank). The
determination of whether the Executive has had a Separation from
Service shall be made by applying the presumptions set forth in the
Treasury Regulations under Code Section 409A.
1.13 “ Year of Service
” means a calendar year during which the Executive is
employed by the Bank for at least 1,000 hours of service. For this
purpose, Years of Service earned prior to January 1, 2002
shall be disregarded.
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ARTICLE 2
LIFETIME
BENEFITS
2.1 Normal Retirement Benefit
. Upon the Executive’s Termination of Employment on or after
his Normal Retirement Date, the Bank shall pay to the Executive the
“Normal Retirement Benefit” described in this
Section 2.1 in lieu of any other benefit under this
Agreement.
2.1.1 Amount of Benefit . The
Normal Retirement Benefit under this Section 2.1 is the
present value equivalent (determined using a 5% discount rate) of
an annual amount equal to Six Hundred Thousand Dollars ($600,000)
payable for a term certain of 15 years.
2.1.2 Payment of Benefit .
The Bank shall pay the Normal Retirement Benefit to the Executive
in a single cash lump-sum distribution on the first day of the
month following the Executive’s Termination of Employment on
or after his Normal Retirement Date.
2.2 Early Termination Benefit
. Upon the Executive’s Termination of Employment on an Early
Termination Date, the Bank shall pay to the Executive the Early
Termination Benefit described in this Section 2.2 in lieu of
any other benefit under this Agreement.
2.2.1 Amount of Benefit . The
Early Termination Benefit under this Section 2.2 is the
Accrual Balance determined as of the end of the Plan Year prior to
the Executive’s Termination of Employment.
2.2.2 Payment of Benefit .
The Bank shall pay the Early Termination Benefit in a single cash
lump-sum distribution within 30 days following the
Executive’s Early Termination Date.
2.3 Disability Benefit . If
the Executive incurs a Disability prior to his or her Normal
Retirement Date, the Bank shall pay to the Executive the
“Disability Benefit” described in this Section 2.3
in lieu of any other benefit under this Agreement.
2.3.1 Amount of Benefit . The
Disability Benefit under this Section 2.3 is the present value
equivalent (determined using a 5% discount rate) of an annual
amount equal to Six Hundred Thousand Dollars ($600,000) payable for
a term certain of 15 years.
2.3.2 Payment of Benefit .
The Bank shall pay the Disability Benefit to the Executive in a
single cash lump-sum distribution within 30 days following the date
of the Executive’s termination due to Disability.
2.4 Change of Control Benefit
. Upon the Executive’s Termination of Employment within 36
months following the occurrence of a Change of Control, the Bank
shall pay to the Executive the “Change in Control
Benefit” described in this Section 2.4 in lieu of any
other benefit under this Agreement.
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2.4.1 Amount of Benefit . The
Change of Control Benefit under this Section 2.4 is the
present value equivalent (determined using a 5% discount rate) of
an annual amount equal to Six Hundred Thousand Dollars ($600,000)
payable for a term certain of 15 years.
2.4.2 Payment of Benefit .
The Bank shall pay the Change in Control Benefit to the Executive
in a single cash lump-sum distribution within 30 days after the
Executive’s Termination of Employment following the Chang in
Control.
2.4.3 Excess Parachute
Payment .
(a) Tax Indemnification .
Anything in this Agreement to the contrary notwithstanding, and
except as set forth below, in the event it shall be determined that
any payment or distribution to or for the benefit of the Executive
under this Agreement (“Payment”), would be subject to
the excise tax imposed by Code Section 4999 or any interest or
penalties are incurred by the Executive with respect to such excise
tax (the excise tax, together with any such interest and penalties,
are hereinafter collectively referred to as the “Excise
Tax”), the Executive shall be entitled to receive an
additional payment (“Gross-Up Payment”) in an amount
such that after payment by the Executive of all taxes (including
any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest
and penalties imposed with respect thereto) and Excise Tax imposed
upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
Notwithstanding the foregoing, the Bank shall pay to the Executive
the Gross-Up Payment no later than the end of the Executive’s
taxable year next following the Executive’s taxable year in
which the Executive remits the Excise Tax to the related taxing
authority.
(b) Determination of Gross-Up
Payment . Subject to the provisions of Section 2.4.3(c),
all determinations required to be made under this
Section 2.4.3, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payments and the
assumptions to be utilized in arriving at such determination, shall
be made by a certified public accounting firm reasonably acceptable
to the Bank as may be designated by the Executive
(“Accounting Firm”) which shall provide detailed
supporting calculations both to the Bank and the Executive within
15 business days of the receipt of notice from the Executive that
there have been Payments, or such earlier time as is requested by
the Bank. All fees and expenses of the Accounting Firm shall be
borne solely by the Bank. Any Gross-Up Payment, as determined
pursuant to this Section 2.4.3, shall be paid by the Bank to
the Executive within five days of (i) the later of the due
date for the payments of any Excise Tax, and (ii) the receipt
of the Accounting Firm’s determination. Any determination by
the Accounting Firm shall be binding upon the Bank and the
Executive. As a result of the uncertainty in the application of
Code Section 4999, at the time of the initial determination by
the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Bank should have been
made (“Underpayment”), consistent with the calculations
required to be made hereunder. In the event that the Bank exhausts
its remedies pursuant to Section 2.4.3(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that
has occurred and any such Underpayment shall be promptly paid by
the Bank to or for the benefit of the Executive.
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(c) Treatment of Claims . The
Executive shall notify the Bank in writing of any claim by the
Internal Revenue Service that, if successful, would require the
payment by the Bank of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten
business days after the Executive is informed in writing of such
claim and shall apprise the Bank of the nature of such claims and
the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day
period following the date on which it gives such notice to the Bank
(or such shorter period ending on the date that any payment of
taxes with respect to such claim is due). If the Bank notifies the
Executive in writing prior to the expiration of such period that it
desires to contest such claim, the Executive shall:
(i) give the Bank any information
reasonably requested by the Bank relating such claim,
(ii) take such action in connection
with contesting such claim as the Bank shall reasonably request in
writing from time to time, including, without limitation, accepting
legal representation with respect to such claim by an attorney
reasonably selected by the Bank,
(iii) cooperate with the Bank in
good faith in order effectively to contest such claim,
and
(iv) permit the Bank to participate
in any proceedings relating to such claim; provided, however, that
the Bank shall bear and pay directly all costs and expenses
(including additional interest and penalties) incurred in
connection with such contest and indemnity and hold the
Executive
