TERRITORIAL SAVINGS BANK EMPLOYEE STOCK OWNERSHIP PLAN

Exhibit 10.12

TERRITORIAL SAVINGS BANK

EMPLOYEE STOCK OWNERSHIP PLAN

(adopted effective January 1, 2009)

TERRITORIAL SAVINGS BANK

EMPLOYEE STOCK OWNERSHIP PLAN

This Employee Stock Ownership Plan (the “Plan”) has been executed on the date set forth below, by Territorial Savings Bank, a federally chartered stock savings bank.

WITNESSETH THAT

WHEREAS, the board of directors of the Bank has resolved to adopt an employee stock ownership plan for eligible employees of the Bank and subsidiaries of the Bank, if any, in accordance with the terms and conditions set forth herein;

NOW, THEREFORE, the Bank hereby adopts the following Plan setting forth the terms and conditions pertaining to contributions by the Employer and the payment of benefits to Participants and Beneficiaries.

IN WITNESS WHEREOF, the Bank has adopted this Plan and caused this instrument to be executed by its duly authorized officer on the date set forth below.

 

				TERRITORIAL SAVINGS BANK
Date				President and Chief Executive Officer

CONTENTS

 

 

(ii)

 

(iii)

TERRITORIAL SAVINGS BANK

EMPLOYEE STOCK OWNERSHIP PLAN

Section 1. Plan Identity .

1.1 Name . The name of this Plan is “Territorial Savings Bank Employee Stock Ownership Plan.”

1.2 Purpose . The purpose of this Plan is to describe the terms and conditions under which contributions made pursuant to the Plan will be credited and paid to the Participants and their Beneficiaries.

1.3 Effective Date . The Effective Date of this Plan is January 1, 2009.

1.4 Fiscal Period . This Plan shall be operated on the basis of a January 1 to December 31 fiscal year for the purpose of keeping the Plan’s books and records and distributing or filing any reports or returns required by law.

1.5 Single Plan for All Employers . This Plan shall be treated as a single plan with respect to all participating Employers for the purpose of crediting contributions and forfeitures and distributing benefits, determining whether there has been any termination of Service, and applying the limitations set forth in Section 5.

1.6 Interpretation of Provisions . The Employers intend this Plan and the Trust Agreement to be a qualified stock bonus plan under Section 401(a) of the Code and an employee stock ownership plan within the meaning of Section 407(d)(6) of ERISA and Section 4975(e)(7) of the Code. The Plan is intended to have its assets invested primarily in qualifying employer securities of one or more Employers within the meaning of Section 407(d)(3) of ERISA, and to satisfy any requirement under ERISA or the Code applicable to such a plan.

Accordingly, the Plan and Trust Agreement shall be interpreted and applied in a manner consistent with this intent and shall be administered at all times and in all respects in a nondiscriminatory manner.

Section 2. Definitions .

The following capitalized words and phrases shall have the meanings specified when used in this Plan and in the Trust Agreement, unless the context clearly indicates otherwise:

“Account” means a Participant’s interest in the assets accumulated under this Plan as expressed in terms of a separate account balance which is periodically adjusted to reflect his Employer’s contributions, the Plan’s investment experience, and distributions and forfeitures.

“Active Participant” means a Participant who has satisfied the eligibility requirements under Section 3 and who has at least 1,000 Hours of Service during the current Plan Year. However, a Participant shall not qualify as an Active Participant unless (i) he is in active Service with an Employer as of the last day of the Plan Year, or (ii) he is on a Recognized Absence as of that date, or (iii) his Service terminated during the Plan Year by reason of Disability, death, or Normal Retirement.

“Bank” means Territorial Savings Bank and any entity which succeeds to the business of Territorial Savings Bank and adopts this Plan as its own pursuant to Section 13.1 of the Plan.

“Beneficiary” means the person or persons who are designated by a Participant to receive benefits payable under the Plan on the Participant’s death. In the absence of any designation or if all the designated Beneficiaries shall die before the Participant dies or shall die before all benefits have been paid, the Participant’s Beneficiary shall be his surviving Spouse, if any, or his estate if he is not survived by a Spouse. The Committee may rely upon the advice of the Participant’s executor or administrator as to the identity of the Participant’s Spouse.

“Break in Service” means any Plan Year, or, for the initial eligibility computation period under Section 3.2, the 12-consecutive month period beginning on the first day of which an Employee has an Hour of Service, in which an Employee has 500 or fewer Hours of Service. Solely for this purpose, an Employee shall be considered employed for his normal hours of paid employment during a Recognized Absence (said Employee shall not be credited with more than 501 Hours of Service to avoid a Break in Service), unless he does not resume his Service at the end of the Recognized Absence. Further, if an Employee is absent for any period (i) by reason of the Employee’s pregnancy, (ii) by reason of the birth of the Employee’s child, (iii) by reason of the placement of a child with the Employee in connection with the Employee’s adoption of the child, or (iv) for purposes of caring for such child for a period beginning immediately after such birth or placement, the Employee shall be credited with the Hours of Service which would normally have been credited but for such absence, up to a maximum of 501 Hours of Service. Hours of Service shall be credited only in the year in which the absence from work begins, if a Participant would be prevented from incurring a one-year Break in Service in such year solely because the period of absence is treated as Hours of Service, or in any other case, in the immediately following year.

“Code” means the Internal Revenue Code of 1986, as amended.

“Committee” means the committee responsible for the administration of this Plan in accordance with Section 12.

“Company” means Territorial Bancorp Inc., the holding company of the Bank, and any successor entity which succeeds to the business of the Company.

“Disability” means the inability 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 which has lasted or can be expected to last for a continuous period of not less than 12 months. An individual shall not be considered to be permanently and totally disabled unless he furnishes proof of the existence thereof in such form and manner, and at such times, as the Committee may require.

“Eligible Employee ” means an Employee, other than an Employee identified in Section 3.4, who has performed 1,000 Hours of Service in the applicable Eligibility Year in accordance with Section 3.2 and who has attained age 21.

“Employee” means any individual who is or has been employed or self-employed by an Employer. “Employee” also means an individual employed by a leasing organization who, pursuant to an agreement between an Employer and the leasing organization, has performed services for the Employer and any related persons (within the meaning of Section 414(n)(6) of the Code) on a substantially full-time basis for more than one year, if such services are performed under the primary direction or control of the Employer. However, such a “leased employee” shall not be considered an Employee if (i) he participates in a money purchase pension plan sponsored by the leasing organization which provides for immediate participation, immediate full vesting, and an annual contribution of at least 10 percent of the Employee’s 415 Compensation, and (ii) leased employees do not constitute more than 20 percent of the Employer’s total work force (including leased employees, but excluding Highly Compensated Employees and any other Employees who have not performed services for the Employer on a substantially full-time basis for at least one year).

 

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“Employer” means the Bank or any affiliate within the purview of section 414(b), (c) or (m) and 415(h) of the Code, any other corporation, partnership, or proprietorship which adopts this Plan with the Bank’s consent pursuant to Section 13.1, and any entity which succeeds to the business of any Employer and adopts the Plan pursuant to Section 13.2.

“Entry Date” means the Effective Date of the Plan and each July 1 and January 1 of each Plan Year after the Effective Date.

“ERISA” means the Employee Retirement Income Security Act of 1974 (P.L. 93-406, as amended).

“415 Compensation” shall mean:

(a) Wages (including overtime pay, bonuses and commissions), as defined in Code Section 3401(a) for purposes of income tax withholding at the source.

(b) Any elective deferral as defined in Code Section 402(g)(3) (any Employer contributions made on behalf of a Participant to the extent not includible in gross income and any Employer contributions to purchase an annuity contract under Code Section 403(b) under a salary reduction agreement) and any amount which is contributed or deferred by the Employer at the election of the Participant and which is not includible in gross income of the Participant by reason of Code Section 125(including any “deemed” Code Section 125 compensation) (Cafeteria Plan), Code Section 457 or 132(f)(4) shall also be included in the definition of 415 Compensation.

(c) 415 Compensation may also include the following types of compensation paid after a Participant’s severance from employment with the Employer, provided that amounts described in paragraphs (i) and (ii) below shall only be included in 415 Compensation to the extent such amounts are paid by the later of 2  ¹ / 2 months after severance from employment, or by the end of the limitation year that includes the date of such severance from employment.

(i) Regular Pay. 415 Compensation shall include regular pay after severance from employment if (a) the payment is for regular compensation for services during the Participant’s regular working hours, or compensation for services outside of the Participant’s regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments, and (b) the payment would have been paid to the Participant prior to severance from employment if the Participant had continued in employment with the Employer.

(ii) Leave Cashouts and Deferred Compensation. Leave cashouts shall be included in 415 Compensation if those amounts would have been included in the definition of 415 Compensation if they were paid prior to the Participant’s severance from employment, and the amounts are payment for unused accrued bona fide sick, vacation or other leave, but only if the Participant would have been able to use the leave if his employment had continued. In addition, deferred compensation shall be included in 415 Compensation if the compensation would have been included in the definition of 415 Compensation if it had been paid prior to the Participant’s severance from employment, and the compensation is received pursuant to a nonqualified unfunded deferred compensation plan, but only if the payment would

 

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have been paid at the same time if the Participant had continued in employment with the Employer and only to the extent that the payment is includible in the Participant’s gross income.

(iii) Salary Continuation Payments for Qualified Military Service. 415 Compensation does not include payments to an individual who does not currently perform services for the Employer by reason of Qualified Military Service (as defined in Code Section 414(u)(1)), to the extent that those payments do not exceed the amounts the individual would have received if the individual had continued to perform services for the Employer rather than entering Qualified Military Service. Notwithstanding the preceding sentence, differential wage payments from the Employer to Participants who are performing Qualified Military Service will be included as 415 Compensation.

(iv) Salary Continuation Payments for Participants with a Disability. 415 Compensation does not include compensation paid to a Participant who has incurred a Disability.

(v) “First Few Weeks” Rule. 415 Compensation shall not include amounts earned but not paid during the limitation year solely because of the timing of the pay periods and pay dates.

(d) 415 Compensation in excess of $230,000 (as indexed) shall be disregarded for all Participants. For purposes of this sub-section, the $230,000 limit shall be referred to as the “applicable limit” for the Plan Year in question. The $230,000 limit shall be adjusted for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code, effective for the Plan Year which begins within the applicable calendar year. For purposes of the applicable limit, 415 Compensation shall be prorated over short Plan Years and only compensation for the portion of the Plan Year during which the individual was a Participant shall be taken into account.

“Highly Compensated Employee” for any Plan Year means an Employee who, during either that or the immediately preceding Plan Year was at any time a five percent owner of the Employer (as defined in Code Section 416(i)(1)) or, during the immediately preceding Plan Year, had 415 Compensation exceeding $105,000 (the limit for 2008, which determines Highly Compensated Employees for 2009) and was among the most highly compensated one-fifth of all Employees (the $100,000 amount is adjusted at the same time and in the same manner as under Code Section 415(d), the Highly Compensated Employee dollar limit for 2009 is $110,000, which determines Highly Compensated Employees for 2010). For these purposes, “the most highly compensated one-fifth of all Employees” shall be determined by taking into account all individuals working for all related Employer entities described in the definition of “Service,” but excluding any individual who has not completed six months of Service, who normally works fewer than 17  ¹ / 2 hours per week or in fewer than six months per year, who has not reached age 21, whose employment is covered by a collective bargaining agreement, or who is a nonresident alien who receives no earned income from United States sources. The applicable year for which a determination is being made is called a “determination year” and the preceding 12-month period is called a look-back year.

“Hours of Service” means hours to be credited to an Employee under the following rules:

(a) Each hour for which an Employee is paid or is entitled to be paid for services to an Employer is an Hour of Service.

 

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(b) Each hour for which an Employee is directly or indirectly paid or is entitled to be paid for a period of vacation, holidays, illness, disability, lay-off, jury duty, temporary military duty, or leave of absence is an Hour of Service. However, except as otherwise specifically provided, no more than 501 Hours of Service shall be credited for any single continuous period which an Employee performs no duties. No more than 501 Hours of Service will be credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period). Further, no Hours of Service shall be credited on account of payments made solely under a plan maintained to comply with worker’s compensation, unemployment compensation, or disability insurance laws, or to reimburse an Employee for medical expenses.

(c) Each hour for which back pay (ignoring any mitigation of damages) is either awarded or agreed to by an Employer is an Hour of Service. However, no more than 501 Hours of Service shall be credited for any single continuous period during which an Employee would not have performed any duties. The same Hours of Service will not be credited both under paragraph (a) or (b) as the case may be, and under this paragraph (c). These hours will be credited to the employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award agreement or payment is made.

(d) Hours of Service shall be credited in any one period only under one of the foregoing paragraphs (a), (b) and (c); an Employee may not get double credit for the same period.

(e) If an Employer finds it impractical to count the actual Hours of Service for any class or group of non-hourly Employees, each Employee in that class or group shall be credited with 90 Hours of Service for each bi-weekly pay period in which he has at least one Hour of Service. However, an Employee shall be credited only for his normal working hours during a paid absence.

(f) Hours of Service to be credited on account of a payment to an Employee (including back pay) shall be recorded in the period of Service for which the payment was made. If the period overlaps two or more Plan Years, the Hours of Service credit shall be allocated in proportion to the respective portions of the period included in the several Plan Years. However, in the case of periods of 31 days or less, the Administrator may apply a uniform policy of crediting the Hours of Service to either the first Plan Year or the second.

(g) In all respects an Employee’s Hours of Service shall be counted as required by Section 2530.200b-2(b) and (c) of the Department of Labor’s regulations under Title I of ERISA.

“Investment Fund” means that portion of the Trust Fund consisting of assets other than Stock. Notwithstanding the above, assets from the Investment Fund may be used to purchase Stock in the open market or otherwise, or used to pay on the Stock Obligation, and shares so purchased will be allocated to a Participant’s Stock Fund.

“Normal Retirement” means retirement on or after the Participant’s Normal Retirement Date.

“Normal Retirement Date” means the Participant’s 65 ^th birthday.

“Participant” means any Eligible Employee who is an Active Participant participating in the Plan, or Eligible Employee or former Employee who was previously an Active Participant and still has a balance credited to his Account.

 

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“Plan Year” means the twelve-month period commencing January 1 and ending December 31 and each period of 12 consecutive months beginning on January 1 of each succeeding year.

“Qualified Military Service” means any period of duty on a voluntary or involuntary basis in the United States Armed Forces, the Army National Guard and Air National Guard when engaged in active duty for training, inactive duty for training or full-time National Guard duty, the commissioned corps of the Public Health Service and any other category of persons designated by the President of the United States in time of war or emergency. Such periods of duty shall include active duty, active duty for training, initial active duty for training, inactive duty training, full-time National Guard duty and absence from employment for an examination to determine fitness for such duty.

“Recognized Absence” means a period for which --

(a) an Employer grants an Employee a leave of absence for a limited period, but only if an Employer grants such leave on a nondiscriminatory basis; or

(b) an Employee is temporarily laid off by an Employer because of a change in business conditions; or

(c) an Employee is on Qualified Military Service.

“Service” means an Employee’s period(s) of employment or self-employment with an Employer, excluding for initial eligibility purposes any period in which the individual was a nonresident alien and did not receive from an Employer any earned income which constituted income from sources within the United States. An Employee’s Service shall include any Service which constitutes Service with a predecessor Employer within the meaning of Section 414(a) of the Code, provided, however, that Service with an acquired entity shall not be considered Service under the Plan unless required by applicable law or agreed to by the parties to such transaction. An Employee’s Service shall also include any Service with an entity which is not an Employer, but only either (i) in which the other entity is a member of a controlled group of corporations or is under common control with other trades and businesses within the meaning of Section 414(b) or 414(c) of the Code, and a member of the controlled group or one of the trades and businesses is an Employer, (ii) in which the other entity is a member of an affiliated service group within the meaning of Section 414(m) of the Code, and a member of the affiliated service group is an Employer, or (iii) all Employers aggregated with the Employer under Section 414(o) of the Code . Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to Qualified Military Service will be provided in accordance with Section 414(u) of the Code.

“Spouse” means the individual, if any, to whom a Participant is lawfully married on the date benefit payments to the Participant are to begin, or on the date of the Participant’s death, if earlier. A former Spouse shall be treated as the Spouse or surviving Spouse to the extent provided under a qualified domestic relations order as described in section 414(p) of the Code.

“Stock” means shares of the Company’s voting common stock or preferred stock meeting the requirements of Section 409(e)(3) of the Code issued by an Employer which is a member of the same controlled group of corporations within the meaning of Code Section 414(b). The term “Stock” shall include fractional shares, unless the context clearly indicates otherwise.

“Stock Fund” means that portion of the Trust Fund consisting of Stock.

 

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“Stock Obligation” means an indebtedness arising from any extension of credit to the Plan or the Trust which satisfies the requirements set forth in Section 6.3 and which was obtained for any or all of the following purposes:

 

(i)

to acquire qualifying Employer securities as defined in Treasury Regulations § 54.4975-12;

 

(ii)

to repay such Stock Obligation; or

 

(iii)

to repay a prior exempt loan.

“Trust” or “Trust Fund” means the trust fund created under this Plan.

“Trust Agreement” means the agreement between the Bank and the Trustee concerning the Trust Fund. If any assets of the Trust Fund are held in a co-mingled trust fund with assets of other qualified retirement plans, “Trust Agreement” shall be deemed to include the trust agreement governing that co-mingled trust fund. With respect to the allocation of investment responsibility for the assets of the Trust Fund, the provisions of Article II of the Trust Agreement are incorporated herein by reference.

“Trustee” means one or more corporate persons or individuals selected from time to time by the Bank to serve as trustee or co-trustees of the Trust Fund.

“Unallocated Stock Fund” means that portion of the Stock Fund consisting of the Plan’s holding of Stock which have been acquired in exchange for one or more Stock Obligations and which have not yet been allocated to the Participant’s Accounts in accordance with Section 4.2.

“Valuation Date” means for so long as there is a generally-recognized market for the Stock each business day. If at any time there shall be no generally-recognized market for the Stock, then “Valuation Date” shall mean the last day of the Plan Year and each other date as of which the Committee shall determine the investment experience of the Investment Fund and adjust the Participants’ Accounts accordingly.

“Valuation Period” means the period following a Valuation Date and ending with the next Valuation Date.

“Vesting Year” means a unit of Service credited to a Participant pursuant to Section 9.2 for purposes of determining his vested interest in his Account.

Section 3. Eligibility for Participation .

3.1 Initial Eligibility . An Eligible Employee shall enter the Plan as of the Entry Date coincident with or next following the last day of the Eligible Employee’s first Eligibility Year and attainment of age 21.

3.2 Definition of Eligibility Year . “Eligibility Year” means an applicable eligibility period (as defined below) in which the Eligible Employee has completed 1,000 Hours of Service for the Employer. For this purpose:

(i) an Eligible Employee’s first “eligibility period” is the 12-consecutive month period beginning on the first day on which he has an Hour of Service, and

(ii) his subsequent eligibility periods will be 12-consecutive month periods beginning on each January 1 after that first day of Service.

 

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3.3 Terminated Employees . No Employee shall have any interest or rights under this Plan if he is never in active Service with an Employer on or after the Effective Date.

3.4 Certain Employees Ineligible .

3.4-1. No Employee shall participate in the Plan while his Service is covered by a collective bargaining agreement between an Employer and the Employee’s collective bargaining representative if (i) retirement benefits have been the subject of good faith bargaining between the Employer and the representative and (ii) the collective bargaining agreement does not provide for the Employee’s participation in the Plan.

 

3.4-2.

Leased Employees are not eligible to participate in the Plan.

3.4-3. Employees who are nonresident aliens with no earned income (within the meaning of Code Section 911(d)(2)) from the Employer which constitutes income from sources within the United States (within the meaning of Code Section 861(a)(3)).

3.4-4. An Eligible Employee may elect not to participate in the Plan, provided, however, such election is made solely to meet the requirements of Code Section 409(n). For an election to be effective for a particular Plan Year, the Eligible Employee or Participant must file the election in writing with the Plan Administrator no later than the last day of the Plan Year for which the election is to be effective. The Employer may not make a contribution under the Plan for the Eligible Employee or for the Participant for the Plan Year for which the election is effective, nor for any succeeding Plan Year, unless the Eligible Employee or Participant re-elects to participate in the Plan. The Eligible Employee or Participant may elect again not to participate, but not earlier than the first Plan Year following the Plan Year in which the re-election was first effective.

3.5 Participation and Reparticipation . Subject to the satisfaction of the foregoing requirements, an Eligible Employee shall participate in the Plan during each period of his Service from the date on which he first becomes eligible until his termination. For this purpose, an Eligible Employee who returns before five (5) consecutive one year Breaks in Service who previously satisfied the initial eligibility requirements or who returns after five (5) consecutive one year Breaks in Service with a vested Account balance in the Plan shall re-enter the Plan as of the date of his return to Service with an Employer.

3.6 Omission of Eligible Employee . If, in any Plan Year, any Eligible Employee who should be included as a Participant in the Plan is erroneously omitted and discovery of such omission is not made until after a contribution by his Employer for the year has been made, the Employer shall make a subsequent contribution with respect to the omitted Eligible Employee in the amount which the said Employer would have contributed regardless of whether or not it is deductible in whole or in part in any taxable year under applicable provisions of the Code.

3.7 Inclusion of Ineligible Employee . If, in any Plan Year, any person who should not have been included as a Participant in the Plan is erroneously included and discovery of such incorrect inclusion is not made until after a contribution for the year has been made, the Employer shall not be entitled to recover the contribution made with respect to the ineligible person regardless of whether or not a deduction is allowable with respect to such contribution. In such event, the amount contributed with respect to the ineligible person shall constitute a forfeiture for the fiscal year in which the discovery is made. Any person who, after the close of a Plan Year, is retroactively treated by the Company, an affiliated company or any other party as an Employee for such prior Plan Year shall not, for purposes of the Plan, be considered an Employee for such prior Plan Year unless expressly so treated as such by the Company.

 

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3.8 Treatment of Qualified Military Service . Notwithstanding any provision of this Plan to the contrary, contributions, benefits, and service credit with respect to Qualified Military Service will be provided in accordance with Code Section 414(u).

Section 4. Contributions and Credits .

4.1 Discretionary Contributions .

4.1-1. The Employer shall from time to time contribute, with respect to a Plan Year, such amounts as it may determine from time to time. The Employer shall have no obligation to contribute any amount under this Plan except as so determined in its sole discretion. The Employer’s contributions and available forfeitures for a Plan Year shall be credited as of the last day of the year to the Accounts of the Active Participants in the manner set forth in Section 8.1-2.

4.1-2. Upon a Participant’s reemployment after performing Qualified Military Service, the Employer shall make an additional contribution on behalf of such Participant that would have been made on his or her behalf during the Plan Year or Years corresponding to the Participant’s Qualified Military Service.

4.2 Contributions for Stock Obligations . If the Trustee, upon instructions from the Committee, incurs any Stock Obligation upon the purchase of Stock, the Employer may contribute for each Plan Year an amount sufficient to cover all payments of principal and interest as they come due under the terms of the Stock Obligation. If there is more than one Stock Obligation, the Employer shall designate the one to which any contribution is to be applied. Investment earnings realized on Employer contributions and any dividends paid by the Employer on Stock held in the Unallocated Stock Account, shall be applied to the Stock Obligation related to that Stock, subject to Section 7.2.

In each Plan Year in which Employer contributions, earnings on contributions, or dividends on Stock in the Unallocated Stock Fund are used as payments under a Stock Obligation, a certain number of shares of the Stock acquired with that Stock Obligation which is then held in the Unallocated Stock Fund shall be released for allocation among the Participants. The number of shares released shall bear the same ratio to the total number of those shares then held in the Unallocated Stock Fund (prior to the release) as (i) the principal and interest payments made on the Stock Obligation in the current Plan Year bears to (ii) the sum of (i) above, and the remaining principal and interest payments required (or projected to be required on the basis of the interest rate in effect at the end of the Plan Year) to satisfy the Stock Obligation.

At the direction of the Committee, the current and projected payments of interest under a Stock Obligation may be ignored in calculating the number of shares to be released in each year if (i) the Stock Obligation provides for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for 10 years, (ii) the interest included in any payment is ignored only to the extent that it would be determined to be interest under standard loan amortization tables, and (iii) the term of the Stock Obligation, by reason of renewal, extension, or refinancing, has not exceeded 10 years from the original acquisition of the Stock.

4.3 Conditions as to Contributions . Employers’ contributions shall in all events be subject to the limitations set forth in Section 5. Contributions may be made in the form of cash, or securities and other property to the extent permissible under ERISA, including Stock, and shall be held by the Trustee in accordance with the Trust Agreement. In addition to the provisions of Section 13.3 for the return of an Employer’s contributions in connection with a failure of the Plan to qualify initially under the Code, any amount contributed by an Employer due to a good faith mistake of fact, or based upon a good faith but

 

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erroneous determination of its deductibility under Section 404 of the Code, shall be returned to the Employer within one year after the date on which the contribution was originally made, or within one year after its nondeductibility has been finally determined. However, the amount to be returned shall be reduced to take account of any adverse investment experience within the Trust Fund in order that the balance credited to each Participant’s Account is not less that it would have been if the contribution had never been made.

4.4 Rollover Contributions . This Plan shall not accept a direct rollover or rollover contribution of an “eligible rollover distribution” as such term is defined in Section 10.9-1 of the Plan.

Section 5. Limitations on Contributions and Allocations .

5.1 Limitation on Annual Additions . Notwithstanding anything herein to the contrary, allocation of Employer contributions for any Plan Year shall be subject to the following:

5.1-1 If allocation of Employer contributions in accordance with Section 4.1 will result in an allocation of more than one-third the total contributions for a Plan Year to the Accounts of Highly Compensated Employees, then allocation of such amount shall be adjusted so that such excess will not occur.

5.1-2 After adjustment, if any, required by the preceding paragraph, the annual additions during any Plan Year to any Participant’s Account under this and any other defined contribution plans maintained by the Employer or an affiliate (within the purview of Section 414(b), (c) and (m) and Section 415(h) of the Code, which affiliate shall be deemed the Employer for this purpose) shall not exceed the lesser of $46,000 (or such other dollar amount which results from cost-of-living adjustments under Section 415(d) of the Code) (the “dollar limitation”) or 100 percent of the Participant’s 415 Compensation for such limitation year (the “percentage limitation”). In the event Stock is released from the Unallocated Stock Fund and allocated to a Participant’s account for a particular Plan Year, the Employer may determine for such year that an annual addition shall be calculated on the basis of the fair market value of the Stock so released and allocated (such fair market value to be based on the valuation as of the Valuation Date immediately preceding the Plan Year in respect of which the release and allocation are made) if the annual addition, as so calculated, is lower than the annual addition calculated on the basis of Employer contributions. The percentage limitation shall not apply to any contribution for medical benefits after severance from employment (within the meaning of Section 401(h) or Section 419A(f)(2) of the Code) which is otherwise treated as an annual addition. If, as a result of the allocation of forfeitures, a reasonable error in estimating a Participant’s annual compensation, a reasonable error in determining the amount of elective deferrals (within the meaning of Code Section 402(g)(3)) that may be made with respect to any individual under the limits of Code Section 415, or under other limited facts and circumstances that the Commissioner of the Internal Revenue Service finds justify the availability of the rules set forth in this paragraph, the annual additions under the terms of the Plan for a particular Participant would cause the limitations of Code Section 415 applicable to that Participant for the limitation year to be exceeded, the Plan may only correct such excess in accordance with the Employee Plans Compliance Resolution System (EPCRS) as set forth in Revenue Procedure 2008-50 or any subsequent guidance.

5.1-3 For purposes of this Section 5.1, the “annual addition” to a Participant’s Accounts means the sum of (i) Employer contributions, (ii) Employee contributions, if any, and (iii) forfeitures. For these purposes, annual additions to a defined contribution plan shall not include the allocation of the excess amounts remaining in the Unallocated Stock Fund subsequent to a sale of stock from such fund in accordance with a transaction described in Section 8.1 of the Plan. Notwithstanding the foregoing, “annual additions” shall not include a restorative payment in accordance with Treasury

 

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Regulation Section 1.415(c)-1(b)(2)(C) that is made to restore losses to the Plan resulting from actions by a fiduciary for which there is a reasonable risk of liability for breach of fiduciary duty under ERISA or other applicable federal and state law.

5.1-4 Notwithstanding the foregoing, if no more than one-third of the Employer contributions to the Plan for a year which are deductible under Section 404(a)(9) of the Code are allocated to Highly Compensated Employees (within the meaning of Section 414(q) of the Internal Revenue Code), the limitations imposed herein shall not apply to:

(i) forfeitures of Employer securities (within the meaning of Section 409 of the Code) under the Plan if such securities were acquired with the proceeds of a loan described in Section 404(a)(9)(A) of the Code), or

(ii) Employer contributions to the Plan which are deductible under Section 404(a)(9)(B) and charged against a Participant’s Account.

5.1-5 If the Employer contributes amounts, on behalf of Eligible Employees covered by this Plan, to other “defined contribution plans” as defined in Section 3(34) of ERISA, the limitation on annual additions provided in this Section shall be applied to annual additions in the aggregate to this Plan and to such other plans. Reduction of annual additions, where required, shall be accomplished first by reductions under such other plan pursuant to the directions of the named fiduciary for administration of such other plans or under priorities, if any, established under the terms of such other plans and then by allocating any remaining excess for this Plan in the manner and priority set out above with respect to this Plan.

5.1-6 A limitation year shall mean each 12 consecutive month period ending on December 31.

5.2 Effect of Limitations . The Committee shall take whatever action may be necessary from time to time to assure compliance with the limitations set forth in Section 5.1. Specifically, the Committee shall see that each Employer restrict its contributions for any Plan Year to an amount which, taking into account the amount of available forfeitures, may be completely allocated to the Participants consistent with those limitations. Where the limitations would otherwise be exceeded by any Participant, further allocations to the Participant shall be curtailed to the extent necessary to satisfy the limitations. Where an excessive amount is contributed on account of a mistake as to one or more Participants’ compensation, or there is an amount of forfeitures which may not be credited in the Plan Year in which it becomes available, the amount shall be corrected in accordance with Section 5.1-2 of the Plan. If it is determined at any time that the Committee and/or Trustee has erred in accepting and allocating any contributions or forfeitures under this Plan, or in allocating net gain or loss pursuant to Sections 8.2 and 8.3, then the Committee, in a uniform and nondiscriminatory manner, shall determine the manner in which such error shall be corrected and shall promptly advise the Trustee in writing of such error and of the method for correcting such error. The Accounts of any or all Participants may be revised, if necessary, in order to correct such error.

5.3 Limitations as to Certain Participants . Aside from the limitations set forth in Section 5.1, if the Plan acquires any Stock in a transaction as to which a selling shareholder or the estate of a deceased shareholder is claiming the benefit of Section 1042 of the Code, the Committee shall see that none of such Stock, and no other assets in lieu of such Stock, are allocated to the Accounts of certain Participants in order to comply with Section 409(n) of the Code.

 

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This restriction shall apply at all times to a Participant who owns (taking into account the attribution rules under Section 318(a) of the Code, without regard to the exception for employee plan trusts in Section 318(a)(2)(B)(i) more than 25 percent of any class of stock of a corporation which issued the Stock acquired by the Plan, or another corporation within the same controlled group, as defined in Section 409(l)(4) of the Code (any such class of stock hereafter called a “Related Class”). For this purpose, a Participant who owns more than 25 percent of any Related Class at any time within the one year preceding the Plan’s purchase of the Stock shall be subject to the restriction as to all allocations of the Stock, but any other Participant shall be subject to the restriction only as to allocations which occur at a time when he owns more than 25 percent of any Related Class.

Further, this restriction shall apply to the selling shareholder claiming the benefit of Section 1042 and any other Participant who is related to such a shareholder within the meaning of Section 267(b) of the Code, during the period beginning on the date of sale and ending on the later of (1) the date that is ten years after the date of sale, or (2) the date of the Plan allocation attributable to the final payment of acquisition indebtedness incurred in connection with the sale.

This restriction shall not apply to any Participant who is a lineal descendant of a selling shareholder if the aggregate amounts allocated under the Plan for the benefit of all such descendants do not exceed five percent of the Stock acquired from the shareholder.

5.4 Erroneous Allocations . No Participant shall be entitled to any annual additions or other allocations to his Account in excess of those permitted under Section 5. If it is determined at any time that the administrator and/or Trustee have erred in accepting and allocating any contributions or forfeitures under this Plan, or in allocating investment adjustments, or in excluding or including any person as a Participant, then the administrator, in a uniform and nondiscriminatory manner, shall determine the manner in which such error shall be corrected, after taking into consideration Sections 3.6 and 3.7 and any revenue procedure or other notice published by the Internal Revenue Service regarding permissible correction methods, if applicable, and shall promptly advise the Trustee in writing of such error and of the method for correcting such error. The Accounts of any or all Participants may be revised, if necessary, in order to correct such error.

Section 6. Trust Fund and Its Investment .

6.1 Creation of Trust Fund . All amounts received under the Plan from Employers and investments shall be held as the Trust Fund pursuant to the terms of this Plan and of the Trust Agreement between the Bank and the Trustee. The benefits described in this Plan shall be payable only from the assets of the Trust Fund, and none of the Bank, any other Employer, its board of directors or trustees, its stockholders, its officers, its employees, the Committee, and the Trustee shall be liable for payment of any benefit under this Plan except from the Trust Fund.

6.2 Stock Fund and Investment Fund . The Trust Fund held by the Trustee shall be divided into the Stock Fund, consisting entirely of Stock, and the Investment Fund, consisting of all assets of the Trust other than Stock. The Trustee shall have no investment responsibility for the Stock Fund, but shall accept any Employer contributions made in the form of Stock, and shall acquire, sell, exchange, distribute, and otherwise deal with and dispose of Stock in accordance with the instructions of the Committee. The Trustee shall have full responsibility for the investment of the Investment Fund, except to the extent such responsibility may be delegated from time to time to one or more investment managers pursuant to Section 2.3 of the Trust Agreement, or to the extent the Committee directs the Trustee to purchase Stock with the assets in the Investment Fund.

 

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6.3 Acquisition of Stock . From time to time the Committee may, in its sole discretion, direct the Trustee to acquire Stock from the issuing Employer or from shareholders, including shareholders who are or have been Employees, Participants, or fiduciaries with respect to the Plan. The Trustee shall pay for such Stock no more than its fair market value, which shall be determined conclusively by the Committee pursuant to Section 12.4. The Committee may direct the Trustee to finance the acquisition of Stock by incurring or assuming indebtedness to the seller or another party which indebtedness shall be called a “Stock Obligation.” The term “Stock Obligation” shall refer to a loan made to the Plan by a disqualified person within the meaning of Section 4975(e)(2) of the Code, or a loan to the Plan which is guaranteed by a disqualified person. A Stock Obligation includes a direct loan of cash, a purchase-money transaction, and an assumption of an obligation of a tax-qualified employee stock ownership plan under Section 4975(e)(7) of the Code (“ESOP”). For these purposes, the term “guarantee” shall include an unsecured guarantee and the use of assets of a disqualified person as collateral for a loan, even though the use of assets may not be a guarantee under applicable state law. An amendment of a Stock Obligation in order to qualify as an “exempt loan” is not a refinancing of the Stock Obligation or the making of another Stock Obligation. The term “exempt loan” refers to a loan that is primarily for the benefit of the Plan participants and their beneficiaries and that satisfies the provisions of this paragraph. A “non-exempt loan” fails to satisfy this paragraph. Any Stock Obligation shall be subject to the following conditions and limitations:

6.3-1 A Stock Obligation shall be for a specific term, shall not be payable on demand except in the event of default, and shall bear a reasonable rate of interest.

6.3-2 A Stock Obligation may, but need not, be secured by a collateral pledge of either the Stock acquired in exchange for the Stock Obligation, or the Stock previously pledged in connection with a prior Stock Obligation which is being repaid with the proceeds of the current Stock Obligation. No other assets of the Plan and Trust may be used as collateral for a Stock Obligation, and no creditor under a Stock Obligation shall have any right or recourse to any Plan and Trust assets other than Stock remaining subject to a collateral pledge.

6.3-3 Any pledge of Stock to secure a Stock Obligation must provide for the release of pledged Stock in connection with payments on the Stock obligations in the ratio prescribed in Section 4.2.

6.3-4 Repayments of principal and interest on any Stock Obligation shall be made by the Trustee only from Employer cash contributions designated for such payments, from earnings on such contributions, and from cash dividends received on Stock, in the last case, however, subject to the further requirements of Section 7.2. The payment on the Stock Obligation during the Plan Year must not exceed an amount equal to the sum of contributions and earnings received during such year or prior to such year, less such payments in prior years. Such contributions and earnings must be accounted for separately in the books and accounts of the Plan until the Stock Obligation is fully repaid.

6.3-5 In the event of default of a Stock Obligation, the value of Plan assets transferred in satisfaction of the Stock Obligation must not exceed the amount of the default. If the lender is a disqualified person within the meaning of Section 4975 of the Code, a Stock Obligation must provide for a transfer of Plan assets upon default only upon and to the extent of the failure of the Plan to meet the payment schedule of said Stock Obligation. For purposes of this paragraph, the making of a guarantee does not make a person a lender.

6.4 Participants’ Option to Diversify . The Committee shall provide for a procedure under which each Participant may, during the qualified election period, elect to “diversify” a portion of the Employer

 

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Stock allocated to his Account, as provided in Section 401(a)(28)(B) of the Code. An election to diversify must be made on the prescribed form and filed with the Committee within the period specified herein. For each of the first five (5) Plan years in the qualified election period, the Participant may elect to diversify an amount which does not exceed 25% of the number of shares allocated to his Account since the inception of the Plan, less all shares with respect to which an election under this Section has already been made. For the last year of the qualified election period, the Participant may elect to have up to 50 percent of the value of his Account committed to other investments, less all shares with respect to which an election under this Section has already been made. The term “qualified election period” shall mean the six (6) Plan Year period beginning with the first Plan Year in which a Participant has both attained age 55 and completed 10 years of participation in the Plan. A Participant’s election to diversify his Account may be made within each year of the qualified election period and shall continue for the 90-day period immediately following the last day of each year in the qualified election period. Once a Participant makes such election, the Plan must complete diversification in accordance with such election within 90 days after the end of the period during which the election could be made for the Plan Year. In the discretion of the Committee, the Plan may satisfy the diversification requirement by any of the following methods:

6.4-1 The Plan may distribute all or part of the amount subject to the diversification election.

6.4-2 The Plan may offer the Participant at least three other distinct investment optio